The financial markets are completely broken. So when they go up it’s a sign of another dose of central bank folly; and also the fact that after 10-years of an utterly artificial bull market, they are spring-loaded with speculative fevers like never before.
Needless to say, the Donald doesn’t have a clue about this fatal threat to his beloved MAGA. Nor does he have an inkling that today’s egregious central bank fostered stock and bond bubbles pose a mortal threat to his continued tenure in office, perhaps to his very liberty once he is no longer an un-indictable sitting president.
Contrary to Trump’s delusional boasting, the stock indices are not in the nosebleed section of history because the US economy and business profits are strong; they’ve been levitated skyward by fearless traders and algos who know the Fed is abysmally weak and dares not risk a hissy fit at this late stage of history’s greatest financial mania.
So time and again, they front-run an expected easing move and are rewarded by the Fed’s ritual capitulation. But what these insatiable speculators perhaps overlook is that no good thing–no matter how perverse—lasts forever.
That is to say, there is a cumulative time dimension to these central bank fostered bubbles. It is now a proven fact that at the tippy-top of financial mania cycles, even the casino runs out of Greater Fools. And that’s the moment of reckoning when giant air pockets open up on the trading charts, no bids are to be found, machine driven selling accelerates and the indices crash.
For want of doubt, simply recall what happened with the high-flying NASDAQ 100 at the time of the dotcom mania. As shown below, it took approximately 36 months from March 1997 to March 27, 2000 for the index to rise from 800 to 4700 or by nearly 6X.
But when the last Greater Fool lifted the last insanely priced offer, the downward plunge was virtually cyclonic. During the next 14 trading days the index shed 40% of its three-year gain.
Yet that was just the warm-up. By October 2002, the index was back were it had started at 800, and the cumulative loss from the bubble’s top tick was a staggering 82%.
Nor was the NASDAQ 100 crash some kind of one-time freak of history. Virtually the same pattern unfolded with respect to the Big Cap S&P 500 index at the time of the 2008 financial crisis.