The market is beyond overstretched. We have not had a 5% correction in six months. Stocks have gone almost straight up for 89 days (we haven’t had a 3+day correction in that long). This is an all time record. The last time stocks rallied without a 3+ day correction was in the buildup to the Crash of 1987.
The Fed knows this and is now trying to prepare the market for withdrawal. But the market is on total life support from the Fed. Take away the Fed punchbowl and the party stops.
Japan should serve as a lesson to central planners around the world. Japan’s stock market/ real estate bubble burst in the early ‘90s. Since that time Japan has launched NINE QE efforts equal to roughly 25% of its GDP. And GDP growth has worsened despite these efforts from 2% to 1%. Ditto for employment.
When this bubble bursts, interest rates will already be at zero and the Fed’s balance sheet swollen with garbage debts. The Fed and other Central Banks WON’T have the usual tools available to save the day.
Maybe this time is different… maybe stocks will only go straight up forever. Maybe this bubble, unlike the last two, will not burst. Or maybe it’s time to start prepping for the next stock collapse.
The market is beyond overstretched at this point on a short-term, intermediate term, and long-term basis. The sheer number of warning signals is staggering.
This is how companies deal with economic contractions. They don’t start laying people off en masse… they start cutting work hours bit by bit. The mass layoffs don’t come until the official numbers announce that we’re in a full-blown recession.
The biggest problem with the financial system is that of bad measurement. Without accurate data, no analyst can make sound investment judgments. Unfortunately for all of us, the data is gimmicked to the point that nothing is valid any longer.
There is not one single example in history in which QE has successfully created jobs. The UK has engaged in QE equal to over 20% of its GDP and hasn’t seen a real recovery in employment. Similarly, Japan has employed QE equal to nearly 25% of its GDP and GDP growth continues to slow while unemployment stays elevated.
A Jackson Hole meeting without the Fed Chairman is like having a performance of Hamlet without Hamlet himself in it. Why would the single most important Central Banker not attend one of the biggest economic meetings of the year?
The is the key area to watch. If Gold continues to correct, then we could go to $1200. But Gold should hold up here as ong as the long-term trendline remains intact.
Investors take note, a false breakout is an extremely dangerous thing. If the stock market is in fact failing to maintain its upward breakout, we could see a sharp reversal similar to that of Gold (Gold has lead stocks for much of the post-2008 period).
