Is the Market Bubble About to Burst?

Aside from the magnitude of the market gains, the smoothness of the rise has been noticeable as the steady flow of cheap money squeezed out volatility. The S&P 500 hasn't even touched its 200-day moving average since November 2012. That's a streak of consistency totaling 464 trading days and counting. That type of consistency has only been seen three other times since World War II: In 1998, 1965 and 1956. 

This is the warning coming from the Bank for International Settlements, the Basel-based institution that's the central bank of global central banks. This is a sober institution that courtesy of former fixture William White (now chair of the Economic Development and Review Committee at the OECD), was critical of central bank policy during the run up to the housing bubble. He was one of the few voices sounding a warning about the risks of overly lax monetary policy, the rise of subprime lending and the risks of a collapse should home prices weaken. 

As an aside, it's worth noting that William White is once again sounding the alarm as well. In a paper from 2012 before the Fed embarked on QE3, he warned that "easy monetary policies threaten the health of financial institutions and the functioning of financial markets, which are increasingly intertwined." He continued, "[It] can lead to moral hazard on a grand scale" — excessive risk taking driven by the idea that the Fed will bail everyone out if it goes sideways. 

We know things are approaching the danger zone because we have price-to-earnings valuations at levels that have only been exceeded in 1929, 2000 and 2007. Confidence is at such high levels that bearish sentiment has dropped to lows not seen since before the 1987 market crash, and an options market that is betting on a "Black Swan" type market wipeout on a scale not seen since 1998 (tied for the second highest level since 1989).

Inside Look: The Specter of Global Debt Default is Once Again Rearing its Head

In recent weeks, the specter of global debt default is once again rearing its head.On August 1, Argentina defaulted on its sovereign debt, which occurred on the heels of bond defaults in South African and Portuguese banks. Meanwhile, Chinese property companies are starting to fail in the same way that subprime funds imploded in mid-2007. 

We think these scattered pockets of default are a prelude to the upcoming debacle. The next, more virulent phase of the credit crisis will focus on government, bank and real estate loans the world over. 

A change in social mood is behind the shift, and it will soon affect the stock market.

DYI 

China’s Russian Invasion

Russian officials have mused openly about the prospects of a de facto takeover of the country’s Far East by Chinese immigrants (legal and illegal alike) reports Joshua Kucera. But a booming Chinese economy and disaffection with Moscow might actually be pushing Russians the other way.

China’s presence can be felt all over Blagoveshchensk, a Russian city 5,600 kilometres east of Moscow but only just across the Amur River from China. There are students learning Chinese, plenty of Chinese-manufactured clothes and electronics in the stores, and Chinese restaurants serving stir-fried potatoes chased down with vodka. Yet you won’t find many Chinese people here.

Indeed, according to a United Nations survey, Russia’s population could fall by a third over the next 40 years. And the prospects in Siberia and the Far East are even grimmer, as residents move in droves to the warmer climate and better economy of European Russia: the population of Russia east of Lake Baikal dropped from 8 million to 6 million from 1998 through 2002, and has continued to fall since. 

Compounding this are growing signs that Russians in the Far East are becoming disaffected with Moscow. There’s a widespread feeling in the area that the central government treats the Far East like a colony. Last year that tension boiled over in Vladivostok, when the government moved to shut down the thriving Japanese car-import business in that city, in order to prop up domestic car manufacturers (who are located in European Russia). The resulting protests were so serious that the government flew in riot troops from Moscow to quell them, apparently not trusting the loyalty of local forces. 

The Russian government also has taken measures to strengthen Russian control over the Far East. It has introduced a program of incentives for ethnic Russians from Central Asia to move to the Russian Far East. They’ve also tried to mitigate the problem of the vast distance between the Far East and European Russia: Vladivostok, on the Pacific Ocean, is a seven-day train ride from Moscow, and seven time zones away. So the Russian government has subsidized airfares for some Russians in the Far East to travel to Moscow, and has proposed decreasing the number of time zones in the country to three or four so that business people and bureaucrats at both ends of the country could work more easily together. 

Because of China’s economic advantages over Russia, some scholars are actually now predicting that, instead of a Chinese invasion of Russia, the reverse may happen. While long-term economic predictions are risky, it seems likely that Russia’s economy, whose current boom is dependent on a (finite) supply of petroleum resources, will eventually be slowed by demographic decline. Meanwhile, China’s economy looks set, for now at least, to remain strong even as demographic projections show China’s population leveling off over the next several decades. As a result, it’s not hard to imagine Russians moving to China for better job opportunities.

Country 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Russia 1.25 1.27 1.3 1.33 1.26 1.27 1.28 1.39 1.4 1.41 1.41 1.42 1.61

Country 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 China 1.82 1.82 1.82 1.7 1.69 1.72 1.73 1.75 1.77 1.79 1.54 1.54 1.55 Definition of Total fertility rate: This entry gives a figure for the average number of children that would be born per woman if all women lived to the end of their childbearing years and bore children according to a given fertility rate at each age. The total fertility rate (TFR) is a more direct measure of the level of fertility than the crude birth rate, since it refers to births per woman. This indicator shows the potential for population change in the country. A rate of two children per woman is considered the replacement rate for a population, resulting in relative stability in terms of total numbers. Rates above two children indicate populations growing in size and whose median age is declining. Higher rates may also indicate difficulties for families, in some situations, to feed and educate their children and for women to enter the labor force. Rates below two children indicate populations decreasing in size and growing older. Global fertility rates are in general decline and this trend is most pronounced in industrialized countries, especially Western Europe, where populations are projected to decline dramatically over the next 50 years. So, does all of this portend a future of Russians in the Far East moving en masse south to China? It’s too early to know for sure. But today’s trends suggest this is more likely than a Chinese mass migration north. ************************** So You Want to Steal a Frigate? Robert Farley’s comprehensive guide to stealing a frigate (spoiler: it’s “absurdly difficult”). The theft of an entire warship would also be remarkably difficult to hide. Unless the entire crew were involved, the people left onshore would sound the alarm. The ship likely would not have access to its full suite of defensive systems, making it a sitting duck for sinking or recapture. Moreover, while the victimized navy might want its ship back intact, other navies are unlikely to have a sense of humor about a pirate-operated warship, and would probably attempt to sink or disable the ship at the earliest opportunity. Technology revolution in nuclear power could slash costs below coal A report by UBS said the latest reactors will be obsolete by within 10 to 20 years, yet Britain is locking in prices until 2060 The Alvin Weinberg Foundation in London is tracking seven proposals across the world for molten salt reactors (MSRs) rather than relying on solid uranium fuel. Unlike conventional reactors, these operate at atmospheric pressure. They do not need vast reinforced domes. There is no risk of blowing off the top.  The reactors are more efficient. They burn up 30 times as much of the nuclear fuel and can run off spent fuel. The molten salt is inert so that even if there is a leak, it cools and solidifies. The fission process stops automatically in an accident. There can be no chain-reaction, and therefore no possible disaster along the lines of Chernobyl or Fukushima. That at least is the claim.  The most revolutionary design is by British scientists at Moltex. "I started this three years ago because I was so shocked that EDF was being paid 9.25p per kWh for electricity," said Ian Scott, the chief inventor. "We believe we can achieve parity with gas (in the UK) at 5.5p, and our real goal is to reach 3.5p and drive coal of out of business," he said. DYI

Miss a Payment? Good Luck Moving That Car

Ms. Bolender was three days behind on her monthly car payment. Her lender, C.A.G. Acceptance of Mesa, Ariz., remotely activated a device in her car’s dashboard that prevented her car from starting. Before she could get back on the road, she had to pay more than $389, money she did not have that morning in March. 

Auto loans to borrowers considered subprime, those with credit scores at or below 640, have spiked in the last five years. The jump has been driven in large part by the demand among investors for securities backed by the loans, which offer high returns at a time of low interest rates. Roughly 25 percent of all new auto loans made last year were subprime, and the volume of subprime auto loans reached more than $145 billion in the first three months of this year. 

But before they can drive off the lot, many subprime borrowers like Ms. Bolender must have their car outfitted with a so-called starter interrupt device, which allows lenders to remotely disable the ignition. Using the GPS technology on the devices, the lenders can also track the cars’ location and movements. 

The devices, which have been installed in about two million vehicles, are helping feed the subprime boom by enabling more high-risk borrowers to get loans. But there is a big catch. By simply clicking a mouse or tapping a smartphone, lenders retain the ultimate control. Borrowers must stay current with their payments, or lose access to their vehicle.

Lenders and manufacturers of the technology say borrowers consent to having these devices installed in their cars. And without them, they say, millions of Americans might not qualify for a car loan at all.

****************************

Canada Warns its Citizens Not to Take Cash to USA

Posted by Martin Armstrong

If you are bringing cash to the land of the free, you will find that saying really means they are FREE to seize all your money under the pretense you are engaged in drugs with no evidence or other charges. It costs more money in legal fees to try to get it back so it is a boom business for unethical lawyers to such an extent that only one in six people ever try to get their money back and the cops just pocket it. That’s right. Money confiscated is usually allowed to be kept by the department who confiscated it. This is strangely working its way into funding police and pensions. This is identical to the very issue that resulted in the final collapse of Rome when the armies began to sack cities to pay for their pensions. We are at that level now with respect to seizing whatever they want knowing you will have to spend more in legal fees to assert your rights that do not really exist.

How the US militarizes the world's police, not just Ferguson's

The story of police militarization in the US and abroad is complicated, and involves the importation and exportation of equipment, tactics, and funds for the purposes of domestic and international security. Here's one part of that story.

DYI

Stock Market Breadth Signals Correction Ahead

*******************************

'Everybody' hates Treasuries...and then there's Gary Shilling

Nevertheless, the conventional wisdom on Wall Street is bond yields are set to rise as the Federal Reserve winds down its quantitative easing program next month and (presumably) starts to actually tighten policy next year. Goldman Sachs Asset Management predicts yields on the 10-year will rise to as high as 4% in the next 12 months, Bloomberg reports. 

Of course, predictions of rising Treasury yields have been a mainstay of Wall Street forecasts in recent years and -- save for the "taper tantrum" last spring -- have proven greatly exaggerated. In short, the continued strength in U.S. Treasury prices (which move in opposition to yields) has been one of the most surprising developments in financial markets in recent years -- certainly in 2014. 

But while "everybody" has been wrong about Treasuries, Gary Shilling has remain steadfastly bullish -- and right.

DYI Comments:  DYI doesn't hate Treasuries only that with yields are so low the capital gains possibility is now subdued or long gone.  Of course if the U.S. economy moves into ardent deflation Treasuries will be a great bargain despite the low interest rate.  A possibility is 2% deflation with 10 year Treasuries at 2% you will have a 4% real return; a great solace with stocks in a long term secular decline.  This is why our two model portfolios are shy of long term bonds as the large capital gains possibilities are now long gone. Unfortunately it will be the Great Wait before our formula pushes us systematically  back into long bonds.  Low inflation and/or deflation will be with us for at least the next 3 to 5 years.

********************************

The Wizard of Oz: a tale of monetary politics?

Like much of the world, the United States operated on the Gold Standard in the 19th century, where its paper currency was backed by a limited and fixed amount of the metal. 

Recession in the 1880s and 90s saw the country gripped by deflation. Prices fell by almost a quarter as the money supply contracted and people were lumbered with rising debts. The groups most affected by the downturn were US farmers and labourers. They joined forces to establish the Populistpolitical movement to campaign for their economic interests. 

One of their key demands was the move towards a bi-metallic monetary system, where silver would be added to the currency reserves in order to increase the money supply and ease austerity. This was a demand known as 'Free Silver', and ever since, the fate of the Populists has come to be associated with Dorothy, Toto, and their journey on the yellow-brick road.

*****************************

Nearly one third of the American labor force works on the weekend

4. Nearly a third of Americans work on the weekend.

The U.S. has the highest incidence of people reporting any paid weekend work. 29 percent of Americans reported performing such work in the American Time Use Survey, more than three times the rate among Spanish workers.

5. More than a quarter of Americans work at night.

27 percent of American workers report working nights, which the study defines rather strictly as any work performed between 10 PM and 6 AM. If the definition of "night" were expanded earlier into the evening, say 7 PM, this number would be considerably higher.

DYI 

Opinion: Everyone is a genius in a Fed-induced stock rally

I’ve noticed that many long-time bears are capitulating. If you look at market history, when bulls feel invincible and beaten-down bears give up, you have the makings of a market top. 

Yet at the moment, the Fed appears to be in control, and they will do everything in their power to keep the market from sinking. In fact, the Fed has injected itself into the market in a major way. Chairman Janet Yellen has made it clear she will keep interest rates low for a “considerable time” and will use whatever tools are necessary to keep the market stable (i.e. levitated). Most investors believe the Fed will protect their investments from any and all harm, but that can’t go on forever. When the Fed attempts to extricate itself from the market one day, that’s when the music stops, and the blame game begins. 

So if you are one of the few bears still standing, it’s not easy fighting the herd. I believe that trader Jesse Livermore was right when he said that to make big money you have to sit and wait. Although there are warning signals this bull market is coming to an end, you may have to wait a while longer. One major signal will be a huge snap in the S&P, that is, a drop of 100 to 150 points. Until then, trying to time the top is difficult in this environment. 

To the bears who have given up hope: Don’t forget why you have refused to participate in a faux bull market that is pretty on the outside but deteriorating on the inside. If you look at previous market cycles, just when it seems too easy to make money, the bear appears and takes a huge bite.

DYI Comments:  No doubt about it this one overvalued, over bullish, overblown market that is greater or similar in valuation to these market tops: 1907, 1929, 1937, 1973, 2000, 2007.

Valuation based on dividend yield only the year 2000 (August 1.11%) had a lessor percentage (currently 1.88%).  Using our averaging formula to determine our asset allocation for stocks is now beyond our parameters of 100% greater than the average for price to dividends (1 / dividend yield).

 9-23-2014

STOCKS

100 - [100 x ( Curr. PD - Avg. PD / 2 ) ]

________________________________

(Avg. PD x 2 - Avg. PD/2)

Avg. Price to Dividends PD  23

Current Price to Dividends   53

% Allocation  -17%

 -17% x 60 (max. allocation) = 10% short

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION

Active Allocation Bands (excluding cash) 0% to 60%

85% - Cash -Short Term Bond Index - VBIRX

13% -Gold- Precious Metals & Mining - VGPMX

 2% -Lt. Bonds- Long Term Bond Index - VBLTX

 0% -Stocks- Total Stock Market Index Fund - VTSAX
 0%-REIT's- REIT Index Fund - VGSLX

[See Disclaimer]

**************

Maximum Aggressive Portfolio

(Super Max)

75% Cash - Hussman Strategic Total Return Fund - HSTRX

13% Gold - Tocqueville Gold Fund - TGDLX

  2% Lt. Bonds - Zero Coupon 2025 Fund - BTTRX

10% Stocks - Federated Prudent Bear Fund - BEARX

  0% REIT'S - REIT Index Fund - VGSLX

[See Disclaimer]

 This blog site is not a registered financial advisor, broker or securities dealer and The Dividend Yield Investor is not responsible for what you do with your money.

This site strives for the highest standards of accuracy; however ERRORS AND OMISSIONS ARE ACCEPTED!

The Dividend Yield Investor is a blog site for entertainment and educational purposes ONLY.

The Dividend Yield Investor shall not be held liable for any loss and/or damages from the information herein.

Use this site at your own risk.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

Time to worry? Russell 2000 hits 'death cross'

The Russell 2000 (:.RUT2) has been diverging from the broader market over the last several weeks, and now technicians point out it has flashed a bearish signal. For the first time in more than two years, the small-cap index has hit a so-called death cross. 

A death cross occurs when a nearer-term 50-day moving average falls below a longer-term, 200-day moving average. Technicians argue that a death cross can be a bearish sign.

DYI 

China...The Paper Tiger.....

America: your days as a global superpower are numbered

We've seen it before: the Roman empire fell, then the British. America's economic dominance could be about to end - and China is taking its place.

Within the next five years, China could account for a larger share of global GDP than any other country and knock the US off its perch as the world’s biggest economy, according to analysts at Deutsche Bank. 

“Based on current trends China’s economy will overtake America’s in purchasing power terms within the next few years,” Tim Reid of Deutsche Bank wrote in a research note. “Given this analysis it strikes us that today we are in the midst of an extremely rare historical event – the relative decline of a world superpower.” 

As Reid points out, America’s share of world output, on a purchasing power parity basis, has already slipped below 20pc, which has historically been the marker of a global superpower, from the Roman to the British empires.

DYI Comments:

China...The paper tiger that roars and growls but lacks the bite do to her many historical, geographical and financial weaknesses.  China historically until now has never (except for very brief periods of time) in its long history look outside itself to become a major power. China's history is rife with instances of turning back into itself and leaving international affairs to others.  Will this time be different?  That is always a possibility; history places high odds against it.

China is NOT a country but an empire built on money and coercion to keep its many divergent factions and cultures from flying apart.

The Chinese regime is a vast bureaucracy that has operational control enforced by a military-security complex that is well housed, clothed, fed, and paid to maintain their loyalty.  Ideology based principals, if they ever existed are long gone.  Such virtues as egalitarianism, selflessness and service to their fellow citizens is more propaganda than actual Chinese attributes.

China has island like qualities that isolate it not by water but from impassable terrain and wastelands.

    

China is 1.366 billion people living in a sardine can.  The effective living area reduces the size of China by two thirds its actual size with the majority of its people living within 1,000 miles of the ocean.

   

China’s soaring debt threatens growth and investment

SYDNEY (MarketWatch) — Economists seem to have only recently identified China’s debt problems. In fact, the country has had a 35-year addiction to cheap credit that now threatens to stunt its growth. 

New lending by Chinese banks has been equivalent to around 30% or more of GDP. Around 90% of this lending has funded investment in building, plant, machinery and infrastructure, especially by State Owned Enterprises. According to the World Bank, almost all of China’s growth since 2008 has come from “government influenced expenditure.” 

This expansion has rapidly increased China’s level of debt. Most estimates now put Chinese government (including local governments), corporate and household debt at around 200%-250% of GDP, up from around 140%-150% in 2008.

DYI Continues:  China has all of the trappings and appearances of a capitalistic country with private property, banks, an active stock and bond market but appearances can be deceiving.  They are not capitalist; as capital allocation is determined by political connections than the merits of the business.  In a sense free markets do not exist in China as capital allocation is not being determined by the market.

China is similar to Japan during the the 1970's and 80's but on steroids.  When this massive debt explodes the Communist party will have its hands full attempting to keep the empire from flying apart.  When that time comes China with all of flaws will be seen as "The Paper Tiger!"

DYI 

The Ponzi Economy 

John P. Hussman, Ph.D.

The standard of living of a country is measured by the amount of output that individuals are able to consume as a result of their work. The productivity of a country is measured by the amount that individuals are able to produce as a result of their work. Over time, growth in the standard of living is chained to and limited by growth in productivity. Productivity, in turn, rests on two factors: a productive capital base, and an active pool of productive domestic labor. The accumulation of productive factors is what drives long-term growth. When the most persistent, most aggressive, and most sizeable actions of policymakers are those that discourage saving, promote debt-financed consumption, and encourage the diversion of scarce savings to yield-seeking financial speculation rather than productive investment, the backbone that supports a rising standard of living is broken.

Meanwhile, financial repression by the Federal Reserve has held interest rates at zero, discouraging savings while encouraging and enabling households to go more deeply into debt. Various forms of deficit-financed government assistance and unemployment compensation have also been used to make up the shortfall, allowing consumption, and by extension, corporate revenues and profits, to be sustained. As long-term economic prospects have deteriorated, the illusion of prosperity has been maintained through soaring indebtedness, coupled with yield-seeking speculation in risky assets that has repeatedly (albeit not always immediately) been followed by crashes throughout history.

Wall Street At Work Aggravating Risk—-Would You Like Some Leverage On Them Junk Bonds!

After more than a decade of financial repression by the Fed and other major central banks, however, junk bond yields have fallen to the 5-6% range. Such rock-bottom yields, of course, are completely uneconomic and barely cover the risk of loss—-let alone inflation, taxes and the rest.  So you would think that bond fund managers would go on strike, forcing yields back into at least a minimum zone of rationality. 

Needless to say, you would be wrong. As highlighted in the Bloomberg piece below, fund managers are still insisting on a 10%+ return, but not by buying fewer over-valued junk bonds. No, they are just buying them on leverage in order to goose the yield on their own capital at risk. 

It goes without saying that the central banks have not eliminated the business cycle—-their pretensions to the contrary notwithstanding. Indeed, we are already in month 62 of this so-called recovery cycle—compared to an average expansion of about 55 months in the 10 cycles since 1948. 

So when the next economic contraction finally hits and there is an investor run on the junk bond funds, look out below. The evaporation of liquidity will result in soaring yields as desperate fund managers scramble to generate cash and are forced to sell into a bidless market. And then the gamblers who followed Citi’s advice and leveraged up their holdings by 2-3X will face margin calls and be forced to join the selling stampede, too.

Pundits are trying to bring subprime mortgages back. Don't let them

Pundits and think tanks are trying to bring back subprime lending, spinning it as a virtuous move for the economy. Nothing could be more obviously a terrible idea

 To see where a return to deregulation can take us, look merely at the fast-decaying market in subprime auto loans, not coincidentally the only lending sector not monitored by the Consumer Financial Protection Bureau, thanks to a legislative carve-out. 

Lenders have encountered higher-than-expected defaults, in what could be the beginning of a wider crash. These subprime loans have driven a temporary resurgence in auto production and boosted the economy, but if the market washes out, nobody will say it was worth it. 

Banks destroyed the housing market when they were allowed to ignore lending standards and sell whatever loans they wanted with impunity. They’re not exactly disinterested observers when they talk about regulation. Considering that they’re asking for the keys to the sports car they just wrecked, we might want to take their claims with a mountain of salt.

Stressed Borrowers Rattle Resurgent Subprime Lending Industry

The fate of subprime auto lending may have a wider impact. The lending has fueled car production, which has in turn buoyed the economy. “Automobile production and subsequent sales have become a leading barometer of growth in this part of the economic cycle,” Jim Vogel, an interest rates strategist at FTN Financial, said. “It used to be housing, and now it’s autos.” 

But history shows that a splurge on subprime lending nearly always leads to a crippling cascade of problems. While credit analysts do not yet see signs of an imminent marketwide disaster, they say that fissures are appearing in certain parts of the subprime sector.

DYI

Alibaba Stock Soars in Jubilant Trading Debut

Alibaba debuted as a publicly traded company Friday and swiftly climbed more than 40 percent in a mammoth IPO that offered eager investors seemingly unlimited potential for growth and a way to tap into the burgeoning Chinese middle class. 

Trading under the ticker "BABA," shares opened at $92.70 and nearly hit $100 within hours, a gain of 46 percent from the initial $68 per share price set Thursday evening. Demand was so high that the company raised its price ahead of the debut. 

"The business model is really interesting. It's not just an eBay. It's not an Amazon. It's not a Paypal. It's all of that and much more," said Reena Aggarwal, a professor at Georgetown.

The red flags around Alibaba and one of the biggest stock debuts in history

The Alibaba Group, China’s e-commerce powerhouse, made history Friday when it raised more than $21 billion in a record-breaking stock market debut. So what exactly did investors buy? 

A piece of a Caribbean-based holding company with tenuous ties to the actual firm. An ownership stake that’s overshadowed by the powers granted to a small group of insiders. And potential future conflicts with Chinese regulators, who are notoriously hard to predict.

DYI Comment:  I'll have John J. Xenakis of GENERATIONAL DYNAMICS do the talking from his excellent website.

China's Alibaba IPO causes lightheaded investors to pop champagne corks

Here's how one news story began: 

"Alibaba debuted as a publicly traded company Friday and swiftly climbed more than 40 percent in a mammoth IPO that offered eager investors seemingly unlimited potential for growth and a way to tap into the burgeoning Chinese middle class. 

The sharp demand for shares sent the market value of the e-commerce giant soaring well beyond that of Amazon, eBay and even Facebook. The initial public offering was on track to be the world's largest, with the possibility of raising as much as $25 billion. 

Jubilant CEO Jack Ma stood on the floor of the New York Stock Exchange as eight Alibaba customers, including an American cherry farmer and a Chinese Olympian, rang the opening bell." 

We've now completely returned to the euphoric hysteria that preceded the 2007-2008 financial crisis. At that time, investors were going nuts over one IPO after another, one leveraged buyout after another. Each one was a sure thing, just like Alibaba, and I'm told that there are a lot more IPOs coming in the next few months. 

There aren't any "real people" investing in Alibaba. The investors are almost all hedge funds and financial institutions. A hedge fund can borrow $10 million and use it to buy Alibaba stock, since it's "sure" to go up. That's how a combination debt bubble and stock market bubble are created. Different hedge funds borrow money and use it to buy stocks, pushing up the prices of the stocks, and in essence creating money backed by a chain of debt. The problem arises when one hedge fund loses money and can't repay its debts, causing a chain reaction that results in a financial crisis. 

Stock market valuations are going farther and farther into the ozone bubble layers. The last time I mentioned the S&P 500 Price/Earnings ratio, just a couple of weeks ago, it was at 18.97, which is already astronomically high by historical standards. But now, according to Friday's Wall Street Journal, the S&P 500 Price/Earnings index (stock valuations) on Friday (September 19) has shot up to 19.36. 

Do I have to remind you, Dear Reader, that it wasn't very long ago, in 1982, when the S&P 500 P/E ratio was below 6. It falls to that level every 30 years or so, and it's overdue to do so again. This would push the Dow Jones Industrial Average down to the 3000 level. 

By the way, those hedge funds didn't really invest in the Alibaba company on Friday. Alibaba is described as "China's e-commerce powerhouse," bigger than eBay and Facebook combined. But the Chinese do not permit foreigners to own Chinese internet stocks. So they set up some kind of holding company in the Cayman Islands, with some kind of relationship to Alibaba. Investors who bought stock on Friday actually bought shares in that holding company. Even large investors have absolutely no say in how Alibaba is run, and China's regulators can pull the plug at any time. But apparently today's investors are so imbued with sheer stupidity that they bought the stock anyway, and pushed its opening price of $60 per share all the way up to $93 per share, within just a few hours.

DYI