Bubble Logic

Harry S. Dent | Wednesday, May 08, 2013 >>

Bubble logic has taken over.

Everyone (it seems) has put lipstick on the elephant in the room and is now patting themselves on the back. Champaign glasses are clinking, party hats are adornrned. Oh happy days!

Of course, I’m talking about the latest surge in markets. Dow over 15,000… S&P 500 over 1,600.

Life is good. The Fed will keep stimulating. Stocks are climbing a “wall of worry.” The economy keeps improving. Look, even the unemployment situation isn’t so bad anymore.

At which point I must stop and ask: has everyone gone nuts?!

This is the way it always looks as a bubble is topping.



And history backs me up on that…

The first major bubble in recorded history was the Dutch tulips bubble – tulip mania. Insignificant little tulip bubbles were trading on the first futures markets and investors just started bidding them higher and higher for a few years until they went to more ridiculous levels than any bubble in current times. At the peak, tulip prices rose 20-fold in a single month!

It was the first time that people demonstrated the reality that, as long as other people thought something was worth a lot, prices could go way beyond any rational level, until the bubble burst…

And bubbles always burst. People are greedy little bastards and can’t resist easy profits.

We have seen one bubble after another since the 1980s. There was the 1987 stock bubble. The early 2000s tech stock bubble. The 2006 real estate bubble. The 2007 stock bubble, which was more around emerging markets. Now we have the 2013 bubble.

Since early 2009, stocks have gone up even faster and further than they did in the 2003 – 2007 bubble. But this time, it’s the Fed driving the bus.

Past bubbles were just exaggerations of strong fundamental economic trends. But this one has come from massive injections of money into the economy to keep the banks from failing. That money keeps the economy barely growing, but more importantly, it gets reinvested and pushes up stock prices and financial assets in general.

It’s taking $2 trillion in stimulus – $1 trillion in fiscal deficits and $1 trillion in QE or monetary injections – to create a mere $300 billion in GDP growth. Imagine where our economy would be without such massive stimulus. We’d be in a depression, not just a recession.

This “recovery,” this stock market surge, is entirely generated by governrnment stimulus, here and around the world. But Wall Street doesn’t care. A market on crack, just wants more crack, and they keep getting it.

Our first forecast was that there would be strong resistance at 1,600 on the S&P 500 as that represented a trend-line through the tops of the last two bubbles in early 2000 and late 2007. We call this a megaphone patternrn: higher highs in each bubble followed by lower lows in each crash to follow.

Now that this level is broken, we see the next major resistance coming from the Dow again in the months ahead. Should we break that level, then there is no resistance. But we doubt it will. Ultimately we’ll see a major top, likely later this year.




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