Domestic Myopic Excuses – The Worst is yet to Come

To try to explain the markets and how there can be a rising stock market with rising bonds, analysts characterize this weird trend as a US monetary experiment of the past four years, which has been caused by the Fed’s endless monetary injections (and pent up inflation expectations) while the bond rally has been due to a quality collateral mismatch and scarcity with the shadow banking system funding via reserve currency “deposit-like” instruments such as TSYs. If this were true, then why is gold declining?

This is the typical domestic explanation that is so far off base and can be reduced to simply opinion. Where is the proof? If it were a closed system, it would be impossible to increase the money supply with rising stocks and bonds. It just would be impossible. There could be NO pent up inflation with ALL commodities declining.

I have warned that the extremely low interest rates have forced capital to seek a return in equities. With dividends at 5-7% in good stocks, 0.5% is not very appealing for pension funds or investors.

1923 Jesse Livermore Turns Bullish

LivermoreThe same thing took place in 1923. Jesse Livermore turned bullish the week of November 12th, 1923. The Wall Street Journal was bearish and accused Jesse of trying to influence the Presidential elections because they said he was friends with the President. When the Wall Street Journal was proved dead wrong, they refused to ever quote Jesse again.

Time Magazine reported November 12, 1923:

“Then came the turn. Late one afternoon, U .S. Steel revealed a fine quarterly statement, declared an extra dividend of 1/4. Next morning, by curious coincidence if it was a coincidence the redoubtable Jesse L. Livermore announced, apropos of nothing in particular, that he had turned bullish, that with agricultural recovery and a European settlement near at hand profits lay on the buying side, and that next year should be prosperous without becoming a boom.”

Indeed, stocks were undervalued and you could earn more in dividends than in the bank. This has nothing to do with the Fed’s monetization since the bulk of QE1 and QE2 went overseas and the Euro is collapsing sending capital to the USA. Even China lowered their Euro exposure to below 7%. The dollar is being absorbed internationally as the last viable currency so the money supply must be seen globally. Those stuck in domestic analysis cannot see anything beyond the one-dimensional domestic cause and effect.

CentralBank Balance Sheet


Sorry once again, but the US is by no means way out of line. Despite all the claimed monetization, it is the LOWEST as a % of GDP! All this talk, talk, talk, about Fed monetization and pent up inflation that has not materialized, has other explanations when you look at the world as a single entity. It’s a GLOBAL economy – HELLO! Time to wake up and smell the roses!

We may yet see a bubble in the US into 2015.75 if we in fact see the dollar RISE as did the yen going into 1989. A rising dollar will increase the profits for foreign investors and draw in even more capital globally creating massive capital concentration and global civil unrest. The Fed will go nuts and be forced to raise interest rates fearing a bubble and that will blow out the deficits and the entire system will collapse 2016-2020. So hold on to your socks. This is likely to be a wild ride.