Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Stock Market Increasing Technical Weakness - 22nd July 19
What Could The Next Gold Rally Look Like? - 22nd July 19
Stock Markets Setting Up For A Volatility Explosion – Are You Ready? - 22nd July 19
Anatomy of an Impulse Move in Gold and Silver Precious Metals - 22nd July 19
What you Really need to Know about the Stock Market - 22nd July 19
Has Next UK Financial Crisis Just Started? Bank Accounts Being Frozen - 21st July 19
Silver to Continue Lagging Gold, Will Struggle to Overcome $17 - 21st July 19
What’s With all the Weird Weather?  - 21st July 19
Halifax Stopping Customers Withdrawing Funds Online - UK Brexit Banking Crisis Starting? - 21st July 19
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

What Credit Markets Are Telling Us About Stocks Now

Stock-Markets / Stock Markets 2015 Aug 18, 2015 - 12:55 PM GMT

By: ...

Stock-Markets Michael E. Lewitt writes: Rather than trust markets to heal themselves, the world's central banks have polluted markets with flawed economic theories and trillions of dollars of debt. Rather than ignite economic growth as they had hoped, however, they have suffocated the global economy.

It began with the U.S. Federal Reserve's move to lower interest rates to zero seven years ago, followed by several bouts of quantitative easing.

This was followed by Mario Draghi's August 2012 declaration to do "whatever it takes" to defend the euro.

And then there were the Bank of Japan's kamikaze moves last Halloween to buy not only every Japanese Government Bond being sold, but even stocks and ETFs.

China is late to this central banking party, but it still managed to rock global markets last week when it devalued the yuan.

Central banks have launched a massive assault on markets that has sucked out their liquidity and distorted normal pricing mechanisms beyond recognition. What we've seen so far is only a taste of what central banks will do in their desperation to prop up over-indebted economies…

The Last Best Hope for Growth

China, of course, has been the primary engine of world growth since the financial crisis.

Unfortunately, it has done so while destroying its environment and drowning its economy in debt. We now know that China's debt grew from $7 trillion in 2007 to s$28 trillion in mid-2014, according to the McKinsey Global Institute.

We also know that China grew by first inflating a real estate bubble, then a bubble in financial products sold through its shadow banking system, and finally an epic stock market bubble that saw its three major stock exchanges (the Shanghai, Shenzhen, and ChiNext) rally by between 200% and 300% in less than a year.

The final – terminal – stage of this bout of bubble blowing was actively aided and abetted by the Chinese government, which encouraged millions of uneducated Chinese farmers and others to open margin accounts and borrow themselves into permanent insolvency.

The government also propagandized the stock market bubble as a sign of the regime's economic genius, leading to such epic stupidity as telling people to buy stocks on Chinese leader Xi Jinping's birthday.

When Chinese stocks finally hit a wall a few months ago, fantasy hit grim reality and, like in Game of Thrones, the Red Wedding began.

Chinese economic growth began to slow in early 2014, something that astute investors noted as they began backing away from commodities. The commodity sell-off is directly tied to China, which has been the marginal buyer of all major commodities since the financial crisis as it built massive ghost cities and tried to create a consumer economy overnight.

Even Apple Inc. (Nasdaq: AAPL) has benefitted from massive sales of iPhones in the China market, which have now slowed and (for now) nicked the stock of the most highly valued company in the world.

Commodity investors are among the most economically sensitive in the world, and when they see the prices of iron ore, aluminum, copper, and oil start weakening, people should pay attention.

While commodities are also getting badly hurt by the strength of the dollar, Chinese economic weakness is a major contributor to the 50%+ declines in prices in these key products.

Devaluing the Yuan May Have Been the Only Option

Having effectively panicked and shut down the normal functioning of their stock markets, Chinese authorities took the next step in their efforts to stabilize their economy last week by devaluing their currency against the dollar.

On three consecutive days, they set the value of the yuan just a little lower against the U.S. currency. While their motives are being endlessly debated, the fact remains that the yuan had been appreciating sharply against the dollar in recent years.

More important, perhaps, is that it had appreciated even more sharply against the Japanese yen, which is being actively debased by the Bank of Japan as a main approach of "Abenomics."

A full-scale currency war is raging in Asia, and China's currency (along with the South Korean won) has been on the losing side. South Korea's export economy is teetering on the edge of recession and most likely so is China's – or at least some regions of China.

China's moves may not yet be enough to level the playing field with Japan, but they are significant and are likely to continue, which will continue to rock global markets in the weeks and months ahead.

A weakening yuan marks a sea-change for a currency that had been strengthening against the dollar for years. Combined with a likely Fed interest rate increase in September, the trends that have dominated global finance since the financial crisis are shifting under the feet of investors.

That suggests that the other dominant trend – higher stock prices – may also be in store for a correction.

This Market Needs a Correction

But for the moment, the major indices are holding on. The Dow Jones Industrial Average is down 1.94% on the year, while the S&P 500 Index is up 1.59% year to date and is only about 2% below its all-time high. The Nasdaq Composite is up 6.59% for the year.

These market-weighted indices are disguising serious damage in individual sectors and stocks, however, as anything commodity and particularly energy-related has been decimated. Other sectors such as media have also seen serious damage.

The high-yield bond market has also sold off hard in August with the average yield in the market rising to 7.3%, its highest level in quite a while.

The large high-yield bonds ETFs, SPDR Barclay's Capital High Yield Bnd ETF (NYSE Arca: JNK) and iShares iBoxx $ High Yld Corp Bond (ETF) (NYSE Arca: HYG), have sold off about 2% month to date.

Credit markets usually signal trouble ahead in equities, so investors should be paying attention to this potential canary in the coal mine.

But a great deal of damage has already been done under the surface of the stock market. The real question is whether the indices, which are driven by their largest cap stocks, will ever give up the ghost.

My bet is that they can't hold out much longer unless some good news arrives at their door soon.

Source :

Money Morning/The Money Map Report

©2015 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email:

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules