This Time, It’s Not ‘Irrational Exuberance’

It is not ‘irrational exuberance’ that is fueling this particular bubble, it is more along the lines of resignation; participants are resigned to the fact that equities and bonds are the only games offering yield. Never-mind that the yield exists on a cushion of air. Never mind that both the stock and bond casinos are behaving as a form of ‘economic-masturbation’ where the yield-seeking capital itself is producing the yield. Pension funds HAVE to invest and receive at least 2–3% to meet their commitments, so they really have no choice but to buy stocks and bonds. And, at the same time, corporate CEOs continue to take the path-of-least-resistance to demonstrate profitability by simply buying-back their own shares, thereby making the company’s per-share profits look better than they really are, while not actually improving the business in any way.

What is going to hold the bubbles up if interest rates rise, even a little? Nothing. The yield in equities and bonds is derived simply from massive money in-flows (from institutions, not individual investors) and when this river-of-money starts to slow-down, the yield will disappear, along with the inflated valuations. For now, however, there is nowhere else for the big money to go, so it keeps flowing in.

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The low bull sentiment counter-trend pattern continues pointing down (chart below).

The correlation between the Pring Inflation Index and the SPX is still in play (see below).

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On the up-side, the Rydex Bear/bull asset ratio continues to signal a bullish change in trend (chart below).

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Gold

Gold made the long anticipated break to the downside this week. Some of the indicators are short-term over-sold, so we expect a bounce, but the fundamentals are still in place for further downside (chart below).

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The very long-term view continues to show downside probabilities for gold, similar to the 2000–2001 era. (chart below).

The futures traders are reducing their short positions and the speculators are reducing their long positions. Both positions, however, remain historically high. This continues to support a high probability of further downside in gold (chart below).