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By Robert Fitzwilson of The Portola Group

December 15 (King World News) - This May Create A Cascading Collapse & Crisis

In the 1914 film series called “The Perils of Pauline”, the lead character found herself facing a variety of dangers and villains, with each episode ending with what is referred to as a “cliff hanger”.  As investors, we, too, find ourselves traveling through a seemingly endless series of cliff hangers.  Next week promises to be another one....

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The chart below is for the exchange-traded fund called “SPY” which represents the performance of the S&P 500.  Prior to the end of 2012, you can see the gut-wrenching oscillations of the S&P 500, only to be rescued by the various forms of policies emanating from the Federal Reserve.  The last policy of purchasing $85 billion per month of Treasuries and mortgage-related securities essentially meant that the Fed went “all in”.

Few know whether or not it is $85 billion or if it is some number substantially in excess of that.  The effect of it has been that U.S. stocks have be levitated for the past two years and any hint of a correction has been short-circuited, particularly since the start of this year.

We will soon know whether or not the Fed is going to taper.  The imperative to print in order to maintain low interest rates and to fund the Federal budget deficit is well-known.  The problem is that the program cannot continue indefinitely or the Fed will own the bond market.  Who knows how much of the stock market they already own?

If the decision to do some form of tapering is announced, it must accompany new programs and policies to manage the resultant rise in interest rates.  If rates rise in an uncontrolled fashion, it could very well have a catastrophic effect on the equity markets.  You can see that there is a tremendous gap between the current level of $178 and support back at $107, a potential decline of some 40%.  The same potential damage exists for the bond and housing markets.  What makes the pending announcement “perilous” is not the announcement per se.  It will be the accompanying new initiatives designed to mitigate the effects of pulling back on the purchases.

The policies of the Fed and the government have created an environment where corporate profit margins, stock buy backs, and margin debt are at nosebleed levels, and the belief that equities are the only asset class in which to invest.  If and when there is tapering and rates rise gradually, it would not dictate that equity prices would collapse, but a very tricky and delicate balancing act is required by the central planners.  A significant change in any of these factors could lead to a cascading decline in equity valuations.

The metals and miners continue to be subject to periodic attacks by the central planners, but the effects seem to be diminishing.  As above ground gold stocks continue to disappear and demand by Asia remains at extremely high levels for physical metals and mining properties, it feels as if the reversal which we have all been expecting might be at hand.  Investors should continue to take advantage of any short-term declines in both areas just like the major international players such as Chinese and the Indians.

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© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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