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Three Steps & A Stumble!

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Wade Hampton III

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Three Steps & A Stumble!

PostWed Feb 15, 2017 5:02 pm

By Dennis Slothower
Written Wednesday, February 15, 2017...

The Federal Reserve chose to not raise interest rates at the end of
January’s FOMC meeting. That may well have to do with the threat of
China selling more U.S. Treasury bond reserves. Another rate hike
would have supported upward pressure on the U.S. dollar, hurting
U.S. exports and angering China, whose currency is pegged to the
dollar. China has been dumping U.S. Treasury bonds to raise cash
to force a deep discount in its currency relative to the dollar.
This is why we are close to a trade war with them. China’s banks
are on the verge of collapse, so it is desperate to keep capital
from fleeing the country.

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And it’s not just China, but the entire world banking system….Banks
now have over $242 trillion in derivatives. For example, Goldman
Sachs has over $45 trillion in derivatives against $880 billion in
assets. Keep in mind the entire U.S. GDP was $18 trillion in 2015.
Yet it has been Goldman Sachs’s own stock that has led this Trump
rally, along with reforms that look to be at least several quarters
away from being a reality. Then there is this: The “Three Steps and
a Stumble” Rule.

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It argues that should the Federal Reserve raise the discount rate
three times in succession, a bear market in stocks follows! In the
12 times over the last 80 years when the Fed has tightened like this,
the stock market has fallen into a bear market. The Fed raised rates
in December 2015, then again in December 2016 — and the Fed has promised
three more rate hikes in 2017 to counter Trump’s “pro-growth” policies.
Another interest rate hike by the Fed would trigger this rule in 2017.
Yet it is U.S. long-term Treasury bonds, particularly relative to the
Dow, that have now become extremely dangerous.

This relative strength ratio is now at record-low levels, even more
than we saw ahead of the 2000 and 2008 recessions, when the stock
market fell into vicious bear markets. Since the presidential election,
this ratio has reached the lowest level in over 20 years, signaling
extreme “bubble” danger. If U.S. Treasuries continue to plunge and the
Fed keeps pumping up the Dow, get ready for the next housing bust and
recession, as soaring mortgage rates duplicate the financial crisis
of 2008.

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