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.