Indeed, we’re facing a dark future with worse economic conditions than the Great Depression of 1929-33.
The issues stem from Europe — a deflationary zone that will see massive sovereign debt defaults during 2016/17. Greece will default this year… starting the contagion effect.
The European Union (EU) and Euro were destined to fail from the start. It was foolish to construct a single currency before political conditions were in place. But the faceless leaders had their own agendas to fulfil.
Bear in mind that a single currency will only work with a single economic policy, a single treasury, a single system of taxation (which should be decreased not increased) and spending, a single parliament and single political identity.
The euro is a currency set up for political benefits. Europe should have combined all their debts at the federal level from the very beginning. This is what happened in the United States after the American Revolution. Alexander Hamilton combined all the war debts of the nation way back in the 18th century.
Having not combined the debts, a default from one nation (i.e. Greece) will set a contagion affect that ripples through Europe and the rest of the world. If you didn’t get to check it out, I wrote about why this is the case late last year (see here). I explained why the defaults this time will be worse than the Great Depression of 1929-33.
Europe will combine its debts…but after the sovereign debt defaults. It will be the policy deployed to ensure the world that the ‘leaders’ have sorted everything out. The muppets in ‘control’ really don’t have any clue.
Nonetheless, Greece is expected to leave the EU on the 25th of January. This will see the demise of the euro, sending it much lower — possibly towards parity against the US dollar bull. This isn’t unrealistic; the issues in Europe are significant. Anyone going to Europe will have a great holiday this year.
The Grexit will send shock waves through the financial system. Who will be next to leave Europe — Italy, Spain, Portugal? Italy, the Eurozone’s third largest economy, is my bet.
No need to worry, European Central Bank President, Super Mario Draghi, is here to save the day. You know that guy from Goldman Sachs who said, ‘I’ll do whatever it takes to save [my job]’. The ECB is set to meet on the 22nd of January. As I wrote last year (see here), this will be the date that the equities bull market starts to take off in full force.
The ECB has set itself a goal of expanding its balance sheet — buying sovereign bonds and assets from banks and others in return for cash it hopes will be pushed into the economy — by up to 800 billion or even 1 trillion euros (US$1.24 trillion).
Money printing will cover up the cracks in the European Financial system, yet again.
It will be argued that it’s necessary for Greece to leave — it had no other choice right? Confidence will return and newspapers will soon start talking about the rugby world cup in England.
In the meantime, the smart money will be getting the hell out of European bonds. The initial switch will be from European bonds to US bonds.
Jeffrey Gundlach, the bond guru who co-founded DoubleLine Capital, believes that the US 10-year Treasury note could fall to 1% this year. It’s currently just below 2%. Keep in mind, when bond yields fall, bond prices rise. The bond bubble is brewing in full force.
I’ll go one step further than Jeffrey…
I’m going to argue that we’ll see negative bond yields in the US.
10-year treasury notes will fall below 0%. That’s right, institutions will pay the US government to hold their money. A positive yield would mean that the bond would PAY YOU a return. Negative yields mean that YOU PAY the bond holder to hold your cash. The capital gain on the price appreciation (yields down, prices up) will be around a 16-18% for 10-year treasury bonds this year.
As this goes on, and the rugby world cup is in full force, the US stock market will keep creeping up towards 26,100 points by years end (see here for technical analysis on the target). Only when the sovereign wealth and pension funds see issues in government debt will they switch to equities.
The issue is that the global debt market is worth circa US$160 trillion. The US debt market is worth roughly US$17 trillion. This number should be familiar to you; everyone talks about how the debt is getting out of control.
Considering that the US debt is only US$17 trillion, it must mean that institutions own debt in Europe, Japan, emerging markets, and the US.
Once the debt issues start escalating around the world, thanks to the political problems in Europe and the bullish US dollar (which will destroy emerging markets and resources, creating a huge buying opportunity for the wise investor), pension funds will experience huge problems.
Welcome to the multi-year bull market — a bull market where fundamentals no longer matter. Albeit, analysing fundamentals for stock selection will be crucial to outperform the bull market.
You’re about to witness a gigantic, global capital shift from the US$160 trillion debt market to equities markets (one third of the size of the bond market). The bullish US dollar and the thirst for yield will see gold sold off this year, sending more money into the stock market. And, thanks to the IMF, cash is no longer a safe option.
Governments are bankrupt and won’t look after you in the future; plan to look after yourself. They think they can fix any problem by raising taxes, increasing capital controls, and tightening regulation (like trying to regulate the internet). This is killing growth and driving unemployment higher.
The smart money is selling bonds and buying equities. 2015 will be a year when punters hunt for yield.
Gold doesn’t offer yield. And it will be smashed by the bullish US dollar.
When gold was trading at US$1,350 per ounce in August 2014, I explained to you how it’s falling to US$931 this year. It’s now trading at US$1,223.40 per ounce.
The only game in town is equities.
Have a look at the chart below. It tracks the Dow Jones Industrial Index. Each bar represents one week.
The chart shows you that the Dow Jones has been in a strong bullish uptrend since 2011. The blue channel lines have held the Dow’s trading pattern relatively well over this time period. Once the Dow moves above the upper blue channel on a weekly close (now 18,500 points), it’s game on for the 2015 equities bull market. The year-end target exists at 26,100 points (see here).
Keep in mind, the Aussie market should follow the lead of the US. However, thanks to the anticipated glut in resources this year, I see a target of 6000 points for the ASX 200.
This year will mark a tremendous buying opportunity for quality resource stocks. After getting crunched this year (see here), the resources bull market will restart in 2016. You make big money buying quality when everyone else sells in panic. Check out Diggers and Drillers to see what sectors I’m bullish on this year — I’m bearish on almost everything.
That said, I wrote the following on the 8th of December 2014 (see here):
‘I’d expect to see a major breakaway on the 22 of January 2015.
‘At the moment, we’re just chipping away at the bull market.
‘Potentially, we could hit visit the 18,160 [then the upper blue channel resistance level] point level by the end of this week. Although, the 18,000 point level will offer psychological resistance and next week is more likely. The question is whether the Dow Jones will retrace and correct thereafter.
‘There’s a good chance that this could happen before 22 January 2015.’
The analysis remains. I still see the chance of a minor correction before the 22nd of January 2015.
This means that we could see a correction within the next two weeks, starting today. After the 22nd of January 2015, we’ll see the market break through 18,500 points. Although, I expect this level to be broken during the second week of February. In this case, the correction will not last.
Last week’s trading was quite interesting. The first two days we saw a decline to the 17,274 point support level (shown by pink horizontal line). 17,274 points is now a major support level. We bounced off support and closed the week, down at 17,737.37 points.
As support exists at 17,722 points, Friday’s close was crucial. This is shown by the blue horizontal line. 17,722 points is important because acted as resistance on the week ending 14 November 2014. It also acted as major support for weeks ending 12 December 2014 and 2 January 2015 (shown by blue circles).
We closed above this support, indicating that the anticipated correction isn’t a sure thing.
However, I wouldn’t rule a correction out; we could close below support this week. That said, given the bullish trend, I now see the 17,274 point level as far more important for the weekly close. A weekly close below this level should see the Dow trend lower next week.
17,274 points is the level to watch this week. If we are nowhere near this level at the end of this week, it’s unlikely that we’ll decline much lower next week.
If we do dip and close below 17,274 points, we may only see another retracement to the red trend line. The red trend line has acted as strong support over the past year.
For a correction to take place, I’d like to see the Dow close below the red trend line. A daily closing below 17,130 points this week would likely send the Dow lower. This target moves to 17,174 points next week.
A breakdown of the red trend line should see the Dow Jones re-test the lower blue trend line. This target represents 16,300 points this week and 16,350 points next week. Under this scenario, we should bounce hard off this level after the 22nd of January.
If we experience a correction, I’d expect we’d see a 17,000 point close on Friday the 23rd of January. In this case, we should break through 18,500 points mid-February.
The flip side is that the market turns bullish and breaks 18,000 points this week in anticipation of money printing in Europe. Money printing should be approved on Thursday next week. As money moves from European assets into US assets, we could then head towards the delicious 18,500 point target next week.
The question is…what will the anticipated Grexit do for overall market mood in the next two weeks? I have a bullish gut feeling for a number of reasons. However, thinking about the consequences for Europe, punters may turn nervous heading into the Greek exit and sell. Whatever the reaction is, I’m not concerned in the slightest.
The bottom line is that the Dow is making a very bullish setup for 2015. The market is extremely bullish. Sometime around the 22nd of January 2015, you’ll see an explosive blast to the north as we head towards 26,100 points by year end. The Aussie market should follow — to the 6000 point level.
Before I leave you, I’d like to let you in on something…
Everyone’s seen the destruction in the oil price of late. Last year, when oil was trading about US$77 dollars per barrel, I told my readers that oil would head to US$58 dollars. It’s now trading at US$50 per barrel.
That sounds like bad news, but I’ve found a way you can profit from the oil crash. I’ve spent the last few months researching this investment idea. Expect it in your inbox today.
for The Daily Reckoning Australia