John wrote:"S&P 500 closes above 1500; Dow nears 14000"
How are things going, Higgie?
Great. Comfortably 100% short with plenty of firepower left.
An analyst I know has been asked to speak at MIT later this year. He asked if I would like to go with him. I said maybe, let's see how things go. I suppose if I do that, we can meet while I'm there. Part of my message back to him today with some current thoughts is quoted below.
He told me he heard from an old Wall Street hand this morning who thinks this bubble is going to break hard soon, with a 75% loss in the stock market in less than a month. I don't know about that, but it's getting more interesting now and more dangerous too.
The person I mentioned last weekend, the Boomer with 40 years of experience, said today that this is the most extreme set of circumstances he has seen and it is going to end badly.
I don't find myself being that excited about it, but just feel comfortable that the craziness is close to the end. The jacking of the market over 1500 at day end and the headlines are for public consumption, a desperate attempt to unload onto a recalcitrant public who is no longer drinking the Kool-Aid. Who will be left holding the bag?
"The point you made about mortgage nonpayments contributing to spending is something I had also attributed to the Apple bubble. The tech companies have the most clever operators and they know how to take the electronic printed money and sweep it into their coffers. Notice that when they do that, the money just sits there. Bonds go on the Fed's balance sheet and the electronic printed money winds up on the tech company balance sheets. People have a few electronic toys or maybe a virtual footprint or memory. Then we are back to square one. Unfortunately for us, Steve Jobs is no longer alive and we can't be sure as to whether Apple's problem is due to "lack of Steve" or whether it is due to lack of excess money to sop up. I suspect more the latter as tech in general is having trouble, but of course not as much trouble as Apple is having.
As you state, I agree the Fed is very powerful and also agree with your correspondent that the Fed has increased the fragility of the markets by decreasing the time scale upon which the crash can occur. Also importantly, the Fed has increased the fragility of the world order, which I will talk about below.
I believe there is now a limit in the S&P futures. I don't believe there was a limit during the flash crash. If there is some kind of daily limit the Fed can step in at some point when the market is limit down and buy. This would buy time and might temporarily prevent a crash below 1010.
Going further, the index is one thing, but since Apple has been crashing I've begun to think about the components of the index. If only the value of the index is supported, many components of the index could tend toward zero, while some others tend toward infinity. This would be unsustainable and would cause the index to eventually crash to zero, given time. Therefore, the only way Bernanke can save the index once that begins to occur (and it already is occurring) would be to buy the individual component heavyweights like Apple and put the Apple, etc., stock on the Fed's balance sheet.
Going beyond the idea of monetary support, it might also be necessary to support the profits of some of the individual companies in order to keep the S&P up. Profit is sort of the uncontrollable component as the overall system tends toward loss and debt has been used to create artificial profits.
Finally, we then have to step outside the realm of economics toward political and social factors as the Fed attempts further and more obvious machinations. Would there be social unrest? Would Obama be impeached if Bernanke buys individual stocks? Would a foreign power attack our financial markets? Would war break out? In any case, I think what happens outside of the economy will determine things more and more as the crisis unfolds. I think civil unrest and world war are likely if the Fed continues siphoning wealth to the center to keep it afloat and picking winners and losers."
