Brandon Smith: Is A Massive Stock Market Reversal Upon Us?

Authored by Brandon Smith via,

I have been saying it for years and I will say it again here - stocks are the worst possible “predictive” signal for the health of the general economy because they are an extreme trailing indicator. That is to say, when stock markets do finally crash, it is usually after years of negative signs in other more important fundamentals.

Of course, whether we alternative analysts like it or not, the fact of the matter is that the rest of the world is psychologically dependent on the behavior of stock markets. The masses determine their economic optimism  (if they are employed) according to the Dow and the S&P and, to some extent, by official and fraudulent unemployment statistics. When equities start to dive, society takes notice and suddenly becomes concerned about fiscal dangers they should have been worried about all along.

Well, it may have taken a couple months longer than I originally predicted, but it would seem so far that a moment of revelation (that slap in the face I discussed a couple weeks ago) is upon us. In less than a few days, most of the gains in global stocks for 2018 have been erased. The question is, will this end up as a “hiccup” in an otherwise spectacular bull market bubble? Or is this the inevitable death knell and the beginning of the implosion of that bubble?

After I predicted the election of Donald Trump, I also predicted that central banks would begin pulling the plug on life support for equities markets. This did in fact take place with the Fed’s continued program of interest rate increases and the reduction of their balance sheet, which effectively strangles the flow of cheap credit to banking and corporate institutions that fueled stock buybacks for years. Without this constant and ever expansionary easy fiat, there is nothing left to act as a crutch for stocks except perhaps blind faith. And blind faith in the economy always ends up being smacked down by the ugly realities of mathematics.

I believe the latest extraordinary dive in stocks is NOT a “hiccup,” but a sign that "contagion" is still a thing, and also a trailing sign of instability inherent in our fiscal system. Here are some reasons why this trend is likely to continue.

Historic Corporate Debt Levels

As mentioned above, artificially low interest rates have allowed corporations incredible leeway to manipulate stock markets at will using stock buybacks and other methods.  However, there are still consequences for this strategy.  For example, corporate debt levels are now at historic annual highs; far higher even than debt levels just before the crash of 2008.

If this doesn't illustrate the falseness of the so called "economic recovery", I don't know what does.  Beyond that, what happens as the Fed continues to raise interest rates and all that debt held by the "too big to fails" becomes vastly more expensive?  Well, I think we are seeing what happens.  Over time, faith in the corporate ability to prop up equities will erode, and a considerable decline is built directly into the farce.

Price To Earnings Ratio

In some of her final statements upon stepping down as the head of the Federal Reserve, Janet Yellen had some choice comments about the state of equities markets. These included statements that stock market valuations were high and that the price-to-earnings ratio of the S&P 500 (the ratio of stock values versus actual corporate earnings per share) were at a historical peak. This fits exactly with the policy shift I warned about in 2017, and my assertion that Jerome Powell will be the Fed chairman to oversee the final crash of the post-bailout market bubble.

The spike in P/E ratios is not only taking place in U.S. markets. For example, the same trend can be observed in countries like India.  Meaning, there are equities valuation problems around the world.

The issue here is that corporate earnings do not justify such high stock prices. Therefore, something else must be inflating those prices. That something was, of course, central bank stimulus, and now that party is almost over, whether the “buy the f’ing dippers” want to admit it yet or not.

10-Year Treasury Yield Spike

Have spiking Treasury bond yields actually been a signal for an “accelerating economy” as mainstream economists often suggest? Not really. In the era of central bank monetary manipulation, it is more likely that yields were spiking because markets are anticipating the arrival of Jerome Powell as Fed chair and accelerating interest rate hikes rather than an accelerating economy.

The notion that the economy itself might be “overheating” in 2018 is a rather new and nefarious propaganda meme being used by central bankers to set a particular narrative. I believe that narrative will be the claim that “inflation” is a key concern rather than deflation and that central banks must act to temper inflation with more aggressive rate increases. In reality, what we are seeing is not “inflation” in a traditional sense, but stagflation. That is to say, we are seeing elements of price inflation in necessary goods and services and well as property markets, but continued deflation in the rest of the economy.

The Fed in particular will continue to ignore negative fundamentals because they are seeking to deliberately pop the market bubble they have created.

The spike in 10-year bond yields seems to be correlating closely to the recent volatility in stocks. This volatility increased exponentially as yields neared the 3% mark, which appears to be the magical trigger point for equities failure.  Though yields suffered a modest decline as stocks tumbled this week, I still recommend keeping an eye on this indicator.

Dollar Weakness

As I have mentioned in recent articles, there has been a strange disconnect between interest rates and the U.S. dollar. As the Fed continues its policy of hiking interest rates, generally the dollar index should rise in response. Instead, the dollar has been swiftly falling, only stalling in the past couple of trading sessions. If the dollar index continues to fall even as stocks decline and rates increase, this may suggest a systemic risk to the dollar itself.

Such risk could include a dollar dump by foreign central banks in favor of a wider basket of currencies, or the SDR trading basket created by the IMF.

Balance Sheet Reductions Accelerating

The Fed's most recent release of data on its balance sheet reduction program shows a drop in holdings of $18 billion; this is far higher that the originally planned $12 billion slated by the Fed.  Meaning, the Fed is dumping its balance sheet holdings much faster than it told the public initially.

Why is this important?  Well, if you have been tracking the behavior of stocks over the past few years as well as the increases in the Fed's balance sheet, you know that stock markets have risen in direct correlation with that balance sheet.  In other words, the more purchases the Fed made, the higher stocks climbed.

Image result for Fed balance sheet and Stocks 2017

If this correlation is directly linked, then as the Fed reduces its balance sheet, stocks should fall.

So, the fed announces its latest round of balance sheet reductions on January 31st, the reduction is much higher than anticipated, and within a week we witness the largest two day market drop in years.  You would think this observation might just be important, but if you look at the mainstream economic media, almost NO ONE is mentioning it.  Instead, they are searching for all sorts of random explanations for what just happened, none of which are very logically satisfying.

I believe that the Fed will not only continue its program of interest rate increases even if stocks begin to flounder, but that they will also unload their balance sheet as quickly as possible.

Corporate Investor Comments

Major corporate investment firms are beginning to raise their voices about the potential not only for stock devaluations, but also the amount that they might fall. Sydney-based AMP capital suggested a rather moderate 10% pullback in equities, which I think will become the talking point for most of the mainstream media over the next couple weeks. At least, until the whole thing comes crashing down much further than that.

The head of Blackstone COO expects stocks to fall at least 20% this year, a much more aggressive number but not high enough in my view.

I still believe these kinds of estimates are only applicable in the very short term. By the end of 2018, it is possible that markets will double the worst estimated declines predicted by the mainstream investment world given the fundamentals.

Central Banker Comments

Comments by agents of the Federal Reserve reinforce the notion that the central bank is about to crush the bull market bubble. San Francisco branch head Robert Kaplan has been quoted as saying the Fed may be required to hike interest rates MORE than the three times expected by mainstream economists in 2018.

As noted above, Janet Yellen’s exit statements were decidedly “hawkish,” suggesting that property markets and stocks are overpriced. On top of this, Jerome Powell, the new Fed chair, has been quoted in Fed documents from 2012 (finally released this past month) discussing the market bubble the Fed had created and the need to temper than bubble. In other words, Powell is the perfect man for the job of imploding stocks. Powell even predicted in 2012 that when the Fed raises rates the reaction by stock markets might be severe.  Interesting that markets would plunge the very first day Powell assumes the Fed chair position.

I suppose finally a Fed agent and I have something in common. We’ve both been predicting the same exact market outcome caused by the same trigger event for around the same number of years.

I outlined in great detail the plan for the “global economic reset” and Powell’s role in overseeing the next stock crash in my article Party While You Can - Central Bank Ready To Pop The Everything Bubble. In that article, I predicted exactly the results which seem to be developing today in equities.

In essence, Powell is being portrayed by the mainstream media as “Trump’s guy,” and the change in Fed leadership is now being referred to as “Trump’s Fed.” This is not random rhetoric.  I can't think of ANY other president in the past that was given credit by the mainstream media for the activities of the Federal Reserve. Trump’s control over the Federal Reserve is zero. But, the actions of the Fed over the course of this year will undoubtedly crash the very equities markets that Trump has been foolishly taking credit for since his election.

The real issue here now is, how fast will this ugly festering sore explode? That’s hard to say. I would not be surprised if markets fall about 20% below recent highs in the course of the next couple of months and then stall. We may even see a couple spectacular bounces in the near term, all set to trumpets and fanfare by the mainstream economic media who will proclaim that the latest shock-drop was nothing more than an “anomaly.” Then, the crash will continue into the end of 2018 and panic will ensue.

That said, if there is some kind of major geopolitical crisis (such as a war with North Korea), then all bets are off. Stocks could crash exponentially over the course of a few weeks rather than a year. As the past few days have proven, stocks are not invincible, not in the slightest. And all the gains accumulated in the span of years can be wiped away in an instant.

*  *  *

If you would like to support the publishing of articles like the one you have just read, visit our donations page here.  We greatly appreciate your patronage.


Dutti lloll Wed, 02/07/2018 - 23:06 Permalink

I am curious:

How does the author and similar crash predictors explain that for example in a country like Venezuela the stock market constantly makes new highs while the country and it's currency goes to hell.

Why would that inflationary scenario not play out in a similar way in the US?

In reply to by lloll

Bluntly Put Dutti Wed, 02/07/2018 - 23:25 Permalink

The difference probably lies in the fact that the dollar acts as the world reserve currency, for now. If that changes, say to an equal weighting with the yuan then I'd expect to see double digit inflation in the cost of living and deflation in asset prices until the fed gears up for more monetary 'stimulus'.

But note that the Nikkei never recovered it's levels after it finally broke and crashed leaving Japan in a depression for over 20 years. What the banks really want is to force everyone to use electronic currency, ban cash, then they can switch from making loans to taxing the economy via 'servicing fees'.

Just a guess.

In reply to by Dutti

iLLivaniLLi19 Bluntly Put Thu, 02/08/2018 - 09:28 Permalink

They can't ban cash because it would destroy the high-low alliance against the middle class. Cash is absolutely crucial for the poor and black market economies and enables the stealth wealth redistribution that keeps the system afloat.


This is actually why the middle class in India was for the banning of cash notes and laws on gold possession; the middle class is tired of the poor playing both the black market and the welfare system above the table while the middle is burdened with the taxation.

In reply to by Bluntly Put

dognamedabu Dutti Thu, 02/08/2018 - 01:29 Permalink

My guess is because the USD won't be crashing until after the markets do. The ensuing mayham of lower values on everything will cause the fed to pump it up but by then they will have to print uber insane amounts to get it moving and somewhere inside that the world will lose faith in the dollar and the mass exodus will finally begin. Buy gold.

In reply to by Dutti

ktown Dutti Thu, 02/08/2018 - 02:34 Permalink

The Fed has a plan to continue raising short rates to stuff its banks with interest on excess reserves, which was 50 billion dollars in 2017? The Fed will continue to use "catch phases"  until it starts calling in loans? The A.I. records everything  and now a word from our sponsors!

In reply to by Dutti

Cloud9.5 Dutti Thu, 02/08/2018 - 07:04 Permalink

The reason stock markets soar in periods of currency collapse is because the natural response to a collapsing currency is to print more currency.  When currencies collapse, the currency holders rush to convert it to hard assets as quickly as possible.  The stock market is deemed by the general populace to be one of those hard assets.

The rush to print hastens the destruction of the currency resulting in starving billionaires.  The FED has decided to crash the market in an effort to save the currency.  What better time to do it than when a white alpha male can be blamed for it.

In reply to by Dutti

Yen Cross ebworthen Thu, 02/08/2018 - 00:09 Permalink

Ebbie, it's coming.  This recent debacle just showed me how small the "EXIT" door is.

  Don't you EVER forget FIFO/ First in<> First out.

  You can partially cover a position as long as its NOT of equal size.

  Let me explain/ You open 2 positions of equal size that overlap. [5 large>x2]

  You go to cover the trade and want to close out/ Both initial trades were of the same size. seconds apart

  You want to partially close a trade.  That's fine.  If you want to partially close the same amount in the other trade, FIFO kicks in.

  Trust me when I say this. Things can get rather "frantic" when you have multiple hedges on.

  If you're tack sharp, you can close a smaller portion of the other trade, but the whole idea of separating the position was to protect your hedge.

  Long story short, U.S. equity markets are rigged to the up-side.

   Have a nice day/




In reply to by ebworthen

Consuelo Wed, 02/07/2018 - 23:50 Permalink

"I have been saying it for years and I will say it again here..."


"Well, it may have taken a couple months longer than I originally predicted"


"After I predicted the election of Donald Trump, I also predicted that central banks would begin pulling the plug on life support for equities markets."


"In that article, I predicted exactly the results which seem to be developing today in equities."


It's that time again...

Hope Copy Thu, 02/08/2018 - 00:03 Permalink

The only economy that has been able to do such a stunt in recent times has been Russia, but they have a very self contained economy.  The 2014 crash of the Ruble was amazing.  Immigration (2-2.4% of the population) increased the productivity ( ,an effective 4-6% due to the age an type of immigrants,) of Russia and they have been effectively trapped, never to go back to THE Ukraine. 

The usual effect of inflating a currency is the Argentinian mode...


Mr. Putin is secretively thanking Mr. Biden.

JLM Thu, 02/08/2018 - 00:37 Permalink

Isn't all this doom porn typical behavior at the bottom of an intermediate correction.  Buy the turn!  You can laugh about how foolish everyone sounds later.  Of course I "could" be wrong..... .  lol

Md4 Thu, 02/08/2018 - 00:59 Permalink

"But, the actions of the Fed over the course of this year will undoubtedly crash the very equities markets that Trump has been foolishly taking credit for since his election."

There's no doubt there HAS been a "Trump bounce" in the equities racket since his election.

HOWEVER, and it's a big however missed by many, I think.

Trump isn't greasing the corporate skids with tax and overseas earnings repatriation incentives for nothing.

He expects RESULTS from those same parties. 

The very WORST thing the corporate hacks (who started all this shit decades ago) could do, is to blow the breaks they're getting on gimmicks like buybacks.

That might tickle the 401k holders a bit more, BUT, that's not going to produce good-paying jobs in new industries.

R&D, new plants, and major new capex is the reason Trump greased those skids. The fucking corporate hacks had better show up with THEIR end of the deal, or it wouldn't surprise me if Trump himself leads the charge to crush the Wall Street shark tank.

MAGA doesn't apply to Wall Street UNLESS it first applies to Main Street.


Davidduke2000 Thu, 02/08/2018 - 03:33 Permalink

as long as the money keep running toward bitcoin and other crap cryptos, there is nothing to worry about as the plunge protection team along with other central banks are ready to buy anything the us market throw at them, but the sellers at least would make a fortune selling the garbage to the us government that one day will blow up in its face.

it's the us population to blame as I do not see anybody in the streets complaining about the massive frauds by the us government, yet when I was young and I wanted to write myself a huge loan in monopoly , my siblings threw me out of the game citing international law. 

hibou-Owl Thu, 02/08/2018 - 04:10 Permalink


Just short of the 61.8% retracement, and the formation now on the 10 min is a head &shoulders. The shoulders line up with the 50% retracement.

If European trades off today then the neckline may be broken today.


Dr_Lucid Thu, 02/08/2018 - 05:15 Permalink

Trump has a hard on to default on certain tranches of US Debt. The guy has been doing this with his own debt for decades and "it all turned out well".  The CB will offset the write-off to the extent they can accelerate balance sheet reductions.

HenryJonesJr Thu, 02/08/2018 - 07:47 Permalink

Interesting article but doom and gloom has been forecast for the past 10 years and most stocks just kept going up.   Perhaps the Fed Ponzi Scheme has grown too big to fail at this point, so they'll just keep printing money and absorbing bad debt for decades.   I dunno .....

el buitre Thu, 02/08/2018 - 15:20 Permalink

"In reality, what we are seeing is not “inflation” in a traditional sense, but stagflation. That is to say, we are seeing elements of price inflation in necessary goods and services and well as property markets, but continued deflation in the rest of the economy."


I wish Smith had elucidates in detail what constitutes the "rest of the economy."  And is he writing about price deflation in the rest of the economy or a further slowdown of money velocity which would constitute Austrian school deflation?  I view it as a weakness in the article that he was not more specific in this important prediction.