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Another Bubble!

10 May

Another Bubble!

Gold Market Discussion

Market Sell-Off Continues

It was just days ago that we warned the stock market was hanging by a thread.  

Now we have seen just how thin that thread was.  

The one-day 473 point drop in the Dow earlier this week is nothing to sneeze at.  As of this morning, its getting hammered again- down over 100 points as of print.

(Incidentally for those that follow technical signals, the Dow closed below its 50-day moving average for the first time since January.)

This market is based on an illusion.  Stock prices are based on the expectation that everything will work out perfectly:

  • That there will be a perfect trade deal with China;
  • That the deficits don’t matter;
  • That the national debt doesn’t matter;
  • That warships steaming to Venezuela and the Persian Gulf don’t matter;
  • That the Fed can really control interest rates;
  • That the Fed, which still has a big problem with QE I, II, and III, will launch another round of money printing to help Donald Trump get reelected.

But as the latest drop proves, all of those views are astonishingly naïve.  At the faintest sign that one of these naïve beliefs will prove untrue, the Wall Street professionals head for the door.

They can be quick.  That’s because they want to make sure they beat you out the door!

Deal with China?

Perhaps a last-minute trade deal with China will be pulled out of a hat.  Or perhaps the Plunge Protection Team (a secret little Deep State operation created to manipulate the stock market) will engage in some sleight of hand to tap the brakes on the new bear market.  

Perhaps.  

But ask yourself this simple question: If the market is as sound as Trump insists, why does it need unprecedented rate cuts and still more Quantitative Easing to keep going?  

It’s like proclaiming someone a world-record setting athlete and then pleading for performance enhancing injections so he can compete.  

In much the same discordant manner, the GDP is supposed to robust, but the national debt is leapfrogging up a trillion dollars a year.  (Months ago, we wrote about the marginal productivity of debt:  How much growth do you get for each additional dollar of borrowing?  Economist Keith Weiner has formulated this into an economic law:  If the marginal productivity of debt is less than 1, the economy is not sustainable.  See our post on The Doom Loop here). 

This stock market is a bubble.  It’s not a bubble because we say it is a bubble.  It’s a bubble because like all bubbles it is driven by the artificial creation of money and credit.

And like all bubbles, it will meet its pin.

That pin could be anything.  Expected or unexpected.

Now, you would think that after the dot.com bubble and the housing bubble, the people would be in no mood for a third Fed-engineered bubble in this young century.  But as we have been saying, the people don’t really understand how these things work.  

And the media sure isn’t going to tell them.  

That’s why we take it as part of our job to help them figure it out with these posts, to show them the wizard behind the curtain.

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