Has the Crack-up Boom Finally Begun?

Dear Reader,

The Dow required just 23 record-breaking trading days to leap from 24,000 to 25,000.

The same Dow took 24 trading days to leap 1,000 points under the old record… a record established only last year.

Can we now expect the Dow to break 26,000 within the next 22 trading days?

And does this galloping pace mean we have entered the crack-up boom — the manic boom that precedes the bust?

Today we take up position ahead of the speeding train… survey conditions… and inspect the tracks for dynamite…

The Federal Reserve raised interest rates on three occasions last year.

It also began to reduce its $4.5 trillion balance sheet in November.

Yet the Dow continues to set records… and now registers 25,392.

Are markets less dependent on cheap credit than imagined?

Or… is the Fed not actually withdrawing stimulus as it claims?

Our own Nomi Prins is a former investment banker with Goldman Sachs.

Ms. Prins recently commenced a project tracking “dark money” flows around the globe.

Dark money being of course credit created by the world’s central banks.

This dark money, argues Nomi, is the steam that’s propelled markets further and further… faster and faster.

And despite the Fed’s “tapering talk,” Nomi reports the following:

The Fed’s balance sheet was down a mere $10 billion (an equivalent of a rounding error) last year. Its book of assets remains at $4.41 trillion, a figure equivalent to 23% of U.S. GDP.

A $10 billion rounding error doesn’t strike us much of a… “taper.”

And an asset book equal to 23% of U.S. GDP seems plenty handsome.

(See below for more from Nomi.)

But what about the foreign central banks — the European Central Bank (ECB), for example?

Is not the ECB supposed to increase interest rates this year?

Sven Henrich from NorthmanTrader.com:

Is the ECB raising rates from record lows? Nope. Has QE ended? Nope. QE continues to run at 30 billion euros a month and rates remain in full panic mode.

Bill Blain, strategist at Mint Partners, in confirmation:

We’re very aware central banks are still holding vast swathes of the bond market (and [in] the ECB’s case, still buying more).

The low-rate conditions that follow allow corporations to take on cheap debt… which they use to buy back their own stocks.

This financial shell game raises their stock prices.

Where is the inflation? Here is your inflation, says Blain:

And what are corporates doing with the vast amounts of new debt they are raising…? They are buying back stock! The result is predictable — stocks and bond prices are rising. If you are looking for inflation — that’s where it is.

Just so.

But as noted, stocks are not merely rising… but rising at an accelerating rate.

The Dow, recall, just increased 1,000 points in a record 23 days.

Is the recent acceleration in stock prices a telltale of the crack-up boom… the TNT on the train tracks?

Famed investor Jeremy Grantham is widely known for his spotting of bubbles.

He argues that accelerating prices — not high prices themselves or even high P/E ratios — are the true indicators of a bubble.

And accelerating they are:

Until very recently [the market] could justifiably be described as clawing its way steadily higher. But just recently, say the last six months, we have been showing a modest acceleration, the base camp, perhaps, for a final possible assault on the peak.

Based on past bubbles, how much longer does Grantham expect the train to run… or in his metaphor, when will the market’s final assault summit the peak?

Nine –18 months from today and a price rise to around 3,400 – 3,700 on the S&P 500… A melt-up or end-phase of a bubble within the next six months to two years is… over 50%.

No day, hour and minute prediction, this… but these are details known only to almighty God.

Let the record show the S&P is now perched at 2,756 — a safe remove from 3,400 or 3,700.

So Grantham thinks the train could potentially barrel on two more years.

Or at least until the S&P takes on another 644 points.

Then Grantham believes there’s a 90% probability a meltdown would follow.

And markets would lose half their value.

If true, fortunes may be made over the next six–24 months.

History shows the largest gains often occur in the market’s final euphoric phase… before the dynamite goes off… and the train goes off the rails.

The question then becomes, who will jump the train in time… and who will go off the rails with it?


Brian Maher
Managing editor, The Daily Reckoning

The Daily Reckoning