Global Credit Bubble in the Midst of Being Popped
Gary Kaltbaum is an investment advisor with over 18
years experience, and a Fox News Channel Business Contributor. Gary is the
author of
The Investors Edge. Mr. Kaltbaum is also the
host of the nationally syndicated radio show “Investors Edge” on over 50 radio
stations. Gary is also editor and publisher of “Gary Kaltbaum’s Trendwatch”…a
weekly and monthly technical analysis research report for the institutional
investor. If you would like a free trial to Gary’s Daily Market Alerts
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I must say, in my years in this business, I have never seen the mood so down
in the mouth. I have never seen so much worry…even about our whole financial
system. I still remember back in 98, rumors were floating that the contagion at
that time was going to cause Morgan Stanley and JP Morgan to go out of business.
Hey yo! Please realize that bad markets do happen. Please realize that cycles do
end. They then correct…they wash out the imbeciles and they then move forward.
There is no one…and I mean no one…who knows where this is going to take us.
Just keep in mind, whenever there is a problem, the PERMABEARS come out to tell
you the end of the world is at hand…and they are now out of their caves in
droves. The permabears are nothing more than the Morlocks from the Time Machine.
But that does not mean there are some rough times ahead. Whenever you have an
unwinding of leverage, it affects markets. And due to the massive leverage that
was out there, this may take some time. I do have a few thoughts today.
The global credit bubble is in the midst of being popped. I begged people to
listen a couple of years back at what I was seeing. Most did not want to listen.
Why? Because markets were going up. The people who were and are responsible for
what happened and is happening were masters at obtaining other people’s money.
They were masters at selling and marketing opaque financial products that
Einstein could not figure out. Frankly, I am amazed at the actual numbers and
leverage that were and are out there. What the hell were the regulators doing?
What were the rating’s services doing? Oh yeah, the ratings services were being
paid by the bad guys…but no conflict of interest there!
That leads me to the Fed. They are now announcing all their intraday moves in
order to calm the markets. I ahve been one to believe they need to ease…but
not to save the perpetrators and not to save the investors. I believe the Fed
should lower rates because they remain behind the curve. It is normal for the
Fed to be a half point lower than the 10 year…which is at approximately
4.72%…so I believe there is room. The Fed disagrees.
The central banks do bear responsibility. After 9/11, they cut interest rates
dramatically and provided the ridiculously cheap money that helped create the
housing problem as well as this leverage problem. I am in hopes they do not
start dropping money from helicopters like Ben once said he would do. This would
do nothing more than sustain the bubble. The Fed should let the markets do what
they are supposed to do…penalize the imbeciles who took ridiculous amounts of
risk. I believe in free markets. Free markets have worked throughout history. I
hope this Fed recognizes that. Alan Greenspan used to flood the market with
liquidity during times of financial instability. As long as the bad guys expect
to be bailed out…and as long as they continue to be bailed out, the longer and
worse the unwinding will be.
Now…back to the market.
There is no doubt in my mind that somewhere, somehow, some day, we are going
to get a great rally. The ingredients are there. Everyone is
depressed…everyone is bearish…many are talking about the end of the world
and the financial system. On top of that, the FINANCIALS are probably the most
extended to the downside I have seen since 1990…deservedly so. But when things
go too far too fast, in either direction, contra-moves occur. So don’t be
surprised.
But that is the trees. The squiggly intraday moves and the bounces are the
trees. The forest is the overall market and to be nice, the market is a mess.
Instead of discussing where things are right now, I wanted to show you a couple
of important charts I was emailed. I already knew the numbers but I had not seen
the charts. Take a gander.
1) Cash Position in Mutual Funds
This first chart is how much cash is sitting in mutual funds right now. It is at
its lowest ever…dropping below the 3.9% from 1972. It is now at 3.8%. In other
words, mutual funds are not sitting on a load of ammo here.
2) Margin Debt vs S&P 500 Market Cap
The second chart is of margin debt. As you can see, margin debt has risen to
all-time highs. Margin debt cuts both ways. It is bullish when it goes up
because there is more ammo to buy stocks. There is actually quite a good
correlation between the expansion of margin debt and rising markets. But the
other side is that after margin debt skyrockets and markets top, margin debt
will top and drop off quickly because of how scared margin money is. Just look
at the drop in margin debt from the top in 00. The combination of a lack of ammo
in the mutual funds as well as the potential for contraction in margin debt is a
potentially negative 1-2 punch the market will not be thrilled with. I thought
it was of import because of how well the correlations have worked.
Once again, this market is way overdue to bounce. So far, recent bounces have
been anemic at best, and have been sold into quickly. I suspect a bigger bounce
is due soon. If one occurs, I will know a lot more by its tone and its duration.
Right now, any rally is nothing but an overdue bounce. Should continue to be
spastic.