After two years of insane money printing designed to rescue its failing economy, Japan has now been rewarded with… another recession.

So what went wrong you ask? The same thing that always goes wrong when a central bank resorts to money printing to rescue an economy instead of allowing a cleansing period and a return to real productive growth. All they accomplished with their massive QE program was to spike inflation.

As I have pointed out many times in the past, any time the price of energy spikes 80-100% within a short period of time it will almost always cause a recession. As you can see on the chart below when Japan began their foolish money printing campaign it spiked the price of oil 83% as priced in yen. Add to that the increase in sales tax and ultimately this was just too much for the Japanese economy to withstand, and it has now turned back down into another recession.

oil yen

Unfortunately all the pieces are falling into place for the Federal Reserve to follow the precedent of the Bank of Japan and ultimately push the US into the next recession. How is that you ask? The economy seems to be rolling along fairly steadily here in the United States.

It always starts with the bubble. In the short run Keynesian economic policies work, but the end result is that they create bubbles. In 2000 we had a tech bubble. In 2005/06 we had a real estate bubble. In 2008 we had a bubble in oil and a severe inflationary event (which of course led to a recession). And now in 2014 we are beginning the initial stages of the next bubble. Notice in the chart below that the S&P is now stretched 33% above its 200 week moving average.

S&P 200 week moving average

Notice how we have very similar conditions to the 1998 period. In 98 the Fed rescued LTCM and sent the signal to the market that the Greenspan put was in place. The market recovered very quickly from the sharp correction and then entered an orgy of speculation with the knowledge that Greenspan would protect the stock market against any serious declines. That culminated in the NASDAQ bubble.

In October the stock market suffered another sharp correction similar to 1998 and again the Fed sent signals that they would restart QE if needed. This caused the market to slingshot back to new highs, and I believe we are now beginning the initial bubble phase that will culminate with the S&P breaking out of its two-year trend channel, and stretching 15-20% above its 200 day moving average. There is even a possibility this could happen quickly if the NASDAQ were to surge straight up to 5100 in the month of December. Otherwise it may take longer and we get our final top sometime next year. Either way, for a bubble to form the market has to stretch a long ways above the 200 day moving average. That is the confirmation that a bubble has formed. We don’t have that yet, and until we do I don’t think we can have a final bull market top.

bubble phase stretch

So how does this cause a recession you ask?

Let me show you how I think this is going to play out in the months and years ahead. At this point the bubble in the stock market is probably unstoppable. The mistakes have already been made and QE to the tune of multiple trillions of dollars is going to have consequences. The bubble in the stock market will continue to rise and grow, until like all bubbles it pops. This is where the plot thickens. I expect the initial crash will take stocks back down to retest the 2000 and 2007 high. I’ve drawn the chart below with the bubble phase occurring next month, but like I said this could easily stretch out into the middle or even fall of next year before the bubble pops. I’ve noted before that it often takes eight months to a year for a bubble to develop and pop. That’s about how long it takes for the public to catch on and every last buyer to enter the market. If we assume that the bubble began at the October low then we could conceivably see this continue until next fall.

initial bubble pop

Once the bubble pops we all know what the Feds response is going to be. They are going to restart QE and print money at an absolutely mind-boggling rate to try and reflate asset markets. The problem is when a bubble pops, and a parabola collapses, nothing the Fed can do will rescue it. The inflation will come out of stocks and look for something else to land on. Just like it did in 2008 when the stock market topped, the inflation is going to move into the commodity markets, and it will without doubt spike the price of energy at least 100% in a year causing the US economy to follow Japan down into the next recession.

bubble Pop energy Spike

This end game has been unavoidable and unstoppable ever sense the Fed began QE3. When Bullard and Williams went public in mid-October to reassure the markets that more QE would be delivered if needed, it initiated the beginning of the final parabolic bubble phase in the stock market. Now it’s just a question of when will the bubble pop and the terrible consequences of these insane monetary policies begin?


  1. jj

    Gary the S&P channel trade has been perfection off the 2011 lows, buy the dips, never short a bull market! Armstrong who called this trend to take place has based it on global capital flows into US equities just as gold topped and entered its bear market in 2011. Deflation in Japan, Europe and China, they didn’t cut rates Fri because inflation is a worry its all about deflation and debt levels, the US will “eventually” implode but its a toss up who goes first Japan or Europe….then the US, but that will happen at much, much higher levels in equities. The US$ will be well bid as the Euro$ heads for par and the Yen 140 based on their central bank policies sending all commodities much lower…….Armstrong, who has called the Us equity market action, US$ and gold perfectly these past 3 years has updated his Dow targets:

    We have the seasonal turning point of January. The key resistance is at the 18133 to 18200 level as the weeks move forward. This has been the top of the Primary Breakout Channel from the ECM turn back in 2011. This channel has performed perfectly containing everything up and down. If we start to break out above this channel and close above it on a weekly basis, this is the warning that we may see the Dow at the 23000-26000 by next September. Exceeding that area will warn of a possible real blast in a Phase Transition that can take the Dow up to 40,000-43,000.

    Gary this will continue to create some great long positions in gold and the miners along with oil and their related companies as nothing goes straight down but last year the biggest gains were made on the short side in the pm’s markets as the Yen, Euro continue to be devalued sending the most liquid currency on the planet the US$ higher and thats not commodity bullish. Deflation is creating recessions across Europe, Japan and now China is dealing with debt deflation. Granted $147 oil was like a massive tax on the global economies BUT its main driver was the US$ as it fell from 121 to 71 on the index sending oil from $15-$147 and as oil fell to $35 the US$ rose 17 cents…………………jj

    1. gary Post author

      I’m of the opinion that everyone is on the wrong side of the boat in the currency markets. Everyone knows the yen and euro are going lower and the dollar is going higher. The problem is that when everyone is thinking the same thing then no one is thinking.

      The US has already printed trillions. Much of that is sitting on deposit at the Fed. When that liquidity comes flooding back into the market the dollar will crash and we will get our spike in commodities.

      We are still waiting for the monetary phase of the commodity bull. The first phase from 2000- 2008 was driven be real demand as emerging markets and a global real estate market created a real supply and demand imbalance. But the second phase of a secular commodity bull market is created by monetary policy errors. ie. too much money printing. And that’s exactly what the world has been doing for the last 6 years.

      For most of that time the inflation has been flowing into global stock markets, but once those form bubbles and pop the inflation will have to find something else to land on. It will land in the commodity markets and we will get the final monetary phase of the commodity bull.

      1. jj

        Regardless of your opinion or mine Gary the global capital is flowing away from the Euro$ and the Yen into US$’s and the key real estate centers like NY, SF and Miami along with US equities, that’s in plain sight, clearly! Yes the US$ will come under pressure when and who knows how far out that will be? the feds unwind until then the actions by Draghi and Abe will send the $ much higher and that’s not commodity bullish as the actions of Japan, Europe and China are Deflation fears NOT inflation as these economies wished they had any type of real growth be it exports, jobs or wages.

        The 2000-08 run you speak of was the US$ devaluation in the background and massive amounts of US and global debt taken on at all levels from the street to governments….it was a debt driven growth cycle that always ends badly and $147 oil was the pin looking for a debt bubble.

        As for nobody is thinking regarding a crowded currency trade, well just when you think your not thinking correctly the ECB or BOJ create more policies that continue their currency devaluation trade and more often than not those actions have created the lower highs in the value of Gold since 2011…..tell me how high the US$ strength will be over the next two years not based on any real US economic growth but weaker global currencies and you’ll know where the bottom in gold, silver, oil and every commodity will be………….jj

  2. arthurk

    Unfortunately for your comparison to Japan, even though the economy is in recession, the stock market is going up, not down. If QE has the same effect in US, stocks would continue to go up even during recession. My contention is that we may have a meltup, since inflation will send monry from bonds to stocks, and may even rival 1929.

    1. jj

      Of course the Japanese equities are going up as a devalued Yen means higher prices in their equities. The US equities are not rising off a lower $ but money fleeing Europe and Japan and China running from higher taxation and negative interest rates in Europe the wealthy know the governments are coming for their idle cash so they are buying assets in protection from government action………jj

      1. Gary

        The problem is that money is not fleeing Europe or Japan. All global markets are going back up. If Europe prints and it rescues it’s economy just like QE here did, then the euro will likely rise along with the European economy just like the dollar did here with the US economy.

        The global stock markets are already signalling that this latest round of QE is going to work, at least temporarily. And if the economy in Europe, Japan and China turn back up along with their currencies then the dollar will suffer and we will enter the final stage of the commodity bull where price is driven by currency devaluation.

        1. jj

          Your only looking at the equity markets Gary as of course the Nikkei is rising off the back of a much lower Yen…look at the Nikkei index chart since Abe announced the Yen devaluation Nov 2012 its up over 100% as the Yen devalues….YET their economy is in another recession! Draghi’s speech in Germany Fri is all about fighting deflation at ground level as they try and create any kind of growth/jobs/inflation. You really don’t think a European QE is going to take Europe out of its debt deflation, not a chance in Hell! Japan is a perfect example more money printing does not create economic growth. It only devalues the currency and drives equity markets higher for the 1% that own equities. Europe, Japan and China have negative to flat to cutting interest rate levels were the US is looking to hike rates in 2015 that only will keep the other currencies in their down trend and the $ bid. Europe and Japan must crash before the US$ falls and the most liquid asset on the planet is the $ during any global crisis.

          How many times have you drawn lines on your S&P500 charts suggesting a big decline along with big declines on the US$ index these past few years, I’ve lost count???

  3. High

    Thanks Gary for the interesting theories and also the comments are thoughtful. As to the correlation between the dollars value and commodities it reminded me of the Exter Inverted Pyramid. If you google it, you will see the idea is that as this financial crisis develops, wealth will flow downward through smaller phases of liquidity (with lower risks) and out of areas of greater liquidity (with higher risk). Anyway, what I find most interesting is the possibility that the USD is just above gold in the funnel and might even be considered a tangible asset just next to gold near the climax of the event. In other words, as people become more concerned with the return of their wealth than with the return on their wealth the actual physical dollar bills will be hoarded just before a hyperinflationary event in which the physical paper dollars are exchanged for gold, silver, and anything else of tangible value.
    Maybe the dollar can go parabolic simultaneous with commodities. It can even be considered a commodity.

  4. Dan

    You write >

    “…for a bubble to form the market has to stretch a long ways above the 200 day moving average”

    What are the parameters you have in mind to determine a “top” ?

    Would appreciate a concise and detailed summary….in other words, spell it out, now, Please.

    Also, Where did you come up with “I believe we are now beginning the initial bubble phase that will culminate with the S&P breaking out of its two-year trend channel, and stretching 15-20% above its 200 day moving average.” Why 15-20% ?? I’m sure it’s not arbitrary to you, but it looks that way to me.

    Seeking knowledge, not confrontation.


    1. gary Post author

      Picking a top in a bubble is almost impossible. They usually go much further than anyone can imagine. But I think we at least need stocks to form a parabolic structure. That would be at least a 15-20% stretch above the mean, although it could be much more than that.

  5. Jose

    Gary, is the purpose of pointing out the possibilities for the next recession an intellectual exercise on potential outcomes or something to currently trade on?

    1. gary Post author

      Yes. I think we have a bubble phase coming in the stock market. So instead of listening to the perma bears call a top everyday I think traders should prepare for a big surge higher.

      Back in mid Oct. while everyone was calling for the end of the bull market I guaranteed that it was only a correction and not the beginning of a new bear. I stuck with long positions and have been rewarded for doing so. Some of my subs even entered call options and are up many hundreds of percent.

  6. John S Harbut

    Are we all overlooking the fact that a “black Swan” event could occur and just blow away all of these speculations? There are certainly enough localized situations in the world that could metastasize into one.

    1. Sooze

      Snap. My thoughts exactly as I was reading Gary’s great article. The conventional markets are sitting atop a house of cards, and there are so many potential black swans out there, any one that could knock the whole thing down. The main stream press has stopped reporting on ebola and russia, and so it’s ‘out of sight, out of mind.’ This nuclear treaty with Iran is a joke, and Israel is poised to act on any aggression on an emboldened Iran. I remember just before Sept. 11th this year you had a collection of generals and politicians on the talk shows saying ISIS chatter was up and an attack on US soil was imminent. So nothing happened, and it’s like we got past that date, so we’re okay now. The lack of reporting in the main stream has lead to a complacency akin to what we see in the conventional markets.

      I take the cynical view that Yellen and her merry band of ponzis would welcome a black swan. They know that the endless money printing is going to end badly and are backed into a corner now, so a black swan would be a perfect opportunity to cast blame somewhere else.

  7. harold coffman

    I’m disappointed … no-one is encouraging an Anchor (all comment
    revolve around variables such as the US$ or US Commodity $) .
    Without a stable Money Anchor measurements are flawed.

    Please think about this …. the definition of MONEY must be
    a single definition (specific) … Money is not meant to be currency.
    All countries can have their own currency, (their own tax laws on
    their own currency).

    Money needs ONE definition, the One and only definition …
    it is the ANCHOR of which all currencies are bid/asked to create
    a level measurement across the world.

    Present currency is working … bid /ask is working … taxes are defined,
    But, the definition of Money is not working, not defined, not Anchored.
    Yes, I am a hard money (anchor) guy … Governments need the anchor,
    possible the slow moving – average stable GOLD bid ask price as the
    basis for International Measure.

    Result would be every country, gets attendant reward and punishment.
    If their currency is not properly and fairly anchored to Gold MONEY.

    Gold is a poor money … but it is the BEST money anchor as defined.

  8. felix

    Hallo Gary, what do you think about predictions like the one of economist Harry Dent, who is saying the biggest stock market crash is imminent (with a final target at 3300 on the dow in 4/5 years), deflation everywhere, and a final price of gold (in 2020/22) between 250 and 400$ ????….

    1. gary Post author

      I don’t think there is much chance of that happening. We had deflation in the 30’s because the money supply was constrained by the link to gold. We no longer have that constraint so this time the depression will be inflationary instead of deflationary.

  9. Jeff Schramek

    Gripping stuff, as always.
    Your forecast of funds soon flowing from stocks to commodities rings true enough, except for the prospect that the Feds may see the danger which you forsee, and so move heaven and earth to forestall it.
    They didn’t forsee the 2008-09 money flows which you recall above, but next time they may have already lined-up policies to prevent a repeat. Such policies could include greater tax breaks for capital gains from stock deals, changing of regs to lower margin requirements for such deals, or any number of other ways not obvious to us now, to goose stock prices.
    To paraphrase Keynes, the stock markets can stay Feds-goosed (relative to other markets) longer than you can remain solvent.

  10. Sam

    “The problem is that when everyone is thinking the same thing then no one is thinking.”

    Oh boy Gary, I tried to contain my amusement when I looked at your rumblings.

    1) Since when you have switched from a TA Chartist to Funnymental-Anal-yst? Back in the days when your “proprietary-cycles” was winning, you said the Funnymentals stories were for Losers and the world actually evolved around your proprietary-Gary-cycles.

    And now since your horrible performance in last 2 years drubbings, you even now subscribed to “Manipulation”?!

    Ha ha! Karma.

    2) When everyone is thinking the same, no one is thinking?
    So Gary, tell me what had you been thinking in 2012 and 2013 that suffered sooo much of losses, and consequently lost 50% of your subscribers?
    Were you doing contrary thinking that suffered so much losses?
    Or were you with the crowd too much that suffered so much losses?
    Or your proprietary-Gary-cycles was obsolete that suffered so much losses?

    Please do not blame on manipulation, as manipulation has been on-going for YEARS, esp with Fed/Greenspan put since 1998, and central banks had been selling Gold since 1970s the Gold-unpeg.

    1. gary Post author

      “Funnymentals stories were for Losers and the world actually evolved around your proprietary-Gary-cycles”

      Actually I’ve always accounted for both fundamentals and cycles.

      And I don’t know what you are talking about losing. Every portfolio is up for the year except currencies.

      I even have a few subs that took heavy call option positions at the Oct. bottom when I guaranteed that it was not the start of a bear market and are now up many hundreds of percent.

      I’m not that brave in my own portfolio but it is up very large this year as I have called every turn in stocks and metals almost perfectly since June of 2013.

      And the question of manipulation isn’t even a question anymore. Virtually every bank is getting fined billions for engaging in it. And if they are getting fined billions then that is only the tip of the iceberg. It’s only what they are willing to let us see. The problem is much much bigger than what is visible. As I have said before, it’s now critical that traders account for manipulation if they hope to succeed. It’s how I have called the last three tops in gold perfectly and how I have called every bottom in the stock market perfectly for the last two years.

      Nice try though. Thanks for playing.

  11. Peter

    When David Tepper went bearish a while ago, I told people not to listen to him and I gave my reasons. People were mad of me. Now we all know that he is down (!) for the year and has to return money to the investors.
    This is the way how hedge funds work, if you are not aware of. They take a lot of risk, if it works, great, they make a lot of money along with the investors, everybody is happy and people love them; if it doesn’t work, too bad, the investors lose, and they try it again the next time, they may have to return money to the investors or even close the funds if necessary, but no worry, they will soon open new funds and try their luck again.

    1. gary Post author

      Only marginally. I don’t think the Nasdaq will go through that level on it’s first try and there’s even a small possibility that the market could top a little above 5100 if it were to get there very quickly, as in next month. That would give us a modest parabolic move.

  12. Michel

    Gary, I just came upon your website from a Google search – I took the time to read your blog. From what I read I think your analysis is one of the soundest I have read. I have been thinking along your lines for quite some time. It is astonishing there are not more commentators observing what is really quite obvious.

    The only other comment I would make (as an economist) is that the current FED created monetary bubble has nothing to do with Keynesian economics! That would be when we have a massive fiscal expansion in the form of massive additional government expenditure and/or tax cuts (or both) as we had during the Bush years when government expenditure ballooned coupled with tax cuts. On a cyclical basis the Obama years have seen a relative tightening due to Republican efforts to keep government expenditure in check. The FED has stepped in to reflate the asset markets as a substitute to prevent a collapse of the economy.

    As you correctly predict this is going to end in disaster (except for those whose coffers have been filled by the FED’s giveaway). Proving that a Keynesian expansion during the 2008-2010 recession would have been far preferable in the longer term than FED printing. History will tell.

  13. Jeff Schramek

    Gary, I have doubts about using Vegas traffic as a barometer for the whole economy, tho I’ll grant its value as a barometer for the top ½ of the populace. I quite doubt that folks in the lower ½ ever could afford many major trips (e.g. to Vegas), since spending substantial $ there is much of the point of going. So, while the upper ½ is probably as well off as ever, the lower ½ has lost major ground, certainly since 2000. Even official figures on real median income are sharply below levels of that year.
    Among better (if imperfect) barometers for spending by the lower ½ might be total annual movie theater ticket sales, which haven’t come at all close to recovering to their 2002 (!) high of 1.58 billion, despite the population having grown by over 10% over the last 14 years. I’d also urge use of official retail sales numbers, but, if Dave Kranzler is at all right, those numbers are too gamed to be of much help.

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