Your Quick Guide to the “Perfect Storm” That Could Cause A January Recession

Over the past few weeks, I’ve written a number of articles about why stock prices are due to take a nosedive soon.

I’ve had my eye on January for some time because a confluence of factors are all coming together in Q1 2018, creating a “perfect storm.”

The Fed is not known for its powers of early recognition. The next recession, whenever it comes, will be well under way before the Fed gets a clue. Officially it takes 2 quarters in a row of falling GDP for the NBER to call an official recession. By the time that second GDP report comes out a recession will have already been under way for 7-9 months. The Fed wouldn’t loosen policy until at least then. With no economic slowdown even in sight, it is virtually certain that tightening money will be with us at least through most, if not all of this year.  

That’s plenty of time for tight monetary policy, which the Fed euphemistically calls “normalization,” to cause considerable damage to stock prices. It hasn’t started yet, but a series of red flags in the first quarter suggests that that time is coming.

Here’s your quick and dirty guide – and what to do to prepare

The Tiny Little Straw That Could Break The Stock Market’s Back This Month

Ultimately, all financial roads lead to Wall Street. The big investment banks and trading firms known as Primary Dealers all play in one worldwide money pool. When the ECB prints money, it’s not just available to Europe, it is also instantly available to Wall Street.

Growing European bank deposits have always strongly correlated with US Treasury note prices. However, that correlation has broken since mid 2016. Instead, European bank deposits have correlated strongly with US stock prices. That suggests that capital flows from Europe have been a key support to the US stock market rally.

European deposits have grown as the ECB has pumped trillions of Euros into their banking system. Deposit growth has not kept pace with the growth of the ECB’s balance sheet. This also suggests that money has been leaving the Continent and heading to Wall Street.

But that could all be about to change…

View this page online: