The Dow – To Be or Not To Be – Blowing Bubbles or Hot Air?

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While the amount of bears in the stock market are truly amazing, there are simply countless economists and analysts all claiming this is the all time high and a crash is imminent. They claim the classic feature of a speculative bull market peak is identified by the margin debt on the NYSE. Tracking this indicator, they argue there has been a surge to the highest level in history in of course nominal terms. They cite this is nearly 2.5% of GDP, which exceeds all but two months in 2000 and 2007. This is no big deal and would need to reach 17% of GDP to match a real crisis in debt. Even the 1929 Bubble took place with total Broker Loans at about $6.5 billion against $104 billion GDP in nominal terms. That means 1929 Broker Loans were 6.25% of GDP making 2.5% no big deal. You can see from the broker loans during the 1929 Bubble, there was no retest of former highs. It was a clear Phase Transition, which is by no means replicated by the current levels.

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Having long-term databases is essential to map out what is real and fake. Sorry – 2.5% is nothing. To match 1929, we need to get to 6.25%. If we look at real panics in government, now we are at 17%. The historical high in call money rates came in 1899 at nearly 200%. The peak in rates only reached 20% in 1929 BECAUSE of all the foreign capital inflows whereas in 1899 there were capital outflows leaving a shortage of cash in the USA driving interest rates much higher.

The problem with this type of analysis besides being too short-term, it is simply the domestic focus as if the world did not exist. This analysis is also focused on the traditional flight to quality between assets and cash. The ONLY alternative to a stock market bubble is to run to cash and bonds. But government debt is the problem right now and pension funds need 8% to survive. What this analysis is ignoring is how does capital act when the crisis is in government rather than the private sector.

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We are not dealing with a mere speculative bubble. The money coming in is institutional and foreign by the overwhelming majority. I speak to stock brokers and it has been unanimous that retail clients are not in the market as was the case previously. Those who invest all the time may be there, but the average person who buys tops when everyone is in is not there yet because the TV financial-evangelists are bearish all claiming to be picking the high.

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We will have a report out on this shortly. The issue is the potential for a coming CYCLE INVERSION where everything must flip so that private assets rise with the decline in the ECM rather than decline. The PUBLIC and PRIVATE aspects must flip in a serious economic implosion that we face known as the Sovereign Debt Crisis. This chart illustrates how bonds collapsed with the Sovereign Debt Crisis of 1931. This is the other side of the coin. There are times when the private sector is the problem. However, then there are times when government is the problem. You better understand how capital moves under each scenario.