Are The Wheels Coming Off The System?

The dollar is said to be “soaring,” though I take issue with that characterization for now (see the chart below);  10-yr Treasury yields are also rising, though the yield on the 10-yr is only up about 67 basis points if you measure from January 1, 2017.  What’s really going on?

Ten years of money printing by the Federal Reserve has removed true price discovery from the markets.  The best evidence is the inexorable rise in the stock market despite the fact that corporate earnings have been driven largely by share buybacks and GAAP accounting gimmicks.  Measuring stock values  on the basis of revenue and revenue growth multiples would reveal the most overvalued stock market in U.S. history.

Now that the Fed has stopped printing money used to buy Treasury issuance and prop up the banks, the system is vulnerable to relatively small increases in interest rates.  20 years ago, when I was trading junk bonds on Wall St, a 60 basis point rise in the 10yr or a 200 basis point rise in the dollar index would have be a non-event.  Now those types of moves permeate the current market and policy narrative.

In fact, the Fed is terrified by the Frankenstein stock market is has created to the extent that, since the sharp decline in August 2015, the Fed steps in to prevent the inevitable crash when a draw-down in the Dow/SPX approaches 10%.

With the dollar moving higher, gold is has been sluggish. Now the price is being attacked aggressively in the paper gold derivatives market.  The propaganda is that a rising dollar and rising rates are negative for gold.  However, gold had one of its best rate or return periods from mid-2005 to mid-2006 while the dollar was spiking higher.  More troubling, the trading pattern in gold and the dollar reminds me of the same pattern in 2008 – just before the de facto financial system collapse hit the hardest (click on image to enlarge):

The economy has been in a recession for most households below the top 1% in wealth and income. This chart is one of many examples showing that most households are not even fortunate enough to be living on the economic gerbil wheel. Instead, they are sliding backwards downhill in their debt/lease-saddled vehicle and the brakes are about to go out:

I would argue that the rising dollar – an concomitantly the obvious official attack on the price of gold – is the signal that the wheels are coming off the system. The Government issued nearly half-a-trillion dollars in Treasuries in Q1, thanks to the soaring defense and entitlement budget  combined with the massive tax cuts. The spending deficit and the flood of Treasury issuance is going to get worse from there and well beyond the CBO’s sanguine projections.

Throw in soaring oil and gasoline prices and rising household debt delinquency/default rates against a backdrop of stagnant wages and an accelerating ratio of household debt service payments to personal income and it’s pretty obvious that the wheels are coming off the system.

The U.S. economic and financial system is an enormously fraudulently Ponzi scheme in which record levels of money printing and credit creation have acted as temporary bandages placed over gaping cancerous economic wounds that are soon going to start hemorrhaging.

The homebuilders are already in a bear market, like the one that started in mid-2005 in the same stocks about 18 months before the stock market started heading south in 2007. My Short Seller’s Journal subscribers and I are raking in a small fortune shorting and buying puts on homebuilder stocks. As an example, I recommended shorting Hovnanian (HOV) at $2.88 in early January. It’s trading at $1.78 as I write this – a 38.2% ROR in 4 months. Anyone get that with AMZN in the last 4 months? You can learn more about the SSJ here: Short Seller’s Journal.

6 thoughts on “Are The Wheels Coming Off The System?

  1. The banksters saddle up the proles
    Hya mules, Hya! Giddyap!
    The gerbilization of the markets; we break our backs on the wheel
    There are no markets; there’s no price discovery
    There’s only the long painful slide into penury, as the peasants slouch towards neo-feudalism
    I’m long hamster chow

  2. Given that the Fed has turned off the printing press for now, and the government funding requirement is very large and growing, then it looks like the Chinese theory of the US intentionally creating global financial stress and crises globally, and driving capital into the US to fund their debts, is now operative. All the more reason for the world to de-dollarize.

  3. Dear Dave, thanks for the article.

    I have looked at this and came to this conclusion: This week’s market action focuses on the spike in the DXY and the relentlessly rising yields of the 10y US Treasury note. Both are moving into the wrong direction. Wrong because the appreciating Dollar threatens the solvency of emerging nations, struggling under the weight of 16 trillion of Dollar denominated debt. Wrong because the rising Dollar will undermine US exports and blow out the dramatic US trade deficit even further.

    The biggest threat is the deterioration of the US bond market. The value of 10y Treasuries has been falling for weeks now, slowly and incrementally at first, much faster and more noticeable now. Foe a long time, market commentators and misinformants communicated the illusion that the 3 per cent ceiling would hold. It did not. Yields finally smashed through it and are now on the move towards 4 percent, a killer for the US economy and the stock market. If history is any guide it will spread from the US across the rest of the globe and will end this economic “expansion”.

    For more that a month now we could see all attempts to stop the rot fail. The manufactured rise in the Dollar did not stop it, neither did the determined interventions in the US bond market, most notable today. The main underlying motivation is the growing flight out of the Dollar (the ongoing Dollar collapse) and the desire of foreign nations to move at least part of their Dollar reserves into precious metals. The gold and silver markets, manipulated for decades with a stealth depletion of western gold stocks are ill prepared for this event. This explains the enormous rise in the issuance of Exchange For Physical contracts. The latest defaults on physical deliveries for 2018 sales only are: For Silver 1266 million oz and for gold 3112 mt. So far the buyers stay quiet. It appears that the US government has put a gun to their head with the classic Humphrey Bogart quote from the Maltese Falcon: “When I slap you, you’ll take it and like it.”

    There is always room for a miracle. This is now a moment for economic statisticians to teach us that the US economy did far better than we imagined in our wildest dreams and that the horrendous fiscal situation is the complete opposite. The hand of god may intervene and we will see that poor old Belgium becomes the world’s biggest investor in US Treasuries. Failing that there can can be only one advice: Put your tin hat on and get ready for a bumpy ride.

  4. Anyone notice that Iran now will only accept Euros for their
    crude oil shipment ? In other news, my favorite Mexican restaurant
    put so much habanero sauce on my carne asada at lunch today that
    I’ve got to put the toilet paper in the freezer.

  5. Just a guess, but Frankenstein will be held together until midterm elections in November are concluded. The military is getting its extra billions and the proles now have their “tax cuts”. All that remains is the job of getting more Republicans elected, especially to the Senate. After that, then the ponziconomy can take its enormous and long awaited dump.

Leave a Reply

Your email address will not be published. Required fields are marked *

Time limit is exhausted. Please reload CAPTCHA.