Catastrophe Is Now Assured

Lots of folks are scratching their heads, wondering why the stock market seems to want to go straight up. Can it last much longer?

My colleague and top trader Jeff Clark says no: "Both the Nasdaq and NYSE summation indexes triggered sell signals. The last sell signal in May suffered a whipsaw and generated a loss. But in 10 years of following these indicators, they've never failed two times in a row."

I disagree with Jeff. That doesn't happen very often. And when it does, I usually end up with egg all over my face and a lot of money missing from my brokerage account. But what I think is happening in the markets right now is the early stages of a big inflation.

No, we haven't seen inflationary pressures leak into most commodities or consumer goods yet. But that's normal. Big monetary inflations, like the one going on right now, always hit the banks first. Look at the chart below of the Financial Sector Fund (XLF), which holds JPMorgan, Wells Fargo, and Bank of America, among others.


As long as the banks and the brokers are making money, the stock market will keep going up. And as long as the government keeps printing trillions of dollars each year, while holding short-term interest rates at nearly 0%, financial stocks are going to keep going up, too.

I call what's happening the "run up." At the beginning of a big inflation, it feels good to everyone. Everything starts going up – stocks, real estate, agriculture, metals, etc. People begin to believe the government's inflation was the correct answer to all of our problems. They say: Just print more money. That way, nothing bad has to happen.

Of course, the good times don't last. The purchasing power of the currency eventually collapses. But at the beginning... everything soars. I think we're in that period. And I think that's why so many normally reliable market indicators (that read "overbought") aren't working right now.

There's a huge wave of money surging into the market, and it's blowing past all of the regular limits. 

More evidence of my "run up" theory: Sales of previously owned homes jumped 7.2% in July. That's the fourth month in a row sales increased. And July's number was the biggest increase since they started keeping track of these statistics in 1999. The last time sales rose four consecutive months was July 2004 – smack dab in the middle of the real estate boom. 

What accounts for this good news? Why should home sales be soaring when home prices are plummeting and mortgage defaults are rising? There's only one explanation – the "run up." 

And as if on cue, the financial pundits are already claiming the government's inflationary policies are what saved us. Economist Paul Krugman recently wrote, "We appear to have averted the worst: utter catastrophe no longer seems likely. And Big Government, run by people who understand its virtues, is the reason why." 

Sure, if you're willing to ignore every single historical example of big government's runaway deficit spending and the impending bankruptcy of our entire country, then catastrophe no longer seems likely. But if you know anything about economic history and the compounding nature of interest, then you know catastrophe is now assured.

The "run up" will feel great. Owning stocks (with stop losses in place) will be a great strategy. And the big-government folks will claim they've saved the day. But just watch what happens to the value of our currency over the next two to three years.

Good investing,

Porter Stansberry 

P.S. Right now, most people think my conclusions about the fate of the dollar are crazy. The idea of a worldwide run on the dollar isn't on anyone's radar right now. But it should be. I devoted my most recent issue to the best ways to protect yourself and profit from what's going to happen. You can access this issue risk free with a trial subscription. Click here to learn more.