KINGSTON, NY 21 March 2018—Despite what the business media hype would have you believe, the markets are not going up or down based on tweets from President Donald Trump, who he just fired, what he'll do when he meets with North Korea's leader, or who hacked what from Facebook.
To determine where the markets and economy are heading, we follow trend lines, not media headlines.
And the trend lines demonstrate that the volatility in equity markets has a much more foundational cause than a single occurrence on a given day.
On the market front, yes, earnings are strong and record stock buy-backs are driving prices higher, but the major factor threatening overvalued and overleveraged equities is rising interest rates.
Following the Panic of '08, it was cheap money that juiced equity markets. For a decade, Central Banks' quantitative easing and negative/zero interest-rate policy became the norm.
But rather than being denounced as an outright fraudulent scheme that greatly boosted stock markets, it only marginally contributed to Gross Domestic Product, worker productivity and wage growth across America and throughout much of Europe.
Like Big Pharma drugs that relieve symptoms but do not cure chronic degenerative disease, big Central Banks' QE/cheap money injections relieved the Panic of '08 symptoms, but not the cause. Indeed, these very policies have set the stage for a severe market correction.
As we forecast in our Trends Journal, Fall 2017: "It goes with little question that the higher interest rates rise, economic growth slows, and downward pressure on equity markets increases. When markets fail, one of the main culprits is central banks aggressively raising interest rates."
RICH GOT RICHER
By all quantitative measures, the soaring stock markets have benefited, at most, the top 10 percent of society, while the gap between the rich and middle class widened.
Americans now owe $13.1 trillion in consumer debt, including $1 trillion in revolving credit. Thus, with 78 percent of Americans living paycheck to paycheck, and already deep in debt, they will be hit harder as interest rates rise higher.
Also in the US, slightly higher interest rates are already blamed for declining housing starts, which fell 7 percent in February. And, residential building permits, a clear indicator of how much new construction is being planned, declined 5.7 percent, while multi-family construction sunk 26.1 percent.
Even in Canada, the housing market took a 6.5 percent drop in home sales in February following the Central Bank's 25 basis points increase in January of the overnight national rate to a miserly 1.25 percent.
And now with the European Central bank shifting its debate from cutting bond purchases to raising interest rates, we forecast similar negative market, consumer and GDP trend lines will impact the EU.
TREND FORECAST: As we have forecast, the Trump Rally has peaked. And, if the Fed aggressively raises interest rates it will send equities into a bear market territory, and trigger the onset of the next recession.
On the gold front, as US rates rise higher and the opportunity cost of holding gold increases, it will drive its price down. Should gold fall below $1,285 per ounce, we forecast an additional down side risk to $1,150.