We have had a bounce up since our last posting. Is the Fed-induced stock bubble dissipating; or is continued Fed Easing continuing to prop up perma-bulls? Is the coming war in Ukraine and the bank-supervised deconstruction of the Russian economy going to affect the 'Wealth-Effect' mechanism of central bank control of stocks? Or has the 'new' stock market been engineered to never retreat meaningfully?
Can the Fed 'fix' the markets so they never go down?
When we look at the OEX (S&P 100 Index), we see an index with short-term trends still breaking down. Normally this would lead to a sell-off that clears the way for another and healthier (eventually) attempted rally. But nothing is 'normal' now. Too much manipulation by the 'Control Freaks' at the helm of the banks and the treasury.
So we present this image with the understanding that the 'powers-that-be' now see it is their responsibility to not allow things to take their natural course. That the 'natural course' is apparently something that needs to be changed, improved, perfected. This is a root of the problem, in fact.
Nature needs to be 'fixed', because it is imperfect. The business cycle grown season ended in 2001; we did not like this, because a perfect nature would grow the economy year-round, without interruption. From 2001, we have been attempting to 'fix nature' by instituting a perpetual growth policy (free money, or nearly free to those wealthy enough to qualify for loans) that will make expansion of comfort perpetual, instead of periodical (as nature has apparently planned it -- everything in nature is periodical).
The OEX chart is not overly negative. But when the short-term trends break down, then usually the longer-term trends eventually follow. The configuration of the short-term trends (top pane) with lower lows and lower highs suggests more selling is coming.
(click to enlarge)Click to enlargeThe VIX (CBOE put options ratio to call options) is generally an anti-stock indicator. When the VIX rises, stocks fall (generally, I write: the VIX is not perfect either). What is the VIX suggesting? The VIX has broken two levels of resistance and has held up above two support levels (third pane from the top). This suggests the VIX will have more upside.
(click to enlarge)Click to enlargeAmazon.com fell apart on Friday, after weak earnings were reported, triggering more selling in the dot.com stocks (we are calling them MOMO stocks today, unlike in 2000 when the first Nasdaq bubble was breaking apart and Greenspan was scrambling to 'fix' nature by giving more cheap money to speculators.)
Amazon began to break down in February. The sell-off is still continuing.
Two stocks we like to short here are GS, Goldman Sachs, and INFY, Infosystems. We have, in fact, shorted them for the last month of so. We still like them short. We think US housing is ready to resume its decline which should have been allowed to occur after 2009. Housing that appreciates 300% in three years IS A CANCER -- and needs to be allowed to deflate back toward reasonable levels (without 0% interest rates required to justify prices).
This past month has been horrible for housing and mortgage-related news. GS is struggling with its mortgage businesses, as are nearly all the TBTF banks. In fact, the TBTF banks need to be broken up. And they also need to repay the taxpayer for all the 'free money' their point-men in the Fed stole from Americans to refund reckless investment that destroyed the global economy right on time (2001-2010, disinflation). A onetime wealth tax payback should be the first step of the breakup of these companies that have been bankrolled by the Fed over the last decade with taxpayer money. We don't need Goliath companies; we need more David companies.
The transfer of wealth from the US Treasury (taxpayers) to the corporations is one of the most shameful episodes of capitalism in the history of America, and in the history of capitalism. We create of capitalism a new religion of wealth, proclaiming it to save all nations of the world from human corruption and poverty. But when capitalism stumbles from the sin of greed, we do not let it work by letting the corrupt parts fail, as they should (those with too much unserviceable debt should fail), we bail out this new-old God with free money sucked out of the populace. Nothing is more ignoble than watching the failures who destroyed the global economy because of their greed for power and wealth celebrate their failures by taking money from their governments (administered through Fed Policy) and using that money to award CEO's and corporate officers bonuses in the millions of dollars from the money 'stolen' from taxpayers. In essence, we rewarded Wall Street for her failures, and encouraged her to do more of the same.
This shame came right on the heels of corporate America's dismantling of American capitalism through the offshoring of American manufacture to poor-labor markets in Asia, Mexico, and South America. This betrayal of American workers was designed only for the bottom-line, the glory of soulless corporations: cheaper costs; inflated profits on products (was not lower costs supposed to lower prices? Not in the new capitalism) -- Wall Street's design is feudalism, with the world controlled by bankers and international conglomerates on top and debt-slaves down below.
It is a shameful picture. Interest rates kept too low for too long throws all financial and political support to rich 'international' speculators and away from non-speculators, regular citizens. Raise interest rates now. Institute wealth tax to take back stolen wealth since 2001. Let nature work. Nature, in this instance, being the breathing process of lower rates during expansions (1983-2001, 1947-1965, 1911-1929...) and higher rates during contractions (2001-2019, 1965-1983, 1929-1947...).
The Fed claims that the US government has failed to become fiscally responsible; however Fed interest rate policies are supposed to help force fiscal responsibility. That is why the Fed has the mechanism available to them of raising rates, making debt MORE expensive, and more painful as a form of self-indulgence. That we have had Fed Chairs who would rather be popular than responsible says much about our continuing problem. Raise rates. Make it PAINFUL to have to service unproductive debt. Things will change.
Michael J. Clark, CGTS