By Bill Holter
Very interesting times we now live in, the financial system is running out of options very quickly and “blowing up the world” seems to be the only final option. I know, this sounds grandiose and dire but let me explain.
This past week we finally saw some very big volatility in global stock markets. I say “finally” because it has been almost 3 years of a steady grind upward where all drops were “aborted” and volatility kept to a minimum. This changed … “something” has changed. We are now red for the year in the closely followed Dow Jones and actually approaching “bear market” territory on the Russell 2000. European bourses have also been very weak and took out some important support levels this past week.
So what has changed? First, the dollar has had a spike upwards in its biggest rally in 4 years. I believe this to be a result of the Fed “only” printing an extra $10 billion (soon to be zero?) per month versus the previous $85 billion per month. This “lack of extra liquidity” has affected the dollar market (I believe short term) and also upset the leverage in the stock market. On a side note, one of Apple’s suppliers went into a “secret bankruptcy” this past week and the reason for this bankruptcy has been “sealed” by the court. How can this be? Apple is doing great so why would a supplier have a problem? Could it be that this supplier was on the wrong end of some sort of hedge or derivative? I think you can bank on this as the explanation, little else fits AND could be swept under the rug so neatly!
Volatility and stress is back and now being felt and seen plainly in Europe. The euro as an inverse to the dollar has been quite weak. In what would have been “heresy” 10 or more years ago, the calls for a very real and very large “QE” are being heard throughout Europe. RBS and Bank of America were quoted in The Telegraph Dam breaks in Europe as deflation fears wash over ECB rhetoric – Telegraph that deflation is taking over Europe. This very well may be but the flip side of the coin are all the sovereign nations where (understated) debt is at or above the banana republic threshold of 100% debt to GDP ratio. You can now see it as clear as day, “inflate or die” and in either case there unfortunately will be no middle ground.