Five Ways This Bubble May End

There's no doubt the current sucker's rally is a mini-bubble, at least in stocks, Treasuries and the USD. But the force is strong, as demonstrated repeatedly over the past few weeks by the market taking bad news as no-news and not-extremely-bad news as great news. And bubbles can last much longer than possible, as demonstrated by many great prophets of doom having predicted ten crises out of three over the past decade.

While it may be futile to predict the timing of bubble burst, it's at least somewhat amusing to imagine how it could take place. So here I go, if only as intellectual masturbation.

1. Current earnings season turns out bad. But this is unlikely, judging by the market's bias of bad news = good news. It may dampen the sucker's rally, but it'd take a few disastrous earnings from heavyweights to prick this bubble. Since several heavyweight financials, including GE (that's a joke haha), have already released earnings and the market saw that it was good (haha again), I bet earnings is not it.
2. GM and Chrysler bankruptcy. This could set off some global chain reaction in US (jobs, parts, services, etc), Germany and Japan (US government subsidy of Ford (F) and legacy US cars), China (parts), and who-knows-where in who-knows-what ways.
3. Central and Eastern Europe currency and debt crisis. This could set off some global chain reaction, starting from Austrian/Swiss/Italian banks and on to the rest of Europe, possibly further to US banks -- I doubt anybody can rule out the last part after Lehman (LEHMQ.PK) contagion.
4. The highly expected/hoped-for recovery never comes. If all else fail to prick the bubble, this one will bite us in the (rear)end. There will be a point where people cannot hold their breath any longer. The world economy doesn't recover, but stablizes somewhat. But the Fed has to continue printing money to prop up banks. USD collapses (no worldwide crisis, no reason to park money in USD -- the only way to maintain a strong dollar under the current circumstances is to make sure there is a worldwide crisis). Inflation surges, without real growth. Food and gold prices surge (I'm not so sure about oil and metals). Even housing prices might recover in this scenario, but would collapse as soon as the government's efforts in supressing long-term interest rate and forcing lending (mostly through GSEs) stop. And stop they will. The first part will stop because foreign demand for long-term Treasuries have already begun sliding and Fed buying has to stop at some point when the non-productive nature of such financial masturbation becomes undeniable. The second part will stop because the world will start pricing in GSE risk as part of US sovereign risk as soon as world economy stablizes somewhat (see above on worldwide crisis).
5. A major bank failure. This is THE only way to solve the problem at the root, shocking the regulatory, corporate governance, and market systems back into a healthy state. But it's not gonna happen, not before Step 4 above is implemented.

Disclosure: No positions.

Comments

[Ricard:]

Here's a question: Banks fail, and then what? Will the consumer magically start spending again? Or, will the consumer remain over-leveraged, with their own toxic assets hiding in their 401k's?

It seems as the picture gets darker, it takes a life of its own. When does it stop, or will it?

Apr 20 06:31 AM

[kds8mln:]

WHAT BUBBLE? worldwide market is totally crashing by historical percentage. How do you see a bubble? LOL.

Apr 20 06:54 AM

[Bad Dog:]

Obama has no choice but to let GM go into bankruptcy. The ground has been prepared. It's a matter of time. The union votes are going to Obama no matter what happens with GM. With the GOP essentially the Party of the Confederacy, it's unlikely that Obama is thinking about GM as an electoral issue. GM is over; all we are arguing over is where to bury the corpse.

My suggestion for an end to the bubble is a complete collapse of the Pakistan government and the accession to power of the Taliban. The Pakistani government has now lost the Swat valley, much of Baluchistan, and the western provinces, the so-called Federally Administered Tribal Areas (FATA). There is no much left to lose. The next step for the Taliban, and its Al Qaeda allies, is Islamabad. At that point, it's pretty much over. Then you will have a very radical, nuclear-armed regime in charge in Pakistan, and the world will have to face a very alarming prospect.

Apr 20 08:57 AM

[kelm:]

I agree with your assessment of Pakistan (and GM) but that would do a lot more than prick the bubble obviously.

Is this a bubble? World markets are rallying as well an some, China in particular, have more reason to rally than we do. Certainly an Eastern European crisis, which some are saying is being ignored could undermine things but I think the most likely scenario is where we get to summer or into the fall and find that growth is just not picking up, government receipts are not nearly what was predicted requiring more debt issuance and unemployment continues to rise.


On Apr 20 08:57 AM Bad Dog wrote:

> Obama has no choice but to let GM go into bankruptcy. The ground
> has been prepared. It's a matter of time. The union votes are going
> to Obama no matter what happens with GM. With the GOP essentially
> the Party of the Confederacy, it's unlikely that Obama is thinking
> about GM as an electoral issue. GM is over; all we are arguing over
> is where to bury the corpse.
>
> My suggestion for an end to the bubble is a complete collapse of
> the Pakistan government and the accession to power of the Taliban.
> The Pakistani government has now lost the Swat valley, much of Baluchistan,
> and the western provinces, the so-called Federally Administered Tribal
> Areas (seekingalpha.com/symbo...). There is no much left
> to lose. The next step for the Taliban, and its Al Qaeda allies,
> is Islamabad. At that point, it's pretty much over. Then you will
> have a very radical, nuclear-armed regime in charge in Pakistan,
> and the world will have to face a very alarming prospect.

Apr 20 09:22 AM

[Ranger:]

One more doom and gloom craphead who has never been right about anything. However, you and your cohorts will do just enough damage to drive stocks down a little so you can load up on options and make a minor killing. And when none of what you forecast happens, the little boneheads here that followed your advice and lost their shorts will simply pout in righteous indignation. When everything is a bubble, nothing is a bubble.

Apr 20 10:26 AM

[connorport:]

I have spoken with several people over the last few weeks that typically do not play the market. My consensus is from what i'm hearing is that they want in now. This should drive the demand for stocks upward. Most of the largest businesses are also diversified in the global market such as China and Dubai where the economy is either booming or recovering quickly due to lack of regulations that restrict quicker American progress. I think the US economy will recover on the backs of these fast growing economies. GE is a big player in this arena and investments today at disressed levels will pay off big down the road for the companies and its investors which will in turn move the market upwards and put some cash back into American hands to spend further driving the markets.

Apr 20 11:07 AM

[pungent:]

From connorport:
"I have spoken with several people over the last few weeks that typically do not play the market. My consensus is from what i'm hearing is that they want in now."

Folks, you will never find a more concise definition of a Bubble than this. As we said 2 years ago, "when the ladies in the church choir are talking about flipping houses, it's time to get out fast!"

Apr 20 12:02 PM

[buoy:]

Yup, I just got me some GE.

Apr 20 12:07 PM

[Allan Frain:]

The logic is there.

Or, the continued loss of jobs, further deterioration in Residential Real Estate, CRE trainwreck, rising revolving credit defaults, and continued negative GDP numbers could preempt anything resembling the referenced stability.

Apr 20 12:27 PM

[Rob Viglione:]

Forward earnings could certainly suggest "bubble" > 20x current price levels.


On Apr 20 07:33 AM Cetin Hakimoglu wrote:

> Sorry, but It's fallacious to call this a 'bubble' when PE ratios
> are still very low. If the S&P 500 had a PE ratio of 20 it would
> be in the 1,400 range. Obama won't let GM go bankrupt because he
> needs union votes in 2012. However, the failure of GM wouldn't have
> negative ramifications. And what if the economic recovery does come.
> Then what?

Apr 20 12:55 PM

[Bo Peng:]

Ricard, I think I've answered your question of "bank fails then what" question before. I see that you're not convinced. ;>

Bank fails. Deposit is saved. Commercial banking part remains public if possible. Investment banking part is taken over by gov and then sold to private partners ASAP. We go back to the old Wall Street model that had worked quite well for about two centuries. Counterparty risk chain reaction is unlikely as demonstrated by the non-event of Lehman CDS settlement.

My point is, too big to fail means it's too big, therefore needs to be broken down. Instead, the gov (not just US gov) is making them even bigger.

Apr 20 03:12 PM

[reval:]

I believe the steep sell off on Monday could have some relationship to the totally negative hit job on 401K's on Sunday's 60 Minutes program. Any casual (or non-casual) participant in a 401K could not be faulted for immediately asking their company to cancel their participation. The piece, done by Steve Krofft, basically said that 401Ks are con-jobs created to enrich the mutual funds. Krofft made the 401-K Executive Director look like an imbecile, which perhaps he may well be. The reporting job was superficial, designed to stir emotions by interviewing teary eyed participants who now must work for a longer period of time and a couple in their 50s who won't be able to buy their cabin "up north" for a few years more. While I can certainly empathize with the damage to almost everyone's 401K, this media hit piece has the potential to make matters much worse,

Apr 20 05:04 PM

[The Geoffster:]

Thank God for "Two and a Half Men."

Apr 20 09:43 PM

[Ricard:]

Good point, thanks for the reminder...:)

I suppose I've mentally 'decoupled' the consumer and the financial institution. I am starting to formulate the opinion that even if banks were to fail or be saved, consumers would still remain over-leveraged, and business may still remain sluggish. Perhaps there is money out there waiting to pounce that is in the shadows (i.e., your new Wall Street), but it seems to me that solving the financial crisis is only half the problem.

I am holding steady in my TIPS and emerging market positions, thinking about selling off my US shares in this rally.

On Apr 20 03:12 PM Bo Peng wrote:

> Ricard, I think I've answered your question of "bank fails then what"
> question before. I see that you're not convinced. ;>
>
> Bank fails. Deposit is saved. Commercial banking part remains public
> if possible. Investment banking part is taken over by gov and then
> sold to private partners ASAP. We go back to the old Wall Street
> model that had worked quite well for about two centuries. Counterparty
> risk chain reaction is unlikely as demonstrated by the non-event
> of Lehman CDS settlement.
>
> My point is, too big to fail means it's too big, therefore needs
> to be broken down. Instead, the gov (not just US gov) is making them
> even bigger.

Apr 21 09:26 PM

[chistletoe:]

Good column.
Lemme just suggest one more way:
More and more young people are realizing that
their whole lives have been robbed from them by the
baby boomer generation, by the ultra-rich and the
politicians. Already this year we've had major riots
(Oakland), major vandalism (cutting of the fiber optic cable into Silicon Valley), and all kinds of suicide bomber and postal violence.... the risk that they
perform some act which will affect the markets grows larger every day ...

Apr 20 05:22 AM