Friday, March 18, 2011

Volatility and the "Permanent Bull Market"

The "permanent Bull market" engineered by the constant intervention of banking and political authorities has a problem: the duration of each cycle is getting shorter.

As we all know, the central banks of the world have decided that in lieu of actual prosperity, they will provide the illusion of prosperity via a "permanent Bull market" in stocks.

I have discredited this "wealth effect" many times, as have others. Since the vast majority of equity and financial assets are held by the top 10% of households in the U.S., then the "wealth effect" only benefits this narrow band of households. Very little trickles down as the newly enriched account for about 40% of all consumer spending--but luxury shopping creates mostly low-paying jobs: clerks in jewelry stores, busboys in fancy restaurants, etc.

So far, so good, as far as the Federal Reserve and the politicos in Washington are concerned; since Wall Street is skimming billions again and big campaign contributors all come from that top 10% slice of the economy, then their pals and supporters are benefitting immensely from the facsimile "prosperity" of a propped-up "permanent Bull market."

But something is going wrong with the interventionists' delight: each new run of the "permenent Bull market" is shorter than the last one. Consider this chart of the S&P 500:

Although it is not shown, you will recall that the first leg of the "permanent Bull market" (PBM) lasted from about March 2003 (final sputtering end of the dot-com bubble) until about July 2008, when the market finally fell below the critical support offered by the 200-week moving average. That run lasted about five years.

The next "permanent Bull market" began in March 2009 after the central banks and politicos intervened on an unprecedented scale in the second half of 2008. That run ended in May 2010 when the Eurozone's debt problems broke through the EU's thick crust of denial and obfuscation. So that leg lasted a mere five quarters.

More intervention and a new layer of denial and obfuscation "solved" that crisis (which seems to reappear with alarming regularity) and the next leg of the "permanent Bull market" was launched by the Fed's QE2 $600 billion quantitative easing program--yet another unprecedented intervention in an economy which was supposedly one year into "recovery."

This most recent return of the "permanent Bull market" lasted less than seven months--from September 2010 to mid-March 2011.

The dynamic is clear, isn't it? Each new leg of the "permanent Bull market" requires a heavier dose of unprecedented intervention, denial, "stimulus" and obfuscation than the last one, yet the resulting Bull market is significantly shorter in duration than the previous run.

If this pattern holds--and exactly what evidence supports the claim that the next "permanent Bull market" will last longer than the previous one?--then we can anticipate that the next Bull market will last considerably less than seven months, and the one after than even less, until the forces of intervention and manipulation encounter a solid wall of granite.

At that point, massive intervention won't spark yet another "permanent Bull market": it will spark a collapse of equities as participants realize that the last iteration of the "permanent Bull market" lasted less than a month, and the next one might not last a week.

I have been setting up a new PC and a bunch of other tech stuff, so please bear with delayed email responses. Your understanding is greatly appreciated.

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