3P’s Supporting Massive Market Speculation

Policy, Profits and Propping… that is without a doubt the underlying fundamental support for a massive and growing phase of market speculation that becomes more dangerous with every week that it lurches forward. Once again, the chart that proves this in no uncertain terms:

Note the 3 humps on the S&P500 (orange).  Again we review…

Hump #1 was a massive speculative surge that separated the stock market from all reasonable measures of fair valuation.  It was the terminal phase of a great secular bull market in US stocks.

Hump #2 was not over valued compared to corporate profits, which were generally instigated by the Greenspan inflation that began in 2001.  From this inflation sprang a massive bubble in commercial credit.  Wall Street took over and sold the inflation to the world in the form of dangerous securitized ‘investment’ instruments.  As long as it worked, corporate America flourished; especially financial corporate America.

After the liquidations that inevitably followed Humps 1 and 2, the Bernanke Fed instigated the mother of all monetary inflation attempts as ZIRP (zero interest rate policy) was initiated in December 2008 and remains an accepted, almost forgotten part of the macro landscape to this day.  Add to this an automated regimen of Treasury and MBS ‘asset’ purchases (despite the ‘taper’ jawboning that periodically hits the media) in an attempt to keep long term interest rates down and deleverage the previous bubble, and you have policy working over-time.  Introducing Hump #3, who’s time is coming due if it is to match the roughly 5 year lifespans of Humps 1 and 2.

The point of the chart above is to illustrate that those with an agenda to ride the trend and look smart are correct when they state that the US stock market is not particularly over valued… if one shuts off one’s brain and accepts policy (blue Monetary Base line, which is but one of several money supply measures) as being at all normal or healthy.  Corporate profits (green) are doing great.  All’s good as the S&P 500 is merely keeping up with its fundamentals.

But these fundamentals are 100% dependent upon some quasi financial institution’s will or ability to continue the inflation.  Or, as with Hump’s 1 and 2, the public’s willingness to continue the speculation.  A secular bull market blew out in 2000 as the final speculative surge by the public and wildly imprudent financial ‘professionals’ just expired and fell apart.  In 2007 something went wrong with the Ponzi racket certain big institutions had going, in which they enriched themselves at the expense of the public through an officially supported commercial credit bubble.

Today we are asked to believe that policy, profits and propping can go on indefinitely, and in the most optimistic views, into a new secular bull market.  The public generally believes that a new bull market began early this year after having sat out the first 4 years of the still-ongoing cyclical bull that began in March of 2009.  This is going to end very badly, whether sooner or later.  March of 2014 is 5 years, but there is no guarantee this bull will reach that nice, round number.

The following graphics courtesy of Sentimentrader.

The public (largely dumb money) is now lovin’ itself some stock market.

In fact, in the tradition of the great blow off in 1999/2000, big tech is the center of the speculative attention. This aligns with the recent post A Cyclical ‘Mini Me’ to a Big Secular Event. This is not a new era, and it is a bubble; in policy making or more accurately in market participants’ willingness to believe in policy making.

Ben Bernanke is the same man that everybody hated in 2011. The Fed is the same chronically inflating entity. It is just that this go round the inflation is ‘working’ toward the ends that would appear to benefit the most people, and as with previous inflation-instigated speculations (in crude oil and silver for example) speculators are jumping on this one. Go have a look at the charts of crude in 2008 and silver in 2011. Or how about the Nasdaq 100 in 2000?

This chart was produced in NFTRH 3 weeks ago to illustrate the extent of participation in this echo bubble (again, the bubble is in policy, not so much stock prices this time), which is a cyclical version of the secular thing that blew out in 2000. Does NDX look vulnerable to you? How about when considering the Sentimentrader graphs directly above? Or Rydex cash levels (a lack thereof)? Or current margin levels being employed by stock market speculators? The list goes on.

Bottom Line

Bubbles can go on and on until they expire and meet a furious end. I am sure many people think they will get out at exactly the right time. It’s just a game of musical chairs. Was yesterday’s hard drop anything to be concerned about? Well, recent high flying bubble stocks like FB and TSLA are showing some cracks (and topping patterns). MSFT seems to be blowing upward with hot money thinking it better get a hold of the likes of dependable old Mr. Softie, leaving the high flyers and high valuations behind.

This bubble can endure out to next spring by my work. It can also end tomorrow… or yesterday. The point is that the Federal Reserve, through its automated and destructive policy, has indeed instigated another bubble with speculation running high. A big change is coming. Don’t get played. Forget the 3 P’s; go with the 3 C’s… Caution, Clarity and eventually, Capitalization.

NFTRH is managing events in a clear and grounded manner, in the weekly letter and by in-week updates at the site. It seems clear that one year from now the landscape is going to look very different than it does today. The only way to be in alignment with changes is to see and evaluate the potential and timing for these changes in an ongoing manner, subjecting the analysis to various acid tests along the way. You arrive at your destination intact and ready to capitalize through unbiased and consistent work, not through predictions or holding to dogma through thick and thin.

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