Has a Stock Market Melt-Up Begun for
a Stock Market Crash in 2016?
By David Haggith, July 15, 2016
Melt-ups precede a major stock market crash, and by all
appearances we may be in a melt-up right now that could
cause a stock market crash in 2016. First, a small bit of
euphoria kicked up permabull adrenaline in the
US market when Brexit didn’t make
the American sky fall overnight. At the same time, central banks
scurried to buy stocks all over the world just to make sure markets didn’t
crash. Then the world’s oldest banks began to topple in
Europe,
causing European money to flee into American stocks. (These banks had
been falling a long time already, but now they started
begging for
bailouts.)
Then investors who shorted the market got scared to death because the stock
market broke a nineteen-month ceiling, which had endured as if it were made of
marble. So, the market shorters started to buy the stocks they had
committed to now in order to close their positions quickly before the
prices went up any higher. That created a massive short squeeze, which happens
when a large number of investors who have shorted the market start buying the
stocks they’ve committed to. That explodes demand, which drives
stock prices up even faster, causing more investors to rapidly run for the
exits of their short positions. In a short squeeze, investors accept
huge losses in order to close out their bets before they lose even more
money.
When Larry Fink, CEO of the world’s largest asset manager,
announced Blackrock beat expectations for the second quarter, he
summarized this week’s ceiling-breaking market as follows:
According to Fink, the recent rally has been supported by institutional
investors covering shorts. “Since Brexit, we’ve seen ETF flows almost at record
levels … $18 billion of inflows,” Fink said. What that tells you is retail
investors are pulling out, he said. “You’re seeing institutions who were short
going into Brexit … all now rushing in to recalibrate their
portfolios.” Another curious fund flow: the ongoing rush into dividend
plays. Fink said he’s been seeing huge inflows in fixed-income products. “So
you’re seeing a risk-off trade, as we call it, around the world.” Fink
also confirmed … that the true force behind the recent surge is a familiar
one: central banks. Fink said extraordinary central bank asset purchases
has been inflating stocks prices. (
Zero
Hedge)
That $18-billion dollar frenzy has the permabull speculators
pawing the ground again and all the algorithms of the electro-speculators
charged up and humming. Thus, the market perpetuates an all-out
feeding frenzy. Very little of this flurry of buying is based on
the economy. It is based on emotions causing actions, which cause more
emotions that cause other actions. That’s why a “stock market melt-up” leads to
the worst crashes in the history of the world.
This could be the final roundup of the
bulls that corrals them into a 2016 stock market crash
A stock market melt-up always ends badly just like a Ponzi scheme. The
market over-revs as everyone expects the other players to keep bidding the
market up in scuffle to the top, until someone stops to take a breath, looks at
the extraordinary height, says “Oh, my …” loses his grip in fear
and falls. Suddenly other investors start doing the reverse of
what they did before, making large panic moves to get out the way before the
others fall. The pyramid that was balancing on its point all begins to crumble.
As
Jim
Quinn just wrote,
Lance Roberts, someone whose opinion I respect, reluctantly agrees we could
see a market melt up:
“Wave 5, ‘market melt-ups’ are the last bastion of hope for the ‘always
bullish.’ Unlike, the previous advances that were backed by improving earnings
and economic growth, the final wave is pure emotion and speculation based on
‘hopes’ of a quick fundamental recovery to justify market overvaluations. Such
environments have always had rather disastrous endings and this time, will
likely be no different.”
…Short-term traders can make immediate profits using momentum techniques,
following the herd, and picking up pennies in front of a steamroller. Remember
your brother-in-law who was getting rich day trading stocks in 1999? Remember
your cousin who was getting rich flipping houses in 2005? … There are always
profits to be made for awhile. Then
the bottom drops out, because
fundamentals, cash flow, valuations, and reality matter in the long run.
This year I’ve read a number of analysts saying the stock market is not
about to crash because the all-out euphoria that drives a market far above
economic reality just before a major crash (the kind of crash that can
wipe out 50-60% of the market’s total value) isn’t happening.
Well, this may be it. We’ve had little bursts of euphoria, but this could
be the Big One — the final roundup of the bulls. Central Banks with their
know-all policies for crowding the market upward may have just herded the
bulls all into the corral for slaughter.
Economic collapses and stock market
crashes are not synonymous
When I predicted the economy would now go into the
second
leg of the Epocalypse, that doesn’t have to mean the
US stock market
will crash in 2016. My latest article on the developing Epocalypse did
not predict another market plunge like we saw in January. (I count January
as a crash of sorts in that it was the worst start of any year in the New
York Stock Exchange’s history — so that’s a significant landmark at the start
of a year of great economic decline around the world — but it was not
followed by the pattern of stock market rallies and drops that I said I
expected.)
Many people think of stock markets and the economies they are based in
as synonymous because people are accustomed to gauging the economy by
how the market is doing. So, when you say, “the economy is going to collapse,”
they think stock market crash. So, just to be clear, that’s not what I’ve said
will now happen.
Usually stock markets and their national economies do track
together. However, most stock markets of late have not tracked their
national economies for a long time, especially in the
US. The
US stock market has even run contrary
to the
US
economy much of the time. It has tracked the Federal Reserve
because speculators followed the money — the big money, the infinite money
that can be created at will. But that only means the market has almost no
economic support. It’s rising on hot air.
The Fed created money to be poured into the stock market
(“front-running the market,” as Richard Fisher, one of the Fed’s board members
said). If the economic news was bad, speculators drove the market up
because a bad economy meant meant a shipload of new money from the Fed
was on the way. The Wells Fargo wagon was coming!
The Epocalypse is an economic catastrophe that is unfolding in
months that will get worse and worse. I noted in my last article about the
Epocalypse that stocks were falling (particularly in Europe and particularly
banking stocks) because crashing stock markets typically create
economic catastrophe all by themselves, particularly if they focus on the
banking industry as in 1929 and 2008 because then stocks and banks fail at the
same time in a one-two, knock-out punch.
Even here, I’m not predicting a stock market crash for 2016. All the
economies of the world are going down whether the
US stock market crashes or not. In
fact, I’m sure the
US
will be the last to fall. I’m pointing out that it
appears the
bulls may be making their final stampede at last. If the current market
rally is an emotional melt-up — as it appears to me — then a massive
US stock market crash in not far off because melt-ups are
just emotional eruptions with almost nothing for support in the
economy that should be the market’s foundation. Without support, the floor of
the once-swelling caldera collapses into the receding magma chamber
beneath.
In buying up stocks to “save us all from Brexit,” central banks may have
unintentionally cued up the next big stock market crash by triggering a feeding
frenzy. A person can make big money on the ramp up (as Lance Roberts and
Quinn note), as many do, but it’s a dangerous gamble because you never know at
what point investors will think too many jinga pieces have been removed and
start to panic.
One reason I cannot predict a stock market crash for 2016 is that central
banks can create infinite amounts of money. Now that fronting money for
the market has practically become their standard play, who knows to what extent
they will buy up the slack through their member banks,
should investors start to flee, by creating fiat money in the reserve
accounts of those banks (QE4)?
Janet Yellen certainly doesn’t want Trump to win the election now
that he’s said job one is to fire her. Therefore, the Fed will pump any
amount of steroids into the market by any vein it can find in order to keep
Trump from proving right about a failing economy. They know that a falling
market will be seen as proof of a failing economy by most people and that a
falling market can create a failing economy. A fourth round of quantitative
easing wouldn’t likely have an affect that would last long, but it could get
enough lift for a couple of months to carry us through the election cycle.
Federal Reserve board members are also now talking openly about “helicopter
money.”
I’m not sure the Fed
can save the market if it has
already created a melt-up, but there is no way of knowing how much money
the central banks will create or where they’ll invest it. Such a major
unknowable can scuttle any prediction.
We do know from observation, though, that the more the Fed
does to centrally manipulate the economy through the stock market and bond
markets, the worse mess it makes of the economy overall. Honest price
discovery, as David Stockman is always pointing out, has been blown to pieces
for so long that no one knows what the real value of anything is because
values throughout all markets have been carried aloft for years by the
Fed’s hot-air of rapidly rising money supply. It’s a hot-air balloon ride into
the unknown. The balloon is rising faster right now, but the flame that is
lifting it may be its own burning fabric at the bottom, and that
could become a melt-up of the whole balloon.