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Thursday, September 27, 2012

The last bubble?

Lets take a peek at the monthly SPX chart.

The most recent high in SPX was 1474 and we can see that SPX has spent very little time above that level. We all know the first peak was in 2000 at the end of the infamous dot com bubble of the late 90s.  The second peak came with the U.S. housing bubble in 2007.  The bottom panel is the ADX indicator which is a mathematical expression of trend strength.  The blue line in that panel is the value of ADX itself.  Notice the declining values at each peak.  The ADX indicator today is just plain on the floor and has been falling this entire rally.  The rally into the 2007 top at least had a bit of a turn up near the end.  We have not seen that so far.  If this turns out to be another major top like the last two, this will be the weakest rally into the top yet.  

There was another bubble created at the time of the 2007 top that is not commonly talked about.  Here is the chart of the emerging market ETF EEM.

The run up into the 2007 top certainly is parabolic enough to qualify as a bubble.  The popping of both bubbles caused the worst global recession since the 1930s. We can see that EEM is still struggling today.  If the emerging market economies were going to reignite again, I think they would have done so by  now.  I think it is more likely they are now in a post bubble situation.

With SPX back in the area of major resistance, it is important to determine of we are on the verge of an upside break out or another major crash.  The ADX indicator seems to indicate an upside break out is unlikely.  We are in a secular bear market and we have not reached historically cheap valuations yet.  This seems hardly the conditions of a new secular bull market.

The prior two crashes were facilitated by the popping of bubbles.  Is there a bubble going on now that might cause another crash?  Of course there is, its the global debt bubble.  Lets look at some charts.


I think that chart speaks for itself.  At least the U.S. is not the worst of the bunch.


Bank assets is another word for debt of course.  Again the U.S. is not the worst.

At least African governments are not high in debt.  However, all the most populated countries are.


The global debt bubble has caused extraordinary measures from central banks around the world.  That chart looks like a bubble unto itself.  Those actions are causing a reaction in gold.



The long term chart above shows the inflation adjusted price of gold is still below its peak. but historically expensive.  However, the situation is a bit different in China and India.  Those are large markets often talked about as being part of the good fundamentals for gold.  The price may be getting a bit expensive for them now. 

The global debt bubble is causing a central bank balance sheet bubble which is causing a gold bubble.  Please don't send me hate mail for saying gold is in a bubble, LOL.  Bubbles can last a long time and go a lot further then people think.  I am not saying gold is in imminent danger of collapse.  I am saying it will top at some point like it did in 1980 and suffer a prolonged correction.  Nobody knows when that will happen.

The popping of this last bubble is a matter of when not if.  There will be a series of sovereign defaults.  As this next chart shows, that has happened before.


I believe this will be the biggest chain of defaults in history because of the huge number of countries in fiscal trouble.  Unless we want to spend the next several decades like Japan with a terrible economy and still no resolution to the debt problem, it is something we must endure.  If the global economy continues to slow into a global recession then the debt bubble pop is likely sooner rather then later.  The last reflation attempt only saddled everybody with more debt and did not solve the economic problems.  I think there will be much less political will for another global throwing of money at the problem.

The only way to prevent a debt crash is to prevent a debt bubble in the first place.  However, there have been debt bubbles and crashes for hundreds of years.  I am sure there will be many more. 


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.