This Financial “Seismograph” Signals A Monetary Earthquake

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Stock markets in the U.S. are trading approximately 2% from their all-time highs, the German DAX has slightly retraced from its all-time highs, the Nikkei index in Japan has almost surpassed its 2000 highs in recent days, the Shanghai stock index used to be a laggard but is making up at an incredible pace (currently trading at 7-year highs). Indeed, it feels like nothing can go wrong.

We are not yet in bubble territory, and the market is not setting up for an implosion as it did in December 1999 or July 2008. However, we are in the midst of a monetary bubble, driven by an explosion of the monetary base and an implosion of interest rates. Paper assets, as opposed to hard assets, have been pumped up by the liquidity that is being funneled into the economic system and the markets.

But exactly that perception that nothing can go wrong is so dangerous. The number of divergences in the system is becoming mind-boggling, a red flag for secular investors.

The global growth barometer has collapsed in 2014. It was undoubtedly driven by the oil market collapse. Low commodity prices are no sign of economic health.

Potentially more concerning is the economic surprise index by Citigroup reflecting the direction and level of economic surprises. If it rises, it means that economic data are on average better than expected (positive surprise). Currently, it shows a negative reading similar to the depths of the 2009 crisis.

So far, these divergences have not resulted in a meaningful correction of stock and bond markets. Mainstream investors have gotten at the point of “acceptance of the new normal.” And rightfully so, because why worry if markets are climbing higher, indicating that everything has to be ok?

Is a correction in the markets brewing? There is definitely a fair chance, in particular if the TED-spread keeps edging higher.

Full article: This Financial “Seismograph” Signals A Monetary Earthquake (Secular Investor)

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