Tag Archives: FOMC meeting

Deutsche Bank Is Collapsing – But It’s Not The “Black Swan”

The global financial system is close to going supernova.

Both Credit Suisse and Deutsche Bank stocks are hitting all-time lows.  Both are collapsing despite billions in Central Bank – Fed, ECB, Bundesbank, Swiss National Bank – monetary support.

Deutsche Bank had been advertising a 5% interest rate to customers in Belgium on  90-day deposits of at least 50k euros .  Bank deposits are essentially “loans” to a bank from the depositor (creditor).  This implies that the rate that DB had to pay to attract deposits is equivalent to a triple-C rated credit (although the 10-yr junk bond rates for double-B  rated bonds are around 5.5%, keep in mind that DB is paying 5% for 3-month money).   This is the unmistakable sign of a company that is collapsing.

DB stock was down over 3% yesterday on a day when most big TBTF banks for down 1% or less. It’s down another 2.8% 3% as I write this today, trading below $15/share for the first time ever.   This bank is obviously collapsing and any money manager who holds onto this stock for clients is in serious breach of fiduciary duty.  This is the 2016 version of Enron.

But it won’t be a “Black Swan” event.  The Central Bank authorities knew DB was going to collapse when Anshu Jain was fired in June 2015, literally about  2 weeks after DB’s board had given Jain even more control over bank operations.  However, the Central Banks mentioned above collectively had a year to put a “ring” around the collateral damage – i.e. the derivative counter-party default risks – that occurs from DB collapsing.

The Credit Suisse problems have been far less visible but the behavior of the stock is signalling to us that CS’ problems are on par with DB’s.  I don’t know if both banks will ultimately end up being monetized by a combination of taxpayer bailiouts (including U.S. Taxpayers) and bail-ins.  I would suggest that bail-in capital available would not even remotely address the derivatives-related liabilities embedded in the Credit Suisse’s and DB’s balance  sheets.

My point here is that – unless there’s even bigger problems hidden from the Central Banks, which have had a year now to address the DB/CS situation – a DB collapse will likely cause a sell-off in the stock market, but would not be the “Black Swan” for which everyone is searching.

I don’t know what the Black Swan is or what it will look like.  Otherwise it wouldn’t be a Black Swan, right?  What I will suggest is that the day in which the “box” with Schrodinger’s cat appears and we look into to it to see a dead cat is quickly approaching.  I would also suggest that this is why those who have been calling for a short-term wipe-out in the price of gold have been proved wrong for over two months, despite the blatant daily attempts by the Fed/ECB/bullion banks to push the price of gold lower.

This is a development that no one is talking about – but I believe that is represents a hidden slow-motion financial collapse that will soon accelerate:

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The “Markets” Are A Total Farce: Stocks Pushed Up – Gold Pushed Down By The Fed

I described the other day what a circus the inter-FOMC meeting periods have become.   One by one Fed clowns appear to describe an economy at full employment and threaten us with another one-quarter of one percent Fed Funds rate hike. Since this process has started last Monday, the S&P 500 has been flat but gold has been taken down methodically  about $80, or 6.7%.   The mining stocks as represented by the HUI have been dropped 12% from their high last week.

Yesterday the circus took on a new dimension.  SF Fed John Williams was once again out promoting rate hikes this year and even more rate hikes next year – LINK.  St Louis Fed clown Bullard was out yesterday pontificating that low rates  for too long could be risky – LINK.  You don’t  say, James?  Is he referencing the nominal .25% Fed funds rate since  lat e 2008?  OR is he referencing the negative real interest rates since well before 2008?  To which measure of interest rates are you are you referencing, James?

They both made some insane assertions about “full employment” in the economy.  Does that mean that anyone who wants to be a bartender or barista can find gainful employment?  But what about the 38% of the population that is no longer counted as part of the labor force?   A large majority have given up looking for work because it’s easier and pays better to soak off the taxpayer via Social Security Disability, Welfare and Student Loans.

Everyone knows that the true unemployment rate is over 20%.   This is based on applying the way the Government calculated unemployment in 1980.  We still have the issue of data collection and “massaging.”  The economy is far from healthy and the flow of economic reports from private sector sources, including regional Feds, continue to reflect an economy that is deteriorating down the level of economic activity in 2009.

The Fed needs to promote the idea of rate hikes in order to show consistency in policy with its narrative of “full employment, tight labor market conditions and an improving economy.”  Just as important, it reinforces the Fed’s ability to manipulate the price of gold.

The source of frustration for many of us is that higher rates correlate with lower stock prices and higher gold prices.    Days like today in the markets are difficult to watch because it’s driven entirely by false propaganda and direct intervention in the market by the NY Fed/Exchange Stabilization Fund.

While days like today may be painful to watch, the truth is that since the Fed began bashing gold with rate-hike drivel starting last Monday, the S&P 500 has not moved higher despite days like today which make it feel like the stock market is poised to hit an all-time high.

When the Fed pushes down the price of gold with paper during NY Comex floor-trading hours, take advantage of it by buying some physical gold or silver.

I have moved U.S.Government electronic monopoly money from my checking account into my  Bitgold account every day this week.  I don’t have the funds required to buy a 1oz. bullion coin everyday, but  BitGold  allows me to accumulate .9995% gold grams. This is bona fide allocated gold.

I want to make it clear that I’m not an affiliate or associated with Bitgold and do not get any ad revenues from Bitgold for the display link at the top (although I’m sure I could if I requested it).  I just really believe in the service and I think anyone can benefit from moving their digital bank credits out of the global Central Banking system and in to Bitgold.  I receive a 2% “bonus” if someone uses the links on this site to sign-up for Bitgold and everyone who opens a new account that is funded receives a 5% bonus.

I had an in-depth conversation with the CEO several weeks ago and when I find the time I am going to share my analysis of the with the subscribers of my Mining Stock and Short Seller Journals.

SoT Market Update: Federal Reserve Intervention In Full Force

The Fed is in full market intervention mode right now.  It is desperate to keep the S&P 500 above 2,000 and gold below $1300.  Despite the intensified threats to hike interest rates at the June FOMC meeting, the stock market continues to spike up and gold is being pushed down.  It’s blatant manipulation.  Interestingly, research shows  – LINK – that Fed interest rate hike cycles are bullish for gold.

Futhermore, the non-seasonally adjusted, non-manipulated economic data continues to Untitledshow the economy has slipped into an “unofficial recession.”  Certainly a rate hike accelerate the problem reflected in this graph (click to enlarge) to the right, which shows the year over year rate of change in the number of delinquencies for commercial and industrial banks.

In other words, we can expect the rate business bankruptcies and liquidations to accelerate going forward.  I guess if Yellen wants to get tagged with that legacy then the Fed should go ahead an push up rates another 25 basis points in June.

The FOMC’s Cirque du Merde

Silver continues to trade DIFFERENTLY, in a positive manner that it has not done in YEARS. The potential for the silver price to explode in the very near future is all there.  The shares continue to maintain their own positive tone and refuse to give up much ground on corrections. – Bill Murphy from GATA’s Midas report

Nearly the entire precious metals investing community looks at the Comex options expiration and the Fed’s FOMC meetings with trepidation, as historically those two events have triggered a massive Comex paper attack on the price of the metals.  Having both events back to back in the same week elicits even more fear.  Of course, Goldman Sachs commodities clown, Jeffrey Currie, was on CNBC again today calling for $1000 gold.  This guy has absolutely no shame about continuously making an idiot of himself with his price predictions for gold.

I exchanged emails with Bill Murphy on Tuesday morning because the precious metals, especially silver, were unexpectedly buoyant in the morning.  I wrote last week that the Comex bullion banks, based on the put/call open interest for May silver, were incentivized to make sure silver closed below $17 today for options expiry.

I emailed Bill asserting that “they” can’t keep the metals down.   Gold spiked at 9:00 EST Untitledon no news or event that would have triggered a spike The 5-minute graph indicates that it started to move up and then short-covering kicked in. Silver started to move and then there’s a red bar and then silver pops. That tells me that they tried to hit silver to keep it from popping but short-covering still kicked in. (click on image to enlarge)

The 60 minute bar chart of silver shows silver oscillating between $16.80 and $17.30 since Untitledlast Tues, with a move up that was slammed with a paper hit on Thursday. But silver refuses to go lower at the direction of the Fed/bullion banks. At this point silver could break either way. They are very desperate to keep it from breaking up, but they seem incapable, at least for now, of forcing it lower.  (click on image to enlarge)

The charts smell of serious desperation. Most gold commentators are pointing at the COT structure and sweating bullets. That side of the ship is too crowded in my opinion. We may well get another surprise move higher tomorrow after the FOMC’s Cirque du Merde show is over.  Gold and silver are definitely behaving differently than we’ve seen over the last 5 years.  The criminal bullion banks seem to be having trouble pushing them lower.

Last week I was invited on a Denver-based radio show, Wake Up With Steve Curtis.  We discussed a lot of the factors that are underpinning this surprising strength in the precious metals. You can listen to the podcast here:

I will be publishing the latest issue of the Mining Stock Journal on Thursday. I’ll be featuring a relatively undiscovered junior mining company that has 5+ million proved ounces of gold and silver in the ground. You can access this report here:  Mining Stock Journal.  I am sending the back-issues to new subscribers but this won’t last much longer.

“Looking forward to the next mining recommendation.  I sold my TAHO Sep 12.50 for a nice profit and need  a place to put some of it.”  – Subscriber “Ed”

Why Is This Big Hedge Fund Manager Terrified?

When I saw this comment from Ray Dalio I said to myself, “this isn’t someone trying to be a prognosticator or compassionate person, this is someone that has had an epiphany that his huge success probably had more to do with his rolodex and endless supply of free money more than anything else and is becoming depressed over that realization.”  His All Asset fund was down 7% in 2015 and negative 2 of the past 3 years.  –  A colleague who manages money in an email to IRD today

Ray Dalio has achieved “rock star” status in the hedge fund world.  Per a report sourced by Zerohedge, Dalio appears to be frightened by the prospects of the “normalization” of Central Bank monetary policy.  In fact, he penned an op-ed in the Financial Times in which he states:  “Since the dollar is the world’s most important currency, the Fed is the most important central bank for the world as well as the central bank for Americans, and as the risks are asymmetric on the downside, it is best for the world and for the US for the Fed not to tighten.”

What has Ray frightened?  There are several highly problematic assertions embedded in that comment by Dalio.  First and foremost is the idea that the dollar is the world’s most important currency.  I wonder how China might respond to that comment?  China has been methodically getting rid of its use of the dollar.  In fact, it can be argued that the world’s most important currency is gold, which is why China and Russia have been accumulating gold on a daily basis with both hands.  I find it interesting that Dalio can discuss currencies and monetary policy and not utter one word about gold.

Dalio has been making the argument that economic vitality is dependent on asset levels. This idea is endemic to the hubris behind Wall Street’s financialization of the monetary system.  The truth is the only outcome accomplished by a system based on fiat currency, fractional banking and the financialization of assets is the monarchical enrichment of money skimmers like Dalio and his Wall Street bank cohorts. If the Fed were to begin raising interest rates in earnest, it would remove Dalio’s ability to skim the system.

As I discussed in a blog post last week – LINK – contrary to Dalio’s assertion, financial assets do not create real economic growth.  If anything, the proliferation of financial assets creates nothing more than Wall Street-enriching bubbles which culminate with a systemic collapse that destroys everything.   To correlate the trading level of financial assets with the creation and support of economic growth is either an intentional misrepresentation of the truth for the purpose of self-interested preservation or naive ignorance.  My inclination is to dismiss the latter as beyond probable.

Debts have continued to build up over the last eight years and they have reached such levels in every part of the world that they have become a potent cause for mischief…It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something.  – William White, former BIS chief economist – Telegraph UK

The debt referenced above by the former BIS chief economist are the credit market liabilities  to which Dalio refers.   It is the world’s inability to service or repay them that Dalio fears – not the contraction of economic activity.  Real economic growth has been contracting for at least 8 years.  Easy monetary policy only serves to exacerbate the predicament.  Of course, the removal of easy monetary policy sabotages Dalio’s ability to continue making a fortune off the inflation of financial assets.

A collapsing global financial system will take away Wall Street’s continued enrichment from QE and ZIRP.   This is what has Dalio frightened and this is why he is urging the Fed to refrain from raising interest rates.  Perhaps he’s also making an appeal for more QE.   What better way to re-inflate monetary assets than for the Fed to print more money?

Unfortunately QE will eventually lose its effectiveness as an asset inflator.  The old law of diminishing returns.  I have no doubt Mr. Dalio is familiar with that law of economics.  But he’s lost sight of this reality because he’s been blinded by wealth-induced hubris.  At some point that proverbial can being kicked by the Fed and the U.S. Government will no longer move.   That’s when the real fun begins and that’s when people will wonder why Dalio never discussed gold except in front of his elitist cohorts at the Council on Foreign Relations.

Is The Fed Beginning To Lose Control?

I enjoyed Stockman’s piece on Dec. 30th – LINK – concerning the impact of the meltdown in the commodity industries. I think people are seriously underestimating the impact.  –  New Year’s Day email from John Embry

I would like to point out that John and I always discuss a few pleasant topics as well as plot the demise of the global economy.   On that note:  Happy New Year everyone (Buon Anno a tutti).

I pointed out to John that Stockman’s analysis did not include any consideration of the amplification caused by derivatives on the destruction to the world/U.S. economy that is going to be felt from the price collapse of oil and basic industrial commodities.   In fact, I would argue, though it’s next to impossible to prove, that the Fed spends a significant amount of time working to prevent any evidence of the brewing derivatives nightmare from reaching overt public view,  in conjunction with the ECB, BoE and U.S. Treasury (the exchange stabilization fund).

An interesting event first brought at least to my attention by Zerohedge occurred on December 31.  The Fed funds (FF) rate plunged significantly below the lower bound of the Fed’s .25-.50% FF rate to the rate set that day at .12% (source:  Zerohedge, with my edits in black) click to enlarge:

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The question is, why did this happen?  To begin with, although it went largely unnoticed, the Fed also jacked up the interest it pays on bank excess reserves (IOER) from .25% to .50% at the same time it nudged up the FF rate.   Let’s first review what Fed funds are and how they work mechanically.

The Fed funds is the mechanism by which banks who have cash in excess of what they need to meet reserve requirements lend these “excess” reserves to banks who might need a temporary loan in order meet reserve requirements.  It is thus a system by which banks with extra liquidity make short term loans to banks who need liquidity.  The Fed funds rate is the rate at which excess funds are loaned out. The FF rate is set in a competitive bidding process each day based on the supply of funds made available to lend and the demand to borrow these funds.

In theory the Fed is supposed to be able to “control” the FF rate by regulating the amount of ready-liquidity in the banking system.  The Fed “adjusts” systemic liquidity using the reverse repo and repo “tools” (it can also adjust the minimum reserve ratio but this is rare). If the FF rate is headed above its target range, the Fed repos cash liquidity into the banking system.  Conversely, it uses the reverse repo if the FF rate is headed below the lower bound of its target range in order to remove systemic liquidity.

The IOER “mechanism” was put in place when the Fed began using its “helicopter” to dump printed money into the banking system.  Note:  half of the printed money either remained inside the banking system, which is a closed system, or went to the U.S. Treasury via transmission through the banking system;  the other half of the printed money was injected into the mortgage banking system through Fannie Mae, Freddie Mac and the FHA via the banking system.  The latter form of helicopter money ignited the mini-housing bubble and has led to mortgage and derivative products similar to the same products presented in “The Big Short.”

Prior to the Fed’s paying interest on excess reserves, banks were not earning any interest on their excess reserves at the Fed unless they lent out that money to other banks via the Fed funds mechanism.

The justification used by the FOMC in implementing the IOER was that it would enable the Fed to control the lower bound of the FF rate despite the flood of bank excess liquidity sitting at the Fed.  This is because if the FF rate were to slip too far below the IOER rate, banks would keep their excess liquidity sitting in the excess reserve account rather than make those funds available for interbank lending.   In the current framework for this interest rate management model, the FF target range is .25-.50% and the IOER is .50%.  A further elaboration of this idea can be found here:  LINK.

Without getting too theoretical, in theory the FF rate should be slightly below the IOER rate.  This is because Fed funds are collateralized by Treasuries and triple-A mortgage paper.  The IOER is “collateralized” by the Fed’s balance sheet, which has a tiny book value in relation to the size of the balance.  In other words, on a “risk-adjusted” basis, a Fed funds loan is slightly less risky than a deposit sitting in a Federal Reserve account. Therefore, the Fed funds rate, everything else being equal, should be slightly lower than the IOER rate.

This brings us to the Friday event, when the Fed funds rate crashed below the .25% lower bound of the current FF rate policy, indicating that the amount of liquidity made available for Fed funds borrowing was well in excess the amount demanded to be borrowed and well in excess of the Fed’s ability to keep the FF rate at the .25% lower bound.

Why did this occur?  The simplest explanation is that the Federal Reserve is losing control of the amount of liquidity sloshing around the banking system and therefore is losing control of interest rates.  Yet, on Friday, the FF rate was set not only significantly  below the IOER rate but it also plummeted below the Fed’s “lower bound” rate.  This means that some banks chose to lend to other banks at a rate that was significantly below the IOER rate.  Bernanke’s Fed told us this would not happen.

It’s possible that this will be attributed to an end of year technical glitch.  As Zerohedge points out in the article linked above, the FF rate dropped at month end every month in 2015.  But it remained within the Fed’s lower bound of 0%.

The Fed could have prevented this from occurring if it had removed significantly more than $105 billion in liquidity from the banking system when it nudged up the FF rate (using the reverse repo tool).  In fact, some estimates were that the Fed would need to remove up to $1 trillion in reserves in order to maintain the lower bound of the FF rate target range.

There must be some reason that the Fed did not remove more liquidity from the system.   This line of reasoning further points to the probability something might collapse if the Fed were to remove the amount of liquidity from the system necessary to keep the FF rate from dropping below the lower bound.  It also suggests that the Fed is losing control of its ability to manage the massive liquidity monster it has created.

I want to close out this post with a quote from someone (I’ll refer to him as “MC”) with whom I was discussing this subject yesterday afternoon.  We both agreed that the Zerohedge post, while informative, was missing some key ingredients in its description of what had occurred.   It was MC’s comment below that led me to meditate further on this ordeal and the more I ponder the “ingredients” which went into Wednesday’s events, the  more I believe MC is on the right track here:

If I had to choose between excess liquidity or a bank that can’t afford a rate in the channel [i.e. the Fed fed funds target range] it would be the latter.  But really?  [The Fed] must be going to extreme measures to avoid any appearance of stress somewhere in the system.

Flexing my conspiracy theory brain cells, it must be something big like JPM where it is big enough to have a real demand for funds where these small differentials [i.e. the difference between the .25% lower bound for the FF rate and the lower rate of .12 at which the FF rate was set on Wednesday Dec 31] could matter and is systemically important and they don’t want attention drawn, yet… Like going to the discount window, etc

Dr. Paul Craig Roberts: Everything Is Disintegrating

Note:  Many of you have already heard this three-part interview of Dr. Paul Craig Roberts from the Shadow of Truth.   Rory went back and re-edited into Part 1 some material that he omitted the first time around pertaining to a short discussion we had about the fact that there are no longer any honest, non-corrupted Congressmen since the departures of Ron Paul and Dennis Kucinich.

In prepping for this podcast, Rory and I had intended to cover the FOMC meeting policy decision last week plus a couple specific geopolitical questions.  Somehow, when we got Dr. Roberts on the phone, we jumped into a conversation on the current political environment in the United States.   From there Dr. Roberts embarked on a completely unscripted discourse in which he describes how and why the United States is collapsing – politically and economically.

The whole western civilization is disintegrating. It’s not a civilization – the western institutions the Americans use to keep things under its thumb – they’re disintegrating under the [American] neocons wars and under the pressure that the neocons have had the American Government put on Russia. – Dr. Paul Craig Roberts

This is an extraordinary three-part podcast:


Stick A Fork In The United States

The tragedy of our day is the climate of fear in which we live and fear breeds repression. Too often sinister threats to the Bill of Rights, to freedom of the mind, are concealed under the cloak of anti-Communism.  – Adlai Stevinson, Speech to the American Legion Convention, 1952

Today the climate of fear being fomented is concealed under the cloak of terrorism/ISIS. Severe repression is coming.  The policies and laws implemented since the inauguration of Bush 2 in 2000 have been slowly strangling the middle class, financially and legally.  The affects of the latter are about to become more apparent and more painful for everyone.

The American public has stood by passively in complete acceptance of the horrendous acts of brutality, savagery and wealth confiscation thrown at it since the passage of the Patriot Act.  We stood by and watched as our Government implemented an illegal attack into Iraq predicated on blatant lies, conducted unimaginable acts of torture on illegally detained prisoners of “war,” bombed weddings and funerals (Hillary Clinton:  “oops, my bad”) – the list seems endless.  The U.S. Government shamelessly throws propaganda in our face which turns the truth inside-out.  Everyone else is the bad guy.  The U.S. is exceptional and therefore entitled to trample over the rest of the world.

Perhaps the most egregious crimes have been right under our own noses, where the elitists have been openly wiping the last crumbs of middle class wealth off the table and into their own pockets.  You really think your retirement fund or pension money will be there when you retire?  That’s laughable.

I’m still trying to sort out and understand the exact reason why the Fed decided to push up the Fed funds rate from zero to not-much-more-than-zero.  What you might of missed is that the Fed raised the interest it is paying to the Too Big To Fail banks who have $2.4 trillion in cash given to them from QE that is earning interest in the Fed’s “Excess Reserve Account.”  The rate was raised from .25% to .50%, effectively doubling the amount of free cash flowing into the banks from their Excess Reserve largesse.   On the other side of this, consumer borrowing rates were immediately raised.

The only conclusion that can be reasonably drawn by the Fed’s move is that the noose described above – put in place quietly over and with no resistance over the last 15 years – is now being tightened.

The S&P 500 Is Set Up To Crash

Let me preface this commentary with the proviso that none of us has any idea the extent to which the Fed and the Working Group On Financial Markets, which has its offices in the same building as the NY Fed, has the ability to prevent a stock market accident.

Having said that, a large portion of the stock market has been in a tail-spin. The Dow Jones Transports Index is down over 18% from its peak last November; the SPDR retail ETF, XRT, is down 15% from mid-July this year; the iShares Biotech ETF, IBB, is down 18% since its high close in mid-July – perhaps ironically one day after XRT closed at its high; AAPL is down 20.3% from its February 23, 2015 all-time high – technically AAPL is now in a bear market; Dow Jones homebuilder/construction index, DJUSHB, is down over 10% from its high close (not even close to all-time high) in August – notwithstanding all the other fundamental headwinds starting blow at housing with full force, hiking interest rates will act like a roadside bomb on the housing market.

The point here is that many sub-sectors of the NYSE, sectors which had been extraordinarily hot as Untitled1stock trades, are now reflecting the truth about the deteriorating condition of the U.S. economy. (click on image to enlarge).

We can dissect the debate over the reasons why the Fed has decided to start “normalizing” – whatever that means – interest rates now. The fact of the matter is that it is impossible to know for sure why the Fed decided to nudge the Fed funds rate up by one-quarter of one percent. What we know based on reams of empirical evidence is that the U.S. economy is now collapsing at the rate it was collapsing in 2008/2009. Unless the FOMC is completely brain-dead – a consideration I would not fully dismiss – the Fed must have had some ulterior for setting a posture of tighter monetary policy.

With the high yield, and now investment grade, bond sectors imploding (I suggested over 2 weeks ago that the virus infecting the junk bond market would spread to investment grade), the next part of the capital structure that will be attacked is the equity “layer.” Many of you might have missed this news release yesterday:  Fed Votes To Limit Bailouts. The Fed is now restricted legally in the scope of its ability to prop up crashing banks.  There has to be a reason this legal restraint was allowed to be executed, because certainly the big banks and the Fed had the ability to derail it.  Perhaps it’s just putting window dressing on impending market developments that the Fed is now powerless to prevent anyway.

I have suggested for quite some time that eventually the natural forces of the market could not be prevented from seizing the S&P 500 and pulling it down to a level that reflects the true underlying economic and fundamental conditions from which markets derive their intrinsic over long periods of time.  History has already shown us many times that market interventions never work indefinitely.  Just ask OPEC.

Again, it’s impossible to time the markets perfectly, but the probability of a big downside event in the stock market is now highly skewed in the favor of those who set up their market bets to take advantage of the coming downside action.  My SHORT SELLER’S JOURNAL is a weekly subscription service, delivered to your email on Sunday night or Monday morning, is a market briefing with two ideas for shorting the market.  I also include some market comments not covered in this blog.

This week I will be featuring a financial stock and some interesting information on the housing market that you won’t see anywhere – at least not at this point.  You can subscribe to this service by clicking here:   SHORT SELLER’S JOURNAL.  If you subscribe by Sunday afternoon, you’ll get last week’s report plus this upcoming report.

S&P 500 vs. The CRB Index Shows Huge Downside Risk For Stocks

While the talking mannequins and “analysts” on cable business shows dissected, discussed and debated yesterday’s FOMC statement, the S&P 500 gave up more than it gained yesterday after the report from the FOMC about the interest rate nudge hit the tape.  Meanwhile the Philly Fed manufacturing index dropped to its lowest level since February 2013, as new orders tanked to a three-year low and future expectations folded.

The reality that the U.S. economy is in a full-mode decline was reinforced by the continued drop in the price of oil, which fell and closed below $35/barrel and by a flattening of the yield curve, where the interest rate spread between the 2yr and 30yr Treasuries declined to its narrowest level since early April 2014.  The price of oil is now below the lows it hit in early 2009.  The flattening of the yield curve reflects the market’s anticipation that the economy is headed for recession, if not already in one.  In absence of extreme Central Bank intervention, the shape of the yield curve historically has been a remarkably accurate economic indicator.

While the S&P 500 has been trending laterally since late 2014.  It’s been slowly “rolling over.” Yesterday’s move popped the S&P 500 back above its 50 day moving average. But today it dropped Untitledright back below both the 50 and 200 dma’s.  The stock market as represented by the S&P 500 is more overvalued now relative to its underlying fundamentals than at any time in history.  (click on image to enlarge).  As you can see, the stock graphically appears as if it is about to roll down a steep hill.

Another indicator which illustrates the enormous downside risk to the stock market is the correlation between the S&P 500 and the CRB commodity index.  Over very long periods of time, the direction of Untitled1the SPX and the CRB is typically highly correlated.  The graph to the left, which goes back 21 years, shows this correlative relationship.  The graph on the left (click to enlarge) is on a monthly scale and goes back to 1994.  As you can see, the divergence between the SPX and the CRB is more extreme now than it was leading up to the peak of the internet/tech bubble.  We know what happened to the stock market in early 2000.  I would suggest that there is a very high probability that the S&P 500 and the CRB will re-correlate and that the move which forces this event will cause a more severe decline than was experienced in 2000-2002 and in 2008-2009.

My  SHORT SELLER’S JOURNAL  is a monthly subscription service that will feature a brief market summary from my viewpoint and offer two short-sell stock ideas plus some trading suggestions, including put/call options ideas.  It will be delivered to your email weekly.SubscriptonGraphic - Copy  I will also send out occasional intra-week updates to help you in your trading decisions.  In addition, subscribers will receive a discount on my full research reports.  If you subscribe before Sunday evening, you’ll get last week’s report plus the upcoming report.  Click HERE or on the graphic to subscribe.