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