Tuesday, May 27, 2014

Great Crashes and Taper Tantrums (excerpt)

Earlier this year, a few technicians warned that the DJIA seemed to be tracking a similar trajectory to the one during 1928-29, and this could be the year for another Great Crash. I first questioned the apparent parallel in our 1/28 Morning Briefing: “Of course, to make the chart work, the September 3, 1929 pre-crash peak has to be superimposed on this year’s peak, and the scales have to be manipulated to maximize the fear factor.” When the scales are indexed to 100, the parallel virtually disappears.

Mark Hulbert touted the 1928-1929 “scary parallel” in his 2/11 MarketWatch column. While he did note that there is a scaling issue in comparing the current DJIA to the frightening parallel, he nonetheless opined that “[i]f the market follows the same script, trouble lies directly ahead.” That omen is a tautology, of course.

In the 2/18 Morning Briefing, I wrote: “What would it take to repeat the grim fundamental underpinnings of the scary scenario of 1928-1933? Another Lehman moment would do the trick, and make Hulbert and the other promoters of this grim scenario right on the money. Of course, there have been several variations of this ‘endgame’ scenario provoking anxiety attacks and corrections since the start of the current bull market. But Godot has yet to show on stage.” He remains a no-show.

Other bears noted that there has been a very high correlation between the S&P 500 and the Fed’s holdings of bonds. They continue to warn that the Fed’s tapering of QE, which is on track to be terminated by the end of the year, will terminate the bull market in stocks as well.

This week’s Barron’s includes an interview with Stephanie Pomboy, the thought-provoking proprietor of MacroMavens. She argues that QE has propped up the economy, which hasn’t achieved self-sustaining growth. So she believes that “the Fed is going to have to taper the taper” because “the economy can't handle a reduction of stimulus.” I disagree. We won’t have to wait much longer to see who is right given that the Fed is on course to terminate QE by the end of the year.

Today's Morning Briefing: Trekky Bull. (1) Star trekky bull tramples “Clingons.” (2) Will Godot arrive before next great crash? (3) Maven says Fed will have to taper the taper. (4) The problem with going away in May. (5) Great Moderation 2.0 could be bullish or bearish. (6) Will risky assets get riskier? (7) CLO 2.0, and CMBS 2.0 too. (8) Analysts turning more upbeat on earnings. (9) Nitpicking Picketty’s data. (10) The flaw in the neo-Marxist formula. (11) Italy adds vice to GDP. (13) “Godzilla” (- - -). (More for subscribers.)

No comments: