House of Cards…on a Foundation of Sand

The S&P500 has declined for three weeks in a row.  Last week’s drop, although nothing serious, was 0.3%.  Volume was not heavy; it was as if investors and traders were looking for direction.  Volatility and skew both edged up slightly, meaning that players are starting to worry more about downside risk.

The economic results were bad and recently, getting much worse.  The Empire State survey collapsed by 50%, when it was projected to stay almost unchanged.  Housing starts plunged; they were expected to rise.  Existing home sales fell markedly; they were expected to rise.  It’s now commonly accepted by all (except real estate professionals who never admit to a down market) that housing is double-dipping.  And if these figures keep up, housing will be in a state of collapse.  Industrial production plunged.  Jobless claims were again in the 400,000 range.  The Philly Fed survey also collapsed; instead of rising to 23 as expected, it fell to 3.9.  Finally, the leading indicators printed a negative number, for the first time since October 2010.

Technically,  the three month uptrend is breaking and a new short-term (three week) downtrend has begun.  If the S&P breaks decisively below support at 1325 (its 50 day moving average), then a lot of technical selling could begin.  If so, the next area of support could be at 1250, which was the March 11 low resulting from the Japanese earthquake.  If that doesn’t hold, then the 200 day moving average is down further at about 1238.

What most analysts are starting to debate right now is whether the two year cyclical bull market and the two year economic recovery are in jeopardy.  If so, then we should all be prepared for a strong market correction, before the markets consolidate and form a base, at which time we can jump back in and enjoy another merry bull market.

This is an argument about the market and economic cycle. It’s normal to have it, and in almost any other time, this would be the most important investment timing debate to have.

But what if investors are missing something?  What if there’s something deeper, something secular, that underlies the debate about cycles?  What if the cyclical bull market was actually built on a foundation of sand?  And to add insult to injury, what if the cyclical bull market itself was a house of cards…….sitting on a foundation of sand?

If the underlying rot, the root cancer, that led to the 2008-2009 market and economic collapse has not been fixed, then the foundation is not at all firm.  It will give way.  The question is only when.

And since the central part of the root cancer—the global debt bubble relative to GDP and the financial fraud that helped blow this debt bubble—is still spreading, then the foundation is in fact NOTHING more than a mirage.  It will not hold.

The cyclical bull market and the so-called economic recovery are also fragile, at best.  At worst, they are a mirage……a house of cards. Why? Because they were engineered by the Federal Reserve (through its money creation program) and the cooperation of the Treasury and Congress (which spent and borrowed over 10% of GDP for the last tow years).  This house of cards will collapse simply because the government cannot continue spending (and printing) over 10% of GDP indefinitely….without a catastrophic blow-back.  The question is only when.

So today, the economic house of cards is starting to wobble.  The markets, in turn, are also starting to quiver.  If these two entities do crumble, then we should really worry.

Why?

Because there is almost zero chance that the foundation of sand—on which they’re built—will hold.

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