Musings Report #17 4-25-15 Blow-Off Top in Progress
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Blow-Off Top in Progress
Experiencing a blow-off top of speculative excess in real time is a fascinating experience, even for those of us who can recall the previous blow-off speculative phases of the 1999-2000 and 2007-2008 bubbles.
How do we know we're in the final blow-off stage? There are two basic give-aways:
1. Charts show parabolic rises in speculative debt and assets
2. Rationalizations of why the clearly visible bubbles are justified by fundamentals reach a fever pitch.
In the past few days, I have read two laughably absurd justifications of the bubble in Chinese stocks by conventional financial analysts: 1) China is a "black box," i.e. unfathomable, so go with what we know, which is China is a nation of entrepreneurs, so buy the bubble here if you want to reap easy profits, and 2) the stock market bubble in China is positive evidence of a healthy re-adjustment of China's financial system.
That neither thesis has the slightest foundation in reality doesn't matter, as the real agenda of the analysts is to justify their own attempts to join the crowd reaping vast profits in China's stock market bubble.
This denial that a speculative blow-off is clearly occurring is a key indicator that a blow-off top is in its final stages. Consider a chart of the number of retail stock trading accounts being opened in China:
And this chart of the Shanghai stock index (SSEC). Is it truly normal for the stock markets of nations with slowing economies to double in less than a year?
Take a look at the blue line on this chart of the Bank of Japan's asset purchases, i.e. money-printing and quantitative easing. (Chart courtesy of Dave P. and mdbriefing.com) Is this reflecting a healthy economy? If Japan's economy is healthy, then why does the BoJ feel the pressing need to buy hundreds of billions of dollars in near-zero yield government bonds?
Margin debt is widely understood to reflect the "animal spirits" of speculation and confidence. When borrowed money is used to buy more stocks, it makes the resulting rise vulnerable to a decline that forces recent buyers to liquidate their positions to cover their margin calls. Margin debt has hit a new high in the U.S.:
Amazon is a large, well-run corporation, but its core businesses are low-margin --even the cloud business, as everybody and their brother is ramping up their cloud biz--H-P, IBM, etc. Is it truly normal for a low-margin company's stock to rise 50+% in four months?
Those of us who have lived through the last two speculative blow-off tops know the impossibility of predicting the final top. Those who bet the top is in by shorting the market are forced to cover when the market continues rising, and this panic buying pushes the market even higher.
Only when virtually no one is willing to bet against the market will the short-covering boost dissipate. At that point the market will roll over when the last crop of greater fools run out of margin buying power.
The dominant investment strategy is one of supreme confidence that any disruption in the global financial system will be limited due to central bank policies and the presumed non-correlation of various assets.
In effect, any fat-tail events (i.e. unexpected disruptions) are expected to only affect one asset class or one region's assets. The basic premise here is the global central bank's liquidity and asset purchases have put a floor under global systemic risk.
This paper is heavy going but it basically disputes this belief: Volatility is the square root of time and fat tails.
What I see is asset classes that appear uncorrelated but that are still exposed to whatever systemic risk the central banks cannot control. As I have noted before, foreign exchange/currency markets are now the primary source of systemic risk for the simple reason that they are too big for central banks to control.
In other words, all assets *are still correlated* by their exposure to currency disruptions. The rising U.S. dollar, which I have called for since 2011, is an example of just this kind of systemic risk. The consequences of a rising USD are still unfolding; in my view, the pressures generated by the rising USD are still piling up beneath the surface of low volatility and complacent faith in central banks.
If the currency markets destabilize, which asset class will be unaffected? It's not at all clear that any asset class anywhere will remain unaffected.
This complacent faith in central banks has inflated a global bubble in virtually all asset classes, and these assets are now in the blow-off top phase. Take all reassurances that "this time it's different" with a hefty grain of salt.
Summary of the Blog This Past Week
Our Financial Future: Infinite Greed Meets a Funny Thing Called Karma 4/25/15
The Rehypothecation of Gold, and Why It Matters 4/24/15
The Old Models of Work Are Broken 4/23/15
Wedges and Triangles: Big Move Ahead? 4/22/15
Ten Wonderful Things I'm Grateful For (Irony Alert) 4/21/15
Disrupt or Be Disrupted 4/20/15
Best Thing That Happened To Me This Week
Lunch with our young Indian-American friends and a beer with my old friend Colbert M. from Lanai High School....
Market Musings: Watching Volatility and Complacency
Two charts help us understand the remarkable decline in volatility and the equally remarkable rise in complacency.
The VXX (one way to track-short-term volatility) has traced out a classic descending wedge, which is a bullish formation. If the VXX busts higher, stocks will drop sharply.
The CPC is the ratio of puts and calls--option activity that reflects fear (more punters buying puts for protection against a market decline) or complacency (more punters buying calls to boost gains as themarket advances). The CPC is signaling an extreme of complacency, a level that typically marks a top in the stock market.
Extremes of low volatility can last a long time, but the clock is ticking.
From Left Field
Poetry is going extinct, government data show -- striking reduction of interest in a once-vital field....
How the stock market destroyed the middle class -- does anyone actually contest this?
Stock buybacks: From retain-and reinvest to downsize-and-distribute -- this is one more example of the rot consuming the economy...
Why the Tech Elite Is Getting Behind Universal Basic Income -- giving people free money--skimmed from where?...or will it all be borrowed?
The Resentment Machine the web has leveraged self-absorption to new heights, and that generates resentment, as almost nobody can match unrealistic expectations...
France declared "lost in stagnation" by economists: Analysts at French banks said that closely-watched indicators of the private sector's strength were "very disappointing" in April
The A**hole Factory: Our economy doesn't make stuff any more. What does it make? (via Lew G.)
On "bulls**t jobs" -- The Economist's take on Graeber's thesis...
ON THE PHENOMENON OF BULLS**T JOBS -- David Graeber's now-famous essay, worth reading...
Is the UK really producing anything? -- the slow decline from a productive economy to skimming off the FIRE economy...
The State of US Small Businesses -- good infographic...
Burned Out: World Bank Projects Leave Trail Of Misery Around Globe
Good Luck Being Born Tomorrow! (via G.F.B.) Nations and economies that don't have legacy systems holding them back can advance much faster....
"The opposite of courage in our society is not cowardice, it's conformity." Rollo May
Thanks for reading--
charles |
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