Monday, April 13, 2015

Central Bank Omnipotence

China is the last frontier for the central bank play.  If the central bank is lowering interest rates or doing QE, buy that country's equities.  It is a simple game plan, and it has been working brilliantly for the past 6 years.  But nothing in the markets that is so simple and widespread lasts forever.  Everyone knows this gameplan.  Even the daytrader in China.  China is the last man on the central bank train, and retail over there has piled into Stock Bubble 2.0, just 8 years after the last one.  Not to forget the US markets, where we are in the final stages of the central bank led bubble.

The more the spring gets coiled, the bigger the move in the other direction.  We are building enormous amounts of potential energy in the negative direction, as the spring is about as coiled as it gets.  If the spring gets anymore coiled, it would be like nuclear fusion, bringing about spontaneous combustion.

Usually when you get these extremely high valuations and bubbles, you hear a lot of bubble talk.  Believe me, there was a huge chorus of "this is a bubble" talk in 1998 all the way to 2000 before the thing imploded.  This time, there really isn't that bubble skepticism, it is almost as if the central banks are believed to be alchemists who can create wealth just by whispering into the market's ears.

I believe we are less than 5 months away from the start of a long bear market in not just US equities, but global equities.  I don't believe those who say that you can't fight the Fed or that central banks can keep equities at high levels forever.  There is not enough of a sample size of QE to support such brash confidence.  This is an experiment with a short history.  Unless the Fed directly starts buying equities like the BOJ, there will be a bear market coming soon.  It is a combination of overvaluation, equity allocation, sentiment, and price action that have led me to this conclusion.

We should see a couple days of pullback ahead of April 15 tax day, as investors sell stock to pay their tax bills.  It should be a boring market for the rest of this month, so don't expect anything exciting here.

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