Bubble III P.O.R.

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machinehead's picture
machinehead
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Bubble III P.O.R.

In the absence of competitive productive economy, the authorities' only strategy is to employ financial manipulation to create sequential Bubbles. Bubble III -- the successor to the tech stock-driven Bubble I (peak = 2000) and real estate driven Bubble II (peak = 2007) -- was born in late 2008, with the Fed's $1.3 trilllion QE1 program. But because asset prices were depressed, it wasn't immediately obvious that Bubble III had been launched.

Today marks the Point of Recognition (P.O.R.) for Bubble III. Let's review three different asset classes as examples:

1. Stocks -- the Nasdaq 100 (symbol NDX) is within 1 percent of its 2007 high, which in turn was the highest level since early 2001 when the tech Bubble was imploding. Here's the decade chart of NDX:

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=ndx&sid=0&o_symb=ndx&freq=2&time=13&x=32&y=16

2. Bonds -- 5-year Treasuries, targeted for Federal Reserve purchases in QE2, are hovering a near record low yield of 1.05%. Here is a decade chart for the 5-year yield (FVX):

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=fvx&sid=0&o_symb=fvx&freq=2&time=13&x=0&y=0

3. Commodities - the CCI (Continuous Commodity Index) has retraced 90% of its decline from a mid-2008 record high. Chart:

http://futuresource.quote.com/quotes/chart.action?symbol=CI+A0&chartMinutes=&chartAggregation=M

All three of these asset classes are now very richly valued. One or more may rise to higher extremes, guaranteeing another multi-year period of malaise as trillions are lost in the succeeding, foreseeable reversion to fair value.

What's unusual is all three asset classes rallying together. Generally, bonds and commodities are opposite ends of a seesaw -- what's good for one is bad for the other. Stocks tend to be 90 degrees out of phase with either of them.

What the Federal Reserve has done with QE2 is to unbolt the seesaw from its foundations, and raise the whole structure to treetop level with helium party balloons. All it would take is a pinprick or a toy arrow to send the heedless little kids playing on it tumbling to their doom.

A characteristic feature of a P.O.R. is violent capitulation, such as a frustrated post elsewhere in the forum which asserts that plunging in with the Bubblers is the only rational choice. True, one doesn't want to step in front of a freight train fueled by 'non revenue-constrained' asset purchases. But as was proven in Bubble I and Bubble II, bubbles eventually pop, usually just when they are considered invincible.

JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2492
Re: Bubble III P.O.R.

As I have expressed all too frequently, I have my doubts that a legitimate bubble can be blown at this point. The God of Mean Reversion just might tumble from the heavens if these asset market bubbles are re-inflated beyond their previous circumferences. As far as I can see there is only one asset that has the technical and sentiment set-up for a bubble; physical cash in USDs. 

I know, I know....Keep dreaming JAG!

Didn't somebody say that markets punish the logical and reward the foolish?Surprised

agitating prop's picture
agitating prop
Status: Platinum Member (Offline)
Joined: May 28 2009
Posts: 854
Re: Bubble III P.O.R.

Jag, You've just got to get off the fiat merry-go-round and pile onto the see-saw with everybody else.  The trick is to be the first to jump off before the balloons are pricked. And when will that be? Machinehead has been swinging around the monkey bars for years, so he'll notify us. He's the alpha orangutan of high finance!Laughing

Lemonyellowschwin's picture
Lemonyellowschwin
Status: Platinum Member (Offline)
Joined: Apr 22 2008
Posts: 548
Re: Bubble III P.O.R.

So Machinehead, what happens when Bubble III pops and where is the endgame?  I mean, do you see it all ending with a dollar collapse, or is there any way to pull out of the dive before the dollar crashes and burns?

yobob1's picture
yobob1
Status: Silver Member (Offline)
Joined: Apr 20 2009
Posts: 132
Re: Bubble III P.O.R.

Here's something that cought my eye the other day.

The BDI as of yesterday stood at 2510 - this site is always a day or two behind.  The blue line is the BDI and the yellow line is the CRB. Note that in the 2006 - 2008 period they both rose and for at least part of that period we were in the tail out period of Construction Mania on a global basis - that is to say there was a slight air of legitimacy to the rise in commodity prices.  Also in that period we had the corn/ethanol debacle that drove grain prices. Conccurrent to that period warehouse levels of base metals were also relatively low.  Following is the 5 year chart of copper warehouse levels - they all pretty much look the same.  You can see that they were relatively low but suddenly soared as that paticular mania ran its course.  While levels are off their peak at the moment, they remain well elevated from the lows and as typically happens I would expect them to start gaining ground quickly as the higher prices will bring increased supply from both stockpiles and higher production.  I have been of the opinion that this attempt at commodity mania II is in many ways even more speculative than the one preceding.  To me its an attempt to anticipate rising demand that I simply don't beleive will be there.

What is likely is that QE II will have even less effect on the real economy and will only serve to fuel the financial markets for as long as it runs.  In this case I think lag is non-existent since we are stoking a dry boiler  The banksters win again while the schmucks take it up the rear.  The destruction of the RE bubble and no end in sight for the foreclosure pace (estimated another 5 million +/- still in the pipe) trumps all else. 

machinehead's picture
machinehead
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Re: Bubble III P.O.R.

Interesting -- yobob's chart of the Baltic Dry Index reminds me of a chart I was examining yesterday -- that of the Power Shares DB Commodity Index Tracking Fund (symbol DBC). Here's a link to the 3-year chart, including the mid-2008 peak:

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=dbc&sid=0&o_symb=dbc&freq=2&time=10

Last time I checked, DBC's portfolio consisted of a limited selection of a half dozen commodities. It has little or no exposure to the red-hot bull markets in 'softs' such as coffee, cotton and sugar, or to copper. Accordingly, it has lagged the broader CRB index badly.

The Baltic Dry Index probably reflects shipping overcapacity to some extent. But it also is affected by reduced world trade volume, which sounds a cautionary note.

Central banksters are trying to paint the tape with depreciating currencies to mask dead-in-the-water economies. It's only a solution to the extent it devalues debt in real terms. But with sovereigns still running huge deficits, even currency devaluation can't shrink debt much, if at all. They are still raging debt junkies, continuing to mainline the hard stuff even as they improbably claim to be in rehab. 

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