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Bubble Alert!


The markets rarely tell this kind of message and it is one that I will heed.

What does the Nasdaq/Housing Chart below have in common with the Nasdaq/Emerging Markets Chart (second) and the Nasdaq/Copper Chart (third)? Well sports fans, these are bubbles. Bubbles are known for their parabolic move and eventual collapse. Others would call it an "Eiffel Tower" formation.

The first chart is one that I have highlighted for over a year. It kept me away from housing and looked for a slower economy as a result.

1) Nasdaq/Housing Chart

But the second chart, while similar in looks, may be more significant and potentially more negative. It compares the popular emerging markets of Brazil, India and Russia to the meteoric rise of the NASDAQ back in its bubble days. Why is it so important to me? Well it seems that most people have made a lot of money in these far away markets and it is where the heaviest flow of funds has been centered.

2) Nasdaq/Emerging Markets Chart

It is also a crowded trade for macro hedge funds levered to this story and hence would qualify as a crowded trade. Crowded, levered trades do not end well in my experience. In fact, they end poorly, sometimes in crashes to Earth like a jump off the Eiffel Tower...

Hence, my firm has no position here and I think the break in commodities that we have recently experienced is due to the lack of controls that are plain to see in the hedge fund community and are a recipe for a nasty spill.

As a result, my firm's portfolios have no long side exposure to these dangerous, sometimes volatile markets. My hunch is that these emerging markets could soon become submerging markets and the move will be more swift and longer than most folks anticipate.

Note the chart below. It is a comparison of the price of copper relative to the NASDAQ bubble. There are so many charts like this, I think the message that the bond market is telling us is very important and may eventually lead to a change in my firm's view in our maturities that we hold for clients. The bond market is screaming slowdown or recession and these charts show the roadmap to that end. If these bubbles burst simultaneously, I don't think the Fed or any central bankers will be able to stop the cascading of prices. This is for both commodities and stock prices. It would also affect corporate bonds, particularly junk and emerging market debt. I realize this is all sobering, and the pictures are downright scary, but to hide from the facts is the wrong "M.O.!"

The markets rarely tell this kind of message and it is one that I will heed.

3) Nasdaq/Copper Chart
No positions in stocks mentioned.

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