US stocks regained their bullish stance with risky debt putting in a stellar week relative to the safety of US Treasuries. Volatility also dropped to the lowest levels since early January, another bullish sign. Our Risk Gauges are now 100% bullish. This seems to have given us the answer to last week’s question of whether the firstfour4 days of September was an early warning sign of further weakness or even worse, an imminent black swan event.
Ray Dalio, founder of Bridgewater Associates (world’s biggest hedge fund), warned this week that the next market drop and economic correction could be unlike anything we have seen in our lifetimes. He believes that the next financial crises could dethrone the dollar as the world’s reserve currency and destabilize the global economy.
Our massive borrowings which have significantly increased with the new tax cuts, along with long unfunded pension and health care obligations, could trigger a 30% decline in the dollar, triggering defaults and dethroning the dollar as the reserve currency.
Robert Schiller, Nobel prize winning economist who developed the CAPE (Cyclically Adjusted P/E) indicator and considered to be one of the best indicators for a long-term forecast of stock market returns, went on record this week that US Equities are extremely overvalued.
I called out the possibility of a problem with the dollar just a few weeks ago. However, with the longer trends firmly intact and a hot economy, a parabolic blow off could happen first and end up being the catalyst for the Big Kahuna. According to Dalio, it could happen up to two years from now.
So once again, with long term valuations frothy, the political situation brittle, and the market still so strong, a final blow-off is possible as is a black swan event. At this point in time, investing requires extreme vigilance, flexibility and great tape reading, which is part of our DNA at Marketgauge. Stay tuned
The highlights of this week’s market action are the following:
