This Is Not A Drill

Last October, when I told you that the stock of Valeant Pharmaceuticals International Inc. (NYSE:VRX) would hit $100 (it was trading at $170 at the time), I certainly didn’t expect the stock to hit my target two days later – but that’s exactly what happened.  Sometimes it’s better to be lucky than smart.  Readers who took my advice and bought puts were ecstatic.

Similarly, I didn’t expect the S&P 500 to hit my year-end 2016 target of 1900 in the first quarter of the year (or in January for that matter), but it appears that things are moving in that direction, and fast. The S&P 500 lost 100 points (about 5%) last week to close around 1940. While my calls are always more directional in nature than anything else, they raise the question of what happens if the market drops more quickly than expected.

This market action is not a false alarm – it’s the real thing.

Here’s what you need to know.

Most stocks were already in a bear market by the end of 2015; it was only a matter of time before the cap-weighted indices joined them.  The narratives of economic strength being promulgated by Wall Street, the mainstream financial media and the Obama administration are increasingly being seen as flat-out wrong.

Investors need to learn to ignore what they are told by the establishment and think for themselves.  The same government that wants to deny that radical Islamic terrorism wants to destroy us is telling people that the U.S. economy is strong.  The same Chinese government that backs Iran and actively undermines American interests around the world claims its economy is growing at high single-digit rates while electricity production, commodity prices and other data tell a much darker story.

And a Federal Reserve that creates bubble after bubble while issuing forecasts that make weathermen look like Nostradamus tells us the economy is so strong that it plans to raise interest rates four more times in 2016 while commodity prices plunge, more than 100 million people can’t find work, and it could barely bring itself to squeeze a 25 basis point hike out of its tightly clenched loins after seven years.

Anyone who believes a word that any of these people say is, not to put too fine a point on it, a fool.

Here’s my 2016 outlook in brief:

  • Oil prices will soon head into the $20s and take a long time to recover.
  • Low oil prices are bad for the economy.
  • Actual inflation is much higher than reported by the government.
  • S&P 500 earnings estimates for 2016 are too high.
  • The S&P 500 will drop significantly in 2016.
  • The high yield bond market will not bottom until late 2017 or 2018.
  • The Fed will not raise rates by more than 25 basis points in 2016.
  • Treasury yields will remain low and the yield curve will flatten.

You can read my full 2016 market forecast here.

Most importantly, as I first wrote more than a year ago, it will not require a recession or an aggressive Fed tightening to cause a bear market at the zero bound.  Traditional rules and conventional thinking no longer apply after seven years of zero rates and several bouts of quantitative easing; this is what markets told us in 2015 as many if not a majority of stocks entered a bear market without the onset of a recession or any sign that the Fed will move aggressively to raise interest rates. In fact, the Fed had to be dragged kicking and screaming to raise rates by 25 basis points when it was too late for it to do any good and probably did damage.

The most likely next step is for the Fed to retract that interest rate hike and initiate another round of quantitative easing as markets and the economy weaken, not because that would be good policy (it would not) but because that is the only way the Fed knows how to operate.  It veers from error to error in a world that it either doesn’t understand or, if you are cynical, doesn’t want to understand because it realizes that the only way it can try to keep the fraudulent Ponzi scheme known as the global economy aloft is to keep printing money until the entire system blows up.

The Real Significance of China’s Debt Crisis

Right now, investors appear to be most worried about China.  China is devaluing its currency and its stock market is collapsing, as I recently discussed here.  China is an object lesson in what happens when a country keeps printing money without any regard to the consequences until its economy simply collapses under its own weight.  I frankly don’t want to hear any more nonsense about how China is growing – it isn’t growing, it is imploding under a debt load that exploded from $7 trillion in 2007 to more than $30 trillion today.  The country is an environmental disaster filled with ghost cities, mines producing too much of every commodity known to man, and hundreds of millions of peasants that it somehow thinks it can transplant into cities and turn into productive urban citizens by saying abracadabra and willing it to happen.

China’s Exploding Debt Load: China Government Debt to GDP

Click to View
(image via

The fact that Western observers actually believed that the Chinese miracle was anything other than an impossible experiment that had any chance of succeeding without causing major global financial instability is a testament to the ability of intellectuals to convince people to ignore common sense and the lessons of history.  China may eventually transform its economy into some version of capitalism, but it isn’t going to do so in a matter of decades and certainly won’t do so without severe social, economic, environmental and likely global disruption. Anyone who believes otherwise knows little of history and humanity.

So rather than stand agape at the prospect of a grossly inflated and fraudulent Chinese stock market blowing up in their faces, investors should wake up to the reality that the world has a serious problem on its hands. The only thing stopping the Chinese stock market from vaporizing is the Chinese government stepping in and buying up the shares of its thousands of worthless companies and propping up the rest of the fraudulent enterprises that populate the country.  China has a massive bad debt problem that is only growing worse by the day; propping up the stock market is not going to make it better – and frankly $3.3 trillion of reserves (which are shrinking by the day) wouldn’t be enough even if the problem could be solved by the government bailing everybody out.

China’s reserves are shrinking rapidly as its sells Treasuries to prop up its economy, which why Treasury yields haven’t dropped as much as one would expect during the stock sell-off.  Anyone that believes that China is going to miraculously stabilize is deluding himself; the country is at the beginning of a severe financial crisis that began in mid-2014 and triggered the global commodities collapse that infected the U.S. stock and high yield bond markets.

It is only going to get worse.

Preparing for a Long-Term Bear Market

Just as the pre-crisis world experienced a U.S.-based housing crisis that spread to the rest of the world through the “magic” of securitization and almost sunk the global financial system, the post-crisis world is suffering from a China-based commodities crisis that spread throughout the world and is now causing severe pressure on the global economy and financial markets.  The only question is whether this commodities crisis will trigger a mere market correction and recession or something much worse.

In view of the fact that the post-crisis world is far more leveraged and geopolitically fractured than the pre-crisis world, there is a serious chance that the world is in store for a crisis rather than something less severe.  Investors should prepare accordingly.

That means investors should sell their stocks and move to cash until markets stabilize, buy gold, and figure out which party in the upcoming presidential election is serious about setting the United States on a productive economic and foreign policy course.



17 Responses to “This Is Not A Drill”

  1. Giancarlo Nicoli

    Hi there,
    I much appreciate your insights.
    I made a few bucks while shorting oil and buying volatility. So thank you for your spot-on prediction.
    Just as an aside to this post, what do you think about going short the Shanghai stock market?

  2. China is crashing yes. But the US treasury game is mind blowing! Average Americans can’t pay more taxes. They can barely pay their mortgage, groceries, gas, utilities and insurance. Not to mention pay taxes which have risen. If the US govt raises the debt level again and again, one day we are going to have the biggest financial tsunami dwarfing the RTC S&L crisis, flash crash, Mortgage crisis and any other financial debacle. Warren Buffet talks about swimming naked when the tide goes out. Forget that. You will see a financial nightmare unlike anything ever seen before. The ability to pay the overburdened tax base will evaporate and the US bond market will collapse faster than anything ever seen. I love the US but want to start investing from top to bottom in the US, employing people, instilling pride in ownership of our country. It’s almost gone. We need to stop talking a get someone to lead.

  3. I think we will see extensive deflation with dropping home values and commodity prices for about 1-2 years , followed by rapid inflation. What ever happens we are all in the same boat. Remember rags to riches to rags in 3 generations!”

  4. I and my family will be eternally greatful for your writings that have brought me up to speed and included rock solid foreign analysis.

    Factors for gold going up:
    20 trillion national debt, 80 trillion unfunded liabilities
    Quantitative easing diluting the dollar, increasing gold
    Insolvent foreign economies, china, russia, europe,…
    Quantitative easing other countries having a similar effect and adding to the instability,
    Now feds unlikely to increase rates
    Continued inflation, continued loss of buying power
    False reporting unemployment, never reporting underemployment, no engine to boost the economy
    Low wage growth, lack of spending to boost economy
    Multiple failing/crashing industries (bonds, oil,…),
    Overwhelming trade deficits, increase US debt further
    Debt to GDP ratio > 100%, unable to pay future debt
    Increasing taxation, decrease stimulus to boost economy
    Broken global monitory policies (thank you for helping us under stand this…. europe, russia, china, jajpan, and so on
    Low current price for gold, great time to buy,
    Thanks for your perspectives on foreign markets, industry, real estate, instability, and volitility
    I guess all that is missing is sentiment from the lemmings

    Factors influencing silver:
    Trends to follow gold
    Limited supply
    High commercial demand
    Gold/Silver ratio >70
    And some other factors listed above

    I have already made my move thanks to you…. I lost in 2000 and 2008. I will not lose this year. I empathize with others that will lose in the next couple of years…. and would encourage all to start educating their friends… It’s a tragedy/sickening our political parties don’t have our interests at hand

  5. Your insightful analysis cuts through all the hype and deceit we are fed each day! Do you believe there might be a collapse of the dollar lurking in the foreseeable future? Besides buying gold, should one buy Swiss francs, which are close to parity now, and what about holding some euros? What about investing in commercial real estate. which is a tangible source of income, if well located…Would greatly appreciate a reply. Ilka

  6. The old order is in crisis. The information age has replaced the industrial age. The middle class, which rose during the industrial age because it’s labor was necessary is in decline because increasingly smart machines are replacing their jobs. In the next 20 years, another 80 million jobs will be replaced. For 20 years we have been substituting lower paying service jobs lacking benefits or security. Leadership has refused to confront the fact that the information age is transforming the world. Neither political party will admit to this, let alone debate it. They are doing the same things over and over again predicting different results, which is Einstein’s definition of insanity. Added to the decline in income for a majority of the public, is an aging population that is growing from 46 million today to 69 million in 20 years. They have spent the last 20 years ignoring this transformation, and printing money and borrowing to keep their promises. Now, history is in charge. It will crush them.

  7. I would also point out that the population growth of the developed world is at or headed to 0. In the absence of population growth in the developed world, and given that the wages of the middle class are declining, basing future planning on growth is a fools game. That world is gone.

  8. Very thankful for this honest reporting on world finances and where we stand in all this…my problem is that I am trying to get my 85 yr old mother that recently lost her husband that took care of all financial decisions. I have recently warned her that bottom line, she doesn’t have the know how and neither does anybody else in the immediate family, to manage the small fortune she and my deceased father were able to put together. She seems to think riding it out was the norm in the past and doesn’t know any other approach other than to ride it out. I tell her at 85 that is the last thing she should be doing from what I understand. Any solid suggestions out there for me and my family that reside in Las Vegas?

  9. You are the first person I’ve heard to say that inflation is much higher than the Fed says. I’ve been saying this for a long time. Two-thirds of our economy is service business and everything in this non-productive (not farms, ranches, factories) part of our economy has been and will be ratcheting higher. For instance monthly bills, mortgages/rents, food, haircuts, car washes, office supplies, yoga classes, car maintenance, entertainment, etc. Generally, these prices range from 5% to 15% a year. Wages and salaries are flat. All these economic numbers the government and Wall St. put out are all fake. All of China’s numbers are fake. What the hell is holding all these fake economies up?

  10. The proverbial hot air of a class that is desperate and determined to manipulate information in order to maintain what they call consumer confidence in order to keep the public, in a consumer economy, spending. They are deathly afraid that if confidence falls, spending will slow, and a recession will follow. And not just one of your garden variety recessions. Agriculture and manufacturing now employ only 11% of the public. It’s a hollow economy.

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