Our Global Regional analysis clearly shows a deteriorating global economic picture.
Contrary to the signals from the trading exchange markets, the Global Macro shows the EU back in recession, Italy experiencing a triple-dip recession, Germany's ifo and ZEW deteriorating badly and the French situation forcing the Prime Minister to abruptly resign.
In Asia China the yuan continues to weaken as an indication of a slowing economy. Japan's economy is the most worrisome as it fast approaches financial instability from ABE-nomics and QQE.
The upcoming ASEAN Common Market launch is not getting the attention it deserves as a serious manufacturing cost threat to both China and Japan.
Our Macro Watch Liquidity Gauge analysis continues to suggest that 2nd Half 2014 will experience a liquidity problem, despite the Fed's recent Reverse Repo actions, unless the Federal Reserve halts the "TAPER" program schedule in Q3 / Q4 2014. Failure to do this may turn out to be the "straw which finally breaks the "camel's back" of the post Financial Crisis Global recovery.
We are presently long overdue for a market correction which will challenge the Fed to stop it from being too deep so as to effect overleveraged collateral values we have been warning of for sometime and the tenuous situation in the shadow banking system where treasury fails have become common.
This is not going to end well, but not before the Federal Reserve is forced into even more dramatic departures from proven Monetary Policy practices. Global Central Bankers are presently highly concerned, but have not yet reached the "panic reaction" stage we expect to see before this monetary experiment tragically ends.
The US economy is steadily deteriorating and continues to be artifically supported by only government deficit spending and a historic growth in the Federal Reserve Balance Sheet. These measures are clearly failing to create sustainable economic growth. Q2 is highly likely to turn out to be a negative growth quarter simialr to Q1 which has been revised lower to - 2.6%. Two consequtive negative quarters defines a recession. Markets will soon react negatively to this realization.
We continue to see major issues in the US Housing market which has begun rolling over, HELOC loan deliquency levels, residual used car values, lower credit scores for new debt, accerating deterioration in retail sales, crumbling capex, weak startup/small business growth and chronic unemployment which is only seeing growth in part time work within poor paying sectors.
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This great M&A Wave which I see coming was set in motion with the removal of the USA from a Sound Money system in March 1968 with the passage of the Gold Reserve Requirements Elimination Act. From that point in accelerating fashion, credit creation in the US began growing geometrically.
It was slow at first but steadily gained momentum after President Richard Nixon removed the US completely from the Gold Standard in August 1971. As Credit increased so did the US’ Current Account Deficit as the US steadily consumed more (and more) than it produced while easily financing it with debt borrowed from the public and abroad.
With the continuous expansion of the Money Supply, inflation (even using government measures which are well understood to be manipulated) accelerated significantly, eventually lowering standards of real disposable income as the wealth producing engine of the US was effectively gutted by an excessive debt burden.
What I categorize as Stage I, ended with the Dotcom Bubble implosion. Up until then the wealth generating engine in the US, though crippled, was still operating as evidenced by the computer communication revolution in the form of the arrival of the internet.
We believe the Intermediate Top is now in and our long discussed "M" Top is now underway. Our expectations are for either a 6% or 12-15% correction. The signals to watch for to know which are:
A "Death" Crosses in the 50, 100 and 200 Daily Moving Averages (DMAs),
A curl in our Monthly S&P 500 Primary Trend Chart,
Deteriorating Credit Markets outside of the already failing HY,
Increasing event & headline risk events.
We feel the Long Term topping process of this classic megaphone top (often present in Major Tops) will take the shape of a "M" top for the following reasons:
Deflationary Pressures increasing due to NPL (Non-Performing Loans),
Collateral shortages to turn credit into debt,
A Tapped out US consumer in a 70% consumption economy
Shrinking Real Disposable income
We are moving towards the fourth wave of a four wave credit cycle,
We anticipate a von Mises type "Crack-up Boom" as a flight to safety away from paper assets,
The tax incented Buyback momentum to mutate to an M&A boom as stocks are reissued as buying currency.
We will give the podium to Fred Hickey, aka the High-Tech Strategist, who gives a very poetic summary of what the Fed's endgame will look like:
"The Fed hasn't made the world a better place with its interventions. It has created
Encouraged the formation of asset bubbles that eventually pop (leaving economic messes),
Widened the wealth inequality gap to record levels,
Discouraged savings and investment,
Severely penalized retirees on fixed incomes,
Funded massive government deficit spending by monetizing the debts,
Lengthened the recession and likely reduced the number of jobs that would have been created if the economy had been allowed to take its normal course.
Eventually the Fed's policy interventions will also have created debilitating, widespread consumer inflation, the "cruelest tax" against the poor and middle classes"
The only solution the Fed KNOW and WILL carry out is to print even more money. The problems above are going to soon destroy the Fed's credibility forcing it into even more desperate acts leading to a von Mises Crack-Up Boom, which will accelerate in a Flight to Safety (the hard brick and mortar assets of dividend and cash flow producing blue chip globalist players).
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Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.
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