From Blow-Off to Blow-Up - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 27 September 2013
From Blow-Off to Blow-Up A  A  A

Paris, France

The Dow finally broke its losing streak yesterday. It rose 55 points. Gold fell $12.

Nothing dramatic. Nothing conclusive. Or even persuasive.

Stocks are going up...or down. No one knows for sure.

We're not gamblers. So we're out of US stocks...and our 'Crash Alert' flag flies...not because we think stocks are going down, but because we think the weight of risk lies on the downside.

That said, the feds have put in some $3 trillion in cash and some $23 trillion in credit guarantees over the last 5 years. Something had to happen to the money, right?

Don't bother looking for it in the trailer parks. Hourly wages are no higher...and fewer people (as a percentage of the workforce) have jobs than ever before...

Household incomes are actually lower, so you won't find it under middle class seat cushions, either...

Real estate? It's still substantially cheaper.

Only stocks have gone up. From its low, the stock market has added more than $5 trillion in paper value. And charts of stock prices and QE show a close parallel. So, we might plausibly believe that the Fed will continue to push up stock prices - at a rate of about $85 billion per trillion per year.

We might even think that by backtracking on its own forward guidance, the Fed has now embarked on a new stage of money-pumping. And that investors might now anticipate trillions more dollars worth of stock buying.

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John Hussman:

    ...investor s may draw on this decision as evidence that the Federal Open Market Committee (FOMC) has placed some sort of 'safety net' below the market...and that the surprising extension of its current policies could spark a short-term speculative 'blow-off'...
We don't deny it. Under these conditions, the bulls might be right. They might bet on a 'blow-off' with much higher stock prices. They might make money.

Dear readers who are feeling lucky might take a chance. Buy some call options. Who knows? They could pay off big!

But dear readers are warned: gamblers gotta know when to fold them...and know when to walk away, too.

A bet on a 'blow-off' is a bet that 1) the economy is not really recovering, 2) the Fed can't/won't taper, 3) with no real recovery, the cash goes into speculations, and 4) the most likely speculative market is stocks.

This is not a bad bet. 'As long as the music's playing, you gotta dance,' said Chuck Prince. But it's risky. Because they don't hold up cue cards to tell you when they're going to pull the plug. Instead, as the end approaches, the party grows wilder and wilder.

Ah yes, dear reader, they don't make it easy. The closer you are to disaster, the harder it is to leave. Just before the 'blow-off' turns into a 'blow-up' stocks are typically going straight up. Who wants to leave then? And then, when the lights go out, everybody rushes for the exits. But it's too late. Bodies pile up at the doorways. It is impossible to get out.

Of course, same is true of the whole Fed intervention. The more the central bank intervenes, the more dependent the economy becomes, and the harder it is to exit. They say they will head for the door when the numbers improve...but as soon as they make a move to the exit, the numbers collapse.

In this sense, too, the bulls are reading the latest Fed announcement correctly. The Fed will keep at it until the bitter end. It will feed the market with more cash and credit. Then, it will find it impossible to back up. Instead, it will keep going until we get a 'blow-off' in stock prices.

The bulls don't realize that they are subject to the same phenomenon: gambling on a blow-off is hard to stop. Gamblers do not walk away from 100% a year gains. They stay at the table...go to the end...from the blow-off to the blow-up.

There's a better way to play this situation. By anti-gambling...more next week.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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