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Building a Bigger Bubble

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Last Thursday, the Dow Jones Industrial Average dropped over 200 points, as worries mounted about China’s economy and escalating tensions in Ukraine.

CNBC reported that Alan Skrainka, chief investment officer at Cornerstone Wealth Management, pointed to a chart making the email rounds showing the correlation between NYSE margin debt and the S&P, with margin debt exceeding its 2007 peak.

It has people a little shook up; there’s speculative froth in the market that needs to be worked out.”

Ever since the spike in late February, the market has been trending lower. Dan Greenhaus, chief global strategist at BTIG noted that “since the beginning of March, the action has been poor all around… I’m not sure there’s any theme to that, we’re just in a general malaise.”

Tyler Durden of Zero Hedge quotes the author of The Great Deformation, David Stockman:

We never should have painted ourselves so deep in this QE corner in the first place, because the whole predicate [of Fed policy] is false. We are already at peak debt and forcing more into the economy didn’t work. The private credit channel of monetary transmission is busted, so the Fed is exploiting the only channel it has left – the bubble channel.”

Yesterday, U.S. stocks fell for the first time in three days as Federal Reserve Chair Janet Yellen said the central bank’s stimulus program could end this fall and benchmark interest rates could rise six months later. Callie Bost blogs in Bloomberg about John Canally’s phone interview from Boston. The economic strategist at LPL Financial Corp said:

The pace of tightening, once the Fed starts tightening, is a little bit faster than thought before and I think that’s why we’re getting this market reaction… Being reminded that the Fed will eventually raise rates is getting traders’ attention.”

Earlier this month, Michael Sincere of WSJ MarketWatch wrote on the “7 signs we’re near a market top, and what to do now.“ Go to his blog to read the details, but I’ll summarize it for you here:

  1. Retail investors have been pouring money into stock mutual funds.
  2. The Investor’s Intelligence survey is concerning.
  3. Sentiment indicators are pessimistic.
  4. Fundamentals are being ignored.
  5. The stock market crash of 2008 has been forgotten.
  6. The Nasdaq is soaring.
  7. Fear and greed are taking over.

Sincere says Wall Street is reliving the 1960s — but the ‘Go-Go’ era is ending.

Is this a bigger bubble than in 2008? Why gamble with that question?

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