"We See Bubbles Everywhere!"

"We see bubbles everywhere, and that is not to be dramatic and not to suggest they will pop immediately. I just suggested in the bond market with a bubble in treasuries and bubble in narrow credit spreads and high-yield prices, that perhaps there is a significant distortion there. Having said that, it suggests that as long as the FED and Bank of Japan and other Central Banks keep writing checks and do not withdraw, then the bubble can be supported as in blowing bubbles. They are blowing bubbles. When that stops there will be repercussions...
 And today from Bill Gross, on why QE is not working as intended, and why the Fed's channels are not only clogged but never worked as intended in the past four years: 
"Does it mean it is a good thing that capitalism should thrive under this quantitative easing posture on the part of central banks that distorts markets and this court's capitalism and promotes a zombie corporations and lowers net interest margins and destroys business model? All of that is the negative aspects of quantitative easing. Can we live with? I do not think this will be with us for a long time."
Isn't it interesting that when a hedge fund manager said two days ago that he thought stocks looked good, the market exploded higher 125 points. But today, when billionaire investor, bond guru, and PIMCO CEO Bill Gross explicitly says that they are seeing "bubbles everywhere", and especially in stocks, he is ignored and the stock market is flat! This is a textbook case of a stock market bubble as explained in the book Why Stock Markets Crash, a very arcane book by Didier Sornette!

More Morose Economic News

Dreadful Divergence Between Macro Data and Stock Market

THIS IS WHAT A BUBBLE LOOKS LIKE! 
This chart shows on a single graph the direction of the stock market coupled with the direction of the economic indicators over the past few months. In finance parlance, we call this a "divergence". It's what happens when the real economy and stocks part ways. Eventually, one or the other must turn and recouple with the other. Any bets on which one it will be? 
It's a pretty safe bet that eventually, the stock market will drop sharply to correlate with the economic data. That's what usually happens! But Wall St, with so much Fed money in its pockets, is betting than the economy will soon turn higher again, despite the horrific economic data. To them, the Fed's power is godlike in its effectiveness. 
 This chart is from Bloomberg News.

Europe In Worst Recession Since WWII

from the WSJ:

But US stocks still close up 60, more than 185 points in two days.

So the bubble continues to build.

Weak Manufacturing, Empire Fed, PPI, But Stocks Hold Gains

U.S. factories cut back sharply on production in April, as automakers produced fewer cars and most other industries scaled back. The Federal Reserve said Wednesday that manufacturing output dropped 0.4 percent in April from March, the third drop in four months and the biggest since October.

The Empire Fed disappointed, the PPI missed expectations, and now, industrial production contracted, but stocks remain near all-time highs and are flat for the day. Insane market! Mirage market!

Markets Disconnect From Reality

Stocks hold gains from yesterday's new all-time record high despite the following news today:
1) US industrial production contracted last month
2) Empire Fed index missed expectations, went negative for first time since January
3) US Capacity utilization declined in April
4) Producer Prices declined in April due to weak demand
5) France slides into recession
6) Euro now has the longest-running recession in history
7) Europe's GDP declines at sharpest pace since 2009

But Wall St insiders are oblivious to news, reality! They're having a Pollyanna Party!
This looks more bubble-like every day! 

Eurozone Recession Drags

But stocks are barely lower! The bubble continues!

Bill Gross: High Price, High Risk, Low Return!

And I just call it a bubble!

TV Comment of Hedge Fund Manager Fuels 100-Pt Rally

This from the Wall St Journal website today:
"Financial and energy stocks led a day of broad gains for the major U.S. benchmarks, following bullish remarks from a prominent hedge-fund manager."

Prominent indeed! 

If this is so, then the perception of risk on Wall St is now so low that a bubble is a certainty! The only thing that is going to stop this insanity is for the Fed to formally announce that it will end QE and its support of the stock market on date certain. Otherwise, this bubble is going to cause even more tears! 

Is It Tuesday? It Must Be Stock Pump Day!

This is the stock market since March 1st.

And this is today's chart. It must be Tuesday!

There's not much news today. Just another stock market rally! Dow up nearly 100 points! The leap began right out of the gate as soon as the market opened.

S&P 500 Hits New Record High

...even as the Fed hints at an unwind this summer!

Fed's "Voice" Speaks of Unwind of Easy Money

...and just as the economy is worsening!

Fed to Begin Economic Balancing Act?

There appears to be a change in the wind! Over the weekend, Jon Hilsenrath, in his article in the Wall St Journal, indicated that the Federal Reserve is going to begin to reduce its creation of money to purchase US government bonds. Both stocks and bonds are lower as a result. And this is taking place just as both the US and global economies are showing signs of renewed weakness.

I wonder if the Fed is doing this solely as a superficial way of talking the stock market down from the edge of the cliff, without any real substance, as was Alan Greenspan's "irrational exuberance" remark. Why the Fed would do this now doesn't make much sense, unless they realize that they are creating greater risk by causing investors to ignore all risk. This is going to be a very perilous high wire act at the most difficult moment of the last four years.

And thus begins an economic balancing act, after Mr. Bernanke has effectively painted us into a corner! Good luck with that!

Rosenberg's Rules

Psychology... or Psychosis?

John Mauldin, quoting Nietze:

"To trace something unknown back to something known is alleviating, soothing, gratifying, and gives moreover a feeling of power.  Danger, disquiet, anxiety attend the unknown – the first instinct is to eliminate these distressing states.  First principle: any explanation is better than none…. The cause-creating drive is thus conditioned and excited by the feeling of fear…."  –Friedrich Nietzsche
"Any explanation is better than none." And the simpler, it seems in the investment game, the better. "The markets went up because oil went down," we are told. Then the next day the opposite relationship occurs. Then there is another reason for the movement of the markets. But we all intuitively know that things are far more complicated than that. As Nietzsche notes, dealing with the unknown can be disturbing, so we look for the simple explanation.

"Ah," we tell ourselves, "I know why that happened." With an explanation firmly in hand, we now feel we know something. And the behavioral psychologists note that this state actually releases chemicals in our brain that make us feel good. We literally become addicted to the simple explanation. The fact that what we "know" (the explanation for the unknowable) is irrelevant or even wrong is not important to the chemical release. And so we look for reasons.

That is why some people get so angry when you challenge their beliefs. You are literally taking away the source of their good feeling, like drugs from a junkie or a boyfriend from a teenage girl.

 

Seth Klarman: "We Are Close To Collapse"

Seth Klarman is an American billionaire who founded the Baupost Group, a Boston-based private investment partnership, and the author of Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor a book on value investing.

From Seth Klarman of Baupost:

Is it possible that the average citizen understands our country's fiscal situation better than many of our politicians or prominent economists?

Most people seem to viscerally recognize that the absence of an immediate crisis does not mean we will not eventually face one. They are wary of believing promises by those who failed to predict previous crises in housing and in highly leveraged financial institutions.

They regard with skepticism those who don't accept that we have a debt problem, or insist that inflation will remain under control. (Indeed, they know inflation is not well under control, for they know how far the purchasing power of a dollar has dropped when they go to the supermarket or service station.)

They are pretty sure they are not getting reasonable value from the taxes they pay.

When an economist tells them that growing the nation's debt over the past 12 years from $6 trillion to $16 trillion is not a problem, and that doubling it again will still not be a problem, this simply does not compute. They know the trajectory we are on.

When politicians claim that this tax increase or that spending cut will generate trillions over the next decade, they are properly skeptical over whether anyone can truly know what will happen next year, let alone a decade or more from now.

They are wary of grand bargains that kick in years down the road, knowing that the failure to make hard decisions is how we got into today's mess. They remember that one of the basic principles of economics is scarcity, which is a powerful force in their own lives.

They know that a society's wealth is not unlimited, and that if the economy is so fragile that the government cannot allow failure, then we are indeed close to collapse. For if you must rescue everything, then ultimately you will be able to rescue nothing.

They also know that the only reason paper money, backed not by anything tangible but only a promise, has any value at all is because it is scarce. With all the printing, the credibility of our entire trust-based monetary system will be increasingly called into question.

And when you tell the populace that we can all enjoy a free lunch of extremely low interest rates, massive Fed purchases of mounting treasury issuance, trillions of dollars of expansion in the Fed's balance sheet, and huge deficits far into the future, they are highly skeptical not because they know precisely what will happen but because they are sure that no one else--even, or perhaps especially, the policymakers—does either.

And While Wall St Celebrates, PMI Drops

PMI now barely breathing in positive territory.

Stocks Jubilant Following Jobs Report

I didn't think this jobs report was worthy of this kind of joy. We got 165,000 jobs, about 20,000 more than expected. That's the good part. But the jobs were produced in low-wage sectors like leisure, hospitality, temp work, and retail. That's hardly something to celebrate.

But don't try telling that to Wall St. They're too drunk on the Fed-fueled stock market bubble to notice reality!

Crude Oil Explodes $5 In Two Days

Nat Gas Crash

from Bloomberg:
"Natural gas futures dropped the most in almost nine months after a government report showed that U.S. stockpiles expanded by more than forecast."