The Phaserl


Base Jumping off the Stock Market’s Peak

by David Haggith, The Great Recession Blog:

According to Bank of America, there is no time to leap into the stock market like the moment before its cataclysmic fall. BofA’s Michael Hartnett has no doubt that the stock market stands on the edge of catastrophic collapse, but the euphoric rise before it takes the plunge could be the greatest financial rush you’ll ever know:

As Hartnett explains, the catalyst for bull in equity and credit markets since 2009 was the “revolutionary monetary policy of central banks” who, since Lehman, “have cut rates 679 times and bought $14.2tn of financial assets.” And, once again, he warns that this central bank “liquidity supernova” is coming to an end, as is “the period of excess returns in equities and corporate bonds, as is the period of suppressed volatility.” (Zero Hedge)

The tail-end risk of this trade

What happens to the Fed’s economic recovery when the Fed ends its money boom just as irrational exuberance in the stock market is retreating? Unless Trump pulls a magic rabbit out of his hat that looks far better than his “great” health-care plan, the Trump Rally will quickly turn this year into the Trump Dump.

Consider what the Trump Dump could turn into: The Fed plans 3-4 rate increases into the unwind of the irrational Trump Rally. It also hinted this week at money-supply reduction. This unwind of Fed and folly will fall into an economy where earnings are far from justifying inflated stock prices, where jobs pay about the same as they did thirty years ago (adjusted for inflation) and where benefits are far below what they were thirty years ago, while the peak of retiring baby boomers dives into a pool retirement funds that have evaporated out from under them because of the Fed’s decade of near-zero interest. (That just names a few of the hazards that lie ahead on this trajectory.)

What could possibly go wrong?

Harnett writes that “risk markets continue to climb a wall of worry, defying bearish structural trends in the financial industry….” Demonstrating how insane just the past year has been in markets, Hartnett reminds us that just eight months ago belief in debt deflation & secular stagnation induced lowest interest rates in 5000 years!

Hartnett believes the market will supernova before it collapses into itself as we exit the Fed’s masterplan of economic re-inflation. He thinks the blow-up of the Fed’s hyper-expansion will sail us through the first half of this year. He could be right. I’ve been saying it will take about that long before everything collapses, too. However, Hartness also believes this supernova is the prime time to trade because the top will blow off the market, and you can ride that explosion.

We’ve gone from “buy the dip” to “buy the blow-off.”

I, on the other hand, am more the type who is afraid I won’t get out before everyone else falls on top of me. No one has ever seen anything like the coming collapse, or “the Great Unwind,” in action. So, how can you be sure you’re timing your exit right? It’s hard even to time the right moment to exit before a normal market correction. So, I’m already fully out. (Staying in, if you are aware of the size of the coming collapse, is a question of whether you thrive on high-risk/high-reward.)

Even Hartnett says,

We believe we are closer to the highs than lows in risk markets. But tops are a process; lows are a moment.

Indeed, we are now at a point near the Great Unwind where you are timing the moment if you intend to experience the maximum rush. Those who try to time the moment are often wiped out in a moment, too.

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