How To (Unlawfully?) Blow A Market Bubble

The Market Ticker ^ | 08/04/09 | Karl Denninger

[FromLori]

So we've got "green shoots" in the market eh?

Very nice chart, this, right?

img src=”http://market-ticker.denninger.net/uploads/Charts-2009-08/spx-1y.png>.

Hmmm... how do you square that with the fact that earnings are dropping like a stone on a year-over-year basis, revenues (the more important indicator of economic activity) are down double-digits on average, and consumer purchasing power (as measured by tax receipts, down 22% at a federal level year over year, the worst since the Depression) is in the toilet?

We're told this is "money was on the sidelines" and "people are rushing in."

But the statistics say otherwise: Only $400 billion has shifted out of money market accounts.

So where has all this buying pressure come from, if not from people shifting assets into the market?

Zerohedge nailed it, I believe:

Why the Federal Reserve of course, which directly and indirectly subsidized U.S. banks (and foreign ones through liquidity swaps) for roughly that amount. Apparently these banks promptly went on a buying spree to raise the all important equity market, so that the U.S. consumer who net equity was almost negative on March 31, could have some semblance of confidence back and would go ahead and max out his credit card. Alas, as one can see in the money multiplier and velocity of money metrics, U.S. consumers couldn't care less about leveraging themselves any more.

This sort of pernicious game looks risk free, and it is - to the banks who got this money. After all, they're "too big to fail", and its very important that these folks be able to issue new stock (thereby soaking you out of that $400 billion) in a vapid attempt to recapitalize.

The problem comes when the consumer doesn't come back in and leverage themselves up any further - either because they refuse or worse, because they can't.

The latter is my postulate, as I've shown from the consumer credit numbers - consumers simply haven't taken down any material amount of leverage:

img src=http://market-ticker.denninger.net/uploads/ConsumerDebtRecent.serendipityThumb.png>.

So once again we have The Fed blowing bubbles, this time in the equity markets, with (another) wink and a nod from Congress. This explains why there has been no "great rush" for individual investors to "get back in", and it explains why the money market accounts aren't being drained by individuals "hopping on the bus", despite the screeching of CNBC and others that you better "buy now or be priced out", with Larry Kudlow's "New Bull Market" claim being particularly offensive.

Unfortunately the banksters on Wall Street and the NY Fed did their job too well - by engineering a 50% rally off the bottom in March while revenues continue to tank, personal income is in the toilet and tax receipts are in freefall they have exposed the equity markets for what they have (unfortunately) turned into - a computer-trading rigged casino with the grand lever-meister being housed at the NY Fed.

Bull Markets are not formed out of The Fed playing "Quantitative Easing", throwing literally $500 billion dollars into the pool which then get "fractionally reserved" by 10:1 to produce a literal $4 trillion dollar market ramp job. Go ask the Japanese how that works - the BOJ did the same thing, the Nikkei rallied off the bottom in the 90s like a rocket ship, but when reality asserted itself (and it always does) it collapsed again and has never been back to its all-time highs since.

No, real buying is just that - real buying from real retail investors who believe in the forward prospects for the economy and business, not funny-money Treasury and MBS buying by The Fed from "newly created bank reserves" funneled back into the market via high-speed computers. The latter is nothing more than a manufactured ramp job that will last only until "the boyz" get to the end of their rope (and yes, that rope does have an end) as the fractional creation machine does run just as well in reverse, and as such "the boyz" cannot allow the trade to run the wrong way lest it literally destroy them (10:1 or more leverage is a real bitch when its working against you!)

Is it coming to an end now? Nobody can be certain when, but what is certain is that over the last week or so there have been signs of heavy distribution - that is, the selling off of big blocks of stock into the market by these very same "boyz." This is not proof that the floor is about to disappear, but it is an absolute certainty that these "players" are protecting themselves from the possibility and making sure that if there is to be a bagholder, it will be you.

Beware the unwind of this mess; unfortunately bubbles, when blown, have a nasty habit of detonating with surprising force and reverting not just to the mean but well beyond it.

[ding_dong_daddy_from_dumas]

Denninger.

[sickoflibs]

Thanks, I like that one. Austrian theory says (I think) when the stimulus goes, so does the bubble and that the stimulus cant last forever much as we want it to.

I just need to know when to get out and every 1000 pt I get more nervous.