Andy’s Notes: We continue to be bombarded with questions regarding stock market action over the past few weeks. Is just a long, long overdue correction, is it the start of a bear market, is it 2008 all over again, has the US’ ballooning external debt finally hit a critical limit? Opinions vary greatly on the subject, and we’d like to add one more to the growing pool of observations. Everyone knows that interest rates have been artificially low since 2007 – at a minimum. There is also a recognized trend that when people dump bonds, the money tends to drift towards stocks and vice versa. Blowing up a huge stock bubble is what we believe to be designed to give lots and lots of maneuvering room to drive money into bonds to keep interest rates in check. The fact that the not-so-USFed monetized the Dow, S&P500, NASDAQ, etc is perceived to be much different than monetizing the bond market – or aka monetizing debt. Monetizing debt is perceived as a last-ditch, inflationary move with negative connotations and consequences where monetizing the stock market or some other asset class is viewed in a completely different manner.

So, we believe, the ‘fed’ monetized the US stock markets knowing that deals are being cut almost weekly to exclude the dollar from international transactions. The resulting decreased demand for the dollar would result (and has) in bond sales. Anytime such sales gain momentum, the plunge team can trigger an equity selloff in an attempt to drive the money into bonds, thus keeping interest rates in check. The only probably is that (at least so far) it is taking an awful lot of equity market selloff just to pause the rise in interest rates. Plus the ‘fed’ is tightening at the short end via the FFR. They do this by pulling money out of the system through various means. The move is easily telegraphed – the ‘fed’ is trying to keep the dollar appealing at a time when there is a bridgehead of negative sentiment being built against the greenback. The problem is the USEconomy is hooked on low rates. How high can interest rates go before the ‘fed’ starts breaking the good China. Pun intended. The next 6-24 months should be awfully interesting as the juggling act becomes more and more difficult and therefore the house of cards that juggling supports becomes more and more unstable.