Custom Index Charts Suggest U.S. Stock Market Ready for a Pause

Weeks after the Election Rally initiated a moderately strong upside breakout rally, our Custom Index charts suggest the US stock market may be ready for a brief pause in trending before any new trends continue. Global traders and investors jumped into the US stock market just days before the US elections expecting something big to take place. The rally that initiated just days before the US election pushed our Custom Index charts well into the upper range of the 2016 to 2018 upward sloping price channel. This suggests the US stock markets have ended the downward price reversion and are now attempting to extend into the upward price channel....attempting to resume the upward trending that started after the 2016 elections.

Weekly Smart Cash and Volatility Indexes

The Weekly Smart Cash Index, below, highlights the impressive rally recently and the upward sloping price channel that is back in play for price. The highlighted range of the upward sloping price channel is actually the lower half of the std deviation range of the 2016 to 2018 price channel. So, as of right now, the Smart Cash Index price level has yet to really breach the middle of this channel and is still only within the lower half of the channel. Still, the support near the lower boundary of this level has been retested two or three times over the past six months and held. This suggests the lower channel level (the lower heavy BLUE line) is now acting as moderate price support....Continue Reading Here.

Waiting for the Russell 2000 to Confirm the Next Big Move

While we have recently suggested the US stock market is poised for further upside price activity with a moderately strong upside price “bias”, our researchers continue to believe the U.S. stock markets will not break out to the upside until the Russell 2000 breaks the current price channel, Bull Flag, formation. Even though the U.S. stock markets open with a gap higher this week, skilled traders must pay attention to how the Mid-Caps and the Russell 2000 are moving throughout this move.

As we continue to advise our clients that the upside pricing cycle in the U.S. stock market is being underestimated, see this research post: we also believe that increased volatility and price rotation will continue to drive larger rotations in price before the final breakout upside move takes place. We want to continue to warn traders that we still don’t have any confirmed upside breakout with price continuing to stay within this price channel in the Russell 2000. Eventually, when and if the price does breakout to the upside, we will have a very clear indication that continued higher prices and a larger upside move is happening. Until then, we need to stay cautious about the types and levels of rotation that continue within the markets.

Recently, volatility has started to increase as can be seen in this VIX chart. If the Russell 2000 is not able to break this trend channel with this current upside price move, then we fully expect continued price rotation in the U.S. stock markets and another increase in the VIX as this rotation takes place. The NQ recently rotated downward by nearly 4% while historical volatility continues to narrow. When volatility diminishes in extended price trends, we’ve learned to expect aggressive price rotation can become more of a concern. We expect the VIX to spike above 16~18 on moderate volatility as we get closer to the cycle inflection date near June/July 2019.

Volatility Index – VIX chart by TradingView

Overall, our researchers believe the upside price bias in the U.S. stock market will continue for another 30+ days as our research and predictions regarding precious metals and the longer term equities price cycles continue to play out. Skilled traders need to be aware that this upside price bias may include larger price rotation and volatility as we get closer to the May/June/July 2019 cycle inflection points. Stay aware of the risks as 4~6%+ price rotations should be expected over the next 30+ days throughout this upside price bias.

Do you want to find a team of dedicated researchers and traders that can help you find and execute better trades in 2019 and beyond? Please visit The Technical Traders to learn how we can help you prepare for the big moves in the global markets and find better opportunities for greater success in the future. Our team of researchers and traders continue to scan the markets for new trades and unique opportunities.

Chris Vermeulen

How Bitcoin Will Make You Big Money Again

If you are a Bitcoin fan or looking for the next opportunity for a Bitcoin rally, you may not have long to wait before a price breakout takes place. Our research team at The Technical Traders believes a price breakout may occur before the end of 2018 – the only question is will it be a breakout rally or a breakdown crash before the next mega rally?

Cryptos and, in particular, Bitcoin has increased in popularity and adoption over the past 24 months across the globe. Recently, Citigroup has announced new technology making Crypto transactions more secure and reducing the risk of such transactions. Additionally, Circle recently announced a US Dollar based Crypto currency that is backed by Goldman-Sachs. News from Europe is that the EU has been urged to adopt common Crypto Currency rules that will fuel more attention and enterprise on developing suitable Crypto solutions for the European markets.

All of this plays into our research that a breakout/breakdown is inevitable and it is just a matter of time before this coiling price consolidation “apexes” and expands.

This chart shows massive breakdown washout below $6000 taking it back to prices before crypto became popular in early 2017.

This next chart below shows our cycle analysis and how much bitcoin moved from our cycle bottoms to tops. We are now at NEARING a critical juncture of a $6000 breakdown which is clearly a support level, and a potential major cycle bottom or continuation down cycle. Huge money can be made from this extreme volatility that is about to unfold and savvy technical traders can see the profit potential unfolding.

We urge all traders to keep Cryptos in focus over the next few weeks and months. Our research team shares our proprietary analysis and research with our paid members regarding the Crypto currency trends and trades.

If you want to learn what we believe will be the next big move in the Crypto markets, then visit The Technical Traders to learn more. Our proprietary modeling systems are clearly showing us what we should expect over the next few weeks and months. As a member, you will have access to this research and benefit from our Daily Research Videos.

Chris Vermeulen

How Our Multiple Cycle and Vibrational-Frequency Cycles Are Lining Up

A quick look at any of the US majors will show most investors that the markets have recently been pushing upward towards new all time highs. These traditional market instruments can be misleading at times when relating the actual underlying technical and fundamental price activities. Today, we are going to explore some research using our custom index instruments that we use to gauge and relate more of the underlying market price action.

What if we told you to prepare for a potentially massive price swing over the next few months? What if we told you that the US and Global markets are setting up for what could be the “October Surprise of 2017” and very few analysts have identified this trigger yet? Michael Bloomberg recently stated “I cannot for the life of me understand why the market keeps going up”. Want to know why this perception continues and what the underlying factors of market price activity are really telling technicians?

At ATP we provide full time dedicated research and trading signal solution for professional and active traders. Our research team has dedicated thousands or hours into developing a series of specialized modeling systems and analysis tools to assist us in finding successful trading opportunities as well as key market fundamentals. In the recent past, we have accurately predicted multiple VIX Spikes, in some cases to the exact day, and market signals that have proven to be great successes for our clients. Today, we’re going to share with you something that you may choose to believe or not – but within 60 days, we believe you’ll be searching the internet to find this article again knowing ATP (Active Trading Partners) accurately predicted one of the biggest moves of the 21st century. Are you ready?

Let’s start with the SPY. From the visual analysis of the chart, below, it would be difficult for anyone to clearly see the fragility of the US or Global markets. This chart is showing a clearly bullish trend with the perception that continued higher highs should prevail.

Additionally, when we review the QQQ we see a similar picture. Although the volatility is typically greater in the NASDAQ vs. the S&P, the QQQ chart presents a similar picture. Strong upward price activity in addition to historically consistent price advances. What could go wrong with these pictures – right? The markets are stronger than ever and as we’ve all heard “it’s different this time”.

Most readers are probably saying “yea, we’ve heard it before and we know – buy the dips”.

Recently, we shared some research with you regarding longer term time/price cycles (3/7/10 year cycles) and prior to that, we’ve been warning of a Sept 28~29, 2017 VIX Spike that could be massive and a “game changer” in terms of trend. We’ve been warning our members that this setup in price is leading us to be very cautious regarding new trading signals as volatility should continue to wane prior to this VIX Spike and market trends may be muted and short lived. We’ve still made a few calls for our clients, but we’ve tried to be very cautious in terms of timing and objectives.

Right now, the timing could not be any better to share this message with you and to “make it public” that we are making this prediction. A number of factors are lining up that may create a massive price correction in the near future and we want to help you protect your investments and learn to profit from this move and other future moves. So, as you read this article, it really does not matter if you believe our analysis or not – the proof will become evident (or not) within less than 60 days based on our research. One way or another, we will be proven correct or incorrect by the markets.

Over the past 6+ years, capital has circled the globe over and over attempting to find suitable ROI. It is our belief that this capital has rooted into investment vehicles that are capable of producing relatively secure and consistent returns based on the global economy continuing without any type of adverse event. In other words, global capital is rather stable right now in terms of sourcing ROI and capital deployment throughout the globe. It would take a relatively massive event to disrupt this capital process at the moment.

Asia/China are pushing the upper bounds of a rather wide trading channel and price action is setting up like the SPY and QQQ charts, above. A clear upper boundary is evident as well as our custom vibrational/frequency analysis arcs that are warning us of a potential change in price trend. You can see from the Red Arrow we’ve drawn, any attempt to retest the channel lows would equate to an 8% decrease in current prices.

Still, there is more evidence that we are setting up for a potentially massive global price move. The metals markets are the “fear/greed” gauge of the planet (or at least they have been for hundreds of years). When the metals spike higher, fear is entering the markets and investors avoid share price risks. When the metals trail lower, greed is entering the markets and investors chase share price value.

Without going into too much detail, this custom metals chart should tell you all you need to know. Our analysis is that we are nearing the completion of Wave C within an initial Wave 1 (bottom formation) from the lows in Dec 2016. Our prediction is that the completion of Wave #5 will end somewhere above the $56 level on this chart (> 20%+ from current levels). The completion of this Wave #5 will lead to the creation of a quick corrective wave, followed by a larger and more aggressive upward expansion wave that could quickly take out the $75~95 levels. Quite possibly before the end of Q1 2018.

We’ve termed this move the “Rip your face off Metals Rally”. You can see from this metals chart that we have identified multiple cycle and vibrational/frequency cycles that are lining up between now and the end of 2017. It is critical to understand the in order for this move to happen, a great deal of fear needs to reenter the global markets. What would cause that to happen??

Now for the “Hidden Gem”....

We’ve presented some interesting and, we believe, accurate market technical analysis. We’ve also been presenting previous research regarding our VIX Spikes and other analysis that has been accurate and timely. Currently, our next VIX Spike projection is Sept 28~29, 2017. We believe this VIX Spike could be much larger than the last spike highs and could lead to, or correlate with, a disruptive market event. We have ideas of what that event might be like, but we don’t know exactly what will happen at this time or if the event will even become evident in early October 2017. All we do know is the following....

The Head-n-Shoulders pattern we first predicted back in June/July of this year has nearly completed and we have only about 10~14 trading days before the Neck Line will be retested. This is the Hidden Gem. This is our custom US Index that we use to filter out the noise of price activity and to more clearly identify underlying technical and price pattern formations. You saw from the earlier charts that the Head n Shoulders pattern was not clearly visible on the SPY or QQQ charts – but on THIS chart, you can’t miss it.

It is a little tough to see on this small chart but, one can see the correlation of our cycle analysis, the key dates of September 28~29 aligning perfectly with vibration/frequency cycles originating from the start of the “head” formation. We have only about 10~14 trading days before the Neck Line will likely be retested and, should it fail, we could see a massive price move to the downside.

What you should expect over the next 10~14 trading days is simple to understand.

Expect continued price volatility and expanded rotation in the US majors.

• Expect the VIX to stay below 10.00 for only a day or two longer before hinting at a bigger spike move (meaning moving above 10 or 11 as a primer)
• Expect the metals markets to form a potential bottom pattern and begin to inch higher as fear reenters the markets _ Expect certain sectors to show signs of weakness prior to this move (possibly technology, healthcare, bio-tech, financials, lending)
• Expect the US majors to appear to “dip” within a 2~4% range and expect the news cycles to continue the “buy the dip” mantra.

The real key to all of this is what happens AFTER October 1st and for the next 30~60 days after. This event will play out as a massive event or a non event. What we do know is that this event has been setting up for over 5 months and has played out almost exactly as we have predicted. Now, we are 10+ days away from a critical event horizon and we are alerting you well in advance that it is, possibly, going to be a bigger event.

Now, I urge all of you to visit our website to learn more about what we do and how we provide this type of advanced analysis and research for our clients. We also provide clear and timely trading signals to our clients to assist them in finding profitable trading opportunities based on our research. Our team of dedicated analysts and researchers do our best to bring you the best, most accurate and advanced research we can deliver. The fact that we called this Head-n-Shoulders formation back in June/July and called multiple VIX Spike events should be enough evidence to consider this call at least a strong possibility.

If you want to take full advantage of the markets to profit from these moves, then join us today here at the Active Trading Partners and become a member.

VIX Spikes Showing Massive Volatility Increase

Today, we are going to revisit some of our earlier analysis regarding the VIX and our beloved VIX Spikes.  Over the past 3+ months, we’ve been predicting a number of VIX Spikes based on our research and cycle analysis.  Our original analysis of the VIX Spike patterns has been accurate 3 out of 4 instances (75%).  Our analysis has predicted these spikes within 2 to 4 days of the exact spike date.  The most recent VIX Spike shot up 57% from the VIX lows.  What should we expect in the future?

Well, this is where we should warn you that our analysis is subjective and may not be 100% accurate as we can’t accurately predict what will happen in the future. Our research team at Active Trading Partners.com attempt to find highly correlative trading signals that allow our members to develop trading strategies and allow us to deliver detailed and important analysis of the US and global markets.

The research team at ATP is concerned that massive volatility is creeping back into the global markets. The most recent VIX spike was nearly DOUBLE the size of the previous spike. Even though the US markets are clearly range bound and rotating, we expect them to stay within ranges that would allow for the VIX to gradually increase through a succession of VIX spike patterns in the future.

Let’s review some of our earlier analysis before we attempt to make a case for the future. Our original VIX Spike article indicated we believed a massive VIX spike would happen near June 29th. We warned of this pattern nearly 3 weeks ahead of the spike date. Below, you will see the chart of the VIX and spikes we shared with our members. This forecast was originally created on June 7th and predicted potential spikes on June 9th or 12th and June 29th.

What would you do if you knew these spikes were happening?

Currently, we need to keep in mind the next VIX Spike Dates

Sept 11th or 12th and finally Sept 28th or 29th.

Our continued research has shown that the US markets are setting up for a potential massive Head-n-Shoulders pattern (clearly indicated in this NQ Chart). The basis of this analysis is that the US markets are reacting to Political and Geo-Economic headwinds by stalling/retracing. The rally after the US Presidential election was “elation” regarding possibilities for increased global economic activities. And, as such, we have seen an increase in manufacturing and GDP output over the past 6+ months. Yet, the US and global markets may have jumped the gun a bit and rallied into “hype” setting up a potential corrective move.

Currently, the NQ would have to fall an additional 4.5% to reach the Neck Line of the Head-n-Shoulders formation. One interesting facet of the current NQ chart is that is setting up in a FLAG FORMATION that would indicate a massive breakout/breakdown is imminent. The cycle dates that correspond to this move are the September 11th or 12th move.

Please understand that we are attempting to keep you informed as to the potential for a massive volatility spike in the US and Global markets related to what we believe are eminent Political and Geo-Economic factors. Central Banks have just met in Jackson Hole, WY and have been discussing their next moves as well as the US Fed reducing their balance sheets. Overall, the US economy appears to show some strength, yet as we have shown, delinquencies have started to rise and this is not a positive sign for a mature economic cycle. Expectations are that the US Fed will attempt another one or two rate raises before the end of 2017. Our analysis shows that Janet Yellen should be moving at a snail’s pace at this critical juncture.

So, now we get to the VIX Spike Data!

The last, most recent, VIX Spike was nearly DOUBLE the size of the previous Spike. This is an anomaly in the sense that the VIX has, with only a few exceptions, continued to contract as the global central banks continued to support the world’s economies. In other words, smooth sailing ahead as long as the global banks were supplying capital for the recovery.

Now that we are at a point where the central banks are attempting to remove capital from their balance sheets while raising rates and dealing with debt issues, the markets are looking at this with a fresh perspective and the VIX is showing us early warning signs that massive volatility may be reentering the global markets. Any future VIX Spike cycles that continue to increase in range would be a clear indication that FEAR is entering the markets again and that debt, contraction and decreased consumer participation are at play.

I don’t expect you to fully understand the chart and analysis below, but the take away is this. Pay attention to these dates: September 11, September 28 and October 16. These are the dates that will likely see increased price volatility associated with them and could prompt some very big moves.

This analysis brings us to an attempt at creating a conclusion for our readers. First, our current analysis of the Head-n-Shoulders pattern in the NQ is still valid. We do not have any indication of a change in trend or analysis at this moment. Thus, we are still operating under the presumption that this pattern will continue to form. Secondly, the current VIX spike aligns perfectly with our analysis that the markets are becoming more volatile as the VIX WEDGE tightens and as the potential for the Head-n-Shoulders pattern extends. Lastly, FEAR and CONCERN has begun to enter the market as we are seeing moves in the Metals and Equities that portend a general weakness by investors.

We will add the following that you won’t likely see from other researchers – the time to act is NOT NOW. Want to know why this is the case and why we believe our analysis will tell us exactly when to act to develop maximum profits from these moves?

Join the Active Trading Partners to learn why and to stay on top of these patterns as they unfold. We’ve been accurate with our VIX Spike predictions and we will soon see how our Head and Shoulders predictions play out. We’ve already alerted you to the new VIX Spike dates (these alone are extremely valuable). We are actively advising our ATP members regarding opportunities and trading signals that we believe will deliver superior profits. Isn’t it time you invested in your future and prepared for these moves?

Join the Active Trading Partners HERE today and Join a team dedicated to your success.

Could There Be a Reversal Coming to the Major U.S. Markets?

Technically speaking, this week could be very important for the major U.S. equity markets. There is an appearance of a “TOPPING PATTERN” forming. I am now awaiting confirmation by the actions of the equity markets, this week. Expect downward pressure beginning this month of August of 2017.

The Only Chart You Need To See!

There is currently limited upside potential in the SPX relative to potential downside for the months of August, September and the early part of October 2017.

There are signs for the short, intermediate and longer term trends returning for the best six months of trading officially inaugurated in November of 2017! This is the timing framework when ‘The Next Runaway Leg Up In The Stock Market Will Resume.’

In last weeks’ market action as the profit taking rotation out of the high-tech sector rotated into the Dow Industrials, it reflected

a more defensive approach while being invested in “Blue Chips” during which time it achieved a new high. Sector rotation increased especially noticeable in the transports and technology sectors that were leading the markets higher. If they continue lower, more sectors will join the decline. I am expecting a coming pop in the VIX on Aug 4, Aug 23, Sept 11 or 12 and finally Sept 28 or 29. 2017. There was a flight to safety in the Yen as well as a strengthening of the price of Gold, Silver, Bitcoin and WTI Crude Oil.

An Unusual Anomaly

Over the past couple of weeks, there was this unusual Anomaly which occurred, as you can see in the chart below. It now makes me more cautious about our long understanding of “risk interconnectivity”.

How can the equity, gold, silver, crude oil and bitcoin markets ALL go HIGHER together?

Tune in every morning for my video analysis and market forecasts at The Gold & Oil Guy to know where the main ‘asset classes’ are headed tomorrow, this week, and next month.

In short, the major equities trend remains to the upside but its likely to take shape in a slow grinding process with downward pressure starting in August fora couple months.

Be sure to follow my daily pre-market video forecasts and ETF trades by visiting here at The Gold and Oil Guy

Chris Vermeulen

Bursting the Biggest Myths in Trading - Don Kaufman's Next Webinar

Our trading partner Don Kaufman is treating us to a free trading webinar this Tuesday evening March 29th at 8 p.m. est. Don't put off reserving your spot since Don and his team are only opening up this up for 1,000 traders.

Reserve Your Spot Here

During this free webinar Don will cover....

• How you can give yourself the gift of time without paying extra so you can give your trade as much time as it needs

• How you can create a trade with zero exposure to volatility so you never have to worry about volatility again 

• How you can set your limited risk before you put on the trade so you know exactly what you're risking. Making this strategy the safest way to trade. So much for the myth that options are risky.

• How you can generate big returns from small moves in a stock

• How you can use this strategy whether you have a $2,000 account or a 6 figure account

There will be a waiting list of traders for this free class so make sure you log in 10 minutes early so you don't lose your spot.

Click Here to Get Your Reserved Seat

See you Tuesday night!
Ray's Stock World

Don Kaufman

The Secret Behind the $1 Million Option Setup....Here’s Your Private Replay (expires soon)

If you missed John Carter’s special training Tuesday night then you are in luck. The limited replay is online now.

Watch the Private Replay Here [Expires soon] 

Get ready to take notes! Unfortunately, I have no idea how long this replay will be up, so watch it while you can. But I can tell you the feedback from those who attended live is beyond awesome. This was not just another ‘webinar’ featuring ‘hypothetical results’.

John detailed, step by step, how to be consistently profitable in these volatile conditions using just a handful of very simple options setups. There was ZERO hype and total transparency. He showed actual trading accounts with winning AND losing trades for all to see. You gotta see this for yourself.

Here’s just some of what John revealed....

•   Why extreme volatility is the new normal. If you don’t want to crash and burn, you MUST adapt

•   The setup John used to turn $3k into $119k in just 3 weeks (and how to spot these rare, explosive moves)

• The simple signal that allowed John to make $1 million in a single day on TSLA options

• How to pinpoint major reversals in advance by legally ‘spying’ on Wall Street Insiders

• The publically available intel that allowed John to catch the Nasdaq’s historic January collapse, AND then get long for the February rally

• The braindead simple option system that turns crazy market volatility into potentially giant gains (sometimes literally overnight , with strictly limited risk)

• How it’s possible to consistently pull in $100 to $1000 a day by trading from your smart phone (even if you have a job)

Like I said, you don’t want to miss this training. John’s refined these simple strategies over more than 25 years. He shows you what’s really working now and the account killing mistakes that you want to avoid like the plague.

Watch the Limited Replay Now

See you in the markets!
Ray's Stock World


Get John's latest FREE eBook "Understanding Options"....Just Click Here!

New Video: John Carters Strategy for Trading Everything from Crude Oil to NFLX

Our trading partner John Carter of Simpler Options is back with another amazing new video. Join John as he walks us through his favorite strategies to utilize in today's volatile market. Get a sneak peak on how he has already grown his account by 48% in 2016.

Visit Here to Watch John's New Free Video

Learn John's favorite strategy for trading everything from Crude Oil to NFLX and why John believes that decades from now investors will look back at 2016 as the best trading ever. You will also get an insider look at.

•  The reasons why volatility can be your best friend even for newbies with small accounts

•  Why options are the best trading vehicle on the planet right now

•  Why down markets are better than up markets

•  How to make successful trades on your phone while you are at work

Watch John's free video then put his methods to work right away. Take advantage of his ability to help you find your own trading style and how to recognize your own psychological limits. In the process John will help you dispel all of your fear of this volatile market. In fact you will welcome it.

Don't wait any longer.....Just Click Here to Watch John's Free Video

See you in the markets,

Ray's Stock World

P.S.  Get an even better understand of John's trading methods by downloading his free eBook "Understanding Options".....Get it Right Here

Buy the Dip? Hell No.....Sell the Rip Instead

By Tony Sagami

Are you worried about the stock market? You should be; at least according to your local Starbucks barista.
Starbucks CEO Howard Schultz told his 190,000 employees in his daily “Message from Howard” email communication: “Today’s financial market volatility, combined with great political uncertainty both at home and abroad, will undoubtedly have an effect on consumer confidence and … our customers are likely to experience an increased level of anxiety and concern. Let’s be very sensitive to the pressures our customers may be feeling.”

You can’t make this stuff up!

Hey, maybe I shouldn’t be too harsh on Mr. Schultz, because the stock market is in a lot of trouble… and not for the reasons the mass media and Wall Street experts are telling you. The know it alls on CNBC are pointing their fingers at the Chinese stock market meltdown as the reason for our stock market turmoil, but that is just the catalyst… not the root problem.

The source of the meltdown is deeper, more problematic, and more painful. What I’m talking about is that the Federal Reserve—from Greenspan to Bernanke, to Yellen—thought they possessed Wizard of Oz powers to fix whatever ails the economy with their menu of monetary tools.

In 2000, the Fed thought it could solve the bursting of the dot-com bubble with massive interest rate cuts and repeated that playbook again for the 2008-09 Financial Crisis. And when they ran out of room by cutting interest rates to zero, they trotted out Operation Twist and QE 1, 2, and 3.

Those three rounds of QE added about $3.7 trillion to the Federal Reserve’s balance sheet since 2008, which now totals a mind boggling $4.5 trillion. The problem is not China; the problem is Janet Yellen and her Federal Reserve buddies.

The Fed—beginning with the original monetary Mr. Magoo of Alan Greenspan—created a bubble, then rolled out more of the same to deal with the bursting of the bubble, and like the shampoo bottle says: Rinse, Lather, Repeat. Zero interest rates plus QE1, QE2, and QE3 created a massive misallocation of capital that has affected everything from home supply, ocean-going freighters, the US dollar, and wages, and pushed stock prices to a bigger than ever bubble.

The recent weakness is the painful process of deflating that bubble, but the Federal Reserve refuses to learn from its mistakes. It won’t be long until we hear about QE4 and/or a delay to the overpromised interest rate liftoff. Former US Treasury Secretary Larry Summers had this to say yesterday: “A reasonable assessment of current conditions suggests that raising rates in the near future would be a serious error that would threaten all three of the Fed’s major objectives; price stability, full employment and financial stability.”

Honestly, I don’t know what the Federal Reserve will do next. Heck, I bet they don’t know what to do either… but they will do something. Central bankers are arrogant know-it-alls who think they can fix the world’s financial problems with a couple of pulls of a monetary lever.

So pull they will.

And so the stock market damage will continue, albeit with some powerful up moves along the way.
Bulls, whether in a Spanish bull-fighting arena or roaming the floor of the NYSE, are a tough animal to kill. They won’t surrender until they make a few more desperate attempts to push the market higher.
Look at what happened last Tuesday after the 588-point Monday meltdown. The Dow Jones Industrial Average shot up by as much as 441 points before ending the day with a 204-point loss.

My point is that you’re going to see a lot of powerful up moves in the coming months… but I’m telling you, these are nothing more than bear market traps to lure you into buying at the wrong time. The stock market is falling into a bear market, and that means big swings both up and down, similar to 2000–2003.

The Federal Reserve, along with the rest of the world’s central bankers, has puffed stock valuations into an epic bubble, and the stock market has a long, long ways yet to fall…..just not in a straight line. That’s heart attack material for both buy-hold-and-pray and buy the dip investors, but it is a goldmine if you adapt your strategy.

Instead of buying the dip, the right strategy going forward is SELL THE RIP.

When the stock market gives you a big rally, the right move will be to sell into strength.

And if you have some risk capital, that will be the time to load up on inverse ETFs and put options, like my Rational Bear subscribers did in July.

The biggest short-selling opportunity of our lifetimes is knocking on your door.

Tony Sagami

30 year market expert Tony Sagami leads the Yield Shark and Rational Bear advisories at Mauldin Economics. To learn more about Yield Shark and how it helps you maximize dividend income, click here.

To learn more about Rational Bear and how you can use it to benefit from falling stocks and sectors, click here.

The article Connecting the Dots: Buy the Dip? Hell No! Sell the Rip Instead was originally published at mauldineconomics.com.

Get our latest FREE eBook "Understanding Options"....Just Click Here!

How is John Carter Trading the Recent Market Turmoil and Making Money?

You know him as our trading partner that made a name for himself as the guy who made the Big Trade on Tesla. Simpler Options CEO John Carter has continued to allow us to watch over his shoulder as he quietly took an account that he put $150,000 in at the beginning of the year and in 8 months turned it into $650,000.

Our readers have been attracted to John's trading methods due to the system's ability to limit risk while limiting the fees it takes to trade in this manner. And best of all it can be accomplished with any size account, no matter how large or small.

So how did John fair in the market turmoil of last week? He calmly continued to make money while using the volatility to his advantage. Luckily for us John put together another game changing free video that shows us exactly what he did in the peak of the madness.

Watch the video HERE

Here's what else he covers for you in the video.....

  *  Why the recent market sell off didn't change his plan

  *  How to compound profits correctly

  *  Why options are so profitable no matter the market condition

  *  And his plan that you can easily copy

Watch the video HERE for free, and let us know what you think

See you in the markets putting this to work,
Ray C. Parrish
aka the Crude Oil Trader


Get the latest updated version of John Carter's free eBook "Understanding Options".....Just Click Here

The Single Most Important Economic Statistic that the White House Never Talks About

By Tony Sagami

For the first time in 35 years, American business deaths now outnumber business births. —Jim Clifton, CEO, Gallup Polls

I’ve been self employed since 1998, and let me tell you, the life of a business owner isn’t easy. It’s filled with long hours, a relentless amount of paperwork, and uncertainty of where your next paycheck will come from.

If you’ve ever owned a business, you know exactly what I’m talking about.

Difficult or not, self employment is extremely rewarding, and I wouldn’t have it any other way. Nor would the other 6 million business owners in the United States. Of those 6 million businesses, the vast majority are small “Mom and Pop” businesses. Here are more statistics on businesses in the U.S. :

• 3.8 million have four or fewer employees. That’s me!
   
• 1 million with 5-9 employees;
   
• 600,000 with 10-19 employees;
   
• 500,000 with 20-99 employees;
   
• 90,000 with 100-499 employees;
   
• 18,000 with 500 employees or more; and
   
• 1,000 companies with 10,000 employees or more.

Those small businesses are the backbone of our economy and responsible for employing roughly half of all Americans. Moreover, while estimates vary, small business create roughly two thirds of all new jobs in our country.

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For those reasons, the health (or lack thereof) of small business is the single most important long term indicator of America’s economic health. Warning: new data suggest that small businesses are in deep trouble.
For the first time in 35 years, the number of business deaths outnumbers the number of business births.

The US Census Bureau reported that the birth and death rates of American businesses crossed for the first time ever! 400,000 new businesses were born last year, but 470,000 died.

Yup, business deaths now outnumber business births.

Pay attention, because this part is important.

The problem isn’t so much that businesses are failing, but that American entrepreneurs are simply not starting as many new businesses as they used to. We like to think of America has the hotbed of capitalism, but the US actually is number 12 among developed nations for new business startups.

Number 12!

You know what countries are ahead of us? Hungary, Denmark, Finland, New Zealand, Sweden, Israel, and even financially troubled Italy are creating new businesses faster than us!

The reasons for the capitalist pessimism are many, but my guess is that the root of the problem comes down to three issues: (1) difficulty of accessing capital (loans); (2) excessive and burdensome government regulations; and (3) an overall malaise about our economic future.

Business owners are permanently smitten with an entrepreneurial bug, and the only thing that prevents them from seeking business success is the expectation that they’ll lose money.

Sadly, the lack of new business start ups is confirmation that American’s free enterprise system is broken.

"There is nobody in this country who got rich on their own. Nobody. You built a factory out there—good for you. But I want to be clear. You moved your goods to market on roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn't have to worry that marauding bands would come and seize everything at your factory... Now look. You built a factory and it turned into something terrific or a great idea—God bless! Keep a hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along." ―Elizabeth Warren

“When small and medium-sized businesses are dying faster than they’re being born, so is free enterprise. And when free enterprise dies, America dies with it,” warns Gallup CEO Jim Clifton.

I don’t believe for a second that America’s free-enterprise system is permanently broken. The pendulum will eventually swing the other way, but our economy will not enjoy boom times until the birth/death trends are reversed.

That won’t happen next week or next month. It will take serious, fundamental changes in tax, regulatory, and judicial rules, and I sadly fear that it will take several years for that to happen. Until then, our economy is going to struggle and will pull our high flying stock market down with it. Are you prepared?

If you’re not familiar with inverse ETFs, you’re ignoring one of your best defenses against tough times. An inverse ETF is an exchange traded fund that’s designed to perform as the inverse of whatever index or benchmark it’s designed to track.

By providing performance opposite to their benchmark, inverse ETFs prosper when stock prices are falling. An inverse S&P 500 ETF, for example, seeks a daily percentage movement opposite that of the S&P. If the S&P 500 rises by 1%, the inverse ETF is designed to fall by 1%; and if the S&P falls by 1%, the inverse ETF should rise by 1%.

There are inverse ETFs for most major indices and even sectors and commodities (like oil and gold), as well as specialty ETFs for things like the VIX Volatility Index.

I’m not suggesting that you rush out and buy a bunch of inverse ETFs tomorrow morning. As always, timing is critical, so I recommend that you wait for my buy signals in my Rational Bear service.

But make no mistake, the birth/death ratio is signaling serious trouble ahead. Any investor who doesn’t prepare for it is going to get run over and flattened like a pancake.


Tony Sagami

30 year market expert Tony Sagami leads the Yield Shark and Rational Bear advisories at Mauldin Economics. To learn more about Yield Shark and how it helps you maximize dividend income, click here.

To learn more about Rational Bear and how you can use it to benefit from falling stocks and sectors, click here.

The article Connecting the Dots: The Single Most Important Economic Statistic that the White House Never Talks A was originally published at mauldineconomics.com

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Last Week's Volatility Could Be A Harbinger Of Things To Come

There's a war going on right now and I don't mean overseas, I mean right here in the markets. Last week was a perfect example as the intraday swings of the S&P500 clocked in at a staggering 6.5%. Market volatility often is a precursor of things to come, and the irony of all this action was that the market closed with a loss of -0.65% for the week.

The net weekly change for the DOW was -0.53% and there was an even smaller loss of -0.42% for the NASDAQ. All three indices formed an important Japanese candlestick pattern, a weekly doji candle. Why is this important? A doji candlestick often signals indecision in the market. When the doji forms in an uptrend or downtrend, this is normally seen as significant, as it is a signal that the buyers are losing conviction when formed in an uptrend and a signal that sellers are losing conviction if seen in a downtrend.

What To Watch For This Week

A lower weekly close would indicate to me that the buyers are beginning lose control of this aging bull market. Here is the "line in the sand" for each of the indices that I am watching. Once below this line, watch for heavy liquidation to come in across the board.

DOW: 17.262 S&P500: 1,992 NASDAQ: 4.090

Gold Is Now Officially On The Move

You might remember on January 7th, I wrote a post on gold (FOREX:XAUUSDO) and the key neckline level. The key neckline in gold was broken to the upside last Friday when gold closed out the week with a very positive 2.9% gain. I now have a confirmed upside target zone of $1,340, which equates to about $132-$134 on the ETF, GLD. To follow all of the entry and exit points for gold, check in daily with the World Cup Portfolio.

How High Can The Dollar Go?

The U.S. Dollar Index (NYBOT:DX) continues to push higher against most currencies with another weekly gain of 0.85% in the Dollar Index. The question on everyone's mind is, how high can the dollar go without a correction? To this observer, it appears that there are technical storm clouds gathering that could spell trouble for the dollar. Take a look at the RSI indicator and check out the negative divergence that is building on the weekly charts. If you are long the dollar, you might want to review and tighten your stops.

How Low Can Crude Oil Go

That's a question better asked to Saudi Arabia as they continues to keep their oil spigots open to the world. Here is my analysis, the trend is down and picking bottoms or tops in markets is not a high percentage game. Before crude oil (NYMEX:CL.H15.E) changes trend, it needs to begin to base out and find a floor. I will leave picking bottoms to others. Meanwhile, the trend is your friend.

Have a Different View?

I invite your comments, pro or con. As always, we appreciate your feedback.

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Every success with MarketClub,
Adam Hewison 
President, INO.comCo-Creator, MarketClub



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Is this the "Sea Change" some have warned us about?

By John Mauldin

Did you feel the economic weather change this week? The shift was subtle, like fall tippy toeing in after a pleasant summer to surprise us, but I think we’ll look back and say this was the moment when that last grain of sand fell onto the sand pile, triggering many profound fingers of instability in a pile that has long been close to collapse. This is the grain of sand that sets off those long chains of volatility that have been gathering for the last five years, waiting to surprise us with the suddenness and violence of the avalanche they unleash.

I suppose the analogy sprang to mind as I stepped out onto my balcony this morning. Texas has been experiencing one of the most pleasant summers and incredibly wonderful falls in my memory. One of the conversations that seem to occur regularly among locals who have a few decades under their belts here, is just how truly remarkable the weather has been. So it was a bit of a surprise to step out and realize the air had turned brisk. In retrospect it shouldn’t have fazed me. The air has been turning brisk in Texas at some point in October for the six decades that my memory covers, and for quite a few additional millennia, I suspect.

But this week, as I worked through my ever-growing mountain of reading, I felt a similar awareness of a change in the economic climate. Like fall, I knew it was coming. In fact, I’ve been writing about it for years! But just as fall tells us that it’s time to get ready for winter, at least in more northerly climes, the portents of the moment suggest to me that it’s time to make sure our portfolios are ready for the change in season.

Sea Change

Shakespeare coined the marvelous term sea change in his play The Tempest. Modern day pundits are liable to apply the word to the relatively minor ebb and flow of events, but Shakespeare meant sea change as a truly transformative event, a metamorphosis of the very nature and substance of a man, by the sea.
In this week’s letter we’ll talk about the imminent arrival of a true financial sea change, the harbinger of which was some minor commentary this week about the economic climate. This letter is arriving to you a little later this week, as I had quite some difficulty writing it, because, while the signal event is rather easy to discuss, the follow on consequences are myriad and require more in-depth analysis than I’ve been able to bring to them on short notice. As I wrestled with what to write, I finally came to realize that this sea change is going to take multiple letters to properly describe. In fact, it might eventually take a book.

So, in a departure from my normal writing style, I am going to offer you a chapter by chapter outline for a book. As with all book outlines, it will be simply full of bones but without much meat on them, let alone dressed up with skin and clothing. I will probably even connect the bones in the wrong order and have to go back later and replace a leg bone with a rib, but that is what outlines are for. There is clearly enough content suggested by this outline to carry us through the next several months; and given the importance of the subject, I expect to explore it fully with you. Whether it actually becomes a book, I cannot yet say.

I should note that much of what follows has grown out of in depth conversations with my associate Worth Wray and our mutual friends. We’ve become convinced that the imbalances in the global economic system are such that the risks are high that another period of economic volatility like the Great Recession is not only likely but is now in the process of developing. While this time will be different in terms of its causes and symptoms (as all such stressful periods differ from each other in many ways), there will be a rhyme and a rhythm that feels all too familiar. That should actually be good news to most readers, as the last 14 years have taught us a little bit about living through periods of economic volatility. You will get to use those skills you learned the hard way.

This will not be the end of the world if you prepare properly. In fact, there will be plenty of opportunities to take advantage of the coming volatility. If the weatherman tells you winter is coming, is he a prophet of doom? Or is it reasonable counsel that maybe we should get our winter clothes out?

Three caveats before we get started. One, I am often wrong but seldom in doubt. And while I will marshal facts and graphs aplenty to reinforce my arguments, I would encourage you to think through the counter factuals presented by those who will aggressively disagree.

Two, while it goes without saying, you are responsible for your own decisions. It is easy for me to say that I think the bond market is going to go in a particular direction. I can even bet my personal portfolio on my beliefs. I can’t know your circumstances, but if you are similar to most investors, this is the time to make sure you have a truly balanced portfolio with serious risk management in the event of a sudden crisis.

Three, give me (and Worth, whom I am going to draft to write some letters) some time to develop the full range of our ideas. To follow on with my weather analogy, the air is just starting to get crisp, and winter is still a couple months away. Absent something extraordinary, we are not going to get snow and a blizzard in Dallas, Texas, tomorrow. We may still have some time to prepare, but at a minimum it is time to start your preparations. So with those caveats, let’s look at an outline for a potential book called Sea Change.

Prologue

I turned publicly bearish on gold in 1986. At the time (a former life in a galaxy far, far away), I was actually writing a newsletter on gold stocks and came to the conclusion that gold was going nowhere – and sold the letter. I was still bearish some 16 years later. Then, on March 1, 2002, I wrote in Thoughts from the Frontline that it was time to turn bullish on gold. Gold at that time was languishing around $300 an ounce, near its all time bottom.

What drove that call? I thought that the future directions of gold and the dollar were joined at the hip. A bit over a year later I laid out the case for a much weaker dollar in a letter entitled “King Dollar Meets the Guillotine,” which later became the basis for a chapter in Bull’s Eye Investing. As the chart below shows, the dollar had risen relentlessly through the early Reagan years, doubling in value against the currencies of America’s global neighbors, causing exporters to grumble about US dollar policy. Then the bottom fell out, as the dollar made new lows in 1992. From 1992 through 2002 the dollar recovered about half of its value, getting back to roughly where it was in 1967. Elsewhere about that time, I predicted that the euro, which was then at $0.88, would rise to $1.50 before falling back to parity over a very long period of time. I believe we are still on that journey.



One of the biggest drivers of economic fortunes in the global economy is the currency markets. The value of your trading currency affects every aspect of your business and investments. It is fundamental in nature. While most Americans never even see a piece of foreign currency, every time we walk into Walmart, we are subject to the ebb and flow of global currency valuations, as are Europeans and indeed every person who participates in the movement of goods and services around the globe. In fact, globalization means that currency values are more important than ever. The world is more tightly interconnected now than it has ever been, which means that events which previously had no effect upon global affairs can trigger cascades of events that affect everyone.

I believe we are in the early stages of a profound currency valuation sea change. I have lived through five major changes in the value of the dollar in the 45 years since Nixon closed the gold window. And while we are used to 40% to 50% moves in the stock market and other commodity prices happening in just a few years (or less), large movements in major trading currencies typically take many years, if not decades, to develop. I believe we are in the opening act of a multi-year US dollar bull market.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best selling author, and Chairman of Mauldin Economics – please click here.

The article Thoughts from the Frontline: Sea Change was originally published at mauldin economics

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Gold Option Trade – Will Gold Continue to Consolidate?

Until recently, the world has forgotten about gold and gold futures prices it would seem. A few years ago, all we heard about was gold and silver futures making new highs on the back of the Federal Reserve’s constant money printing schemes.

However, after a dramatic sell off the world of precious metals it became very quiet.


Gold prices have been in a giant basing or consolidation pattern for more than one year. As can clearly be seen below, gold futures prices have traded in a range between roughly 1,175 and 1,430 since June of 2013.





The past few weeks we have heard more about gold prices as we have seen a five week rally since late May. I would also draw your attention to the fact that gold futures also made a slightly higher low which is typically a bullish signal.


At this point in time, it appears quite likely that a possible test of the upper end of the channel is possible in the next few weeks / months. If price can push above 1,430 on the spot gold futures price a breakout could transpire that could see $150 or more added to the spot gold price.


Clearly there are a variety of ways that a trader could consider higher prices in gold futures. However, a basic option strategy can pay handsome rewards that will profit from a continued consolidation. The trade strategy is profitable as long as price stays within a range for a specified period of time. Ultimately this type of trade strategy involves the use of options and capitalizes on the passage of time.


The strategy is called an Iron Condor Strategy, however in order to make this trade worth while we would consider widening out the strikes to increase our profitability while simultaneously increasing our overall risk per spread. Consider the chart of GLD below which has highlighted the price range that would be profitable to the August monthly option expiration on August 15th.





As long as price stays in the range shown above, the GLD August Iron Condor Spread would be profitable. Clearly this strategy involves patience and the expectation that gold prices will continue to consolidate. This trade has the profit potential of $37 per spread, or a total potential return based on maximum possible risk of 13.62%. The probability based on today's implied volatility in GLD options for this spread to be profitable at expiration (August 15) is roughly 80%.


Our new option service specializes in identifying these types of consolidation setups and helps investors capitalize on consolidating chart patterns, volatility collapse, and profiting from the passage of time. And if you Advanced options trades are not your thing, we also provide Simple options where we buy either a call or put option based on the SP500 and VIX. The nice thing about buying calls and puts is that you can trade with an account as little as $2,500.


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See you in the markets!

Chris Vermeulen

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Can Central Planners Revive China’s Economic Miracle?

By John Mauldin

For years, when asked whether I thought China would experience a hard landing, I would simply answer, “I don't understand China. Making a prediction would be pretending that I did, so I can’t.” The problem is that today China is the most significant macroeconomic wildcard in the global economy. To understand both the risks and the potentials for the future you have to reach some understanding of what is happening in China today. Last week we started a two part series on what my young associate Worth Wray and I feel is the significant systemic risk that China poses to global growth.

The first thing in my inbox this morning here in Tuscany was a note from a friend about the growing scandal in Quingdao. For a long time many of us have known that there has been “double counting” in the commodities trade sector in China, where local “entrepreneurs” create multiple warehouse receipts on which to borrow money cheaply, and then invest in what are essentially subprime securities that pay higher rates. Everyone “knows” that the government is not going to let anyone lose money on investments, so what could possibly go wrong? It turns out that Chinese warehouse officials are now emigrating in significant numbers to parts unknown around the world, armed with only their passports and whatever money they made through producing such bogus receipts.

My sources suggest that the size of the problem is approaching $1.3 billion (far greater than the number being bandied about in public reports). Since one of the guiding principles operative in any scandal is that there is never just one cockroach, I expect the ultimate losses to be far larger. And it appears that the People’s Bank of China is finally going to let people lose money on these fraudulent schemes. Good for them. But to suggest there is no risk in cleaning up corruption and fraud misses the point of our own subprime crisis. In a world where global economic trade and international banks are so intricately linked, trying to determine the actual risk to the system is difficult. And as I will note in my “final thoughts” section, corruption is a very real issue.

We are going to try gamely to finish with China today, having left at least three or four letters worth of copy on the editing floor. There is just so much information and misinformation to cover. I’m going to turn it over to Worth and then follow up with a few final thoughts of my own. (Please note that this letter will print exceptionally long as there are a number of charts and other graphics.) Now let’s do a deep dive into part two.

Can Central Planners Revive China’s Economic Miracle?

By Worth Wray
In my Thoughts from the Frontline debut this past March (“China’s Minsky Moment?”), I highlighted the massive bubble in Chinese private-sector debt and explored the near-term prospects for either (1) a reform-induced slowdown or (2) a crisis-induced recession. Unfortunately, it was not an easy or straightforward analysis, considering the glaring inconsistencies between “official” state compiled data and more concrete measures of all real economic activity, which is why I suggested that China is simultaneously the most important and most misunderstood economic force in the world today.

With the stakes now higher than ever, I returned to Asia’s “miracle” last week (“Looking at the Middle Kingdom with Fresh Eyes”) and probed deeper into the shadows (including China’s shadow banks) with the help of my new friend Leland Miller and a few illuminating excerpts from his Q1 2014 China Beige Book (the largest and most comprehensive survey series ever conducted on a closed or semi-closed economy).
Pulling back the Bamboo Curtain, Leland’s data revealed aspects of the Chinese economy that John and I could have only guessed at before, giving us a rare opportunity to explore regional contrasts in Chinese economic activity, to survey the modest (but still insufficient) rebalancing among sectors, and to identify a series of pressure points within the credit markets that suggest last summer’s interbank volatility may return in 2014.

Unfortunately, Leland’s key insights confirmed our fears that China’s consumption-repressing, debt-fueled, investment-led growth model is slowing down and starting to sputter… but not collapsing (at least not yet). 

What happens next – with huge implications for global markets – depends largely on the economic wisdom and political resolve of China’s central planners, who must find a way to gradually deleverage overextended regional governments and investment-intensive sectors while also rebalancing the national economy toward a consumption driven growth model.

Finessing the challenges will require not just one but a series of miracles.

Like Every Other Investment-Driven Growth “Miracle” 

After 34 years of booming economic growth averaging over 9% per year (the longest sustained period of rapid economic growth in human history), China’s credit-fueled, investment-driven growth model is exhausted and increasingly unstable. As you can see in the chart below, the Middle Kingdom’s credit boom is well past the point of diminishing marginal returns; and no one can deny that the misallocation is widespread, with capacity utilization now below 60%. (I should also note that Societe Generale’s Wei Yao has consistently published some of the best research on China in recent quarters; personally, I won’t be surprised to see her vault to rock-star status as the People’s Republic decelerates.)


Source: Wei Yao & Claire Huang, “SG Guide to China Reform.” Societe Generale Research, May 14, 2014.

Moreover, state perpetuated distortions in the cost and availability of financing are (1) funneling huge amounts of capital toward increasingly unproductive, state directed investments, and (2) pushing household and private business borrowers into the shadows, where the burden of substantially higher interest rates drags on household consumption.


Source: Wei Yao & Claire Huang, “SG Guide to China Reform.” Societe Generale Research, May 14, 2014.

It doesn’t require much imagination to connect the dots. Structural distortions in Chinese financial markets are a major cause of debt fueled overinvestment; and without sweeping structural reforms (along with a major crackdown on corruption at all levels of government), captive capital will continue to flow toward unproductive investments, capacity utilization will continue to fall, and China’s investment boom will continue its march toward a mega Minsky moment.

This kind of structural distortion is a classic symptom of an overextended investment boom and a warning sign that rebalancing – whether it’s induced by voluntary reforms or an involuntary debt crisis – will not be easy. The critical adjustments – gradual deleveraging and structural rebalancing – will require a greater slowdown in economic growth and a sharper fall in still-bubbly asset prices than China’s policymakers are letting on.

“This is not an easy task,” The Daily Telegraph’s Ambrose Evans Pritchard says, in a truly brilliant article published this week, “not least because land sales and taxes make up 39% of state revenue in China, and the property sector employs 20% of workers one way or another. It is clearly a bubble of epic proportions and already losing air. Mao Daqing from Vanke – China’s top developer – says total land value in Beijing has been bid up to such extremes that is on paper worth 61.6pc of America’s GDP. The figure was 63.3pc for Tokyo at the peak of the bubble in 1990.” Yikes.

As Peking University professor Michael Pettis explains in his 2013 book, Avoiding the Fall: China’s Economic Restructuring, “Every country that has followed a consumption-repressing, investment-driven growth model like China’s has ended with an unsustainable debt burden caused by wasted debt-financed investment. This has always led to either a debt crisis or a lost decade of very low growth.”
China’s “miracle” is no different from any other investment-driven growth binge where high levels of leverage (directly or indirectly paid for by the household sector), combined with high levels of fixed investment, eventually result in excessive and unsustainable debt loads. Pettis elaborates:

While these policies can generate tremendous growth early on, they also lead inexorably to deep imbalances. As demonstrated by the history of every investment-driven growth miracle, including that of Brazil, high levels of state-directed subsidized investment run an increasing risk of being misallocated, and the longer this goes on the more wealth is likely to be destroyed even as the economy posts high GDP growth rates. Eventually the imbalances this misallocation created have to be resolved and the wealth destruction has to be recognized. What’s more, with such heavy distortions imposed and maintained by the central government, there is no easy way for the economy to adjust on its own…. [Furthermore], Beijing [will] not be able to raise the consumption share of GDP without abandoning the investment-driven growth model altogether.

In other words, the world’s second largest economy is approaching its debt limit and the end of the line for investment led growth… but China’s financial system is structurally designed to prevent capital from flowing freely toward more productive uses. One way or another, the world’s largest contributor to global economic growth must slow down – either because Beijing has the foresight, resolve, and political capital to pursue aggressive economic and financial market reforms or because party elites fail to address the country’s structural imbalances and policy-induced distortions before the credit bubble pops. “Debt,” Pettis explains, “as we will learn over the next few years in China, has always been the Achilles’ heel of the investment-driven growth model…”

Which Way to Sustainable Growth?

Among the various reforms set forth in last November’s Communist Party Third Plenum, ranging from financial liberalization to a crackdown on corruption and pollution, the most challenging is the gradual deleveraging of the Chinese economy while simultaneously rebalancing the national economy toward a more sustainable, consumption-driven growth model.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best-selling author, and Chairman of Mauldin Economics – Please Click Here.

The article Thoughts from the Frontline: Can Central Planners Revive China’s Economic Miracle? was originally published at Mauldin Economics

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