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Bubble Alert: Part II


...if they break simultaneously, there isn't enough cash or a large enough Plunge Protection Team to stop the cascading of prices.

In my piece the other day, I made the case that many bubbles exist around the world. While e-mailing back and forth with the very intelligent Professor Scott Reamer of Vicis Capital yesterday, I realized that there were probably more bubbles than I thought around the globe.

The issue, obviously, is that if they break simultaneously, there isn't enough cash or a large enough Plunge Protection Team (I like to call them 'Bigfoot' and yes I think it exists unfortunately) to stop the cascading of prices. The theory of the PPT is that it is the Fed that steps in to support equity markets because they know, as do we, that asset prices need to remain levitated in order to support all of the debt outstanding.

So, I started to look around this morning for other bubbles and lo and behold, there are many. Some are broken, some are still levitated. Keep in mind that the ones I have in this piece are just a few. I could probably show 50 of them but will resist and just use these as 'poster children.'

For example, see the chart here comparing the NDX and natural gas. It WAS a bubble, but is now broken, and possibly ready to bounce, although my firm does not trade commodity contracts.

Next up? How about this chart that compares the NDX and Mexico? Same deal, different emerging market - an accident waiting to happen. It is noteworthy to me that when my career began in 1981, Mexico was in crisis and was a thorn in the side of capital markets worldwide. Now it is this sought after? Please...

The last chart is the NDX against Vietnam. Please note I have nothing against these indices but realize the importance of the relationships that exist. I don't hold myself as an emerging markets expert from a fundamental perspective but am looking at it from a purely technical/emotional perspective. The charts simply demonstrate the crowd mentality towards these asset classes; one of extreme optimism that will eventually be corrected in my opinion. Like I said the other day, going back to the days of the Tulip Mania of the 1500's in Holland, bubbles and parabolic moves end badly. It also proves my theory, I think, of coordinated central bank credit and asset creation to support the monstrous debt levels outstanding.

Basically, they reek of speculation and will eventually crash back to earth like all parabolic bubbles. The question is who will get hurt if and when they do. My guess is that so much money has been allocated to these markets in both the mutual fund and hedge fund industry that the trade is very crowded. And getting out of these, along with emerging market debt, will be akin to the proverbial 'elephant through the keyhole.' It could also have a huge impact on emerging market and junk bond debt.

A possible positive spin, I suppose, would be that money would come back to the US shores as our markets aren't parabolic, but I do firmly believe we have a bubble in earnings, as mentioned in previous commentaries, and that it would affect the brokerage and other financial concerns.

This has all led to my firm being significantly underweight equities, overweight Treasuries and Agencies (which are breaking out of resistance and, along with the inverted curve and negative Philly Fed number yesterday and crashing housing, are suggesting recession on the horizon). My firm will continue along this path until I see a resolution of problems.

I hope this finds you well and I welcome questions and comments.
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Position in Treasuries, Agencies

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