The Stock Market Is A Bubble, Economy Entering Deflationary Period

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Includes: SDS, SPY
by: Gold Bug

Summary

The stock market is obscenely overvalued, this is a bubble.

Serious questions need to be asked about Federal Reserve over reach in the economy.

Government expenditure and debt make this an existential threat for the U.S.

The Atlanta Fed Quote:

"The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2016 is 0.1 percent on April 8, down from 0.4 percent on April 5. After this morning's wholesale trade report from the U.S. Bureau of the Census, the forecast for the contribution of inventory investment to first-quarter real GDP growth fell from -0.4 percentage points to -0.7 percentage points."

The countdown to 0:

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U.S Monetary Base, Currently 4 Trillion.

The Federal Reserve has been trying its hardest to prevent deflation. However, economics is a closed system were interference in one area will cause blowback in another.

The following chart shows the increase in the U.S monetary base caused by Quantitative Easing. This policy performed its intended goal of preventing deflation, but at the cost of inflating another bubble in the equity markets.

U.S Monetary Base, 1918 to Present:

Monetary Base Expansion Has Created A Stock Market Bubble.

We may not have been seeing significant increases to the CPI since the start of QE, but without a doubt there is significant inflation in this economy. Before inflation became an arbitrary index of consumer prices it was objectively considered the expansion of money supply. While base money is not necessarily the money we interact with, it is still money and it has been inflated.

I believe this base money created by the Federal Reserve has been exported into the equity markets and the result is a massive stock market bubble.

U.S Base Money Expansion Compared to The Stock Market:

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We have brokerages who are charging as little as 1% on margin loans when just a decade ago 8-9% was the norm. This is what a bubble looks like. Easy credit leads to wild speculation leading to and an overgrown market waiting to collapse. Such a level of leverage has not been seen since the crash of 1929.

It is not coincidence that financial institutions like Wells Fargo and UBS began issuing highly leveraged train-wreck securities that offer 2X and even 3x leverage at almost the exact same time the Fed began pumping them with cheap monetary Kool-Aid and near 0% interest rates. The result: UTWI DWTI, QQQ, MORL, BDCS and millions of dollars in retail investor wealth destroyed.

These types of securities can also be purchased with the afore mentioned margin for an effective leverage rate of over 9x on the underlying index. If this is not evidence of mal-investment and risk distortion I don't know what is.

The Stock Market Is Worth Over 1.2% Of GDP:

The stock market is obscenely overvalued. It totals over 120% of the dollar value of all the goods and services in the entire economy. Put like this, does it really make sense for a percentage of the equity of companies within the economy to be 20% greater than the value of the whole economy?

No, it doesn't. That is why the market has never stayed at this point for very long.

Stock Market to GDP Ratio:

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Technicals Suggest This Will Be The Most Severe Correction Since 1929:

This is what is known as the Dow Jones Megaphone Pattern, it shows us how every bull run has corresponded with a larger and more severe bust.

This is occurring because instead of letting the market clear via deflation, Keynesian governments and central banks simply kick the can down the road by inflating a bigger and badder bubble.

The Dow Megaphone Pattern:

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Government Debt Makes This Situation An Existential Threat To The U.S:

If this was only an economic situation the problem would not be so severe. The added element of politics makes things downright scary.

What we see in this graph is that government current expenditures are growing significantly every year with no end in sight. The purple line shows U.S tax receipts. Government revenue is almost as business cycle dependent as the stock market.

Government Tax Receipts During Recession:

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If economic conditions worsen we can expect to see the debt rise to even more unsustainable levels and. depending on the severity of the downturn. programs like Social Security and MediCare could find themselves at risk.

Conclusion:

The U.S stock market is currently in one of the most severe and obvious bubbles in history and the bubble is in danger of bursting at any moment. This will result in recession and massive deflation. No amount of QE and stimulus will be able to prop this up much longer. If my prediction holds true no asset will be safe; not gold not bonds and certainly not stock.

The condition of the market is so disgusting that I have liquidated all my positions into cash. I predict we will see recession within 24 months. I am waiting for (NYSEARCA:SPY) to break past $175, this is my buy signal that the market has capitulated, at which point I will go long (NYSEARCA:SDS) the 3x inverse S&P 500 ETN.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.