Wall Street posts hyperbolic five day surge
Wall Street stocks surged hyperbolically again last week, with the Dow increasing by almost 600 points, and the S&P 500 Price/Earnings index (stock valuations) once again approaching the astronomically high value of 19, putting the stock market into an enormous bubble. The historical average for the P/E ratio is 14, and every 30 years or so it falls to the range 5-6, which is where it was last in 1982. A fall in the P/E ratio to 5-6 again will push the Dow down below 3000.
Friday's surge particularly was apparently caused by a shock announcement by the Bank of Japan that they would start a new massive "money-printing" program in the form of quantitative easing, similar to the program that the American Federal Reserve has been pursuing. It's widely believed that the Fed's QE program, which ran as high as $85 billion per month, just pumped money into the stock market, benefiting the rich people and the Washington elites, without improving the income of ordinary people.
It's now assumed that the BOJ's new QE program will have the same effect.
However, the surprise BOJ announcement was a shock to individual investors who been expecting a further dive, and had a portfolio of short sales (essentially betting that the stock share prices would continue to fall). According to stock market guru Art Cashin.
Cashin added that short-covering rallies seldom last long. However, other analysts point out that the European Central Bank may make a similar announcement soon, pushing the stock market bubble even more enormous.
Generational Dynamics predicts that, like all bubbles, this bubble will burst, in the context of a global stock market panic and financial crisis, pushing the Dow back down to the 3000 level.
"And anybody who was bearish, is now scrambling to cover. ... What we're seeing is a massive global short-covering. That's why stocks are rallying."
John P. Hussman, Ph.D.
At present, the entire global financial system has been turned into a massive speculative carry trade. A carry trade involves buying some risky asset – regardless of price or valuation – so long as the current yield on that asset exceeds the short-term risk-free interest rate. Valuations don’t matter to carry-trade speculators, because the central feature of those trades is the expectation that the securities can be sold to some greater fool when the “spread” (the difference between the yield on the speculative asset and the risk-free interest rate) narrows. The strategy relies on the willingness of market participants to equate current yield (interest rate or dividend yield) with total return, ignoring the impact of price changes, or simply assuming that price changes in risky assets must be positive because low risk-free interest rates offer “no other choice” but to take risk.
The narrative of overvalued carry trades ending in collapse is one that winds through all of financial history in countries around the globe. Yet the pattern repeats because the allure of “reaching for yield” is so strong. Again, to reach for yield, regardless of price or value, is a form of myopia that not only equates yield with total return, but eventually demands the sudden and magical appearance of a crowd of greater fools in order to exit successfully. The mortgage bubble was fundamentally one enormous carry trade focused on mortgage backed securities. Currency crises around the world generally have a similar origin. At present, the high-yield debt markets and equity markets around the world are no different.DYI Comments: With this big push in prices at the end of the month this has moved our two managed accounts further into cash. Historically and valuations this is a very expensive stock market along with a bond market's sub atomic low yields due to central bank manipulation.
AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 11/1/14
11-1-14
Maximum Aggressive Portfolio
(Super Max)
71% Cash - Hussman Strategic Total Return Fund - HSTRX
17% 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
The Great Wait Continues.....
DYI
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