With all of the turmoil in Ukraine, Iraq, and Gaza, the sell-off in stocks over the last couple of weeks is causing many people to ask, is the top in for this Fed-induced bubble? The short answer is NO. The bubble in govt hubris, that is turning the world against us, may have popped, but stocks are not done inflating. The reason has nothing do with traditional valuation methods, or even the Fed. Simply put, stocks will rise due to global capital flows that see no other alternative, at least for now.
As stated on April 5, 2014, the “Jaws of Death” pattern in the Dow (shown below), that was originally displayed on 1/31/2013 , still remains valid. At that time the upper boundary was around 17,000. As the bearish wedge expands, the upper boundary is now closer to 17,200. By the time the bubble burst in 4Q15, the upper boundary will be closer to 17,500. Since final legs can blast through resistance before crashing, making a guess where stocks will top out is about as futile as picking the top of the NASDAQ in Dec, 1999, when it rose another 85% in the final three months.
In the short-term, the S&P 500 and Dow should bounce to the 1960 and 16,800 area, respectively. That bounce should be followed by a test of support during September around 16,200 for the Dow, and 1900 for the S&P 500. If those support levels hold, as they should, the final “irrational” parabolic bubble will expand above Dow 17,200 and S&P 2,000.
The short-term head & shoulders pattern for the NASDAQ (NDX) points to a downside target of 3680, which also corresponds to the lower boundary of the uptrend that has been in place since late 2012. If the uptrend holds, then the NDX will likely make a final run toward 4200 before collapsing later next year.
What will propel stocks to new highs? Where else can countries park their reserves when they are threatened by economic implosion and/or war, especially when US treasury rates start rising from historic lows? Foreign countries have been reducing their purchases of US Govt debt for years. However, as the sovereign debt crisis ripples across the globe and crashes onto our shores by the end of 2015, the move from public debt to private equities will accelerate. When the economy turns down again in 4Q15, I suggest keeping an eye on the number of municipal bankruptcies, which will lead to civil unrest as public pensions vaporize.
It’s no coincidence that war accompanies economic decline. Politicians always need something to distract the masses from their corrupt and flawed policies. Why not reward your donors in the military industrial complex while you’re at it? As socialism continues to collapse the economies of Europe, Japan, and the US, expect the leaders in these countries to point the finger at divisive issues and foreign boogeymen. Saving ones job, perks, and power is always the priority of those in govt. Yes, hubris and psychopathic behavior can also afflict corporate leaders, but they can only drive their company into the ground.
Like most short-sighted govt undertakings that ignore human nature, the current cast of characters are replicating the same flaws as govt’s all the way back to the Roman Empire. As govt’s try to mask their overspending, they resort to tactics that produce currency wars, trade wars, and real wars – all of which results in capital fleeing and not being available to grow businesses.
Today’s examples include, the NSA and FATCA hunting and confiscating money for a broke govt, manipulating interest rates and currencies, and implementing sanctions and tariffs. All of these actions are an attempt to circumvent the invisible hand of free markets, which by definition reduces commerce, and incomes. Since govt never wants to downsize itself, it takes what others have left, precipitating the economic and societal death spiral. As the economy turns down, the govt theft will migrate from the standard tax and fee increases to bail-in’s (confiscation of IRA’s, 401K, and bank deposits). This kind of theft requires big distractions.
The international turmoil will send capital fleeing into the dollar, which will also increase the size of dollar-based debts. It will ultimately be the phony strength of the dollar that blows up the balance sheets of the Fed, corporations, and individuals that hold excessive dollar-based debts.
The recession just reported in Italy will cascade into France and Germany, which will spill over into China, Japan and the US later in 2015. Economic desperation will cause these govt’s to take actions that will further erode confidence, which is the primary underpinning of fiat currencies. The crisis in confidence that will grip the world during 2016-2020, will make physical gold and silver one of the better investments during this time.