Bailout Ben’s 2007 Time Machine

Yesterday we reviewed the employment situation in the US economy. Today, we’re looking into the stock markets.

The first and only thing anyone needs to know about this market rally begun March 2009 is that is was entirely fueled by “funny” money. It was not fundamentals, economic underpinnings, earnings, or even technicals (we’ve seen the markets violate numerous key technical signals only to completely reverse on clear ramp jobs).

No, this market is all about funny money. This is why we had a near perfect 100% inverse correlation between stocks and the dollar for most of 2009. It’s why the correlation between stocks and commodities is at a 20 year high. It’s why most of the market’s action occurs almost entirely at key times (over the weekend, during the futures night session, options expiration).

Again, not fundamentals, not even technicals (unless you count quant programs buy and stop orders), it’s FUNNY MONEY: money printing, giving handouts to banks, throwing billions if not trillions around like it’s all one big joke (and for many of the powers that be it appears that is the case).

Ben Bernanke has accomplished many things in the last 24 months. However, his biggest, most incredible accomplishment has been the re-creating of 2007’s investment environment: a time when the market moved mindlessly, was dominated by speculation, and had absolutely nothing to do with reality.

It is no coincidence that a man who specializes in bubbles (times in which assets stretch so far from reality that there is literally no basis to their behavior) has managed to foster the very same atmosphere that existed BEFORE the world realized that most of the economic/ monetary policies of the last 30 years were total garbage.

Look at the data:

1. Insider selling-to-buying ratios are back to Fall 2007 levels
2. Corporate debt issuance hit 2007 levels
3. Even bullish sentiment briefly hit 2007 levels before the January correction

Now, even the S&P 500’s chart is beginning to look like it did in 2007 albeit in a sped up fashion. To see what I mean, let’s jump into our time machines to before the financial Crisis began.

Here we are in 2006 moving into 2007. As you can see stocks entered manic rally mode in mid-2006, moving straight up without taking a breather for nearly seven months.

We finally saw a decent sized correction in the first quarter of 2007. However, the market erupted higher soon after, entering yet another manic rally that seemed virtually unstoppable. Indeed, when stocks finally DID come to grips with reality, there was a rapid, massive sell-off in July-August 2007.

As a final head-fake, this correction was followed a large bounce that actually brought the market to new highs. The bears, having been beaten down virtually non-stop for more than a year, finally threw in the towel, right as the market began to roll-over. What followed was a gradual collapse that accelerated into the nightmare of Fall 2008.

Now, have a look at the market rally begun in March 2009:

The chart’s look somewhat different due to their respective contexts, but the action is virtually identical. As was the case in late 2006-late 2007: the market staged a virtually unstoppable rally. The few corrections that DID occur were immediately followed by explosive rallies that destroyed the bears time and again.

Once stocks finally DID stage a real correction (late January 2010) the drop was rapid and major. However, stocks have since staged a massive bounce that now looks like it will follow the 2007 precedent of setting new highs.

In a nutshell, Ben Bernanke has recreated 2007, just in a sped up, condensed time frame. The market action of 2009 and 2007 have featured near identical traits:

1. Unstoppable rallies on ever decreasing volume
2. Brief corrections that are immediately followed by “next legs up”
3. A final significant correction that is both violent and quick
4. A bounce after the correction that took stocks to new highs

The issue now is what will occur AFTER the bounce ends. Personally, I expect we’re going to see another period just like 2007-2008 only occurring in a much short span of time. Bailout Ben has recreated 2007 in a sped up fashion. What took two years back in 2006 only took one this time around. So when the Crisis begins anew, it should take even less time for the damage to be done.

After all, back in 2007, the Fed had yet to instigate all of its emergency policies and bailouts. This time around, the Fed has ALREADY played its hand. One can only imagine the kind of panic that will occur when investors figure out the Fed CAN’T solve the Financial Crisis.

Good Investing!

Graham Summers

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