Still on “Crash Watch” – Investment Watch

by Craig Hemke via Sprott Money News

During the month of September, we’ve been on “Crash Watch” over concerns that a global stock market crash could trigger a liquidity-driven margin call across all asset classes. The clock continues on this week’s FOMC meeting and then into October.

What is “Crash Watch”? It’s like a tornado watch for those of us in the American Midwest. A Tornado Watch is issued when atmospheric conditions favor tornado development. Only when an actual tornado develops is a tornado warning issued. Or maybe think of it this way:


And right now, we’re under a Crash Watch. What are the conditions that drove the clock? Here are just a few:

  • The Fed draining liquidity via QT
  • Much higher interest rates in the US and globally
  • Concern that the sell-off in the US Treasury market could accelerate out of control
  • The rise in the US dollar index
  • Commodity warranty issues in China and elsewhere
  • The yen and yuan sink against the dollar
  • Positive real interest rates when measured against inflation expectations

The main driver of any liquidity-driven sell-off will be US equity markets. The S&P 500 started the year at 4766 before dropping 3637 on June 17 for a 23.7% decline. It has since recovered, but these previous lows are important, and any break from them will lead to bigger losses in the fourth quarter.

So the big question on Crash Watch is: Will the S&P 500 break out and start making new lows in 2022? If it does, the rush to the exits will accelerate as margin calls lead to further selling and these forced liquidations spread to other asset classes.

Check out the S&P chart below. It’s not good. It appears to be breaking through major support at 3900, and if this is confirmed, a test of those June lows would be very likely.

If the June lows are cleared, then the 200-week moving average (currently near 3586) should provide some support, as it did in 2018 and again in 2020. But will it this time?

What if things get out of control? The Fed has been trying to push for a reverse wealth effect since April, and it may very well get its wish. As you can see below, since the advent of the game-changing quantitative easing programs after the Great Financial Crisis, the S&P has consistently bottomed out near the same trend line.

So stay alert and on your guard for a sharp fall in the “markets” in the coming weeks. As with the collapses of 2008 and 2020, stock indexes in freefall could lead to margin call-induced selling in all asset classes, including COMEX digital gold and silver.

For that, see the chart below of COMEX gold represented by the TIP ETF. The TIP is a simple measure of real interest rates, and as you can see, it is very closely related to COMEX gold prices. The TIP has fallen substantially this year as real rates have risen, but COMEX gold prices are down less than 10% year to date. The obvious concern is that gold could move to “get” the TIP if all global markets start moving sharply lower.

Ultimately, the Fed and the rest of the world’s central bankers will face a choice. They can abandon their hardening schemes or they can sit back and watch a total and uncontrollable collapse overwhelm them. Of course, they will eventually choose the former, but global markets (stocks, bonds, commodities, all of them) can get pretty nasty before they do.

Therefore, we will remain on Crash Watch for the foreseeable future. Be careful and be careful. And keep planning accordingly.

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