Speculate Like Its 1999

"I was dreamin' when I wrote this, Forgive me if it goes astray
But when I woke up this mornin',  Could of sworn it was judgment day

The sky was all purple, There were people runnin' everywhere
Tryin' to run from the destruction, You know I didn't even care

'Cause they say two thousand zero zero, Party over, oops out of time
So tonight I'm gonna party like it's 1999" - Lyrics to the Prince song 1999

 

For those of you who traded through the 90's it was a time when speculation was rife.  It was extremely easy to make a killing and many people did just that.  The problem was that once the party was over the market cratered.  Tech stocks were the hardest hit as their earnings were non-existent.  Stocks values were based on concepts and perception rather than solid fundamentals.  On top of this the rally was fueled by Greenspan money printing.  A lot of this money found its way into the stock market and the frenzy fed off itself until one magic day the frenzy stopped.  The party was over and the hangover set in.

 

Today is not much different.  Stock earnings ratios are nearing their highs of 2007 right before the last crash, bad news is ignored and the focus is on the 50 day moving average over fundamentals.  Will this magical line hold and if so the speculators will pile in once again blindly trading off this signal.  I would not be surprised if there is not another new all time high printed very shortly.  The problem as I have repeatedly mentioned throughout this blog is that all of this frenzy is being created by easy money printing and is not based on proper fundamental value.  As we have seen time and time again this will end poorly but this time it is different for the simple reason that never in the history of man has there been such a combined global monetary easing effort as the one currently being undertaken.  Moreover for all the effort there is no success other than a high flying market and a once burgeoning housing market.

 

I say once burgeoning housing market as the recent data points of housing starts and resale have slowed considerably for the simple reasons that house prices have rapidly become unaffordable to the masses and interest rates at 4.6% have put a lot of potential purchasers on hold.  To think that a rate rise to 4.6% can derail the housing market is a signal in and of itself as that rate is low by historical standards.  The fact that the rise to this level has caused buyers to walk from purchases points to a very weak economy and not something to be proud of if you are the Federal Reserve.

 

Furthermore the Federal Reserve as we have seen recently with the hiccup in the market at the announcement of the tapering of their purchases has painted themselves into a corner.  If they stop printing money bond yields will rise choking any growth and the stock market will dive into the abyss.  As these are the only two data points that show any kind of success losing control of these markets without a feasible plan of action in place will undermine the Feds credibility and place the economy in the hands of the open markets.  This is when the end will not be pretty as for the first time since the 90s the markets of the world will ignore the Federal Reserve and deal with the problem head on making the hangover of 1999 seem tame.  With Bernanke set on printing to the end of his term and then scampering off back to the bubble world of learning institutions the mess will have to be sorted out by someone else.  The problem is that the lineup all seem to be intent of blasting more champagne corks into the air rather than dishing out the pain relievers and hitting the gym!