Take Cover Now – They Don’t Ring A Bell At The Top

This is getting downright stupid. After the minor 8% correction in October, the dip buyers came roaring back and the shorts got sent to the showers still another time. Earlier this morning the S&P 500 was pushing 2050——or up 12% in less than a month.

So the great con game remains in tact. The casinos run by the Fed and other central banks can’t go down for more than a few of days—until one or another central banker hints that more free money is on the way.

A few weeks ago it was James Bullard hinting at a QE extension. Next was Mario Draghi pronouncing that the whole ECB is unified behind a plan to expand its already swollen balance sheet by another $1.2 trillion. And then Haruhiko Kuroda, the certifiable madman running the BOJ, not only announced his 80 trillion yen buying scheme, but soon averred that falling oil prices—–a godsend to Japan—–were actually a threat to his mindless 2% inflation goal that might necessitate even more money printing. That is, after buying up 100% of the massive Japanese government bond market, the BOJ would not hesitate to monetize ETF’s, stocks, securitized real estate debt and, apparently, sea shells, if necessary.

Accordingly, bounteous wealth is seemingly to be had by the three second exercise of clicking  “buy” on the SPU (basket of S&P 500 stocks). Indeed, for the past 68 months running, the stock market has blown through every mini-correction, and has been traversing a near parabolic rise.

Needless to say, this relentless expansion of the bubble eventually kills off the bears, the skeptics, the prudent and even the militantly incredulous. Undoubtedly, that is where we are now because the global economic news has been uniformly negative since the October dip, yet the market has resumed its relentless melt-up.

Under such circumstances, therefore, it is well to remember that we are in the middle of the greatest central bank fueled inflation in recorded history, and that this insidious inflation has been channeled into financial assets owing to the arrival of peak debt everywhere around the world.

Stated differently, households are saturated with debt and cannot borrow any more to spend on goods and services that have not been earned with prior production. So the massive tide of liquidity generated by the central banks never leaves the financial markets; it just cycles there, fueling the carry trades and every manner of speculation that modern technology-enabled bankers can concoct.

But that is the Achilles heel of the game. As the bubble takes on ever greater girth, it becomes increasingly susceptible to a negative shock to confidence. Part of the reason is technical.  When markets reach their current nose bleed levels there are no shorts left; and it is also likely that the day trading gamblers have become increasingly lax about absorbing the cost of even cheap “downside insurance” (i.e. puts on the S&P 500). That is, they are “long” and “unprotected”.

So if a sharp, sustained self-off gets underway due to an unexpected blow to confidence or the arrival of the proverbial “black swan”—- there are no shorts to cover and take their profits by buying the market as it craters; and there is a simultaneous scramble among the buy-the-dip longs for downside “protection” in order to ride out the storm. But in this context, market makers who sell such protection are not in the least inclined to write insurance or puts on a naked basis.  So they sell the index short in order to cover their exposure, thereby adding to the downward momentum.

That is part of the reason why central bank driven bubbles expand relentlessly for years, but then correct swiftly and violently in a few months or even weeks when the bubble finally cracks. Thus, the S&P pattern shown above unfolded in a similar manner during the 2002-2007 Greenspan Bubble—–and then crashed after the Lehman event.

During an appearance on Fox Business today, I had an opportunity to address this pattern in greater detail in response to the skepticism of the show’s free market host, Stuart Varney.  Yes, you can “loose” a lot of money on the way up.  The problem is, no one rings a bell at the top.