All the major U.S. stock indices continued to correct this week. The Nasdaq 100 and Nasdaq Composite were down for the third week in a row while the S&P 500 and Dow Jones Industrials declined for the second straight week as company earnings reports continued to be released for the first quarter results. While the pullback in the stock indices may be attributed to various reactions to the recently released earnings reports, the U.S. stock market has been overdue for a pullback after a 10 plus week rise in the S&P 500 (9 plus weeks for the Nasdaq indices). Some more choppiness is to be expected in the near future until we put the uncertainty of the earnings season behind us and of course, can restart the buyback engine once companies have released their earnings reports.
As I have been pointing out all along, the real driver in this bull leg has been the decline of the dollar. This has propelled energy and other commodity related stocks off their February bottoms. Since commodities are primarily priced in dollars they will rise as the dollar falls. The dollar looks very likely to continue its decline but may take a momentary break for now. Last week, the low of the dollar reached 91.88, its lowest since mid-January 2015 before it reversed slightly to end up for the week at 93.83. The dollar is now sitting on the edge of a long trading range dating back over a year and it will not take much to push it down to the 89 area where it will hit its 200 week exponential moving average that should provide some temporary support.
The dollar is not only in very bad shape from a technical point of view but the fiscal fundamentals of its government and economy are terrible with no relief in sight. So the U.S. stock market will resume its last march higher and continue to be led by energy and commodity related stocks until the dollar falls below a level that ends its reign as the primary world’s reserve currency. Then commodities will probably no longer be priced in just U.S. dollars or probably not in U.S. dollars at all but in new, stronger currencies. That will be the time when the U.S. economy and probably its government to a large degree will have to reorganize and start back from square one. This last statement vastly understates the turmoil and dislocation that this event will cause before any efforts can be made to get back on a track that resembles stability and progress.
To note, it would be funny if the impending results would not end up being so disastrous that the U.S. stock indices rose during the two weeks when the major U.S. banks reported such bad earnings in April. On the face of it, one would think that things must not be so bad at these major U.S. banks if their stocks and the major U.S. stock indices rose after the release of the big bank earnings. Do not believe this ruse for a minute as this was orchestrated to make the public think everything is okay with these banks and the economy at large. This is despite what the terrible earnings numbers at these banks are telling you. These big banks are ticking time bombs, each with a boat load of off balance sheet financial derivatives (that are not even addressed or considered in their official earnings reports) compounded by distressed loans in the energy and other failing sectors of the U.S. economy that are on the verge of setting off a financial firestorm the likes of which have never been seen. These major banks are more overleveraged than they were in 2008 when they required bailouts from the American taxpayers.
The big banks will not be alone in this coming financial Armageddon as the U.S. government will run the U.S. dollar into the ground creating a hyper-inflationary event that has never been seen in the U.S. in modern times. Concurrently you will at some point also see the long term interest rates start to rise that will contribute to fall of the dollar as the Fed and Treasury print more dollars in a futile effort to stem the rise of interest rates. The Fed and other major central banks are gradually losing more and more control of the financial markets. The first financial market to go has been the major currency markets as major currencies other than the dollar have declined significantly over the last few years. Now it is the U.S. dollar’s turn to catch up with the other major currencies and it has started to decline since late January although technically you could say the decline started at the end of November 2015.
The reason the major currency markets have been the first financial markets to show signs of stress is currency is a government’s and their cronies primary tool in their efforts to keep the other financial markets in their required place to keep this Ponzi scheme alive if only on terminal life support. Massive currency expansion is needed to keep interest rates low in the extremely over-leveraged and high debt predicament that governments, major banks, and many large corporations find themselves in. In addition, massive currency expansion is also needed to keep the stock markets near highs or at least from entering a bear market to make the public think the economy is in reasonably decent shape. It is also imperative to keep interest rates low to support a few large areas of the economy that have shown some growth or are needed to support the consumer based economy such as the home/commercial loan/building, auto sales, and consumer credit. These areas are only barely functioning due to interest rates being at these historically low levels. There are already economic figures that show these sectors are starting to turn down as it now stands. When interest rates and inflation rise the decline will only accelerate.
The shale oil sector, one of the few areas of the U.S. economy that demonstrated real organic growth has already taken a major hit due to the unexpected decline in oil prices. This was despite the historically low interest rates that gave these energy companies access to extremely cheap capital. Interest rates for this sector have risen and have contributed to the decline in this sector along with low oil prices. This is just one example of the fragility in the U.S. economy, as well as most major world economies. The extreme debt loads of governments and companies result in a substantially decreased ability to handle even typical economic headwinds that naturally occur from time to time. The government’s continuing dependence on increasing debt to fund their daily operations demonstrates the rapidly increasing instability of our political and economic system.
This will not end well and it will not take much longer to reach the end of rapidly deteriorating economic and political system. The huge U.S. government infrastructure has been built up over the decades on the basis of a reasonably productive but increasingly dysfunctional economy and the U.S. dollar as the primary world’s reserve currency. One quasi-economic area that has flourished under this regime is the military-industrial complex. War is not a productive nor creative endeavor and as such is not a true area of economic activity. The U.S. government has made expansion and maintenance of its foreign empire its primary concern at the expense of its own nation as well as at the expense of the nations that it forcefully meddles in under false pretenses.
The U.S. government and their cronies have hollowed out the U.S. economy in a hugely parasitic manner that leaves little of substance going forward for the majority of the American public. The economy has become very dependent on government expenditures and the output of a relatively few large corporations, that increasingly want to move their headquarters overseas to escape the high U.S. corporate tax rate. This is after they have moved many of the formerly U.S. jobs overseas.
Government’s impact on the economy will be greatly decreased once the dollar is toast. That will cause a great amount of misery and devastation on an economy that is largely dependent on the government and its currency being the world’s primary reserve currency. One of the most egregiously negligent actions in this ongoing collapse is the U.S. government will not take even the slightest action to warn its own citizens of what is about to happen much less take action to do anything to dampen its effects. They will say afterwards that no one could have foreseen such an occurrence of events which will just be more lies from the criminal gang called the U.S. government.
Gold is still trading in a range that is now twelve weeks long. I would expect gold to roll over later this week after it first makes another marginal high early in the week to trap the breakout crowd and trip the stops on those short. As I have been saying, the TPTB are not about to throw in the towel to this Ponzi scheme as long as their main tool/weapon, the U.S. dollar is still standing. The game continues on until the dollar declines to its all-time low of around 70 and maybe then some. At least that looks like the most likely scenario at this point. That means the price of gold cannot continue higher, for the time being. Precious metals will experience a bull market of historic proportions but the TPTB will delay it for as long as their paper based construct can continue to deceive and maintain their empire.
Things are just too good at the top of this rigged game for the self-appointed overseers to just give up or to magically start trying to do the right things. This government and system has never been about trying to do the right thing or about being just. It is about acquiring, maintaining, and expanding power and profit for themselves and their cronies at the expense of the public. This system can work in no other way nor was it designed to work in any other way. The longer this fascist, soft-core totalitarian regime lasts the worse it will become for the American public because in the end the system was purposely designed to favor the few at the expense of the many. They need to control, oppress, and suppress the many (the public) for this system to work in their favor. This system is very good at destabilizing individuals as well as countries through a vast array of nefarious means as key methods to maintain their positions of power and profit and gain control over others. Those in charge do not want independent, self-reliant citizens that have little need for this type of government and that may become competitors to their current positions of power and profit in the future.
Finally, junk bonds look about ready to roll over which is bad news for marginal companies, particularly in the energy sector. This may also be an indication that the rise in long term Treasury interest rates will not be far behind. The rise in long term rates would signal much more large scale and ominous implications for the economy and government.