I was forwarded an article from David Stockman the other day with the tag line “Get out while you still can!”. In light of last weeks two-day sell-off, Mr. Stockman would appear to be quite the forecaster, except for the fact he has been telling his readers to get out of stocks and the dollar for years. Don’t get me wrong, I like Mr. Stockman’s experienced insights and warnings about the Deep State and the financial chaos that’s coming due to our govt’s insatiable dependence on debt and political donations to maintain their jobs, perks, and power. However, like other smart people that keep calling for the dollar and stocks to collapse (i.e. Jim Rickards, John Robino, Jim Sinclair, James Turk, Paul Craig Roberts, etc.), Stockman has been dead wrong on the response of global capital. For example, it has been the euro that has been stair-stepping downward since 08′, not the dollar. Stockman and company are easy to believe because their concern for this country seems sincere. However, their forecast results indicate they are either talking their books or they suffer the common flaw of not thinking globally.
Stockman, along with the gold bugs and debt sellers, have been preaching the demise of the dollar since the Fed started its money printing (QE) and (almost) zero interest rate policy (ZIRP) in response to the 08′ financial crisis. This sales job works, because if one is US-focused, it makes sense. I certainly bought it for a while. After all, the money printing and unsustainable debt are real problems, but when compared to the rest of the world, not so much.
As we know, declining interest rates produce higher bond prices, and a declining dollar means your debt gets paid back in cheaper dollars, and if US debt is bought in a currency that appreciates against the dollar, then it’s a home run. That’s been the sales pitch since 09′, and foreign govt’s have bought it hook, line, and sinker. The con continues, even though the dollar began ramping higher in mid-2014, and rates have been moving higher for over 7 months.
The issue is global capital flows / investment are 10 times larger than trading volumes, and the demand for dollar-based assets from abroad dwarfs the Fed’s money printing (debt creation). On top of that, much of the money that was created by the big banks from selling bonds to the Fed was redeposited back at the Fed for a risk-free 0.5% return, and not lent into circulation. You also have the fact that debt outside the US is nine times larger than the US’s $20 trillion. So, as bad as the US economy and banking system are, they are still better than the rest of the world.
The stock market will continue to climb higher in the years ahead because of global flows away from troubled areas of the world, not because of fundamentals. The bounce in the euro since the French election is just that, a bounce on the belief that the anti-EU/euro populist movement died with Le Pen’s loss. Since the reality is economic, not to mention Macron is really a socialist/Marxist, the economic problems in France and the EU will get much worse because Macron’s victory gave govts the excuse NOT to reform. Much can happen between now and the German elections in September. So, lets see how badly the bureaucrats screw things up in the next four months. A Merkel loss will be far worse than a Le Pen win, and will send huge flows into the dollar.
The establishment’s all-out propaganda attack against Trump, which is delaying tax reform, is hurting the dollar and causing the hot money to sell the dollar and stocks. Like the EU bureaucrats that will destroy Europe under the false belief they can save their perky lifestyle; the Deep State, media, and other never Trumper’s will do what ever it takes to maintain the status quo that has enriched them so nicely. The sad reality is the lack of govt reform is the root cause of our problems, and the sheeple can’t see through all the relentless propaganda.
The fact that the S&P 500 did not close the week below 2335, and the Dow did not close below 20K, means a more serious correction is off the table for now. However, if the indexes do close out May below the April low, then a prolonged correction into 2018 is in the cards, which means the big buying opportunity is still ahead. How big an opportunity? Think 1928, when the Dow doubled before the 1929 crash.
The bottom line is the euro is toast because the debts of member countries were never consolidated to create an alternative to US Treasuries, and because the EU is run by self-interested unelected bureaucrats that are destroying socialist countries faster than normal. With Japan drowning in debt and suffering a demographic crisis, there is no serious alternative for reserves, other than the dollar, at least until a hybrid alternative is operational, which won’t occur until a financial crisis forces the change.
The financial crisis won’t occur until the rising dollar and rates bankrupts foreign govt’s and other entities holding too much dollar-based debts. When the govt bond bubble pops, which dwarfs the stock market, the stock market will be the only other market that’s deep enough to absorb the flows? Yes, gold will do well, but blue chips will do better because they will replace govt bonds as the safe haven, and gold has the risk of govt confiscation – plus, it can’t be transported through an airport metal detector.