Looking at the market at the close of this week, apparently the “policy makers” have once again gotten a handle on the financial markets. In the Dow Jones BEV chart below it did correct 10%; but only for one day, February 8, with the Dow Jones coming back since. It closed the week only 4.81% from its last all-time high of January 26, and so could easily make a new BEV Zero in the days and weeks to come. As 10% corrections go, as seen in the thirty-six years of the Dow Jones BEV chart below, this wasn’t much of a double-digit correction.

This plus the Dow Jones Total Market Groups’ (DJTMG) top 20 closed the week back at 53 of 74 groups within 20% of their last all-time highs.

Here’s the frequency table for the top 20 below. The DJTMG’s high-water mark was in Barron’s January 29 issue; after which the BEV Zeros (new all-time highs) dropped dramatically as groups shifted lower, to the right of the table.  But after the top 20 declined to only 51, groups are once again migrating upward towards the left side of the table. Like I said, it wasn’t much of a 10% correction in the market.

If this continues the Dow Jones and the general market may once again rise into record territory; and why not, as the “policy makers” are once again doing their “market stability” thing, as seen in the chart below.  

As so many times before in the chart, the latest decline in the Dow Jones (Blue Plot) was accompanied by a spike in trading volume (Red Plot), followed by the Dow Jones increasing on declining trading volume.  This is a total inversion of the law of supply and demand, so I’m thinking it must be some kind of “policy initiative.”

If the “policy makers” find it so easy to manipulate the stock market higher, why shouldn’t we join in the party on Wall Street?  With the Dow Jones so close to making a new all-time high after a pitiful double-digit correction, I refuse to argue the point. I’m only pointing out that what the “policy makers” are doing is ultimately self-destructive, as “stabilizing” the market as they do requires that debt loads on someone or something must increase; and there’s a limit to how much debt an individual, a corporation, a government or an economy can carry.

Below is a chart of what I call the Real National Deficit.  I take the US national debt from 52 weeks before and subtract from that the national debt published in this week’s Barron’s. This week it was -$1,000 billion (-$1 Trillion), illustrating the debt carried by the US Treasury increased by a trillion dollars from 52 weeks before.

That sounds pretty bad, but during the mortgage crisis of October 2007 to March 2009 it was worse. In January 2009 the US national debt had increased by over $2.5 trillion in a 52 week period as the “policy makers” used the US Treasury’s balance sheet to bailout Wall Street’s big banks.

This is “implementing market stability” of a kind; the kind of “market stability” that ends in national bankruptcy.  But when will that happen? When bond yields in the Treasury market rise above an unknown threshold, possibly around the 5% seen in the chart below, though that is pure speculation on my part.  What isn’t speculation is that bond yields (Red Plot) in the corporate, municipal, and US Treasury markets have been rising since the summer of 2016.

As they do bond prices decline, and this is the problem as Wall Street has bundled most bonds trading in the bond markets with interest-rate derivatives to “hedge interest-rate risks.”  Right now these derivatives are worthless. But as interest rates continue to rise they will come into the money and become tens or even hundreds of trillions of dollars in liabilities to someone.  

Who stands behind these derivatives?  The big banks would say that they do, but as we discovered during the mortgage crisis, it was actually the US Government that ultimately did, as seen in the Real National Deficit chart above.  This is what we’ve come to expect when we have the best Congress money can buy.