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By Gregory Mannarino TradersChoice.net
If you are a follower of my work here in the Trends Journal, then you are already aware of the epic distortions which are now occurring in the financial markets. For some time I have been detailing for you how, in the face of everything being thrown at this market, stocks would continue to hit record high after record high.
Just last week the S&P 500 hit a series of new record highs despite round after round of abysmal economic news. In fact, in the many articles I have written for the Trends Journal and in my own work, I have stated that if the bad economic news keeps coming, one should expect this record run in the stock market to continue.
Today’s market is completely disconnected from the economy—and there is the paradox. Even during the deliberate shutdown of the economy at the previous height of the scamdemic, which wiped out 60 percent of U.S. small business, stocks hit a series of record highs.
The driver here is exploding debt and a hideous merger between corporate entities and this new government system here in the United States.
The bad economic news is a guarantee to the market that the Fed will continue buying assets, moreover, it is also a guarantee that the US debt to GDP ratio will continue to get much worse—as a percentage of GDP the U.S. economy is contracting rapidly, and this as well is fueling a stock market bubble.
The value of the U.S. equity/stock market is derived from four factors:
- The debt market. The debt market is a hyper-bubble. It is continuing to be fueled by the Fed, along with other central banks, including the IMF (International Monetary Fund) which is issuing record amounts of their currency called SDR’s—a default/supplemental reserve currency.
- The U.S. Dollar. The U.S. stock market is dependent on a weak dollar, as are commodities which are priced in U.S. Dollars—henceforth why the Fed is deliberately creating inflation attempting to weaken the dollar.
- Crude oil. Crude oil IS the lifeblood of the market. The entire energy sector and financial sectors of the market are dependent on the price of crude being high.
- The Federal Reserve’s balance sheet. If the balance sheet of the Federal Reserve continues to balloon, stocks will gain. The Federal Reserve balance sheet is now over $8.5 Trillion and going much higher.
Today equity prices act independent of PE ratios, forward guidance, earnings, valuations, etc. Instead, the price action of the market is dictated, and derives value from, the above four factors I listed.
Therefore, the stock market itself is a derivative.
The paradox, or a stock market which will propel higher as the economy continues to freefall, will continue… until it doesn’t. But there are clues.
By understanding the four factors driving the market we can stay ahead of the moment of reckoning, a stock market crash which will occur because of the massive distortions which now exist.
If these four drivers continue their current trend, the stock market will gain.
The biggest clue to when a real stock market meltdown will occur is in the 10-year yield. A stable 10-year yield will drive stocks higher as the Fed continues to suppress rates, but when the 10-year yield begins to spike in an uncontrolled manner—it will be at that time when we dump stocks and run for the hills.