They’re Back…..Bubbles

Like the Energizer bunny, the march upward is moving into nosebleed territory–the S&P500 rose 2.1% last week.  The VIX (or fear) index, although lower, did not fall a great deal. 

There was very little economic data released last week.  The leading indicators rose, but primarily because the equity markets have risen.  Producer prices jumped more than expected, but the core PPI did not; it matched the low consensus figure.  Initial jobless claims remained elevated, at 456,000.  Durable goods orders fell, when they were expected to rise.  Existing and new home sales both jumped more than expected, but both rose–once again–because of the government’s terribly misguided home buyer credit.  This credit will expire (finally) next week, and the artificial boost to home sales will erode over the next two months.  More ominously, existing home inventories rose, suggesting that downward price pressures will only get stronger.

Technically, the overbought conditions in the S&P are reaching levels last seen at the peak in 2007, as well as in 2000 and 1987.  To say that there’s more downside risk than upside risk in the S&P is an understatement.  The daily charts are still screaming negative divergences–where prices remain high but other indicators are already well below their recent high levels.  The weekly charts are a bit stronger, but are also extremely overbought.

Jeremy Grantham, the founder and head of the GMO which manages more than $100 billion in capital, recently gave an interview with the Financial Times where he basically calls the stock market rally in the US and much of the world a bubble.  He adds that the emerging markets and commodities are also in bubble territory. 

In fact, he asserts that in bubbles like the one we’re in today, the prudent course of action is to protect investors, or else risk ruining one’s career. 

Grantham blames the Fed for blowing another bubble, and for dooming the economy to the damage that will inevitably result when the bubble breaks.

He marvels at the Fed’s ability to generate another bubble so soon after the after the tech and housing bubbles.  Normally, he says, more than 20 years separate bubbles because of the painful memories in the minds of investors.

And finally, he asserts, “the US market is now thoroughly expensive again.” 

As difficult as it is to sit out the dance, a prudent investor–just as in 1987, 1999 and 2007–must prepare for the inevitable downturn.  

Leaving the party early might lead to the loss of some current return.  Leaving the party late might lead to the loss of one’s career and lifetime savings.

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