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Ben Bernanke Has Become The Pied Piper Of Momoism

Tyler Durden's picture




 

Today will be day 12 of 13 (or something just as silly) that the market has been melting up on no volume: yet another truly ridiculous statistic in the anals of momoism. As David Rosenberg points out: "the market has been able to digest California, Dubai, and Greece" - and this has all been offset by what? Merely promises of ever increasing liquidity and bailouts by the Fed, first domestically, and soon internationally. Have people really forgotten yet again that this is precisely what got us on the verge of a historic collapse in the first place? Yes, the Fed bailed capitalism out last time around (with about 3 hours to spare), but this time it has gone dodecatuple all in, and unless intelligent, and very rich life, on Mars is discovered pretty quickly, this will all end in ruins (certainly those of the Marriner Eccles building).

Speaking of momentum, as everyone rushes to find ever greater fools (no scarcity these days), the economic condition is forgotten. But the market is a leading indicator skeptics will say... Perhaps, in every other Keynesian situation that did not have global sovereign default on the other side of the crossing. We are now truly in a unique situation where the market is a leading indicator of nothing but greed and stupidity (in retrospect, that's not all that unique). Here is a good recap of where we have been, and where we are, courtesy of Rosie (who we hope is sufficiently inebriated at this point to note the humor in the current situation).

The equity market at any given moment of time is one part reality and three parts perception. Our friend, Brian Belski at Oppenheimer was on CNBC the other day and claimed that this was turning into a normal economic recovery. And that is what many market participants seem to believe until they don’t believe it any more. Their resolve has been impressive. But if this were a normal cycle, then:

  • Employment would already be at a new high, not 8.4 million shy of the old peak.
  • The level of real GDP would already be at a new cycle high, not almost 2% below the old peak.
  • Consumer confidence would be closer to 100 than 50.
  • Bank credit would be expanding at a 14% annual rate, not contracting by that pace.
  • The Fed would certainly not have a $2.3 trillion balance sheet
  • And, the government deficit would not be running in excess of 10% of GDP or twice the ratio that FDR ever dared to run in the 1930s.

If this were a normal cycle, then there would be a ‘clean’ 5-6 months’ supply of homes on the market, not the 21 months overhanging as is the case now when all the shadow inventory is included from the foreclosure pipeline.

If this were a normal cycle, then the funds rate would not be near zero and one in six Americans would not be either unemployed or underemployed.

If this were a normal cycle, then mortgage applications for new home purchases would not be down 13.9% year-over-year (just reported for the week of March 12) on top of the already depressing 29.4% detonating trend of a year ago.

But the perception that this is turning out to be a normal sustainable expansion is strong and pervasive, although the reality is that this is just a brief statistical bounce aided and abetted by unprecedented government bailouts and intervention.

While we are inundated with that old refrain about “not fighting the tape”, in our view, this is just a glib excuse to stay long the market because of the herd effect, and to be honest, we heard that same trite rhetoric over and over again back in the spring and summer of 2007.

This is not the time to live in the moment but to plan for the future. It is a time to reflect not what the talking heads have to say on bubble-vision but on what history teaches us in the aftermath of a busted asset and credit cycle. The Nikkei enjoyed 260,000 rally points during its post-bubble era and yet the market is still down 70% from the peak; the rallies were to be rented, not owned.

The Dow in the 1930s saw no fewer than 30,000 rally points that would get investors periodically juiced up that the post-bubble economy was heading back on track from the New Deal stimulus. But go back and you will see that the next bull market did not begin until 1954 even if the ultimate lows in the Dow were turned in 22 years earlier. It was a multi-year tumultuous period that was racked by volatility and manic market performance. The key to success over the long haul was to immunize the portfolio from the massive ups-and-downs, ensure that you were getting paid to take on risk as opposed to paying for taking on risk, and a pervasive focus on capital preservation, dividend yield and dividend growth among blue-chip stable cash flow companies, and income-generating securities, including corporate bonds for those entities that had the capacity to survive.

Despite massive attempts at monetary and fiscal reflation, which did produce periodic sugar-high influences on growth, government bond yields did not bottom until 2003 in Japan and 1941 in the U.S.A. — over a decade after the initial credit collapse. This is not the story that a ‘live in the moment’ investor may want to hear today, but even as the market lurches forward, the economic outlook is more uncertain than is commonly perceived and we believe investors are taking on too much risk to be overweight equities at this time. The primary trend towards consumer frugality, liquidity preference and deflation has not vanished just because of the impressive bear market rally in risk assets that has occurred over the course of the past year.

Yet nobody cares, as the Pied Piper of Monetary Insanity once again leads the Wall Street rats to the euphoria of irrational exuberance, followed promptly by the guillotine. But everybody forgets the inevitable second part.

And speaking of the credentials of the Pied Piper, it would be useful if at least the Fed could keep its swan song song consistent.

What is most interesting is to see how the Fed’s view of the housing market has changed over the past four months (then again, it’s run by the same Chairman who told us that the problems in housing and subprime mortgages would be contained just a short three-years ago):

  • November 2009: “Activity in the housing sector has increased over recent months.”
  • December 2009: “The housing sector has shown some signs of improvement over recent months.”
  • January 2010: No comment.
  • March 2010: “…housing starts have been flat at a depressed level.”

So where should we look to for the next focus of risk flaring? Why, to our beloved creditors of course.

So far, the market has been able to digest California, Dubai, and Greece, but what about China? That could be the next shoe to drop (before Iran — have a look at Israel and the Crisis with Obama on page A21 of the WSJ) specifically the new spat between the U.S. and China over currency policy. Make no mistake, if China does not make a move away from the peg with the U.S. dollar over the next few weeks, there is a very good chance that trade sanctions are going to come our way. April 15 looms large as that is the day when the U.S. Treasury could well declare the Renmimbi as being “manipulated”.

Gold will be a very nice safe haven in this environment (also have a look at Martin Wolf’s article today on page 9 of the FT — China and Germany Unite to Weaken the World Economy). Also see Prompted by Economy, Lawmakers Press China to Address Value Of Its Currency on page B3 of the NYT.

Who cares about any of this, one may ask. The market can only go up, up, up. Yes, if one considers price discovery to be a function of micro volume block buying by algos who have only been programmed to bid the market up. We broke key resistance levels in the past 2 days, and nothing: no major short covering spree, no influx of new buyers. The market has become a stealth melt up mechanism, driven by who knows what money (mutual funds are out), with shorts out. This is precisely the environment that allowed the market to go bidless overnight in 1987. When will this happen - nobody knows. Although if we continue to antagonize the only major foreigner who has allowed the Fed and the government to embark on its ludicrous policy of fiscal and monetary insanity, we will surely find out very soon.

 

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Wed, 03/17/2010 - 12:24 | 268368 TumblingDice
TumblingDice's picture

Strong upside volume would be the indication that the cartel has found the greater fools they were looking for. Having said that, it is hard to imagine this happenning any time soon.

Wed, 03/17/2010 - 12:40 | 268390 SheepDog-One
SheepDog-One's picture

The only time any volume shows up is on selling, so their only answer to passing off the pump to retail is desperately search for buyers ever higher? Didnt have any volume buying at DOW 10,000, lets try DOW 11,000, see if any suckers can be found there! GO momo-Ben, GO!

Wed, 03/17/2010 - 23:19 | 268959 Bthewee
Bthewee's picture

So sorry for Jackin the post - my apologies.

However...

 

I/We have not Seen MARLA - post-comment-edit-or do anything in AT least 2 months!!!

WHAT..... ZH has become of Marla?? and the Great job she has done for this site??

Wed, 03/17/2010 - 23:18 | 268958 Bthewee
Bthewee's picture

So sorry for Jackin the post - my apologies.

However...

 

I/We have not Seen MARLA - post-comment-edit-or do anything in AT least 2 months!!!

WHAT..... ZH has become of Marla?? and the Great job she has done for this site??

Wed, 03/17/2010 - 12:24 | 268369 buzzsaw99
buzzsaw99's picture

The pension funds never sell, they only buy, buy, buy. The perfect bagholders.

Wed, 03/17/2010 - 12:44 | 268391 SheepDog-One
SheepDog-One's picture

And we know the endgame of printing and pumping and stuffing the pensions full of things like 'BIDU', one of the biggest collusive scams ever, thats the govt seizing 401K's, pensions, that story ran the other day in the Wall St Urinal.

Fun times indeed!

Wed, 03/17/2010 - 13:55 | 268453 buzzsaw99
buzzsaw99's picture

Better to rip off the sheeple than the chinese, the sheeple don't have nukes.

Wed, 03/17/2010 - 12:29 | 268376 AnonymousMonetarist
AnonymousMonetarist's picture

Mother should I trust the government?
Hush now baby, baby, dont you cry.
Mother's gonna make all your nightmares come true.'
-Pink Floyd

'A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship. The average age of the world’s greatest civilizations from the beginning of history, has been about 200 years.'
-Alexander Tyler

'The nation is of age and it can do what it pleases; it can spurn the traditions of the past; it can repudiate the principles upon which the nation rests; it can employ force instead of reason; it can substitute might for right; it can conquer weaker people; it can exploit their lands, appropriate their property and kill their people; but it cannot repeal the moral law or escape the punishment decreed for the violation of human rights.'
-William Jennings Bryan

'We all want to believe that the key to making an impact on someone lies with the inherent quality of the ideas we present. The size of the crowd in the theater has a big effect on how good the movie seems.'
-Malcolm Gladwell

'Some people without brains do an awful lot of talking.' -The Scarecrow

Imagine Dorothy as the beguiled American public, the scarecrow as representing indebted consumers, the tin man symbolizing industrial workers, the cowardly lion as the Masters of the Universe and the Wizard as the Oracle at Eccles.

And the yellow brick road as the debasement of the sovereign scrip where Dorothy can return home to prosperity by following this path.

A rhyming version of what many folks think was a hidden message within the Wizard of Oz.

Back then, the United States was on the gold standard. When there was malinvestment causing overproduction, prices fell.

William Jennings Bryan, represented by Baum as the cowardly lion, argued for the right to coin money and issue money as a function of government. He contrasted his platform of legislating to make the masses prosperous whereby their prosperity would find its way up and through every class that rested upon them with his opponents' platform that Bryan derisively opined held fast that if you just legislate to make the well-to-do prosperous, their prosperity would leak through on those below. His opponents argued for sound money.

Today's cowardly lions ,or Nancy Capitalists, are the Masters of the Universe that have literally been given the right to coin money (saved by zero, money for nothing) and issue money (FDIC guaranteed debt, the chits are free.)

Today's Wizard of Oz, the Oracle at Eccles, argues for sound money. Hiding behind the 'I Can't Beleive it is not Capitalism' curtain, he too has been shown as a fraud.

Today's malinvestment cannot and will not result in prices falling, says the Wizard.

Pay no attention to the marks behind the curtain. The operating levers secretly lubricated by the debasement of the scrip cannot be disturbed, discussed or disclosed lest the Emerald City be laid to waste.

Bryan said 'You shall not crucify mankind upon a cross of gold.'

Sorry Bill, the cross has been sold, leveraged, rehypothecated, and is being leveraged again. Sound money is now found money. For the masses? The Dark Side of the Rainbow.

Oh, and in L. Frank Baum's original novels, Aunt Em and Uncle Henry find a refuge in Oz when they are unable to pay their mortgage on the new house that was built after the old one was carried away by the tornado.

'Nuff said.

Wed, 03/17/2010 - 12:29 | 268377 Bearish Spirits
Bearish Spirits's picture

The local Fox here in Chicago has a "business segment" every morning.  The anchors were talking with someone from Fox Business about how the volume has been extremely low lately, even mentioning that it was indicative of a lack of confirmation for this melt-up over the past month.  Considering the generally bullish slant of the vast majority of their business segments, I was shocked...so are they trying to pull more money in, or is the lack of volume so obvious it can't be ignored?

All this as school district layoffs are being announced all over the metro area...heck of a recovery.

 

Wed, 03/17/2010 - 12:39 | 268388 Rainman
Rainman's picture

......and in Cali, 23,000 school teachers got a pink slip notice on the March 15 deadline for notification.

Wed, 03/17/2010 - 13:22 | 268428 deadhead
deadhead's picture

for me, one of the critical items that we are crossing the rubicon into a further depression is state and local layoffs, particularly teachers.  this is not something to be taken lightly in terms of the signs of the times.  

Wed, 03/17/2010 - 21:31 | 268882 mtomato2
mtomato2's picture

O.K.  Get this:

Remember how we all figured that "maybe someday, if we needed, we could 'fall back' on teaching"

So I had a roofing company.  And we did pretty well from about '95 through '07.  Then (this is a secret) the bottom dropped out of the building industry!  Don't tell anyone.

So I went back and got certified to teach High School math through Senior Calculus.  I figure: any warm, carbon-based life-form should be able to get a job teaching CALCULUS!

No soap.  They're not even hiring math teachers.  Not even astute middle-aged man ones. 

This MUST be bad.

 

 

Thu, 03/18/2010 - 00:44 | 269021 faustian bargain
faustian bargain's picture

It's the third year in a row the state schools budget has been cut. Local districts are going to be leaning on the taxpayers.

Wed, 03/17/2010 - 13:30 | 268435 1fortheroad
1fortheroad's picture

I was wondering why the market gapped up this morning.

Wed, 03/17/2010 - 16:12 | 268551 Ripped Chunk
Ripped Chunk's picture

Only the beginning.

As states and localities increase taxes on everything that moves, burns is wearable or edible while simultaneously laying off workers, the death spiral becomes unstoppable.

Wed, 03/17/2010 - 13:15 | 268418 CB
CB's picture

and the zombie citizens yet again do not respond because there's still one more beer in the fridge and a twinkie in the pantry.

Wed, 03/17/2010 - 14:21 | 268486 Headbanger
Headbanger's picture

And the most important thing of all: There's still gas in the tank.

Thu, 03/18/2010 - 01:35 | 269045 merehuman
merehuman's picture

and cable.

Thu, 03/18/2010 - 07:34 | 269113 Reflexivity
Reflexivity's picture

 

+1 Agreed.

Wed, 03/17/2010 - 12:35 | 268381 ZakuKommander
ZakuKommander's picture

The raccoon sits poised just outside the trap [don't worry, it's a Hav-a-Heart trap; no raccoons will be killed in the making of this post], eyeing the juicy apple inside.  Waiting, waiting.  It knows it's a trap, but the apple gets riper, the raccoon gets hungrier, and it finally decides . . . "well, the trap hasn't sprung yet, and I am nimble, so let's have a go!"

Those algos are so lulling, so comforting . . . 

 

Wed, 03/17/2010 - 13:41 | 268442 crosey
crosey's picture

Great visual analogy.

Wed, 03/17/2010 - 17:09 | 268636 RockyRacoon
RockyRacoon's picture

I ain't fallin' for no apple!  No way, no how. 

Got gold.

Wed, 03/17/2010 - 21:33 | 268884 mtomato2
mtomato2's picture

I'm glad you said that part about the Hav-a-Hart trap.  The person who was offended by the use of the term "Dead Cat Bounce" might have come for you.

Thu, 03/18/2010 - 00:47 | 269022 faustian bargain
faustian bargain's picture

I tell ya, you can't swing a dead cat without hitting a trap for some unsuspecting raccoon.

Wed, 03/17/2010 - 12:39 | 268389 economessed
economessed's picture

Everyone has their favorite historical analogy to compare this market to, and I continually draw parallels between this stock market and the Beanie Baby craze that played-out during the early days of eBay -- around 1998 give or take a year. 

For some reason, people convinced one another that a mass-produced $3 plush toy was intrinsically valuable, and bid prices north of $400. 

Human behavior is highly maleable, and stupidity is a fuel source that powers the cyclic engine of boom and bust.

Wed, 03/17/2010 - 15:39 | 268556 Ripped Chunk
Ripped Chunk's picture

I remember that fiasco.

Similar situation when I saw the PS III "rights" getting bid up over $2k on ebay.

What the fuck were they thinking?????

 

Wed, 03/17/2010 - 12:45 | 268393 crzyhun
crzyhun's picture

Everyopne is 'in' but like Jason B is looking for three exits at the same time

Second, like a charmed snake this market is rising on illusion. Just who is the charmer. Any guesses? The first two don't count...the administration through its lap dogs is the winner. Whether Ben, GS, FRBKNY et. al.

Wed, 03/17/2010 - 12:46 | 268394 john_connor
john_connor's picture

This is a time to just look out for your family and remove all capital from the system.  The NY banking cartel will destroy themselves eventually.

Wed, 03/17/2010 - 12:58 | 268400 SheepDog-One
SheepDog-One's picture

Agreed, john conner. Im not near nimble enough to out-guess Jason B. on his multiple exit strategies all day long. I'll take 100% safety and just clear the blast zone. Let the zombies eat each others damn brains, Im sick of this.

Wed, 03/17/2010 - 15:19 | 268537 Whizbang
Whizbang's picture

Or you could just purchase options as a hedge. Thats the difference between the average retail investor and the pro. Hedges...

Wed, 03/17/2010 - 16:47 | 268612 Celsius
Celsius's picture

Hedging attempts to hide risky investments. Systemic events can prohibit counter parties from meeting their obligations. AIG CDS's are a perfect example, because without the government bailout the investor hedges would have failed.

Fri, 04/09/2010 - 16:41 | 293606 orangedrinkandchips
orangedrinkandchips's picture

AND HOW brother! just so sick and tired of this crap, enough to make you really sick.

Today I did selling, even the ones I think are solid....hell no. Fuck no they are not.

Who is inflating this market?

 

God, sometimes like lately I think I am so alone, fucked in the head and wrong, wrong, wrong....I cannot shake the shit that T-bone goes over.

I cant change horses in mid-stream. Once I do, it's all over.

Mutual funds? nah...I think this is a good old fashioned short covering...

 

Wed, 03/17/2010 - 12:54 | 268398 SheepDog-One
SheepDog-One's picture

'April 15 may well be the day the Treasury declares the Renmimbi 'manipulated'"

Pretty bold statement coming from the kings of manipulation themselves! Like pirate crews accusing each other of stealing. Arrrrrgh, mateys.

Great article, Tyler.

Wed, 03/17/2010 - 14:07 | 268468 merehuman
merehuman's picture

Pirate economy limping along on a swaying deck in turbulent seas

Wed, 03/17/2010 - 12:59 | 268401 Headbanger
Headbanger's picture

As long as ol Wiley Coyote doesn't look down when he runs off the cliff... That's the market we've got now.

Wed, 03/17/2010 - 13:01 | 268404 Prof Gulliver
Prof Gulliver's picture

The market is also digesting Rosie and spitting him out. He may be a great philosopher, but as a stock analyst and predictor he is awful. This game will go on until eternity. Madoff would still be going strong if only he could print money. Let's face it, folks. All of us expecting a crash based on fundamentals are never going to see it. WE are the sheeple.

Wed, 03/17/2010 - 13:18 | 268423 Missing_Link
Missing_Link's picture

Good point.

Those who believe fundamentals still matter really need to answer the question:

What are the mechanisms that cause the market to correct to the fundamentals?

And why are those mechanisms no longer working as they should?

If we believe the market must eventually revert to the fundamentals, what are the mechanisms that could cause that to happen?

Or is the belief based on "efficient market" theories that may once have been valid but have been invalidated since the 1990s by momentum-driven quantitative algo trading?

Wed, 03/17/2010 - 14:13 | 268479 merehuman
merehuman's picture

Since we are no longer a country of Laws

anything is possible. Most certainly a higher crime rate.

Until Law is restored there is no market, only a sham of collusion.

 

Wed, 03/17/2010 - 16:27 | 268593 GS is short Gold
GS is short Gold's picture

technical analysis no longer works either. The only thing that works is being on the inside of the good ole boys network. 

Thu, 03/18/2010 - 01:39 | 269048 merehuman
merehuman's picture

or on the outside, planting your garden on this sunny day and ignoring the whole show while your PMs are safely stored.

Wed, 03/17/2010 - 23:06 | 268945 Tethys
Tethys's picture

Well, I would say that the primary mechanism for the market to correct on fundamentals would be for more people to become aware of what is going on.

And the primary mechanism for making people aware of what is going on is the mainstream media.

And the mainstream media is controlled by... oh my.

 

Thu, 03/18/2010 - 00:50 | 269024 faustian bargain
faustian bargain's picture

What we need to do is convince N.N. Taleb to be a contestant on Survivor...

Thu, 03/18/2010 - 07:38 | 269116 Reflexivity
Reflexivity's picture

Why?... So, his messages and mutterings get picked up by Joe 6-pack and Jane-the-desparate-housewife who are addicted to prime time TV (since they never end up in the bookstore, let alone the philosophy of finance section)?

 

Wed, 03/17/2010 - 13:41 | 268440 economessed
economessed's picture

This is the theory of univariate valuation -- establishing a value using the object itself as its own measure of intrinsic value.

But I disagree with that assumption -- valuations are set in context of something else.  In the short run, we can ignore external comparators when we decide to buy a stock (it was up today, I think it will go up again tomorrow).  In the longer-term, facts matter.  Dot com, housing, tulip bulbs, whatever. 

The stock market and fundamentals parted ways at some point over the past 14 months, never to have seen one another since.  They'll meet up again soon, and one of them is going to be profoundly mis-aligned with the other.

Wed, 03/17/2010 - 18:39 | 268746 deadhead
deadhead's picture

very well said.

Wed, 03/17/2010 - 14:06 | 268470 crosey
crosey's picture

Never is a very long time, and assumes that control can be maintained.  That's the myth.  Control requires that all global players agree, all the time.  Now that is the only "never" that has ever happened.

But it is very true that the market can remain irrational far longer than we can remain liquid.

Wed, 03/17/2010 - 15:01 | 268515 Prof Gulliver
Prof Gulliver's picture

Never will be interrupted by short-lived episodes such as we had in 2008-early 2009. Then we will resume the rationally irrational flight to eternity. And next time it will be more short-lived. They know how to play the game now.

From "Never Give a Sucker an Even Break":

Card player to WC Fields: "Is this a game of chance?"

Fields: "Not the way I play it, no."

Wed, 03/17/2010 - 15:06 | 268518 masterinchancery
masterinchancery's picture

It can sure go on for a long time with enough help from high places; a great example being John Law and the Mississippi Scheme in the France of 1715 to 1720. Ultimately, however, the result was catastrophic bankruptcy that permanently damaged the French economy, with promoters like John Law fleeing for their lives.

Wed, 03/17/2010 - 13:01 | 268405 1fortheroad
1fortheroad's picture

Exactly and they can keep this trap going for months, maybe years,

its just a constant spin. The trap is called greed.

Thu, 03/18/2010 - 01:43 | 269049 merehuman
merehuman's picture

Its  also been said that the "market" was bigger than the PPT. So now which one is true?

Either they can do this forever or

The "market" is bigger.

Wed, 03/17/2010 - 13:09 | 268414 SgtShaftoe
SgtShaftoe's picture

Has anyone studied stock charts of nations that begin to enter hyperinflation?  It's a question not rhetorical.  I wonder if this is a direct result of monetary inflation, showing up as first sign in markets.  Seems like this could be a wall of worry to me.  However,  nominally and retrospectively, money in the market should lose a little more purchasing power against gold.  

Wed, 03/17/2010 - 13:17 | 268422 ghostfaceinvestah
ghostfaceinvestah's picture

I think you are absolutely correct.  I have been saying this for just about a year now.  $1.25T in money printing for MBS, it has to go somewhere, and it sure as hell isn't going to the peasants.

And it's not just the stock market.  Oil, copper, etc all outperformed the stock market last year from the bottom.

What we are experiencing is no different than Zimbabwe, just a milder form, for now.  I expect some pullback when the MBS buying stops, but it will probably be temporary as you know Zimbabwe Ben will panic and print more money.

http://mises.org/daily/2532

Wed, 03/17/2010 - 13:30 | 268436 SgtShaftoe
SgtShaftoe's picture

Agreed. If we believe in an inflationary outcome, we must consider the possibility that the market will not get any meaningful correction.  (Fundamentally it will happen in terms of gold.) I happen to believe that we've seen a bottom in stock prices in dollar terms.  We can have both a upward moving market, and loss in real value.  I also don't expect for the prices to track perfectly against commodities.  The shennanigans at work behind the scenes may make temporary noise in prices of the baseline commodities like gold.  It's an election year this year, and everyone wants the wrapping of the economy to "look" good.  They may be able to pull that off for a time, but I expect we could have a explosive correction after that. 

Thu, 03/18/2010 - 01:16 | 269035 Oracle of Kypseli
Oracle of Kypseli's picture

Did we not learn justifying sky high PE ratios during he dotcom bubble?

How can investors justify high PE ratios, no volume markets and high unemployment and pour money in the market now?

The market is stalled, within a 500 points. It doesn't matter how much money BB prints and the PPT pumps the market, when the average Joe starts pulling out to buy milk and gas, it's game over. No. The game can not go on forever. Something has to give. I am betting on PM's and agri-products. 

Wed, 03/17/2010 - 13:09 | 268415 Missing_Link
Missing_Link's picture

Hasn't the market always been driven by greater fools?

Really.

That's how fools become kings, and methamphetamine-addicted button-bashing morons like Jim Cramer get their own investment shows on CBNC.

When money can be printed electronically and channeled from there directly into the market, I don't see what the force is that can stop it.

Wed, 03/17/2010 - 15:10 | 268524 masterinchancery
masterinchancery's picture

But nothing goes on forever, and, as Jim Rogers likes to say, trees don't really grow to the sky.

Wed, 03/17/2010 - 13:13 | 268416 dvsteenk
dvsteenk's picture

Could the triple witching on coming Friday have anything to do with this run up?

Wed, 03/17/2010 - 13:47 | 268449 Cyan Lite
Cyan Lite's picture

Quad witching to be exact...

Wed, 03/17/2010 - 13:16 | 268420 BlingBlingBen
BlingBlingBen's picture

Printing money equals job security!

Wed, 03/17/2010 - 13:20 | 268425 deadhead
deadhead's picture

once again, the Fed has clearly and unequivocally failed.

bernanke, like his mentor clone greenspan, has created another bubble but this time it is an echo bubble.

by the way, in addition to Tyler's Keynesian comment, people need to recognize the impact of a major global bank crises that we are currently experiencing and is still in its infancy, maybe toddler stage.

Wed, 03/17/2010 - 13:22 | 268430 Waterfallsparkles
Waterfallsparkles's picture

I think about the Squirl in Ice Age.  After accumulating a huge reserve of Acorns on top of the Ice Mountain he tries to Ram just one more into the hoard of Acorns he has accumulated.  It cracks the Ice and all of the Acorns are released and fall down the Mountain.  This action is what creates the Ice Age.

The Squirl then fendishly chases the last Acorn no matter what happens.  But, no matter what he does he cannot catch or keep the last Acorn.

Everyone in the market is chasing the last Acorn.

Wed, 03/17/2010 - 13:50 | 268450 hambone
hambone's picture

market up, up, up. Good news is good and bad news is good.

So be it…as has been said, the market is a voting machine in the short term but a weighing machine in the long run. The vote now is up. I guess I'm waiting for the eventual weigh in. I do the eyeballing of the upside and downside potential and, just to be fair, seems good to be open to both the potential of a bull market and a bear market.

A quick tally:

Bull:

-momentum…trend is your friend and all moving averages and market signals are bullish and highly confident

-low Fed interest rates for largest borrowers for "extended period" and great spreads on loans (0% from fed, loan for average 15% to consumers = infinite returns)

-improved earnings for larger companies via reductions in spending, low labor rates

-growth in emerging markets available for those mid and large companies w/ international exposure

-rising US employment #'s likely for near term

-restocking still under way (inventories still very low)

-Dubai, Greece, US/EU financials, homebuilders, car makers, etc. all bailed out and further state support available, if / when needed.

-dollar is weakening again aiding US exporters

-Bid under market? tin foil brigade growing??

Bear:

-market looks overbought, overconfident, w/ extremely low "cash on the sidelines" judging from mutual funds, etc.

-market valuations (PE's) over 21 on a 10yr trailing average…seem stocks are at historically high valuations.

-consumer confidence at record lows

-consumer credit low (MEW's non-existent, credit cards pulling back) and very expensive

-consumer income flat to down, reduced benefits, higher co-pays, etc.

-jobs being created are of lower quality, lower pay than those lost (think census, service, etc.)

-consumer spending? continues down based on real time state by state sales tax receipts

-business top line sales not growing

-new housing still not turning around due to excess capacity and ongoing foreclosure's

-25-50% of mortgage holders have little or no equity in their homes

-CRE and RRE both have significantly more distressed buyers to be dealt w/

-FASB or some type of more realistic accounting in the wings? for banks to deal w/ HELOC's and the like held at par value on upside down properties when true value is $0.00 recovery - plus banks have no loan loss allocations for these losses helping their present balance sheets.

-accounting fraud and gimmicks (see Lehman) likely endemic and potential regulations to improve true visibility to company balance sheets / risks

-interest rates can only go up…and how high?

-total outstanding credit continues to decline (deleveraging) and available credit to small business / consumers decreasing

-input costs (oil) rising back above $3 gallon and beyond (another drag on consumer discretionary spending)

-health care costs still rising rapidly annually (another blow to consumer)

-federal annual and long term deficits ballooning…will mid term election losses for Dems change willingness to continue adding on to our tab?

-Fan / Freddie continue to hemorrhage w/ over $225 billion in losses so far. Will these "implicit" fed guarantee's be forced onto the deficit and add another $6T to the $12.5T deficit?

-SS is no longer a net source of revenue for the government to borrow from and is now an annual liability w/ an annual net deficit…billions more in borrowing will be needed to bridge this gap annually that is not in the budget.

-stimulus funds, tax credits waning and Fed MBS program ending March 31…no $ allotted for continuation in budgets

-states, pensions need a 'bailout" to avoid deep cuts…likely to be added on top of this years $1.6T deficit (along w/ bills being passed daily over and beyond the record deficit budget). This won't matter till it matters?

-20% of American GDP looks likely to be under US gov control in the looming health care bill.]

-China / US trade relations deteroriating and China slowing lending / raising interest rates sooner than later

-Sovereign crisis looming for the developed world…not now, but when and what will be the signal that Japan or UK or Spain or Italy or US cut spending or face significantly higher interest rates (risk premiums) for continued borrowing?

Seems all the bear case has been shelved until who knows when and the focus is on a V shaped recovery (regardless if the only V is the stock market and not the economy). Likely at some point the real economy and real global debt issues in the bear case will need to be addressed and then the markets weighing machine will likely show some significant imbalances. Till then, I guess it's time to go long?

Wed, 03/17/2010 - 16:30 | 268597 Sisyphus
Sisyphus's picture

A great list hambone. Thank you! There is no way I'm going long this market and will not even try to fight the Fed by going short. I am staying out of this market. I am sure, one day, and it might be many years away, the market will reverse to its mean, and I'll have my chance to go long again. Until that time, I'm out and I send all you master traders my best wishes.

Wed, 03/17/2010 - 19:40 | 268800 ZeroPower
ZeroPower's picture

Great cliffnotes thanks man

Wed, 03/17/2010 - 13:56 | 268454 ratava
ratava's picture

10777 baby!

Wed, 03/17/2010 - 13:58 | 268456 hambone
hambone's picture

All resistance or thinking is futile - buy or be damned.  Accckkkk.

Wed, 03/17/2010 - 14:00 | 268461 estrader
estrader's picture

I have thrown in the towel.   I can no loger be short this fucking joke of a market.  No more pain.  Can't take it anymore. 

Wed, 03/17/2010 - 14:05 | 268466 buzzsaw99
buzzsaw99's picture

If you can't stand the heat stay out of the kitchen.

Wed, 03/17/2010 - 14:13 | 268478 Missing_Link
Missing_Link's picture

Good.  Don't fight the tape.  No point tilting at windmills.  You have to listen to what the market is telling you.

Thu, 03/18/2010 - 07:44 | 269120 Reflexivity
Reflexivity's picture

I have thrown in the towel.

That is usually the time (or shortly thereafter) when the market will do exactly what you had predicted.

Wed, 03/17/2010 - 14:03 | 268462 hambone
hambone's picture

Estrader - at least wait for the 30-50% retrace before selling - even if market is going up forever, you'll get a more attractive exit point soon.

Wed, 03/17/2010 - 14:47 | 268505 merehuman
merehuman's picture

Meanwhile average Joes like me sit at home, read this and ask myself...how long can this last?

In june like every year i have to renew bond and liability insurance and pay the state to keep my const.contr. lic. This year i doubt i will pay the little more than a 1,000.00$  My business income averaged 35 thousand per year doing my own work.Last year it was 5,000.00. This year less than 2. going by whats happened so far. Averaged 2 houses per month last 13 years. Now its 1 house per 8 months. Having to find a new market in repairs and even thats not happening.

Many Oregon carpenters, plumbers and other trades men are self employed. No show on the unemployment reports. If it werent for the tourists and the SSecurity we would be a ghost town.

 

  To me it seems we are a dying nation. Death due to ignorance and greed is coming our way. We go on each day as if life were normal, but its certainly far from normalcy.

Outside the sun shines today, brightening the early spring colorful panorama of new growth.

It feels more like an episode of twilight zone

 

Wed, 03/17/2010 - 15:30 | 268548 HumbleServant
HumbleServant's picture

merehuman,

I feel your pain.  In my company, we had to lower our prices and cut wages to stay in business but now our cost of materials has started going back up.  My employees are complaining because they're barely making it but I'm making less than they are and I'm the owner!

I try to keep in mind that 40% of the earth's population lives on less than a dollar a day so we're still among the richest on the planet.  We are leaving the era of the most freedom and wealth enjoyed by any people in history.

One thing I have noticed from talking to my customers is that people who have been in business for a while (and enjoyed the profits during the biggest building bubble in history) think that business is really bleak right now but young people just starting out think that business is great because they don't know any better.

You sound like a versatile person so maybe you need to get a different kind of business started.  Hang in there, count your blessings (literally) and keep in mind what is really important.

Thu, 03/18/2010 - 01:49 | 269050 merehuman
merehuman's picture

many of my compatriots in the trades dont have as much put aside and i see them struggle and the stress it causes. Multiplied across the country that makes for a hell of a cultural change.

Wed, 03/17/2010 - 14:48 | 268506 estrader
estrader's picture

At this point I cant see how anything can change this.  There is no one to sell stock.  There is no one to dare short.   I can see this going on forever.  Only a black swan event will change this,  and who knows how long it might take for something like that to happen.   The Nasdaq is up 90% from the low.  VIX @ 16.50???   Who are people kidding here???  Even a monkey can see none of this is organic buying,  just HFT manipulation. 

Wed, 03/17/2010 - 15:39 | 268557 Racer
Racer's picture

This reminds me of oil going to $135

it kept going up until it stopped and then it didn't stop going down for a long time..

after a while you run out of buyers and with no shorts left to squeeze, just a few sellers will start the snowball rolling downhill,

Wed, 03/17/2010 - 15:50 | 268568 1fortheroad
1fortheroad's picture

Resistance is futile "You will be assimilated"

Wed, 03/17/2010 - 18:31 | 268729 ghostfaceinvestah
ghostfaceinvestah's picture

1.25T in Fed MBS money printing ends in 2 weeks.

Wed, 03/17/2010 - 14:58 | 268513 rhinotrader
rhinotrader's picture

Never seen so many really smart traders blown to bits (19 years trading). Most impressive move one-way I have ever seen for US. Everyday........Who will be holding the bag on this musical chair mkt? I wish I could get bigger short but I don't want to be carried out on my shield. Good luck!

Wed, 03/17/2010 - 15:07 | 268521 trillion_dollar...
trillion_dollar_deficit's picture

Why is any of this a surprise?

TD posted the chart several months back showing the perfect correlation between QE and the rise of the market. This is merely the last grasps of the QE effect. Once we get into April it should get real interesting.

Wed, 03/17/2010 - 15:24 | 268544 Stuart
Stuart's picture

They're not going to stop QE when the Gov't above all others cannot afford higher rates.

Wed, 03/17/2010 - 15:34 | 268552 deadparrot
deadparrot's picture

That's why I think these protectionist attacks on China and saber-rattling toward Iran are happening right now. The govt can't keep QE and manipulation going on forever. They have to know that debt downgrades and/or market volatility is right around the corner. Think like a corrupt politician. What you need is a scapegoat. Blame the economic meltdown on China and Iran. No one is better at pointing fingers than our govt.

Wed, 03/17/2010 - 15:44 | 268563 Ripped Chunk
Ripped Chunk's picture

QE to infinity and beyond!

Or darkness as they shovel the dirt on.

 

Wed, 03/17/2010 - 17:08 | 268635 Assetman
Assetman's picture

Yep.  The policy makers in Washington are searching for convenient excuses to pull out once TSHTF.

China and Iran are obvious.  The PIIGS in Europe have bought some good time, making the USD look better than it really is...

Most intriguing is our current rhetoric toward Israel.  You just get the feeling that something really funky is going to happen in the Mideast and cause a panic in the oil markets.

As for QE, Ben will do whatever it takes to save the Treasury issuances.  He really can't afford to do much more than that.  Don't put out of the realm of possiblities that Bernanke might start adminsitrating some tough love to the banking system after April.  If he doesn't, it's time to start looking for that shack outside the U.S. borders.

 

Wed, 03/17/2010 - 18:44 | 268753 deadhead
deadhead's picture

As for QE, Ben will do whatever it takes to save the Treasury issuances. 

it's all about the bond market.  well said as usual assetman.

Wed, 03/17/2010 - 15:17 | 268533 Captain Willard
Captain Willard's picture

When ZH no longer posts Rosie's letters, it will be time to go short.

Wed, 03/17/2010 - 15:25 | 268545 DavosSherman
DavosSherman's picture

I wouldn't ask Bernanke for directions to the rest room - for I'm confident I'd wind up walking in the ladies room.

 

Wed, 03/17/2010 - 15:29 | 268547 deadparrot
deadparrot's picture

Does anyone really think the Fed can manipulate the markets forever? I certainly don't. If they could, would we have had a financial crisis in the first place? Seems to me the Fed is a lot like cop staring down a gang when he has no bullets in his gun and no batteries in his radio. The Fed controls the markets for as long the Fed can fool everyone into thinking they can.  

Thu, 03/18/2010 - 01:52 | 269051 merehuman
merehuman's picture

Planned crisis more likely.

Wed, 03/17/2010 - 15:42 | 268559 crosey
crosey's picture

This morning I had a thought while shaving.  Ben B's conviction is to avoid deflation/depression (at all costs) and avoid the mistakes of the last depression.  His argument would be convincing.  So this becomes the path on which they embark.  But has it ever been tried on this scale, and in the presence of the (tottering) global financial landscape?  I think not.  Any simulations run would be merely theoretical, even if all assumptions were included in the simulation.

As such, IMHO, Ben's approach will not be the solution.  In history, it will be reviewed as another approach that should not have been deployed.

Perhaps by Depression III, the incumbent wizard will have the balls to adhere to Occam's Razor....and recall that the simplest solution is often the right one....and just let the market correct itself.

Wed, 03/17/2010 - 15:47 | 268566 Racer
Racer's picture

If they hadn't fiddled and interfered so much up to now, it wouldn't be in this much of a mess anyway

Wed, 03/17/2010 - 16:00 | 268572 crosey
crosey's picture

+1.  Definitely FUBAR.  I love the line from "Contact"....."first rule in government spending is why buy one, when you can have two at twice the price."  Thank you S.R. Haddon!

Wed, 03/17/2010 - 15:47 | 268565 BlackBeard
BlackBeard's picture

I smell skittle rainbows and cotton candy unicorn poop on the horizon! WEEEEEEE!!!

Wed, 03/17/2010 - 16:02 | 268573 Racer
Racer's picture

7/1/05 - Interview on CNBC

INTERVIEWER: Tell me, what is the worst-case scenario? We have so many economists coming on our air saying ‘Oh, this is a bubble, and it’s going to burst, and this is going to be a real issue for the economy.’ Some say it could even cause a recession at some point. What is the worst-case scenario if in fact we were to see prices come down substantially across the country?

BERNANKE: Well, I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.

Wed, 03/17/2010 - 16:27 | 268592 Overpowered By Funk
Overpowered By Funk's picture

The man is clear in his mind, but his soul is mad.

Wed, 03/17/2010 - 16:33 | 268602 Ludic Fallacy
Ludic Fallacy's picture

Where can I find accurate volume measurements for the S&P 500?  Something that shows volume on an hourly scale, and daily?

Wed, 03/17/2010 - 17:26 | 268661 stoverny
stoverny's picture

I am surprised by how many people are suddenly popping up saying "fundamentals don't matter" and "the money-printing scheme can continue for infinity".

Are people really believing this?  Sounds like we are nearing the collapse when even clear-eyed Zero Hedgers start sounding like the Pets.com bulls of the tech bubble era.

Wed, 03/17/2010 - 17:28 | 268665 Racer
Racer's picture

You can only bash your head against a wall so many times, or more like get it bashed for you so you start believing all sorts of stupid idiotic things 'they' want you to believe.. after all they keep peddling this Hopium and after a while with all your skull fractures you finally have to take it to keep the pain away

Wed, 03/17/2010 - 18:35 | 268736 ghostfaceinvestah
ghostfaceinvestah's picture

I've been saying this for over a year.  I told people shorting in the face of 1.25T in MBS purchases was pure suicide.

Personally I didn't buy stocks, but commodities, and they did even better than the stock market.

But just wait two weeks, the end of the MBS money printing will end, at least temporarily.

Wed, 03/17/2010 - 18:14 | 268704 gmak
gmak's picture

Annals has two 'n's. Anal is the first part of the word Anal-yst. -OR- related to that part of anatomy that many don't know from a hole in the ground.

Thu, 03/18/2010 - 01:02 | 269029 faustian bargain
faustian bargain's picture

Pretty sure it was an intentional misspelling. The Tylers have done that one before. ;-)

Wed, 03/17/2010 - 19:33 | 268765 hambone
hambone's picture

Two possibilities occur to me now:

1- we are very near the top where all bears are thoroughly broke, defeated, and repudiate shorting and instead take long positions.  This would be the natural state of a roll over when all money's have flooded one side of the boat and big players see the imbalance, switch sides and make a ton going short.

OR

2- the fed can't allow interest rates up or market down (as this would destroy fed budgets, pensions, credit, etc.) and will keep a bid indefinitely for both...

More and more are moving to the 2nd proposal and we should know fairly soon (mid to late April seems right) if 1- fed is spinning the plates...2- can continue to do so, and 3- then the question will be for how long and what could disrupt this course? 

BTW - funny thing is if the fed is pumping the market, the higher it goes the lower the volume and thus the easier it is to manipulate?  MBS is a bit more expensive but if all they are doing is eating up new issuance vs. buying up existing bad debt, again the slowing of the RRE and CRE will make it easier to control rates to avoid an interest spike, esp. important for RRE ARM and CRE i/o rollovers.

Last thought, a magician never shows his hand and likewise fed will never admit to anything...the threat of manipulation can be just as effective as the real thing so long as you keep everybody guessing.  Otherwise entire market will become no different than AIG, C, Fred, Fan - wards of the state kept alive by pure, simple moral hazard.

Thu, 03/18/2010 - 08:19 | 268833 Racer
Racer's picture

Yes low volume manipulate up, gives vertical take off and in most cases a crash landing follows when you get the tiny bit of profit taking which is all it will take to trigger a 1987 or 9/11 type drop

 

This market is for fools chasing the last few pennies littered on the ground

Wed, 03/17/2010 - 19:58 | 268810 Caviar Emptor
Caviar Emptor's picture

It's like this. Wall Street always seeks the next Ponzi. Has to. If a shark doesn't keep moving it dies.

After 2000 they moved the party to the credit markets with securitization and all the exotic unregulated derivatives that crashed capital markets in 07-08. Well they've had to cool it with those games. So they're coming home to roost in the old fashioned stock market with the little guys. Bet they can't stand it :) But that's why stock market physics no longer apply. 

Wed, 03/17/2010 - 20:47 | 268850 Itsalie
Itsalie's picture

QE works because there are a bunch of greedy and cynical fund managers out there who like Mr Prince, choose to dance with the music, incentivised and enriched probably by contributions from 401 accounts. Note: they are not stupid, they just choose to go alng with Benny's put and his bailouts. When the market tanks, everyone would be going down, and he continues to get paid. That is the system we have built, and Benny is one of its servants.

Wed, 03/17/2010 - 22:38 | 268869 Vol Addict
Vol Addict's picture

As usual, Rosie hits it square on the head. The problem is, so does everyone on this site, but obviously being right lately has nothing to do with it. In fact it is getting downright expensive. Among his many economic musings, today's policymaking hero, John Maynard Keynes, once warned students about the dangers of applying too much theory to market behavior. His famous quip, "markets can remain irrational longer than you can remain solvent" is a sobering daily reminder that we simply cannot fight The Man.  That said, I continue to marvel at today's dysfunctional markets as implied volatilities across the entire spectrum of products continue to slide to levels not seen since the spring of '07. Merryl Lynch's global volatility index (MOVE) at that time hit an all-time low. We are now approaching those price levels as "investors" continue to reach for yield by selling risk premia, and are being lulled to sleep by the same lullabyes that we heard then. Bernanke talked of "containment" in the mortgage bubble, and Bill Gross said that the vol on the 10yr note would track the yield "for the next decade or so". Obviously, those remarks proved false. The only prediction that was worthwhile at that time came from the great James Grant. He agreed that the subprime crisis was indeed contained, " contained on planet earth!"  As of today, the 10yr implied is making a run at the yield, right around 4.8% (down from the mid teens where it hung sustained from the fall of '08 until QE). And who can blame it with 10yr historical in the low 3 handle? As Gross continues to sell hundreds of thousands of strangles that collar the 10yr yield between 3.40 and 4.00, there are no "natural" buyers of vol left to support prices. Mortgage hedgers have blown out, gotten swallowed up at Paulson's gunpoint, or transferred their entire book of risk to the Fed (in some cases all of the above!). And anyone that was speculating (yes vol speculation is still legal, just not profitable) on volatility has been nuetered by Government (Pimco)intervention.  So what that leaves are vol levels spiralling like a vortex aroung the toilet drain. They will continue to do so until, as in June of 2007, we will need to call a plumber.  Happy plunging!

y

Government

 

Thu, 03/18/2010 - 08:51 | 269136 trichotil
trichotil's picture

vodka bitches!

 

someone had to say it...

Fri, 04/09/2010 - 16:44 | 293615 orangedrinkandchips
orangedrinkandchips's picture

Fantastic piece Tyler....just outstanding!

I came here after the close because I feel crazier than a shit-house rat. WTF!

Heck, im living in the moment now and just like last year....short and wait.

last year was buy and hold.

The beauty of this move lately is that it is not only parabolic at 5.2% for the week but that is generally how these melt-ups end...with a move straight up. Then level heads realize we are on the cusp of another fuck up...

 

but the fed has nothing....

 

it's beyond frustrating for everyone...it's a joke.

 

 

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mark456's picture

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