"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Saturday, May 18, 2013

Bubble Views

As the regular readers of this site are now fully aware, I am on record as stating that the current rally in the US equity markets is a gigantic Federal-Reserve-induced bubble that has eclipsed all previous equity market bubbles in modern history.

The disconnect between what is going on in this market against what is going on in Main Street, is growing exponentially larger with the passing of each week. You will have the equity perma bulls crying up one reason after another to justify this aberration but the simple fact is that this is what PAPER ASSET INFLATION looks like. In a deliberately created, ZERO INTEREST RATE ENVIRONMENT, investors looking to obtain a return on investment are forced to put capital into stocks. As stated yesterday, the only RISK is the RISK OF NOT BEING IN THE STOCK MARKET.

I cannot state it any more forcefully than that.

Just for the purpose of illustration, I put together a chart of the S&P 500 detailing in graphic form the extent of the growing bubble. The index is shown on the bottom chart. In that chart is a dark blue line which is the 100 Week Moving Average.

In the upper window is the DIFFERENCE between the weekly closing price of the S&P 500 and that same 100 week moving average. There is nothing particularly exotic about this indicator - it is merely a way to measure OVERBOUGHT or OVERSOLD readings.

I think you will find this rather startling. Go back to the year 2000, the year in which the huge speculative bubble in equities popped and which was the catalyst for the now decades+ intervention by the Federal Reserve to create one bubble after another in attempting to deal with the fallout from the enormous bursting that occurred that year. You remember, first we had the equity bubble, then the real estate bubble, then the commodity markets bubble, then the bond bubble and now once again we have the equity bubble, courtesy of these master meddlers known as Central Bankers.

I drew in a horizontal line showing the peak in this indicator which first came in 2000. As you can see, it extends all the way to the current period. At no time prior to this year, did this indicator reach the peak that occurred in the year 2000. Yes, it came close, particularly in early 2011 after QE1 and QE2 had been implemented and run their course, but it failed to reach that prior peak.

Cast your attention upon this week - since QE3 and QE4, a combined $85 BILLION of fresh money creation each and every month by the Fed, the indicator has not only MATCHED the 2000 peak, it has EXCEEDED IT!  In other words, this is now an historic bubble even when measured against what many correctly believed then and still do now, was a bubble of epic proportions all the way back in 2000.

Quite frankly, I already believed the current stock market rally was an historical mania. After seeing this graph, nothing can dissuade me from that view. How high this thing can go is anyone's guess because they will always be fools saying, "this time it is different". When this bubble explodes however, and it  most certainly will, heaven help us all, as there will not be a single soul to buy it on the way down.


  1. There will be a single soul to buy on the way down....the FED!

    This is one of the reasons we are seeing this paper inflation. Everyone is relying on the Bernanke put, if the stock market starts to slide the FED will save it.
    The stock market is merely another too big to fail entity.

    1. at some point even the feds printing wont work anymore

  2. factor in the unmatched money printing, the hatred/smashdown of other inflatable assets like commodities and gold, the caution around housing, the other nations of the world love for U.S. equities, and the no-yield bonds coutesy of the Fed, this pig *IS* going to go parabolic. Who would have thought that stocks would be the next bubble? I thought for sure it was going to be alternative energy.

    1. hi willydog. already is in parabolic phase ,past 3-4 wks thx..

  3. Hi Dan,
    Great wrap up this week. Appreciated.

    Signs of the bubble, it seems to me:
    a. is that EVERYONE is day trading, certainly around me. And I am getting stock tips from "shoeshine boys" (and 16 year olds are being featured on yahoo as champion stock pickers)
    b. I have finally thought about day trading as gold marks time, & have gone so far as developed a strategy & tactical vehicles for executing them.
    For this I feel like I'm the shoe shine boy of Bernard Baruch's top indicator. But the fact that I know I'm the shoe shine boy / dumb money...does it make a difference ?
    c. Everyone confident stock market & dollar going parabolic. Probably from people who haven't even taken HS geometry.
    d. Set up has been perfect, all the wall of worry obstructions have been climbed: Europe? check. Debt Limit? Check. QE to infinity flows going into stocks? Checks. Feedback loops have been created--bad macro news? market goes up, earnings miss? shorts cover. Earnings beat? flat. Bad stocks are reaching stellar valuations (airlines--has any one ever produced a dividend?)

    Also, everyone one I know qualified for a mortgage has got one in the past 6 months...

  4. I must disagree about the equity bubble.

    The SPY just broke out of a 10 year consolidation last week, and a big move is just getting started.

    Unlike 2003-2007, you are not seeing wild speculation in small cap names, Chinese stocks, speculative tech names, etc. Most of the action has been in the highest quality blue chips only.

    In fact, Investors Business Daily's ratio of small cap growth vs. big cap growth mutual fund performance is still near 2-year lows.

    We have many big cap industrial and material stocks like CAT, AA, X, FCX, SLB which have barely moved. Once they start going along with the small caps, then you will really see some fireworks to the upside.

    The XAU/Gold ratio is now the lowest in history. Lower than 2008, lower than the bear market lows in 1999 - 2000.

    A vicious short squeeze is imminent in GDX. Short positions in GLD, GDX, FXC are near record highs. However that rally will need to be sold into, after giving it about 4 - 6 weeks to run. Nimble traders will be able to make about 40% by scaling in now.

    1. Mark -
      Interesting. Though I think there i individual run ups e.g.
      LNKD: trailing EPS 702, Share price Jan 12: ~63, Over 200 May 2013

      To your point--perhaps we are seeing a rally only in large cap because of the misallocation of capital--i.e. since the few entities are really investing / laying out capital, we are not seeing risk capital flowing to start ups in any way like we did in the late 90s. Companies are buying back stock, increasing dividends, but not investing in capital intensive projects.

      This would also give explanation as to why capital goods stocks aren't moving. No infrastructure spending. The best case in point would be GE.

      I think CAT, FCX, SLB, AA, etc are explained by the horrible performance of the underlying commodities in the case of FCX and AA. SLB is hurting because there is a glut of Fracking suppliers (and I'd imagine therefore less incentive for high risk but lucrative off shore projects). CAT obviously doing poorly because both industrial and precious metals mining bad (not to mention China stalling).

      Funny that utter junk is doing well. Airlines! Buffet on airlines: “It’s been a death trap for investors." If you want one industry to aggressively short when the bubble bursts, try one that doesn't make money even in the best of times.

    2. The 10years is nowhere near enough to end the secular bear of the S&P.
      Its currently in an overextended cyclical bull, which will end in tears.
      The P/E ratio (currently overpriced around 21... and increasing) will plummet in the next cyclical bear, down to around 7, and that will signal the end of the secular bear in stocks.

    3. re when people say pes still undervalued. the E in PE is being subsidized by the fed

  5. Dan,

    you know that this rally has no economic reasoning from an industrial standpoint as silver has not moved with it. Silver is suppose to be an industrial metal and has been sold down iwth the precious metals complex..go figure.

  6. The stock market is not in a QE-induced bubble. This will become painfully obvious to the bears and skeptics when the Fed announces it will scale down and, later, cease QE.

    In fact, the past week's rally is giving you a preview of precisely my view. With the John Hilsenrath article last weekend, and even dovish FOMC member John Williams stating he's in favor of beginning to scale it down, the stock market not only ignored that information, but the S&P 500 gained 2% on the week.

    1. the economic news throughout the world is poor. there is still QE. lets see after the fact, they havent withdrawn QE or zero int. rate policies.

    2. There is a stock mania at present, oblivious to whether QE is up or down.
      QE is going up.. buy stocks (sell gold!)
      QE is going down.. sell gold (buy stocks!)

  7. Dan can you do a comparison of the dow vs from the last gold bull in 1974-1979 and this present run... it seems that we are not going to do a 2008 repeat but rather a 1976 repeat where the dow crashes and gold rises..

  8. Looks like a huge "megaphone" top going back quite a few years.

  9. Ok but wouldn't this be more informative if you used percentage relative difference with 100MA instead of absolute numbers?

  10. "When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates. The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market, triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed."

    Alan Greenspan
    "Gold and Economic Freedom"

  11. Concerning gold, one factor not discussed at all is the cost of production. With oil near 100, I assume the cost of production has gone up a lot and if its not profitable to produce it, new mine production will cease to exist. So one of the consequences of this bear market in gold will be less supply. Wonder what anyone has to comment on this .

  12. Trying to get a handle on the dollar situation. Maybe after cyprus, a lot of rich euro holders decided to get out of euros and into NY high priced condos, and in so doing had to buy dollars. The prices are insane, but perhaps they just wanted out of the european banks. It seems like gold would be a better choice, but for now, its looks like NY condo is the parking place. Any thoughts, anyone.

  13. Dan, did you expect silver to be 20 on sunday night?

  14. Park Avenue "Maids Quarters" Studio For $3.9 Million

    However, to call the emerging, full-blown panic scramble to park cash sight unseen, with zero regard for asking price "a bubble", would a slap in the face of all calm, cool and collected bubbles everywhere. Because any time someone is willing to pay $95 million for a non-duplex one-floor apartment, $44.8 million for a 4-bedroom apartment, $10 million for a two-bedroom, or a paltry $3.9 million for a maid's quarters studio (no really), something far more profound is going on beneath the surface than a simple asset bubble.

    The NYT explains:

    Only 10 floors have been completed in what is intended to be the tallest residential building in the Western Hemisphere — a slender, 84-story tower on Park Avenue at 56th Street in Manhattan. But the top penthouse is already under contract for $95 million.

    In a sence, New York has joined the rest of the world's "wealth parking" capitals, where the only two profitable construction projects are those targeting the uber-wealthy or the mega poor. Middle class: sorry, you are out of luck

    “There are only two markets, ultraluxury and subsidized housing,” said Rafael Viñoly, the architect who designed the tower on Park Avenue at 56th Street, which is called 432 Park.


    I don't know...everything seems out of whack.

  15. I want to apologize for Fridays rant. It is apparent to me now on Sundays headlines that there is now an all out "Sound Money" war and anyone who dares to step in the way will get crushed in the short term. When the JPY bonds finally give way, who knows, but I think comex may just explode at this point. Asia opened and the squeeze sent silver tumbling. Obama is now going to try to offensively lie his way out of everything. A world that I do not understand. I am holding and going to hold miners straight through this craziness. As far as my intent, I hold every thought that this administration is a farce, full of lies, and eventually will cave to impeachment proceedings, if not, there will be two Americas. I am sure by know everyone knows which side I am on. So it goes forward, IRS fully targeting Sound Money, either Obama is IGNORANT or willfully complicit. Take your pick. If ignorant then impeach due to his inability to govern, if complicit (my leanings) then impeach, charge, and run him out of office. As far as the big banks, well lets just say Dimon (a major contributor to Obamas campaign) is willfully complicit. I hold contempt and anger. Today's sermon helped me. We are Rome times ten with a Banking sector acting as money changers. I hope to get some upside before year end. Let us see how the nations debt limit debates go? How about the new healthcare czar who was in charge of targeting tea party non profit applications. This can go on only so long before it ends. Until then, please accept my apology for my anger. My wife found me cleaning all my weapons and talked some sense into to me. I can hang on. We need a meltdown of epic proportions to change the system. I am now rooting for it. Dan, I apologize to you and your readers but watching the CSPAn hearings drove me over the edge. 1000 paper gold and 18 dollar silver with gdxj and gdx to all time lows when printing all over the world exists just does not add up. Collapse is coming.

  16. Also, why did Soros sell his GLD and buy 10 times that amount in the GDXJ? What is going on? why did bloomberg spin this as if Soros is exiting the Gold instead of telling the truth?
    Does anyone understand what is happening other than Japans hari kari is driving the large Japanese bond holders into US Stocks and treasuries? Help?

  17. This is the greatest dive in a 2 minute time frame in the history of silver. It is pretty shocking. From $50 to $20. I hope the buyers down there have the courage and strength to realize $50 again.

    1. No way the stackers could BTFD on that one!
      back up $1.5 in the blink of an eye... and up to $3 higher within 18 hours.

  18. Since the intraday high on gold on 9/6/2011 and silver on 4/30/2011 the same crowd has been saying buy, buy, buy.
    That crowd includes Sinclair, King, Embry, Hathaway, Schiff,
    Turk, etc. That crowd is the most toxic to the gold market.
    They're the ones that will cause this downtrend in PM's to drag on for years. Instead of blaming the bullion banks, that crowd of idiots should be sued for malpractice.

    1. I would just class them as contrarians in the current gold bear climate.
      I don't see how the opinions of a few rich men & their followers can alter the market for years.
      The people saying that (eg Martin Armstrong) say that manipulation of the market by banksters & govt doesnt change the underlying cycles, and then turns around to claim Jim Sinclair will cause prices to drag out for 3years, all the way to $900.
      How does that one work?

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