The Market Is Caught In A Tug Of War

Essentially, the bizarre trading in U.S. stocks is the result of a tug-of-war that is occurring: the market wants to fall and needs to fall, but it is being propped up by the Fed and other central banks. The market “wants” to fall due to the downward pressure created by the Fed’s balance sheet unwind, high valuations, falling earnings estimates, uncertainty caused by the trade war with China, Brexit, etc., but is being propped up by the Plunge Protection Team, the Fed’s dovish turn, and foreign central bank balance sheet expansions.

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The chart of the cyclically-adjusted P/E ratio below shows that the U.S. stock market is still quite overvalued, which explains the natural tendency for the market to fall unless it is actively being propped up:

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How will this situation resolve itself? Unfortunately, I can only see it ending in chaos. Central banks are becoming increasingly desperate to keep the bubble markets inflated, which means that risk is being transferred to unbacked fiat (or “paper”) currencies. While this approach may assuage the fears of market participants for a while longer, it’s just a matter of time before the currencies themselves bear the brunt of the debasement.

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