The correction I warned you about seems long gone. Albeit, I believe that the market could still see another brief correction before 22 January 2015. I’ll talk about this below in the technical analysis section. But a correction in the short term doesn’t worry me in the slightest — it simply won’t last for long.
This comes down to understanding Europe’s disaster zone — it’s an absolute basket case over there. New forecasts by the ECB predicted the bloc’s economy would grow just 1.0% next year rather than the 1.6% predicted just three months ago. Monkeys could do a better job than these guys…
Increasing taxes, regulation, and capital controls won’t solve the problems of high unemployment, low growth, and limited opportunities. Low inflation exists because of the problem. Few will spend money as they did the 90s when you keep taxing people through their teeth. Few in their right mind would set up a business either, employing others.
And as I explained to Diggers and Drillers readers this week, Japan’s position is just as bad as or worse than Europe’s. Albeit, Japan can kick the can down the road for a little longer, because it owns 95% of its debt and has US$3.2 trillion in net foreign assets.
That said, Abenomics — money printing on steroids and increasing taxes — is eating away at this net foreign asset position thanks to rising debt load and the depreciating yen. Japan, like Europe, doesn’t have long until the ‘debtinator’ clock stops ticking.
With two of the largest debt markets in the world —Europe and Japan — in a state of disorder, where do you invest?
The US financial market is the last man standing that can handle US trillions of capital. Around US$160 trillion of debt exists globally. Where’s this money going to go when things start to fall apart in Europe and Japan?
This is why the US dollar has entered a tremendous bull market. And, as money heads into the US, this is why the US stock market will turn exceptionally bullish next year. The Aussie should follow, aided by a falling Aussie dollar — heading to possibly 66 US cents by mid-2016 — and positive investor sentiment.
During the Great Depression of 1929–33, many European countries held little foreign debt. The sovereign debt defaults back then caused destruction in financial markets and extended the depression.
This time around, it’s the complete opposite situation — everyone owns each other’s debt. Even Germany isn’t safe. We’ll see mass government debt defaults spreading across Europe in the next two to three years. And then the attention will turn to Japan’s 230% debt to GDP ratio.
This is a very serious situation for world financial markets.
Buying quality equities — and gold at the right time — will be one of the only ways to protect yourself from the coming destruction in debt markets. Not to mention that cash doesn’t offer you yield in a low interest rate environment, and it isn’t an option for two reasons.
The first is that we’re facing looming multiple bank failures in the next three years. Australian banks finance themselves by borrowing from depositors and other banks, including those in Europe thanks to the liquid debt markets over there.
The second is that the IMF and world governments have agreed to confiscate 10% of your cash.
If you think I’m making this stuff up, don’t forget about Cyprus.
Remember the little country that required a banking injection earlier in May? And a little fact…those politicians thought it would be a great idea to steal 10% of everyone’s bank accounts to pay for it.
That was a huge success. Well, at least the International Monetary Fund (IMF) thought it was a great policy.
These clowns have even gone to the extent of saying that the ‘bail-in’ policy should be applied to the rest of Europe the next time a banking crisis comes. Joe Hockey, Australia’s Treasurer, and David Murray, Financial System Inquiry Chair, also think this is great policy and want to bring it to Australia.
I wouldn’t be holding cash at this time. Especially when you’ve got a bullish US market staring you in the face — now is the time to buy quality equities.
The 2015 bull market will start next year. Just wait for the ECB announcement telling markets that it will buy sovereign debt.
Last week, President Mario Draghi said that the bank will decide whether to initiate money printing on a wide scale in January 2015.
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).
Keep in mind that this is a government bond bubble.
The ECB buying bonds will see yields fall. Bond yields move inverse to prices. In this case, the ECB will blow up the government bond bubble on a colossal scale. This will send equities skyrocketing as we see a tremendous switch from debt to equities markets.
Once the ECB makes this announcement on 22 January 2015, welcome to the bull market of 2015 — the risk is a correction before this time.
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. I’ve been recommending quality resource companies in Diggers and Drillers that should outperform in the coming bull market.
2015 will be a year when punters hunt for yield.
Gold doesn’t offer yield.
When gold was trading at US$1,350 per ounce in early August, I explained to you how it’s falling to US$931 next year. It’s now trading at US$1,193 per ounce. I’ve shown Diggers and Drillers readers a detailed monthly analysis on gold and silver. If you’re interested in knowing where gold is heading in 2015, click here.
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 (18,160 points), it’s game on for the 2015 equities bull market. But more on this in a second…
The Dow Jones closed higher at 17,958 points last week. This is right on target.
I didn’t expect that we’d close above 18,000 points last week given the ECB’s decision to delay its sovereign bond buying program. Adding to this, the week’s trading activity was rather choppy as we headed into Friday’s trading — the momentum just wasn’t there to support a close above 18,000 points.
Albeit, I thought we’d hit 18,000 points and reverse. The intra-day high was 17,991 points last Friday — a breath away from 18,000 points. It’s likely that we’ll see the Dow move above the 18,000 point psychological level early this week.
What I call a ‘hop, step and jump move’, is definitely in play.
What do I mean by this?
A fortnight ago, we stepped off the purple support trend line. I’d expect to see the Dow close above the green resistance trend line this week (18,050 points). And as time moves us into late December, head towards the upper blue channel line (18,160 points). A jump above this level would complete the hop, step and jump move.
A strong weekly closing above the blue channel line is crucial to see this bull market explode higher. In this case, 18,160 points is the magic number this week. This resistance climbs higher as time moves on and the channel extends.
If we see a jump from 18,160 points, this would be very bullish for 2015. But we need to see a weekly close above this level to signal the start of the bull market. I’d expect to see a major breakaway on the 22 of January 2015.
However, at the moment, we’re just chipping away at the bull market.
Potentially, we could hit visit the 18,160 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. This means that the hop, step, and jump move may not be completed until this date. Major support exists around the 17,150 points level. This is shown by the red horizontal line and represents a minor 5.5% fall from this level, or 18,160 points.
If the Dow sees a close below 17,150 points on the weekly level, we could see a return to a major correction and fall towards the 16,500 level, at worst. This would be a 9.1% correction. Given the fundamentals, I highly doubt that an extended correction will happen.
But focus on the prize — the market is extremely bullish and sometime soon, you’ll see an explosive move to the north. The fundamentals are there to back the Dow going significantly higher next year. And there’s a good chance that we could see a multi-year raging bull market from here.
The bottom line is that the Dow is making a very bullish set-up for 2015. The Aussie market should follow. But the bull market will see both ups and downs.
for the Daily Reckoning Australia