The financial markets hit yet another series of bumps a week ago.
Those bumps are:
1) Turkey’s financial meltdown.
2) China’s shadow banking issues.
3) Argentina veering towards default.
While these economies are all markedly different, the common theme behind their current financial woes pertains to one dreaded word:
The biggest problem with the epic Central Bank rig of the last five years is that propping up a bankrupt financial system by printing money only works for so long.
The reason for this is that no one, whether it be a country, company, or person, can defy mathematics.
A loan can be extended, it can be restructured, or it can be finagled in countless financial ways. But at the end of the day, if your creditors lost faith in your ability to repay it… it’s GAME OVER.
This issue is now beginning to ripple throughout the emerging market space.
Moreover, the US equity market has entered a kind of mania a may in fact be topping.
Take note of the following:
1) Investors piling into stock-based mutual funds at a pace not seen since the Tech Bubble.
2) Margin debt (debt investors take on to buy stocks) at a record high.
3) Market leaders (Tesla, Netflix, Amazon, etc.) showing clear signals of investor rotation.
4) Corporate profit margins at record highs and primed to fall.
5) Market breadth shrinking (meaning fewer stocks participating in the rally).
6) The VIX (a measure of investor sentiment) dropping to levels of complacency not seen since 2007.
7) Investor bullishness hitting record highs and investor bearishness hitting record lows.
8) Investment legends either returning capital to investors (Icahn, Klarman) or sitting on mountains of cash (Buffett).
In simple terms, the bull market of the last five years finally went into mania mode as retail investors stopped worrying about income (investing in bonds) and drank the Fed’s Kool-Aid: bought stocks.
The blow off/ mania component of the rally occurred when retail investors began to pile into stocks (as is always the case with tops) around the end of 2012/ early 2013. Whenever this period ends, the chart of the DOW shows where we’re likely going:
Be smart… prepare in advance.
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