The third stage of bull markets, the mania phase, can last longer and go farther that logic would dictate. However, the data suggests that the risk of a more meaningful reversion is rising. It is unknown, unexpected and unanticipated events that strike the crucial blow that begins the market rout. Unfortunately, due to the increased impact of high frequency and program trading, reversions are likely to occur faster than most can adequately respond to. This is the danger that exists today. Are we in the third phase of a bull market? Most who read this article will say "no." However, those were the utterances made at the peak of every previous bull market cycle.
Discussion of a market bubble (in stocks, credit, bonds, Farm-land, residential real estate, or art) have dominated headlines in recent weeks. However, QEeen Yellen gave us the all-clear this morning that there was "no bubble." Are we currently witnessing a market bubble? It is very possible; however, as STA's Lance Roberts notes, if we are, it will be the first market bubble in history to be seen in advance (despite Bullard's comments in opposition to that "fact"). From a contrarian investment view point, there is simply "too much bubble talk" currently which means that there is likely more irrational excess to come. The lack of "economic success" will likely mean that the Fed remains engaged in its ongoing QE programs for much longer than currently expected - and perhaps Hussman's pre-crash bubble anatomy is dead on...
Investors who believe that history has lessons to teach should take our present concerns with significant weight, but should also recognize that tendencies that repeatedly prove reliable over complete market cycles are sometimes defied over portions of those cycles. Meanwhile, investors who are convinced that this time is different can ignore what follows. The primary reason not to listen to a word of it is that similar concerns, particularly since late-2011, have been followed by yet further market gains. If one places full weight on this recent period, and no weight on history, it follows that stocks can only advance forever. What seems different this time, enough to revive the conclusion that “this time is different,” is faith in the Federal Reserve’s policy of quantitative easing. The problem with bubbles is that they force one to decide whether to look like an idiot before the peak, or an idiot after the peak...
One of the mysteries surrounding the insolvent, and already once bailed out Spanish banking sector, has been the question why reported bad loans - sharply rising as they may be - are still as relatively low as they are currently, considering the nation's near highest in the Eurozone unemployment rate, and in comparison to such even more insolvent European nations as Greece, Cyprus and Slovenia. Courtesy of the just completed bank earnings season, and a WSJ report, we now know why: it turns out that for the past several years, instead of accurately designating non-performing loans, banks would constantly "refinance" bad loans making them appear viable even though banks have known full well there would be zero recoveries on those loans. In fact, as the story below describes, banks would even go so far as making additional loans whose proceeds would be just to pay interest on the existing NPLs - a morbid debt pyramid scheme, which when it collapses, no amount of EFSF, ESM or any other acronym-based bailout, will be able to make the country's irreparably damaged banks appear even remotely viable.
Still think houses are extremely affordable? Still think rents, especially for rental stream-securitized offerings by Blackstone et al to widows and orphans , will continue rising in perpetuity? Think again. As the following chart from Bloomberg Brief shows, mortgage payments as a % of average consumer incomes has risen to 40%, up from the higher 20% as recently as a year ago, is still rising, and is now back to levels last seen in 2008.
The MSM did their usual spin job on the consumer credit data released earlier this week. They reported a 5.4% increase in consumer debt outstanding to an all-time high of $3.051 trillion. In the Orwellian doublethink world we currently inhabit, the consumer taking on more debt is seen as a constructive sign. The storyline being sold by the corporate MSM propaganda machine, serving the establishment, is that consumers’ taking on debt is a sure sign of economic recovery. They must be confident about the future and rolling in dough from their new part-time jobs as Pizza Hut delivery men. Plus, they are now eligible for free healthcare, compliments of Obama, once they can log-on. Of course, buried at the bottom of the Federal Reserve press release and never mentioned on CNBC or the other dying legacy media outlets is the facts and details behind the all-time high in consumer credit. They count on the high probability the average math challenged American has no clue regarding the distinction between revolving and non-revolving credit or who controls the distribution of such credit. A shocking fact (to historically challenged government educated drones) revealed by the Federal Reserve data is that credit card debt did not exist prior to 1968. How could people live their lives without credit cards? 1968 marked a turning point for America...
Recent activity in asset markets suggests dangerous bubbles are building everywhere. It's time to bunker down and we look at ways to best protect your capital.
In case the world needed any additional proof that the latest housing bubble (not our words, Fitch's) was on its last legs, it came earlier today from Credit Suisse' Dan Oppenheim who in his monthly survey of real estate agents observed that October was "another weak month" for traffic, with "pricing power fading as sluggish demand persists." This naturally focuses on the increasingly smaller component of buyers who buy for the sake of owning and living in a home instead of flipping it to another greater fool (preferably from China or Russia, just looking to park their stolen cash abroad). Quantifying the ongoing deflation of the bubble, Oppenheim notes that the "weakness was again broad-based, and particularly acute in Seattle, Orlando, Baltimore and Sacramento.... Our buyer traffic index fell to 28 in October from 36 in September, indicating weaker levels below agents’ expectations (any reading below 50). This is the lowest level since September 2011."
Yes... a rating agency - the same entity that enabled the last housing market crash - just warned of a housing bubble. How the times have changed - maybe it is different this time?
The financial markets continue higher, and the excesses of the status quo continue expanding with little ill effect (so far). Why is it so difficult to predict the timing of crisis/collapse? The question is equally valid for both bears and bulls; how could all the boosters of housing be so wrong in 2008 when they asserted that "housing is not a bubble"? Here are ten possible factors in why it's so difficult to predict crisis/reset.
The Fed will have to increase QE (not taper it) because systemic debt is compounding faster than production and interest rates are already zero-bound. Lee Quaintance noted many years ago that the Fed was holding a burning match. This remains true today (only it is a bomb with a short fuse). Thirteen years after the over-levered US equity market collapsed, eleven years following Bernanke’s speech, five years after the over-levered housing bubble burst, and four years into the necessary onset of global Zero Interest Rate Policies and Long-Term Refinancing Operations, global monetary authorities seem to have run out of new outlets for credit. In real economic terms, central bank policies have become ineffective. In other words, the US is now producing as much new debt as goods and services.
While some harp on about the growing dangers of yet another housing bubble in the western world, there are other more important things perhaps that are going on in other countries in the world.
As we enter into the two final months of the year, it is also the beginning of the seasonally strong period for the stock market. It has already been a phenomenal year for asset prices as the Federal Reserve's ongoing liquidity programs have seemingly trumped every potential headwind imaginable from Washington scandals, potential invasions, government shutdowns and threats of default. This leaves us with four things to ponder this weekend revolving around a central question: "Does the Fed's Q.E. programs actually work as intended and what are the potential consequences?"
Just a few days ago Alan Greenspan’s latest piece of work was published (October 20th 2013). It’s entitled The Map and the Territory: Risk, Human Nature, and the Future of Forecasting.
Looking at all non-equity asset classes, one would be left with the impression that the December taper is an increasingly likely outcome. Sure enough - bonds sold off again, and have been selling off consistently since the FOMC announcement. In fact they are poised to close at 2.62%, the highest yield since October 22. The dollar, inversely, ramped higher on both EUR woes and the expectation that its destruction may "taper" in the near future. As expected, gold did the opposite of the dollar, and Gartman's latest reco, and continued its sell off for the third day in a row: Thus the taper trade continued for the second day in a row in all asset classes, except stocks of course. Despite breifly dipping into the red shortly after today's conflicting manufacturing reports, the late day ramp was once again on location, and helped push ES nearly to a new intraday high in the minutes before the close, before a shakedown took place just after the close, sending ES sliding after hours, and wiping out the entire 3:30 pm ramp in seconds. It can be seen just where the rug gets pulled moments after the 4:00 pm close of trade. And so we close another week of mad fun with Mr. Chairman's, soon to be Mr. Chairwoman's manipulated, frothy, bubbly, markets.