This horrifying fact comes courtesy of Morgan Stanley analyst David Greenlaw. And it confirms what I’ve been saying since the end of 2009, that the US has entered a debt spiral: a time in which fewer and fewer investors are willing to lend to us for any long period of time… at the exact same time that we must roll over trillions in old debt and issue an additional $100-150 billion in NEW debt per month in order to finance our massive deficit.
When the Fed announced that it would issue its QE lite program in mid-August, the world took this to indicate that QE 2 was definitely coming.
Indeed, virtually EVERYTHING occurring in the financial markets right now can be traced to the view that the US Federal Reserve has a $1 trillion+ QE 2 program on deck. Nowhere is this clearer than the US Dollar.
This sure sounds like a perfect set up for a reversal to me. On that note, I expect this week we’ll probably see a final impulse high on stocks, but that stocks will end the week down, creating a reversal week. This in turn I believe will be the beginning of a larger, VIOLENT collapse that will take stocks back to 1,040 on the S&P 500 in a matter of weeks. And ultimately, I believe we're heading to 875 by year-end.
In plain terms, WWIII is already being staged in the currency markets. Predicting exactly how this will all play out is impossible, but the clear result is that market volatility will be increasing and we are absolutely guaranteed heading for a Crash.
Consider that the currency markets trade over $4 trillion in market volume per day. To put that number in perspective, the entire world stock market is about $36 trillion in market capitalization.
Unbeknownst to most investors, last week Ben Bernanke pumped an additional $11.05 BILLION into the system ON TOP of the $11.15 pumped via the POMOs. In plain terms, the Fed juiced the system by $20+ billion in a single week, bringing its liquidity pumps RIGHT BACK QE 1 LEVELS.
Last week I forecast that we would see a reversal in stocks. The market did indeed show signs of breaking down on Wednesday and Thursday, however, the Fed’s juice managed to keep stocks afloat and closing in the green for the week. All told, the Fed injected more than $10 billion into the market directly via its three Permanent Open Market Operations (POMO) pumps. However, Bailout Ben wasn’t content with mere open market juicing, so he pumped another $10 billion into the system “behind the scenes.”
Let’s be honest. Forget recessions, forget even Depressions, the US is an empire in decline.
You can literally see it crumbling right in front of you. Just start looking at how people live, eat, and act on a day to day basis. Look at how our Government runs itself, how it manages our affairs, how it spends our tax Dollars. Look at how our justice system works, who it protects and who it punishes.
It’s all out there, right in the open for you to see. You don’t need an expert degree or some kind of advanced education. It’s OBVIOUS to anyone who bothers looking around.
The fact we don’t admit it doesn’t mean it’s not true.
Regardless, the primary point is that the US credit bubble has not deleveraged in any meaningful way. The system remains debt saturated to the gills on a personal, corporate, state, and Federal level.
In plain terms, the entire US system is one giant debt bubble. And there are only three ways to deal with a debt problem:
1) Pay it back
2) Default/ restructure
3) Hyper-inflate it away
The US has no chance of #1, which leaves either #2 or #3. Both involve the Dollar taking a sizable hit, which might explain why Gold has begun breaking out while Treasuries are dipping.
All the pieces are in place for a significant top to form and a potentially devastating reversal to begin. To wit, stocks have spiked up over major resistance at 1,131 on the S&P 500 just as the RSI nears an overbought reading.Meanwhile investor sentiment has swung by to wildly bullish with the Daily Sentiment Index showing 83% of investors bullish on the S&P 500 while the AAII survey shows 50% of investors bullish and only 24% bearish. We also have corporate insiders dumping shares as fast as possible to cash out of the market.
Graham’s note: the following is an excerpt from my latest issue of The Phoenix World Views Digest, my monthly newsletter devoted to dissecting how the socio-economic-political structures of the world REALLY work.
I mention all of this, because the European banking system seems to be repeating the exact same policies today, only two years later.
We’ve already seen the phony “stress test” charade along with the “all is well” proclamations. Now, the largest, most venerable European banks are starting their own version of the “we need capital, but all is well” tightrope act.
Last week I forecast that the stock market would likely rally to test its 200-DMA. We didn’t quite get there, but that’s largely due to the fact that no one was actively trading the market last week.
Indeed, thanks to a holiday week that entailed both Labor Day and Rosh Shoshanna, market volume was truly abysmal. In fact, last week saw even lower market volume than during April 2010 top, which should give you an idea of just how few participants were involved:
Last week, the municipal bond Crisis began in earnest when the capital of Pennsylvania, Harrisburg, dropped $3.3 million worth of municipal bond payments for the month of September.
This is just the beginning. Collectively US states continue to face massive budget short-falls in spite of massive Federal Aid. According to the Center on Budget and Policy Priorities, US states are expected to run deficits of $144 billion and $119 billion in FYs 2011 and 2012 respectively, unless they can cut spending further or raise taxes dramatically to close these gaps.
Last week I forecast that stocks would either re-test 1,040 and breakdown or rally to 1,100. Stocks once again opted to accomplish both of my forecasts falling to test 1,040 on Tuesday before starting the mother of all ramp jobs Tuesday afternoon into Friday.
All in all, stocks rallied over 5% in the span of 72 hours. The move started off as the most obvious manipulation in history, with stocks exploding higher in the final 15 minutes of trading in August to insure that the Dow closed the month above 10,000, which appears to be the proverbial “line in the sand” that the PPT has drawn (more on this in a moment):
