Highway To Hell: January 31, 2016

General Markets: According to the Wall Street Journal, U.S. stocks suffered their worst month since August 2015 in January. The sector that took the worst hit this past month is the Biotechs (NYSE ARCA Biotech, -24%) which was one of the primary leaders of this recent bull market. Next in line of losers was the Banks (KBW Bank, -12.62) and then smallcaps (Russell 2000, -8.85), which indicates that major market participants are not in the mood for risk on trades or investments. Banks are leaders in bull markets and when the banks go south so does the market. Another way of putting it is if a business that has a monopoly on can creating money out of thin air (other than a central bank which is also an instrument of the large banks) and can increase its working capital by 90% using this ability can’t make money, then you know things are bad. The two sectors in the green for the month of January were the DJ Utility Average (+5.80%) and the PHLX Gold/Silver Index (+1.47%). This along with a big move to Treasuries in January, show that market sentiment is extremely negative and in this case, rightfully so.

The game is coming to an end soon and I say that rather than a bust in the current market bubble because this market reversal we are currently in is not just another run of mill start of a bear market after an almost seven year run up. The U.S. government has run up so much debt at this point that there are no more financial maneuvers, offers of protection, or threats that the government and their cronies can pull out of their magic bag of tricks to solve their current dilemma. The world has set up an alternative currency payment system that will bypass the U.S. dollar when it and what’s left of its economy start to collapse into freefall. Major U.S. vassals such as the EU and its adjunct partners are already in the midst of dire economic, debt, and social circumstances. Canada, a historically stable compatriot of the U.S. controlled world regime, is starting to experience serious food inflationary pressures in addition to the major hit its economy has taken from the low oil prices. Its long overheated real estate market in selected cities may be showing signs of reversal as well as global economic conditions deteriorate.

The world is becoming much more multipolar, both economically and politically, with emerging markets looking to throw off the yoke of U.S. imperialism and its resulting serfdom. Emerging markets realize that the clubs, both economically and militarily, that the U.S. government and its cronies have brought down on other nations repeatedly are being held by very weak hands now. They may still pay lip service to the self-appointed U.S. overlords and in many situations show considerable restraint in dealing with continual U.S. government transgressions into their business but that is because they know the U.S. regime is a teetering empire ready to fall under its own egregious overreach and heinous activities not including its insane and incompetent management of its financial affairs.

You can see this being played out in the world stock and commodity markets. The U.S. and European stock indices are far off of their highs now without any substantial economic footing to support a move back up to new highs. European stock indices have already broken through major areas of support and the U.S. indices look ready to follow. The DJ Transportation Average has already broken through major support without any indication of turning around. Its bull market high was made all the way back in the week of 11/24/2104 showing you that the U.S. economy has been in a long state of decline and recent economic data shows that the economy continues to grow worse despite what our delusional (or are they just lying? … like they do about most everything else) government may say.

As I have been saying in recent posts, selected emerging markets look close to turning around. They are mostly dependent on commodity and natural resource prices improving which is why they are called emerging markets because they do not have fully developed, reasonably well diversified economies in many respects. China is the exception in this case, as they have developed a very diversified economy with strong manufacturing capability. They are in the midst of transforming their economy into a more domestic consumer-based economy, primarily due to the global economic deterioration but also because of the increasing size of their middle class resulting from their economic success over the last few decades. Oil and natural gas have been showing signs of bottoming over the last two months, and if these markets continue to rise, then selected emerging markets like Russia, Brazil, and China (although for some different reasons as well such as the relative strength of its economy, inclusion of its currency as a reserve currency by the IMF this fall) will also rise. This will happen as the U.S. and European stock markets continue to decline as these countries have little of tangible and at this point, little of intangible value either. The governments of these countries are both economically and morally bankrupt (these two items do not necessarily go together but in this case they certainly do; many times economic bankruptcy is do due to stupidity, ignorance, declining economic environment, unexpected exigencies and surprises, and/or unsustainable financial practices).

Energy: The WSJ reports that U.S. crude oil prices were down 9.2% in January but are up more than 27% from a more than 12 year low on January 20 of $26.55. This is a very significant move up over the last 10 days of January indicating the strong possibility of bottoming action taking place. During Friday’s strong U.S. stock market move up, the PHLX Oil Service index was the strongest performer of all major U.S. stock indices, highlighting this sector’s recent strength. Friday’s strong performance was despite the strong move up in the U.S. dollar on that same day which usually moves inversely to oil related stocks. U.S. natural gas prices also had a strong move up on Friday of 5.64%, which again does not usually move in the same direction as the U.S. dollar. These latter two indications are showing the underlying strength in the oil and natural gas markets. If oil continues to move up to $39 and hold at or above that price for a few weeks, that will be a good indication that the bottom may be in place. King World News had a report from Citi analyst Tom Fitzpatrick this week that the current oil downtrend (-77%) is commensurate with previous historical oil downtrends dating back 30 years. At about current levels, a bottom is usually put in and sharp rallies of 100%+ typically follow. That would suggest a price rise to the low-mid 50’s. Even though percentage wise that would be a big move, those oil prices are probably not high enough for the high cost producers to be profitable. So the contraction of much marginal oil supply would still remain in place at those prices, possibly contributing to a further price rise as global oil demand remains at an all-time high primarily due the increasing demand from emerging markets and their populations. This does not take into account the appearance of an exogenous hit to the current market such as escalated tensions in the Middle East that could significantly decrease supply.

Currencies: The U.S. dollar made a big move up on Friday after the Japanese Central Bank lowered their interest rates into negative territory. This rise puts further pressure on U.S. exports and U.S. multi-national companies in already weakening economy. That the PHLX oil service index and natural gas prices rose so strongly on Friday as well leads me to believe that the dollar may not be as strong as it is purported to be.

Hedge funds like to trade currencies, bonds, and commodities because typically they trend very well when they move, much better than any stock market typically trends. This is the primary reason trend following trading systems are so popular with many hedge funds. The U.S. dollar has traded in a relatively tight range since the first week of March, 2015. This is longest and tightest range the dollar has traded in going back 20 years.  This length of a range bound currency is unusual and an old saying in the markets is “what can’t go up, will go down”. If the dollar was as strong as it is purported to be, then it should have broken out of this range by now and continued higher. This lack of strength over the last several months is despite all the turmoil going on in the world over the last several months. I am expecting a false breakout of the dollar to higher levels but to no more than about 106 and then reverse to sharply decline in value. The dollar will bear close watching over the next several weeks and with the oil market showing significant signs of strength, things could get very interesting in the not too distant future.

European Banks vs. U.S. Banks: Major European bank stocks have never recovered during this seven year bull market and have traded basically in a sideways, range bound fashion or even downward during that time. Overall, their performance has been much weaker than major U.S. banks, which at times during this recent bull market have stage significant rallies and are still trading far above their lows of 2009. That said, U.S. bank stocks look very weak now as well, and for good reason with the huge derivative books of five of the major U.S. banks along with increasing exposure to the failing shale oil sector for many U.S. banks including regionals. Both European and U.S. banks hold many sovereign bonds of their respective country and these governments are mostly bankrupt or very close to it. Most banks are way overleveraged as standard practice of business and that is why there is such an unnatural emphasis on extreme growth to fuel this debt-based, funny money system. Expect more bad news for both European and U.S. banks as both economies continue to decline. Their beloved central banks will not be able to save them this time. These banks will take down many hard working, saving people and businesses in their coming demise.

This Masquerade: January 23, 2016

General Markets: The major U.S. market indices had their first upweek of 2016 but the technicals still look poor for the future. The Nasdaq 100, Nasdaq Composite, Dow Jones Industrials are all still trading above their weekly 200 day moving averages but the Dow Jones and Transportation and the Russell 2000 are not. The latter two indices do not look likely to regain and hold their position above this key support area.

Currencies: Historically, at least since the end of World War II, the dollar has been seen as the safe haven currency in times of global turmoil, but times are changing. For the first time since World War II, major countries and many emerging markets have worked together to construct a platform to accept other currencies than the U.S. dollar in trade. Other currencies are gradually being used more in global trade with the Chinese Yuan slated to be added to the IMF basket of world reserve currencies this fall. A separate platform has been set up by these countries to completely bypass the U.S. dollar and its associated network, when needed. These countries have even worked together to construct associate institutions such as the Asian Infrastructure Investment Bank and National Development Bank to assist and further economic development without using the U.S. dollar. When the U.S. dollar collapses (not if), this new network will be ready to take over from the U.S. dollar and U.S. dominated system. With all the economic and social turmoil in the EU, one might expect the U.S. dollar to continue to go up. Then you add the huge debt that Japan has run up and its currency could continue to collapse into oblivion as well as the Euro. The Euro and the Yen are already largely devalued and maybe on the verge of dismantling/defaulting in the not too distant future. If you see emerging market currencies rising due to a rise in commodity and natural resource markets rising, would not the smart money want to go to currencies that are backed by rising, tangible assets? The real kicker would be the de-peg of the Saudi Riyal from the dollar and a subsequent pronouncement that oil will be traded in non-U.S. dollar currencies. With the world largely in disarray, primarily due to U.S. aggression and weak declining economies due to love of fascism among those who run the world, value may become the key attribute going forward when it comes to currencies. By value, a currency that has something of real, tangible value behind it in these increasing turbulent times.

Many countries have already determined the U.S. dollar to be much weaker than is generally perceived by the public. These countries saw a preview of what will happen when the dollar blows up in the 2008 financial crisis. That is a big reason why you have seen so many reports in the last year of China, Russia, and several other major creditors of the U.S. government sell their U.S. securities and are using them to buy something of tangible value such as precious metals, economic development deals, and infrastructure although some are just using them to meet short term budget problems and maintain their hold on power. While the U.S. government and their cronies run up huge debts fighting needless wars to build their empire and in a pathetic attempt to control the resources of other countries (they should try negotiating real economic deals with the other party instead of invading them). The Fed does not have the ammo to bail out their crony banks again (that is why you have all these new bank bail-in laws to take depositor funds when TSHTF). The U.S. government has issued even much more debt since 2008 to keep this rigged and highly unstable game going.

The increasing unstableness of the system is being reflected in the U.S. and global stock markets and the U.S. junk bond market. Volatility has risen greatly risen over the last six months, started to rise again starting out 2016, and is usually a good indicator of the inherent unstableness of a system. These countries know the U.S. dollar is getting ready to fail and they do not want to be stuck holding a bunch of worthless U.S. paper assets (this is an oxymoron-paper anything, even if it has pretty artwork and famous people printed on it, is not a real asset. It is only used as money because governments and their cronies force us to use it as money, while they are the only ones allowed to create this funny money and use the vast majority of it for their own interests which has nothing to do with furthering the interests of the people. They throw the people a few crumbs to make them think they are getting a good deal from all this criminal and corrupt activity).

So, I will be surprised if the U.S. dollar goes much higher from here. I think the run-up in the U.S dollar due to it being considered the safe haven currency has already occurred, from 7/1/14 till 3/1/15. I am expecting it to go up to around 106 at most before it reverses back down. It may not make it that high as global stock markets have continued their decline into 2016, many have been declining since mid-2014 or even longer. If the Fed announces something like QE4 or some other easy money policy then that would contribute to the falling dollar scenario. Obviously, we have to wait to see how everything falls out and what occurs, but I do not think we will have to wait long (within the next 1-3 months). In the falling dollar scenario, selected emerging markets should rise (Russia, Brazil, and probably China) along with natural resources and commodities.

Oil: I believe energy will be the first commodity/natural resource sector to rise as it currently has a high base global demand and global supply is beginning to seriously contract and most of it will take time to turn back on and it will need a good reason to turn back on first i.e. much stronger global economic activity. Natural gas and the solar sector already have shown serious signs of bottoming and oil this week has shown signs that it may not be far behind. Oil rose on Thursday and had its best day since October 2015 according to the WSJ and this was despite much negative news coming out such as increased oil inventories and Iranian oil to come on the market. It is usually a good sign when a stock or commodity rise despite negative news and for the week oil showed considerable strength. Also, when the commodity/natural resource sectors start improving and rising, that will make emerging market and commodity/natural resource-based country currencies rise as well. If oil is bottoming then that typically means the U.S. dollar goes down which again will help the natural resource and commodity markets as well as emerging markets whose economies depend on the production and export of those products.

The U.S. dollar at that point will be backed by a rapidly failing economy, more government hot air, and a U.S. military that will quickly become underfunded as the almighty U.S. dollar fades into the history books. Then if the U.S. economy starts to rebound sometime in the future, it will be forced to perform real economic activity and make real economic deals with its trade partners rather than the first and only response being threaten, invade, and occupy to commandeer another country’s cooperation and its resources while the U.S. domestic resources, infrastructure, and economy rot.

Deutsche Bank, U.S. Big Banks, and Derivatives: Deutsche Bank (DB) is trading at greater than 19 year lows which obviously does not speak well for the bank’s current performance or status. DB holds more derivatives (52 trillion as of October, 2015) than any bank in the Europe (Only Citigroup has more) primarily due to its 1998 acquisition of Bankers Trust (former U.S. Bank) and its huge derivatives book. If Germany’s largest bank implodes, this does not portend good things for the European Union in general. The EU has a multitude of economic, debt, and social problems. The U.S. big banks (JPM, C, BAC, GS, MS, WFS) have huge amounts of derivatives on their books as well. See last week’s article by Pam and Russ Martens from WallStreetonParade.com website. U.S. Banks performance over the last two weeks has been terrible even though their earnings were perceived to have exceeded expectations.   The S&P bank index (KBE) was trading near its bull market highs two months ago but has since sliced down through all support on rising volume, and looks poised to fall much further in the not too distant future. The S&P Regional Bank Index (KRE) looks very similar. Citigroup (C) has the largest derivatives book of any U.S. bank at 53 trillion and has been the worst big U.S. bank stock performer in 2016. Yet no one in mainstream media is talking about the quadrillion or so of derivatives on these big banks books and what that could mean.

Selected Emerging Markets: With oil showing signs of turning around this week, some emerging markets showed some bottoming signs such as Russia. Russia attracted a lot of negative news this week with the Ruble trading at all-time lows to the dollar and Putin being accused of playing a part in poisoning a former Russian emigrant a few years ago that was living in the Britain. Yet the Russia ETF RSX showed signs of bottoming.

Precious Markets: Nothing has changed here. The most likely direction is down. This move down should be what is considered to be the final capitulation phase but we are not there yet.

Recommendations: Russian ETFs RSX and RUSL (3x leverage).

Russian Stocks on U.S. exchanges: Yandex (YNDX), Luk Oil ADR (Russian oil company) (LUKOY), Gazprom (Russian natural gas and oil company) (OGZPY), (VIP), (MBT).

Solar Stocks & ETF: First Solar (FSLR), Sunpower (SPWR), and Solar ETF (TAN)

GASL (3X leveraged ETF representing U.S. natural gas stocks) for higher risk tolerance traders.

The Great Pretender: January 18, 2016

General: That is what came to mind when I heard the President say in his SOTUS (State of the Union Speech) on Monday evening, to paraphrase, “anyone that says this economy is doing poorly is peddlin’ fiction”. What planet, much less, what country is this guy livin’ on. You have about 100 million people not even considered part of the labor participation force mostly because they cannot find any work, about 46 million on food stamps, and wages in real dollars are about the same as what they were in the mid 1970’s. The only reason unemployment is not much worse, according to government figures (I think I just answered this question – government figures), is they manipulate that number so thoroughly and intensively, that it bears little resemblance to the true picture. I have mentioned this before and so have others such as Dr. Paul Craig Roberts (former Assistant Secretary of Treasury under Reagan), that I won’t go into the details again here. Even the big corporations, which this system is designed to benefit, are not growing their earnings and have to resort to financial engineering such as stock buybacks to make their earnings look presentable, as well as for the company executives to get their bonuses (put their stock options in the money).

This system has become so heavily financialized over the last few decades, that little of value is left in the real economy. What we have left is excessive emphasis on consumerism and related products, pharma-industrial complex peddlin’ their various elixars, pills, potions, and treatments that have little to do with curing a disease but a lot to do with treating ongoing symptoms of chronic ailments to generate recurring revenue to continually and consistently fill up their coffers which then pays large amounts of tax revenue to their beloved partners in crime the Federal government, who often create and spread these chronic ailments (through aerosols as one favored medium – it’s nearly impossible to detect, especially by anyone who may be watching) among their own citizens to keep them down, more easily controlled, manipulated, less of a competitive threat, and much less self-reliant. You think that last statement is that of a madman, just wait a year or so, you have not seen or heard of crazy just yet. And we cannot forget the military-industrial complex and their unmatched and prodigious ability to fight wars, not to mention their almost equal ability in starting wars and rarely winning them, all at great human and monetary cost not including all the unnecessary hate and discontent that they foment in these regions. This again is designed to perpetuate war and chaos to generate recurring revenue for both the military-industrial complex’s “private” companies as well as for the Defense (War) Department, whose funding makes up a huge part of the annual federal budget. It also focuses its wars on areas that are always rich in natural resources and usually are in strategic locations (so they can threaten and intimidate other countries not yet occupied) in a so far pathetic attempt to control the resources of other countries. I recommend F. William Engdahl’s book, Full Spectrum Dominance to look further into agenda of the military-industrial complex and the U.S. government in general.

Reasons the American public has been so easily brainwashed into supporting these horrific, destructive, and rewardless exercises, supposedly in the war against terrorism and spreading democracy and freedom, is 1) these wars are not taking place in their country (9/11 is a whole another story, I recommend the documentary “Loose Change”, available on the internet, to give you a much better idea of what took place there), 2) the American public is not forced to fight in these wars i.e. there is not a draft as was the case in the Vietnam War so you do not have any strong dissenting groups to provide you with another point of view; also the all-volunteer military pays reasonably well, especially considering that this fascist system has pretty much destroyed the real economy and there are not many decent jobs that are available, 3) the people have always been taught and brainwashed into believing and following the government because they are purportedly looking out for you and your interests, the U.S. is supposedly the leader of the free world and is exceptional etc., and, 4) the system appears to be working better here than in other places (it has been getting progressively worse in the U.S., not just economically but also in the diminution of individual/property rights and the pace of decline is accelerating; the U.S. system is not much different than what is going on in large parts of the world except the U.S. and many of its western vassals (Europe and Japan) are on a downward trend economically, politically, and socially while emerging markets are in many cases are on an upward trend). This parasitic system ultimately destroys its host and the host in this case is the American people (the relatively free market and capitalistic, merit-based system we once had is long dead- yes remnants of it are still alive and that shows you the vitality and strength of the free market system that many Americans still believe in, against all odds, as well as the strong traits of creativity, productivity, and resilience present in the entrepreneurial mindset- the opposite of the destructive, warmongering mindset present in the Pentagon and military-industrial complex partners). Because having weapons of mass destruction such as central banks and the fractional reserve system, that are only intended to benefit the few (big government and oligarchs) at the expense of the many, ultimate destruction of all including the remains of the system as we know it is inevitable. The destruction process is happening as we speak and it will affect more people as we go along and the pace of destruction is quickening. Politicians, big government, empire building, and this fascist system are a plague to humanity – now to the markets.

Markets: The U.S. and global stock markets had another terrible week. The Dow Jones Industrial Index and the Nasdaq Composite are now officially in a correction as each is down at least 10% from their recent highs. Many are expecting the Fed to do something soon since the market does not have a reason to bounce back up unless we have an exogenous event like the rapid demise of the petrodollar, which does not look strong either. I think whatever happens, it will have to result in the U.S. dollar going down. The decline of the dollar is the only thing that will turn around the commodity, natural resource, emerging, and U.S. stock markets at this point. Yes, the continuing contraction of supply in the commodity and natural resources will help prices find a bottom in this continuing low price environment but we also need another catalyst to turn this extended correction around and for the market to take off, like it probably will when the dollar starts noticeably weakening. I do not think interest rates are going to go down, at least for any extended length of time, despite the negative interest rate rhetoric from one of the Fed governors recently. There are more reports of the ongoing major selling of U.S. Treasury securities by foreign creditors including one today on Zerohedge. The exchange stabilization fund or some other Fed proxy is probably stepping up as the buyer of last resort in order to keep interest rates low but even the almighty Fed has limits on how long they can keep this rigged game going, especially when more of their past co-conspirators (major creditors) like China, Russian, and oil producer dependent nations are selling their Treasuries to navigate their own internal financial debt problems. The old saying from naval days of a bygone era, when the ship starts sinking it’s every man for yourself and this grotesquely debt laden ship is starting to sink faster. The dollar has not looked strong over the last several weeks. The U.S. stock market is starting to be overextended to the downside but short of some major announcement by the Fed or unexpected exogenous event affecting oil prices or the dollar, there is not much reason to look for reversal opportunities to the upside, yet.   Based, purely on market technicals, I would expect a relatively sharp turnaround sometime over the next two weeks or so. But to try to identify the catalyst with any clarity would only be a slightly educated guess. I would also be reluctant to initiate new short positions for the same reasons. Junk bonds had another bad week on high volume.

Retail: Retail numbers were reported on Friday and according to the Wall Street Journal retail sales growth for 2015 were the weakest since 2009. Walmart announced the closure of 269 stores including 154 in the U.S. on Friday. Macy’s recently announced the closure of 40 stores and Kohl’s Department Stores is looking at taking itself private or breaking the company up. Sears and The Gap are also looking at similar retrenchments after disappointing operating results. A report in Business Insider, citing a New York Times article from 2016, said more than two dozen malls have closed down in the last four years and another 60 malls are on the brink of death. So the entire spectrum of the retail sales market is now being affected by the slowdown in the economy without any sign of improvement despite what our delusional President said to us last Monday evening. This is despite extremely low oil prices which many thought would help spur consumer activity by lowering transportation costs and providing extra money for other purchases.

Banks: JP Morgan, Citigroup, and Wells Fargo reported earnings this week and all exceeded analysts estimates. JP Morgan exceeded analyst’s earnings estimates not because of revenue growth, which was negative, but because of less legal expenses and job cuts. Reaching your earnings estimate by cutting expenses based on one-time type events is not a sign of a healthy company nor of a healthy growing economy, especially when talking about one of the biggest banks in the country. Most of the major banks are trying to decrease in size to avoid higher capital reserve requirements of very large banks, but even in their core areas, revenue growth is mostly invisible. Citigroup reported earnings the next day on Friday morning and revenues increased by 3%, the first revenue increase after four quarters of decline. Its full-year profits were the largest in a decade and were much higher than a year ago due to primarily having greatly reduced legal fees. The bank has continued to cut branches and jobs over the last year, reducing branches by 135 to under 3,000 and cutting 10,000 jobs to reach about 259,000 employees. Zerohedge reports that Well Fargo, the largest US mortgage lender had only $64 billion in mortgage applications this quarter, much lower than the preceding quarter results and the lowest since the first quarter of 2014. So in their words, one can kiss the so-called housing recovery goodbye for the final time. Zerohedge further reports, from Wells Fargo’s conference call, Wells was asked how much loan exposure do they have in the energy sector, answer= $17 billion. Next question was how much is not investment grade i.e. junk; answer from Wells: most of it. Not a good answer considering loan loss reserves are 7% of the $17 billion loan total. Concerns over banks exposure to the energy sector are weighing on the sector and some regional banks are reporting that they are experiencing higher charge-offs or will miss earnings estimates due to problems with loans in the energy sector although they appear to be related to just a single company loan in each of the reported cases. Zerohedge had a report that a Dallas Fed representative went to Houston area banks to look at their exposure to the energy sector and to see how many problem or non-performing loans they had on their books. Direction from the Fed rep was not to mark to market problem loans to make their financials look reasonably good. Bank reserves for loan losses may not be enough to handle the fallout in the energy related loans on their books.

Time Has Come Today: January 11, 2016

General Market: The title from an old hit by the Chambers Brothers aptly describes where we are in the current market cycle as well as the U.S. hegemony cycle. There is no more waiting for when will things start to fall apart in the U.S.A.   The almighty U.S. stock market, which is one of the top propaganda arms of the U.S. government to push their narrative of a recovering economy is quickly starting to decline and show serious stress fractures. January stock market performance has historically been an important indicator for how the U.S. stock market will perform for the rest of the year with the first week of January a good historical indicator in its own right. The first week of January performance of the Dow Jones Industrials and the S&P 500 were the worst in their history according to the Wall Street Journal (WSJ). This terrible performance follows the poor performance of the U.S. stock market during the whole of 2015 (worse since 2008) and things have no reason to improve going forward.

2016 Market Opportunities: This is not to say there will not be select opportunities in the markets during 2016. On the contrary, I think there will be some outstanding market opportunities in select emerging markets, the energy markets, the agricultural commodity related markets, and in the 2nd half of 2016 in the precious metals markets and possibly the Chinese stock market. This view is based on valuation, demand, contraction of supply due to the prolonged low price environment in the natural resource/commodity space, and the continuing transition from the unipolar world of U.S. regime dominance that tries to force its will on every sovereign country in the world through its military-industrial complex and financial engineering/warfare machinations to a multi-polar world that may be lead by a few leaders that are much more willing to collaborate with their trade partners and respect sovereign rights to a much larger degree.  The world is a much more equal and competitive place in economic matters. The emerging markets make up 40% of the global economic trade today compared to approximately 10% a few decades ago.  These countries want their rightful seat at the table when discussing economic or political alliances and deals instead of being dealt with as a serf to the world’s self-appointed ruler, the U.S. government.

Energy Markets: A key market to watch to catch this world platform transition on a more timely basis is the oil market. The oil market is the most highly correlated market to the U.S. dollar of all the markets and it is inversely correlated to the U.S. dollar. Natural gas and solar energy have shown serious signs of making a bottom over the last month. According to an article in Monday’s WSJ, major natural gas producers have announced significant cutbacks in expenditures and production for 2016. The same can be expected for major oil producers. The low price environment makes relatively high priced production of shale oil, Canadian Tar Sands, and North Sea oil uneconomical according to Rick Rule, legendary resource investor and co-founder of Sprott Global. Zerohedge just reported the latest figures for rig count this week and the number of rigs in production have plunged. World demand for oil is the highest it has ever been despite the slowing economy primarily due to the growth in the emerging markets of the world.

Middle East: On top of the basic supply, demand, and low price environment in the energy sectors, the Middle East is a potential powder keg waiting to blow. You have the U.S. and Saudi Arabia fighting and supporting wars and terrorist activities in the Middle East. Tensions are rapidly rising between Saudi Arabia and Iran due to the recent beheadings by the Saudi government of Saudi Shiite government dissidents. The Saudi government is operating at a serious monetary deficit level that will only be corrected by higher oil prices or a serious decrease in spending. Budget deficit problems will also be significantly ameliorated by de-pegging the Riyal from the U.S. dollar. Tensions are seriously rising within Saudi Arabia since the new monarch took over last year and will probably erupt to civil unrest if the heavy social welfare state has to make further cutbacks due to continuing budget deficits. The most likely move first would be for the Saudi regime to remove the peg to the U.S. dollar of its Riyal currency, which will probably seriously weaken the U.S. dollar. As I said, the U.S. dollar is inversely correlated to the price of oil so if the U.S. dollar starts to fall then the price of oil most likely will rise. That is another strong motivator for these oil rich but budget poor countries to distance themselves from the structurally unsound U.S. dollar. It will also make it easier to fund their budgets in the short term if they devalue their currencies.

Strength of U.S. Dollar: Also, concerning the strength of the U.S. dollar, foreign countries and their central banks have been selling several trillion dollars of U.S. Treasuries in the past year. According to the always astute Rob Kirby of Kirby Analytics in the most recent interview of Greg Hunter’s USA Watchdog, the Exchange Stabilization Fund (ESF) of the U.S. Treasury has been secretly buying these securities to maintain the strength of the dollar. The ESF, which was created in 1934 and is very secretive in its operations, has accomplished this sleight of hand via dollar swaps and reverse swap instruments which are currency derivatives. According to Mr. Kirby this type of action is aligned with raising rates and that is why the Federal Reserve had to raise rates in December as part of this artificial dollar strengthening process. I had mentioned in earlier articles that I thought the Fed was still conducting a secretive QE campaign to maintain market stability but that was an uneducated guess on my part. I was sure something was going on behind the scenes by the U.S. government, its central bank, and/or its big banks to maintain simultaneous strength in all the major U.S. markets (stock, bond, and currency) when the fundamentals and reports of foreign countries selling U.S. securities in very large amounts screamed otherwise. Mr. Kirby, who has a lifetime of bond, precious metals, and big bank finance experience offers a much more plausible explanation.

Limits to Creating Make Believe Money and Its Abuses: But there is a limit to all this funny money hocus pocus, even if you have the largest funny money printing press in the world as the U.S has had since the end of World War II. You have reached this limit when you have run your country’s economy into the ground to where it’s a shell of its former self, you have run up a gargantuan amount of debt that is still increasing exponentially with no end in sight, you act as the self-appointed ruler of the world and of all its affairs, you start war and chaos all around the world in an effort to control the resources, markets, and political affairs of other countries, you have forced a large percentage of your population to believe in cradle to grave social welfare and have removed any incentives to become independent, self-reliant individuals. This last one was accomplished through a combination of destroying the economy, indoctrination, and other covert/overt government actions. This corrupt, criminal, militaristic, fascist regime favors the relatively few at the top at the expense of the general population and the evidence abounds everywhere for anyone to see.   The weapons this regime uses are its central banks that creates money out of thin air for it to use to build up a huge and overwhelming government infrastructure, to buy off people with jobs and benefits, its control of mainstream media to control the message that is told to the people about any news item, its control of the school system to control what people are taught and told to believe (government is good being the primary belief system), and always force for those who see through the BS or have their own ideas about how to lead their lives. Even more heinously, those who are too young to know what is going on are attacked and oppressed through vaccines, drugs, and weapons to ensure people in general as well as designated targets will never become threats to the status quo or the system that is in place. This sort of thing really started to escalate after World War II when the military industrial complex and all of its nefarious components and three letter comrade groups were either created or greatly increased their power. Fractional reserve banking is another big part of the problem. Any time you give one particular business type a monopoly on creating money out of thin air you have a rigged game that concentrates power and profit in that entity.

Rigged Game Near Its End: Despite its overwhelming power, paper (or digital) funny money is its basis and the real source of its and its crony’s power. But this game is coming to an end, because the U.S. dollar along with the rest of these paper fiat currency regimes have run up so much debt that far outstrips the economic capacity of most developed and many emerging countries. This system also destroys and suppresses economic activity outside the realm of its chosen cronies. This system not only has financial mismanagement problems but has badly mismanaged the interests and affairs, large and small, of their countries. The countries that will lead the way economically after this fiat currency collapse will probably be China and Russia because they have the most gold, even if China is underreporting their true gold holdings at the current time. And they along with other emerging markets have or are developing real economies where the people are not trained from youth to believe the government will take care of them. But we may see large unforeseen changes in even the best positioned countries because having a large amount of gold does not even begin to solve the problems and extreme overreach of these big governments who think the people are here to serve them and their designated cronies instead of the other way around. Having a gold based system will greatly limit the amount of power and consequently overreach governments will be able to execute in the future. But it will also be incumbent on the people to understand the government is not looking out for your interests unless you understand how the government operates and you take control of your government and country back. Governments in the future will be much less able to provide extensive social services and be much smaller in size (especially the U.S. government) if we go back to gold based system.

China: China has been the focus of financial news this past week with its accelerated program of devaluing its currency, the Yuan. The increased pace of currency devaluation has created great volatility in the Chinese stock market. The Chinese government has tried controlling that stock market volatility by inserting market circuit breakers to halt the market when 5% (market operations halted for 15 minutes) and 7% (market closed for the day) declines were reached. As usual, central planning authorities attempt to intervene in a somewhat free market resulted in very poor results so the market circuit idea has been reconsidered and terminated for future market operations. This increased pace of Yuan devaluation has increased the uncertainty in the Chinese stock market and how things will work out in the end. This is especially in respect to the huge debt that Chinese banks are carrying and continue to roll over due to the inability of its clients to pay anything but interest on many of the loans. Also there is not a reliable figure for the amount of nonperforming loans on the books of these state banks. Many of these loans date back to the heyday of the construction boom that was enacted by the all-knowing central authorities in an effort to forestall the fast compression of its economy and primarily affecting the manufacturing sector due to reduced global trade. The total amount of these loans will never be repaid and how it all ends is very disconcerting to say the least when you are talking about the largest economy in the world. There have been multiple detailed articles on the subject this week at Zerohedge. All that said, and despite the recent declines and volatility in the Chinese stock market, I believe at some point this year the sun will shine on the Chinese stock market. It may be in the first half of 2016, but I think things look better in the 2nd half of 2016. In June, the MSCI will add more Chinese stocks to its Emerging markets index. This will be the 2nd and final move that MSCI has done to add Chinese stocks to its index. The first was done in November 2015. Also, the Yuan will be added to the IMF SDR basket of currencies will should attract more capital inflows into the Chinese stock market.  And while some of the sectors in the Chinese economy are undergoing serious slowdowns, there are probably other sectors in such a huge economy that are growing and attracting capital. At some point the Chinese debt bubble will burst (just like the U.S. and European debt bubbles will burst), but they probably have the wherewithal to delay it until after their stock market makes a nice run up first.

Russia and Brazil: Russia and Brazil stock markets are looking very interesting in this area. I still advise to watch and wait but they look close to a bottom. Their turnaround will be dependent on oil, natural gas, and the agricultural commodities markets turnaround.

Precious Metals: Still expect precious metals to make a serious move down and not bottom until probably mid-year.

New Stock Recommendation: Fuel Cell Energy Inc (FCEL), as per Yahoo, together with its subsidiaries, designs, manufactures, sells, installs, operates, and services stationary fuel cell power plants for distributed power generation. The company is also involved in the development, design, production, construction, and servicing of fuel cell products under the Direct FuelCell name. Its power plants electrochemically produce electricity and heat using various fuels, including natural gas, biogas, methanol, diesel, coal gas, coal mine methane, and propane. The company serves utilities, independent power producers, and governments; and education and healthcare, gas transmission, industrial and data centers, commercial and hospitality, oil production and refining, wastewater treatment, food and beverage, agriculture, and landfill gas sectors.

Flirtin’ With Disaster: January 4, 2016

As we enter the new year, the title of the old Molly Hatchet song describes the ongoing machinations of the U.S. government, its central bank, and all of its cronies and puppets. The U.S. stock market action over the last few months looks like the market is carrying a very heavy burden that is almost ready to start taking it down. The recent failure of the junk bond market is often an early indicator of a coming stock market failure as more companies start to fail and go bankrupt. While the shale oil companies have been in the spot light for their precarious position and some recent bankruptcies in this prolonged low oil price environment, interest rates have been rising on bonds of other sectors such as pharmaceuticals, media, telecoms, semiconductor and retail industries as reported by Financial Times in mid-December. High yield interest rates are rising significantly in response to the higher risk business environment that all companies find themselves operating in as evidenced by the slowing global (Baltic Dry Index, extreme and prolonged low prices of commodities and natural resources) and domestic (failing junk bond market, decline of S&P 500 earnings for 3 straight quarters) economies. The junk bond market looks poised to continue and accelerate its 2nd half of 2015 decline as evidenced by the high yield ETFs, JNK and HYG, which both fell hard on heavy volume in December. The high yield market has been in a trading range dating back to September, 2009. So for ETFs JNK and HYG to basically fall continually since June 1, 2015 (down 6 of those 7 months) with an accelerated pace of decline on much heavier volume in December does not set the table up nicely for either the high yield market or the U.S. stock market in 2016. These ETFs are on the verge of breaking down through that lower range bound and there is a lot of air with little support until you go much further down. To sum it up, you ain’t seen nothin’ yet if you think the junk bond market has already fallen hard. This also points to higher interest rates at a time the economy is slowing and can ill afford additional obstacles. Some of the major U.S. indices may make a marginal high sometime in January but I do not expect much more than that based on current indications.

With high yield interest rates rising, a higher oil price than what previously sustained the shale oil producers will be required to keep many of these marginal shale oil producers in business and the oil price has not shown signs of bottoming yet.   Interest rates in general look poised to continue higher as the Fed just raised rates in December and they usually continue to raise rates after the initial rate hike.   As I said in a recent post, I think the initial rate hike by the Fed was in response to things that are happening in the Treasury markets that the Fed has not publicly disclosed. It certainly would not be the first time the Fed, the government, or a big bank did not disclose what was really happening in the markets but only tell the public what they want the public to believe. When Bernanke first announced the possibly of tapering back in May 2013, the stock market experienced some short term volatility and the interest rates on Treasuries shot higher for several weeks. When QE3 was actually officially discontinued in October 2014, none of that type action occurred. I think that may be because QE3 never actually ended but the Fed wanted to show (deceive) the markets that the economy was strong enough to grow on its own without additional artificial stimulus and that there was plenty of demand for their toxic instruments called Treasuries. The U.S. government cannot curb its addiction to excess spending and there is no one in their right mind buying Treasuries for a long term hold. Many major foreign creditors have been reported in the last year to be selling large amounts of Treasuries as well as setting up an alternative financial network that will bypass the U.S. dollar and the subsequent need to buy Treasuries with those dollars.

Countries are starting to de-peg their currencies for various reasons from the dollar such as China (effort to make its currency more free floating), Kazakhstan (due to low oil prices and budget problems), and Azerbaijan (due to low oil prices and budget problems) which takes away support for the U.S. dollar. There have been reports that Saudi Arabia may soon be forced, due to its own internal budget problems resulting from the prolonged low price of oil, to abandon its peg to the U.S. dollar. This action would significantly weaken the dollar. The U.S. dollar looks strong on a technical basis and is still in a bull trend despite the long range bound action of the last several months. But its underlying structure hardly resembles anything that relates to objective fundamental values of strength. It is a hugely indebted country whose spending continues to spiral out of control. Even with its huge and increasing debt, it shows no restraint in its overseas adventures to start unnecessary wars and chaos in every land it touches in a continual effort to rule the world. The country’s economy is a hollow shell with a relatively small number of major international corporations comprising the remnants of a once mighty and well diversified economy. The U.S. economy was once much more diversified in both business sectors and in the various sizes of businesses from small to huge. Business creation is very hard in the U.S. due to extreme regulatory requirements and an oppressive, seriously criminal government.

The current U.S. dollar strength is a result of the Federal Reserve’s ability to print money out of thin air because of its primary world reserve currency status, the petrodollar, and a very strong military.   These three foundations are already starting to show serious chinks in its armor. Other countries have already constructed an alternative payment and investment network that completely bypasses the dollar and is just waiting for the next financial crisis to fully turn on. The prolonged low oil price environment and their own internal government mismanagement is forcing Saudi Arabia to make hard economic decisions that may soon result in the de-pegging of its currency from the U.S. dollar resulting in the end of the petrodollar to a large degree.  The U.S. military that spends more on itself than the rest of the developed world combined has been outperformed and out-strategized by the Russian military in areas that the U.S. military has considered vital. The U.S. government’s effort to isolate and dominate Russia has failed miserably and the military shows no signs of re-evaluating their excessively imperialistic goals. Rising interest rates combined with a steadily increasing current and long term failure of the U.S. economy and a huge increasing government debt portend bad things for the future of the U.S. dollar. This summation ignores the huge derivatives time bomb that resides in the big banks of the world which will explode when its interest rate threshold is reached, which looks to be this year. High yield rates are rising, the Fed just started to raise rates so the interest rate trend is up and the timer has been initiated.

Many say the dollar is still considered the world’s safe haven and that may be true for a while longer. But the dollar is the world’s reserve currency for all the wrong reasons now and is heavily dependent on the kindness of others as the dollar approaches its precipice. The kindness of many of its major creditors is wearing thin due to the U.S. government’s lack of trustworthiness, its overt and covert aggression toward its trading partners and creditors, its terminal fiscal condition, and severe mismanagement in all areas.

The bigger, more complex, and corrupt as well as more centrally authoritarian an organization gets just hastens its end. It’s a runaway train that is going to derail soon. The U.S. has been on this track for a little over a hundred years now (since the creation of the Federal Reserve) but it is running out of fuel (currency that has real value). The U.S. government and its cronies have bled their own country dry and pissed off much of the rest of the world in its actions. A healthy, prospering country would have a large and vibrant middle class. The private sector middle class that is not dependent on government spending has been pretty much eliminated and is hardly visible due to overt and covert government suppression of its own citizenry in a premeditated and designed fashion. All fascist, militaristic regimes have failed in the past and this one will too.

Saudi Arabia is like the USA in miniature except more crassly obvious in its actions. Its government has aggressively and unnecessarily (this small, poor country is not a threat to Saudi Arabia) invaded its very poor neighbor, Yemen, in an effort to re-instate a government favorable to Saudi Arabia. It is also somewhat covertly funding the terrorists fighting the Assad regime in Syria. It recently made a major arms purchase from the U.S. military-industrial complex that it can hardly afford in the current and prolonged low oil price environment. It is showing an increasing lack of tolerance for criticism of the government in its own country exhibited by the recent mass beheadings of government dissidents. The only thing keeping its citizenry quiet and reasonably subdued is the lavish social welfare policies that this rich country provides its people to maintain loyalty to the ruling faction. But it is undergoing serious budget deficits and cannot long maintain the current level of spending on all its war and social welfare activities. It has already cut some of the domestic subsidies such as for gasoline in its country as it looks for ways to fund its war and remaining social policies. The new ruling regime (came to power in January 2015 upon the death of the previous king) is already causing significant dissension within its own country. The country has a very oppressive ruling environment with little economic opportunity for the general population. If this regime is overthrown or it de-pegs from the dollar or both, then that is a major nail in the coffin of the U.S. dollar.

As an adjunct, one of the major social benefits of the U.S. government is low prices for consumer goods due to the dollar being the world’s primary reserve currency. Low prices will disappear when the U.S. dollar loses the remaining 3-4% of its original value in 1913 (it has lost about 96% of its value since then) when the Federal Reserve was created and the people in the U.S. will not be happy either.

In the energy markets, natural gas started to show serious signs of bottoming in December on heavy volume. It may be a month or two before we can start to see a sustained advance but recent activity bears close scrutiny. Oil has not shown significant signs of bottoming yet but I doubt if it will be too far behind natural gas so I am looking for significant signs of bottoming this month in the price of oil. Another thing that may help the oil price to rise is the possibility of Iranian oil coming to the market is looking less likely due Iran not adhering recently to the supposed agreement with the U.S. so further sanctions against Iran are probably forthcoming. Despite mainstream reports, oil supply to the world markets is not that much above base demand that is still at an all-time high according to a report on Zerohedge concerning a Kyle Bass interview. Another report I saw this week on the Sprott Global website also questioned the amount of oversupply currently on the market. These confirm reports I referenced a few weeks ago, one by the Wall Street Journal on a high base world demand despite slowing economic conditions and the other an interview of Carlo Civelli, Singaporean/Swiss financier on marginal oversupply. The solar energy sector looks to have already bottomed and looks poised for significantly higher prices. Sunpower (SPWR), First Solar (FSLR), and Solar ETF (TAN) are my continued recommendations here. In the Natural Gas sector, ETFs are the safest way to invest in this area as to avoid the risk of investing in individual companies, many of whom have extreme debt levels. ETFs include UNG (unleveraged and tracks natural gas futures price), UGAZ(this tracks the natural gas futures price and is 3X leveraged), and GASL(this is a basket of natural gas companies and is 3X leveraged). UNG and UGAZ showed nice gains last week.