Are U.S. Equities Due to Rise Forever?

Chris Hamilton, who was my guest last week on my radio show, makes a very strong case for a perpetual decline in GDP, given not only a declining rate of population growth but also an outright decline in the number of working-age adults. Like Harry Dent, he looks to population growth as the key driver in GDP. Indeed this year, the number of 20-to-60-year-olds in the U.S. is starting to decline. It all makes sense because this is the age group that spends big to raise families, buy houses and cars, and educate their kids.

However, unlike Dent, Chris does not see declining GDP result in lower stock prices. Of course we have been seeing a rising stock market despite a wretched economy that in reality bears little resemblance to the group-think propaganda from the Fed, our government, and mainstream media. Chris points out that not only GDP but interest rates also are closely tied to population growth trends, so his view is that the recent rate rises are only temporary. In a July 7, 2017, missive, Chris wrote the following:

“So, the Fed is presently focusing on the micro cycle and hiking absolutely against the macro trend. And, unless ‘this time is different,’ this is just another ‘gyration,’ and I suggest to you with 99.9% confidence that the Fed will be returning to the macro trend over the mid and long term. The macro direction of interest rates premised on the population cycle is that clear (flat to down, NIRP?) and the continued negative impacts to GDP are obvious. As for the Fed and Janet, either they are the dumbest smart people only our ivory-towered academia can create…or they know quite well what I’ve outlined and are lying about it (for what purpose, everyone can surmise for themselves).”

Hamilton’s views have a great deal of merit. I’m just trying to get my head around how this money-printing scheme can go on forever if the result is a continuing hollowing out of the real economy. Actually, I believe the Fed might drain its balance sheet and thus drain liquidity out of the system for the same reason that Volcker did that in 1979-1980? Back then the Europeans said they would dump an intrinsically worthless dollar unless the Fed stopped endless money printing. Of course a much more serious inflation problem then provided Volcker with cover for draining liquidity and raising rates. But I believe the real reason was the credibility of the dollar, which was also being called into question as gold rose from $35 to $850. Think about this. A dollar that is shunned by the rest of the world is a death sentence for the Fed and the banking system that it is charged with saving and preserving.

A couple of weeks back, Michael Oliver’s momentum work told him that if the dollar index broke 99 by the end of the month, the dollar would be facing a serious decline. The dollar has a great deal of trouble because it is becoming ever more worthless given its unending creation and because, increasingly, foreign nations that have been buying Treasuries are no longer doing so. And as the Military Industrial Complex continues ramping up vitriol toward China and even our “friends,” what do you think will save the dollar except a drainage of liquidity and higher rates? Oliver’s work also tells us that the U.S. T-Bond has entered a bear market. Indeed, as we are seeing, even the Fed’s more hawkish rate stance has failed to keeping the dollar from entering a new bear market. 

I have to believe that what we are seeing is a true supply/demand problem for the dollar and the only way the Fed knows to defend its currency is to raise rates even if that means sending us into a depression. After all, nothing is more important to the Fed than preserving the perceived value of the dollar, which in fact has no intrinsic value.

I would call your attention to a chart from a recent article written by Chris Hamilton that in my view tells the story. For the longest time, America has gotten by with living beyond is means because foreigners have been willing to lend America money. But look at what is happening now. During 2015 and 2016 foreigners have not only stopped buying U.S. Treasuries but have also decreased their holdings by 12%. During the financial crisis intergovernmental funding (mostly social security) was largely offset by QE. Social security did pick up with the modest “recovery” in the 2015-16 timeframe. But without the “kindness of foreigners,” domestic funding has had to fund 87% of U.S. Treasury funding purchases.  Wow! The U.S. is broke!  

Now here is the thing about that 87% “domestic funding.” As Chris has pointed out, $745 billion, or 49.6%, of this domestic funding has come from so-called “other” domestic sources. 

Chris hasn’t told us where he thinks that 49% has come from but who could it be, other than the Fed or some combination perhaps of various central banks around the world? You might expect a combination of miscellaneous sources to be lumped together as “other.” But when you have 745 billion dollars it seems only logical and honest to talk about what “other” is. I suspect it is indeed a continuation of stealth QE that is being used to try to suppress interest rates that would simply rise on a shortage of supply to fund the gigantic federal debt that is growing exponentially.

So I think the Fed has a very delicate balancing act as it tries to perpetuate its great Keynesian lie that you can create wealth through the printing press. If it were to allow the laws of supply and demand to work, rates would rise dramatically higher, not because the economy is strong but simply because there would not be enough savings to fund the debt, now that foreigners have walked away. To keep the dollar con game going a bit longer, the Fed, headed by the N.Y. Fed, is pushing to let rates rise. But if rates rise too much too fast, there is big trouble brewing for the stock market and if that happens, all hell breaks loose in Congress because our representatives are deep into the stock market, not to mention what would happen to pension funds and all manner of personal investments if the stock market crashed, because under a phony manipulated interest rate, investors have been forced to take stock market risks to an extent greater than ever before.

Obviously shorting the S&P 500 and the junk bond market has hurt this letter’s Model Portfolio. One short that is panning out for your editor is a call option on a dollar short, namely, the PowerShares DB U.S. Dollar Bearish ETF (symbol UDN), which I bought when Michael Oliver pulled the trigger on selling the dollar. With several months left, UDN is selling at $21.90 so my position is now in a profitable mode. Based on Michael’s work, I feel the chance of seeing UDN enter in the money beyond my call price of $0.30 is highly likely while the likelihood of the dollar strengthening to any great degree from here on is minimal.

With the Treasuries now in a bear market and given my view that rates will rise due to the need to defend the dollar, I still believe that the junk bond short will eventually work out.  And if rates continue to rise as Michael’s work suggests they will, continue to do, that should also eventually put pressure on the stock market. It’s something the Fed wants to do, but it is faced with the lesser of two evils. From its perspective as protector of its shareholders (major money center banks) at any cost, it must keep the dollar from crashing. And right now the dollar is under tremendous pressure in part because nations that save don’t want it. If the dollar goes down, so does the Anglo-American Empire and nothing is more at the center of the empire than the banks that fund it out of dollars from nothing.  As the world is rejecting a worthless dollar, I believe the Fed understands it has no option but to let rates rise in order to fund the perpetual U.S. war machine and ongoing and escalating socialism in America. We could be in for the worst of both worlds—rising interest rates that do not rise fast enough to protect the dollar. I can’t think of any scenario more bullish for gold. Can you?