Bubbles start in areas where we do not expect and continue until they reach such a size that eventually they collapse upon themselves.
It has been said that bubbles need more and more money to keep expanding but eventually they collapse upon themselves.
Currently, the largest bubble ever seen has entered the public eye but has yet to be recognized by the public or financial markets.
That bubble is governments and their debt all around the world.
One can say that the start of this bubble was when former President Bush embarked on a program to give money back to the people via a $500 disbursement.
Spending then exploded throughout the prior decade as the financing of two wars and loose credit created a mortgage bubble of epic proportions which almost brought down the entire global financial system.
The last four years have seen the US spend every possible dollar they could create exploding budget deficits and threatening the future of the US Dollar as a global reserve currency, credit rating, and the fiscal sustainability of the country itself.
Over in Europe the IMF and the EU appear to be engaged in a sort of shell game to raise capital from investors and then continually throw it at imploding banking systems and sovereign governments.
Take the LTRO program as an example. The central banks expected the banks to borrow at ultra low rates using strong bonds as collateral and in return lend the borrowed funds to companies kick starting economic growth.
In reality, the banks dumped their worst garbage on the ECB as collateral in return for money which was either kept on deposit or used to purchase slightly better quality sovereign debt. So bad was the garbage put up as collateral that the Bundesbank push the ECB to revise their rules to give sovereign nations the right to refuse bonds if they saw fit.
Now the IMF believes that they can raise $400 billion dollars to provide a firewall against the crisis when the flames have already spread from Greece to Portugal to Spain and now to the Dutch. That is like bringing a water pistol to a raging forest fire.
The mountain of debt that has been created by sovereign governments in Europe and the US is weighing heavily upon the markets as seen by the rolling over of major indices as the mopping up of capital by sovereign nations constrains the ability of companies to expand.
Across the board in Europe and China manufacturing PMI's are coming in below expectations and the fears of a global slowdown and recession are rising.
Investors hoping that this rally may continue into the summer should watch the indices very carefully as two important technical patterns are playing out. The first is a head and shoulders top within a much more important 3 Peaks and a Domed house pattern (more info here).
As the newsflow begins to turn negative over the coming months and worries over a debt restructuring in Spain grow the market will turn lower leaving investors wondering what happened to their first quarter gains.
During the current market conditions investors should look for a pullback to the 200 day moving averages in the Dow (DIA), S&P 500 (SPY), and Nasdaq (QQQ) where we can properly assess the risks emanating not just from the EU's failed programs but the results of upcoming elections across Europe which are already generating surprises for investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I am short the broader market through some leveraged ETFs as part of my overall strategy to be long gold and short the broad market.