Alasdair Provides the Fundamentals

I enjoyed my discussion with Alasdair Macleod this past week on my show. His explanation of the markets dovetailed very well with the technical views that Michael has been accurately providing. 

Alasdair explained that the market’s performance has very little to do with earnings these days. Rather it has everything to do with money flows that have to do with a bastardized cycle caused by illicit monetary policy. Thanks to massive amounts of debt-based money, the Fed prints this fiat money until the economy is overburdened with so much debt that when rates rise, the market crashes. The latest and greatest such crash occurred in 2008-09. When the market is on the floor, the Fed pumps an enormous amount of money into the banking system through Treasuries purchases, thus creating bank reserves that are also available to enter the stock market. Stocks boom during this “recovery” period.  But at some point, like over the past couple of years, when interest rates reach cycle lows, banks begin to sell bonds and use those proceeds to begin lending to companies and consumers because to hold Treasures when rates rise cause losses but their selling cause rates to rise even more! Out of fear of collapsing markets, the Fed keeps creating more reserves, keeping rates from rising as fast as they need to restore market equilibrium thus causing real rates to remain negative. That keeps demands for goods and services more robust than should be. Commodity prices boom and real wages being to rise.  

With money flowing into the real economy, economic activity on Main Street rather than Wall Street heats up and prices measured in the CPI begin to climb. With rates rising, stocks become less attractive. So even as the economy beings to heat up and earnings rise, stocks head south. As prices begin to rise, psychology begins to change such that monetary velocity starts to surge higher.  But with rising interest rates and an enormous debt created to try to paper over the past cycle, the stage is set for the next financial crisis. At some point, the threshold of lethality is met and the system melts down again and stocks crash once again with each cycle more dramatic than the prior one. Meanwhile, commodity prices are strong, especially as the dollar plunges as markets sniff out the vulnerability of a Fed that cannot raise rates fast enough to stave off inflation or save the Dollar. Alasdair’s fundamental explanation fits like a glove with Oliver’s ongoing momentum based predictions as measured by MSA (www.OliverMSA.com). Unfortunately for most, a bear market in stocks is now underway! Fortunately for gold bugs, gold and gold shares shine.

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