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Euphoria

What does euphoria look like, how does it feel?

The most obvious example of euphoria these days is bitcoin.

But to my eye, the stock market crossed the threshold of euphoria this fall.  I predicted we’d get a pull-back in the fall, but instead, we accelerated up.

My reasoning was based primarily on natural range extension on a very large time frame, in the SP 500.

To me, that was a VERY conspicuous level, and SHOULD have at least produced a pullback.  We got there neatly in August, so were perfectly set up for the fall fall.  Instead, without a pullback, we accelerated UP!

2017 was already bullish.  Lots of pundits were predicting pullback, or worse.  When we exploded up, those voices evaporated.

Suddenly instead, we got calls from Goldman Sachs of 3100 on “rational” enthusiasm, and 5000 if it got irrational.

I remember in the late 1990s, hearing calls for the Dow at 20,000…which it did get to, but 20 years later.

I think the SP 500 just got irrational when it broke above 2500.  How far it can go like this, who knows?  Will it crash?  For sure.  When?

Since we know this entire run was driven by central bank printing, since 2009, it still seems to me that a reversal of that policy would likely turn the tide.  But so far, the pumps are producing, $2 trillion in 2017 of new money.

But, more on how historic, and awe inspiring this Trump breakout is.

Look at the Dow!  The Trump run ALONE is as big as the entire wave from 2007 to 2014!  It also appears to me to have exceeded a natural, rational level, since Sept 2017.  It’s a breakout everywhere you look.

Look how the 2003-2009 wave ENGULFED the entire market value of the earlier range, around the 2000 bubble.

When you look at these increasing wave sizes, it’s tempting to envision a giant crash, when this one topples.  What if it engulfs the former range, like last time?

Zooming in, just since 2009, the sheer velocity of the Trump wave exceeds anything since the Obama era Fed QE scheme started driving it.  AND, on top of that, our local central bank has stopped printing money since 2014, although, globally, money creation continues.

So yes, Virginia, we are going parabolic.  This is what euphoria feels like.  The last gloomy guys hang their heads in shame, and clam up.  Predictions percolate for levels we will only reach possibly after another crash and rebound.

BTW, will we get a giant down wave, a crash of 80% or something, as happened in 1929, and 2000 to the Nasdaq?  It’s possible.  But I think for the answer to what is most likely, we should consider Japan.

The argument for why this will crash and burn and fall 80% is that added value has been created by printing ever more money, to correct for each recession.  Each time, a larger amount of money is needed to correct for the recession, since an increasing amount of it flows in to the stock market, where it is low velocity, and does not generate a lot of economic activity, gdp.  That’s the cause of the increasing wave size in asset values.

All this new money is debt, and each bubble pops when a class of debt starts going bad.  Loans pop like bubbles, and the money disappears.  Deflationary bubble popping kicks in, and markets fall.  Then at some arbitrary seeming point, the central banks step in, turn on the presses again, and start buying assets (bonds), and lowering interest rates, to encourage others to borrow money and buy other stuff, most of which turns out to be companies borrowing to buy back their own stock, reducing the float, and causing more updraft on valuations.

The doom argument is that, at some point, the money printing scheme will fail…perhaps because bitcoin has revolutionized banking or something.  For some reason, everyone will suddenly see through the shame of fiat currencies, and turn up their noses at them (although they will still have to convert back to them to pay taxes.)

But what if we don’t have the crash to end all crashes.  We get something like a healthy 50% pullback, which doesn’t even take us back to the range of 1996-2012.  How could this happen?

Japan arguably hit a point similar to where we are now, decades ago.  And they have prevented any severe economic depression by simply printing more money.  They are something like 3x as indebted as US or Europe.  Their central bank creates money and, for one thing, directly buys their stock market through ETFs, to the point of owning a large share of the whole market.

So, to my mind, it seems plausible that we could have another Fed buying caused up wave, after another crash, which might not go too deep.

When we look at a 100 year chart, not adjusted for inflation, the market has moved up in big spurts, which never revisited the earlier ranges.

The breakout out of the 1960-70s range (secular bear) is exactly correlated with the legal change in 1982, that allowed for corporate buybacks.  That is, a lot of the buyers, in that epic run from 1982 to 2000, were the companies themselves.

Clearly, that happened in a higher interest rate environment than we’ve had since 2009.  So it CAN happen in a higher interest rate environment.   And we also know that interest rates can fall, even from here, and even from zero.

Here’s an in interesting 120 year annotated chart of the Dow, from this page

I’ve been primarily looking at the price action itself…how big the waves tend to be, historically, how long the calm phases last.  But of course, it’s interesting to overlay a chart of all the exogenous events, and seemingly relevant news of the day.

Of course it’s true that some event like WW3 could Trump Trump, and central banks, for a while, possibly years.

Trump

Back to the historic nature of the Trump breakout.  I’m sure a lot of records are being broken.  One is, I think this is the most one-time framing (higher lows) monthly up candles in a row in history. 13!

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