The financial markets have been weakening recently as the relationship between the market and Fed and fiscal stimulus programs do not always correlate with each other. The money expansion represented by growth of Treasury debt and the Fed’s balance sheet lose their power to offset debt destruction when interest rates are at the zero bound and the funds created rarely reach the intended target.
The Fed began this process by aiming to reverse the collapse of real estate prices. Most recently, it has shifted to targeting stocks to regenerate wealth in the economy. The Treasury has taken on massive debt to offset employment losses that accompanied the bursting real estate bubble and while these policies have historically slowed the descent of asset losses and rise in unemployment, they tend to prolong the process over protracted periods of time.
Currently we are seeing fear of accelerating world deflation taking hold of market players’ emotions. Whether this shift – from the hope that drove stocks up earlier this year – will take us lower or not is the question. We rely on our proprietary technical analysis system to guide us, and so far it is doing what we hoped it will do.