Creating the Bond Bubble – Role of the Stock Market
All over the place they are touting that the stock market will crash and burn. Indeed, when you say there is a coming crash, everyone immediately assumes that means the stock market. It appears that the bulk of those who claim to be analysts are all proclaiming the coming stock market crash. This is typical since no one in the field has really be around for a collapse in government. In the United States, we had the Sovereign Debt collapse during the 1840s of many states who defaulted permanently on their bonds trying to bail out the banks after Andrew Jackson’s closure of the Second Bank of the United States. Here is Wave #913 of the ECM. What is relative here is that the famousPanic of 1837 came on the half-cycle after the peak where the share market actually topped out in the USA during 1835. That wave bottomed in 1839 and thereafter began the State Sovereign Debt Defaults since Jackson had destroyed the central bank and the USA entered the age of Wildcat Banking where state banks issued money.
The share market in the USA peaked in 1835 with the ECM and it declined for about 7 years into 1842. The Panic of 1837 unfolded as Jackson effectively adopted austerity demanding everything be paid in gold. That set off a massive deflationary wave and the closing of the Second Bank of the United States in 1836 set off a real nightmare. Jackson closed the bank because it had been funding political candidates who were his rivals. In this respect, Goldman Sachs has learned to pay both sides and bet on no one but themselves.
The above ECM chart of Wave #913 illustrates that the US share market bottomed in the chaos in 1842 as the massive deflationary wave set in thanks to Jackson’s austerity move. Yet once states began to permanently default in 1842, capital ran into private assets. We see the US share market bottomed with the deflation in 1842 and then rallied for 10 years.
The State and Federal defaults in the USA go back further to the collapse of the Continental Congress and the reorganization of the United States where the constitution forbid the states from ever issuing money on their own once again. The transition to US dollars was not without its pain. There were wild gyrations and Hamilton directed the bank of New York to buy his paper to try to do the exact same type of stimulation the ECB and the Fed have engaged in today. The Panic of 1791 was also a banking crisis.
So How did the financial markets respond to such events domestically within the United States? The Panic of 1791 was followed by a massive real estate bubble which then burst during the next Panic of 1792.
At this time, we see that there is the traditional risk of a correction in the share market that could set off the final stage of the bond bubble. Keep in mind this is not going to materialize in the long-end of bonds/bunds. What we are seeing is capital is not rushing into the 10 year or greater paper, it is rushing into the very short end. Rates there are negative as there is not enough short-term paper around to meet the demands to park cash.
We still see May – July – September as key targets for turning points. Whatever we end up with in September should produce the opposite trend immediately thereafter. As we now head into the last week of May/first week of June, we should start to see the choppy trends begin.
It is more likely than not that we should see a retest of support that will scare people and cause them to believe the stock market will crash. The high in the Dow still remains March 2nd at 18,335 level. Support begins at the 17,153 level and a daily closing beneath that level will signal the correction is then possible. The key support lies back at 16,540 level. A drop back to that area in the weeks and months ahead should convince everyone to buy more government paper and complete the final bubble top in government debt.
The Euro & the Press
It is typical how much of the European press is saying the Euro decline is over and a Greece default will not harm Europe. This seems to be the standard propaganda from government that comes out with every serious change in trend be it Japan in 1990 to the US 1929 Bubble where it was also immediately pronounced the fundamentals were all sound.
We warned that the first area of resistance was at the 115 level on the weekly models and that we did not expect a break of the 80 cent level just yet – that was more after 2015.75 than before. Yet we need a daily closing above 11360 to stabilize the Euro. A daily closing back BELOW the 11120 level will warn that a retest of the lows will follow.
The decline is still in motion. This is a reaction rally and the very best we can hope for is a retest of the 120 level. However, we must break through the top of the channel on this chart to make that happen. Otherwise, the 115 level may be the maximum on the upside. That channel stands at the 11427 level at this time and the 109 level under the market. Break the channel on the downside on a closing basis and the lows will be retested. The main support still lies at the 103 zone.
Yields Are Collapsing on Short-End
The amount of cash rushing around on the short-end is stunning. Yields are collapsing into negative territory and this is the same flight to quality we began to see at the peak in the crisis back in 2009. The big money is selling the 10 year or greater paper and everyone is rushing into the short-term. There is not enough paper around to satisfy the demands. Capital is unwilling to hold long-term even the 10 year maturities of governments including Germany. This is illustrating the crisis that is unfolding and there is a collapse in liquidity.
As long as the share markets DO NOT make highs with the ECM, then it still appears we can have that Phase Transition into 2017. It appears we are headed into that false move that requires the share markets to decline which then send cash running into government debt. What is unfolding right now is the severe decline in confidence in government is causing the big capital to sell the long-end and move to the very short-end. So we should continue to see this trend and the rates should continue to move negative in that paper.
Since we elected two Weekly Bearish Reversals at 15620 and 15630, the correction was confirmed. However, the next reversal was at 10522 and a Monthly Bearish lies at 15065. This is the critical area to watch for a weekly closing below this level will warn that the highs are clearly in place and we will see long-term rate start their rise. Smart capital sees the crisis. Look for the development here going into the last week of May. We should get a bounce thereafter, but government debt will decline after 2015.75 on a worldwide scale.
The share markets hopefully create the false move and that should send more capital rushing into government paper. There is not enough short-term paper around so we should then see capital forced to start moving up the maturity duration just to park money as share markets correct. Keep an eye on the Global Market Watch. That should help to pick the highs and lows specifically in different instruments.
IRS Seizing Small Business Accounts Because of Cash Deposits
The IRS is seizing accounts of small business operations under the crime called Structuring. This is where you deposit less than $10,000 two or more times to try to avoid the bank reporting the cash deposits. Lyndon McLellan made two deposits amounting to $11,400 within a 24 hours period. The IRS seized his entire account of $107,702.66 assuming his store is entirely illegal. This is by no means the first story of this nature. This is the new scam. They are seizing the accounts now a small businesses who deposit cash from sales.
Republicans For Sale Thornberry’s Bogus Defense Bill
In the chairman of the House Armed Services Committee Rep. Mac Thornberry’s new bill set to pass this week changing how the Pentagon buys weapons, the very people who sell the arms to the government got to wrote the bill in favor. Thornberry has altered the acquisition system weakening the power of the Pentagon’s chief weapons tester, an independent watchdog who answers directly to the secretary of defense. This position is what has in the past uncovered flaws in big-ticket weapon systems. The Thornberry provision allowed the Aerospace Industries Association to make sure contracting officials use the standard of lowest price when choosing winning bids only in “appropriate circumstances”. Anyone who wants to know why, well the F-35 is said to be a disaster and the bill went from $8.6 billion to $15 billion and it may still not work.
This basically demonstrates that career politicians are way too dependent on donations to run for reelection all the time. This is just another example why term limits are so mandatory.