Saturday, July 09, 2011

The Sharpest Rally Since 1644

The recent stock market rally's manic force is deeply suspect.

According to my research, last week's stock market rally was the sharpest such surge since 1644, just before the Ming Dynasty collapsed and Europe was decimated by an epidemic of plague. Perhaps that is coincidence, perhaps not. The Status Quo always tries to brighten the outlook just before things fall apart, and nothing cheers flagging spirits more than a sudden rise in wealth.

The rally in barley in Babylon during the last week of December 1748 BCE was almost as robust, a peculiar coincidence given the next sharpest rally on record was the rebound in Dutch tulip bulb contracts which also occurred in the month of December, 1636.

Shares in the South Seas Company recovered much of their initial losses in a similar rebound in London, September, 1720, a welcome respite for all the investors who were about to be wiped out by the 80% decline in share value when that bubble popped.

More recently, condos in Florida saw a sharp uptick of sales and prices fetched in August, 2007, just before that market collapsed in a great heap.

You see the pattern: the sharper the rally, the closer the market is to the bubble's end-game. The South Seas Company is the closest analog financially to today's Fed-goosed stock rally; massive insider profiteering and official intervention pushed share prices up, fueling a frenzy of buying and forecasts of rising profits forever. In another eerie parallel, the South Seas Company's entire raison d'etre was to offload government debt onto a proxy entity to evade the perception that government debt was out of control. (Funding various wars tends to do that to national debt.)

Does anyone seriously believe this rally is based on fundamental strengths in the U.S. and global economy? Uh, sure. Let's be honest, the whole thing reeks of massive goosing by proxies with the goal being perception management. If the stock market is rising, wealth is increasing and the economy is healthy. Or so goes the marketing pitch.

With the end of QE2 and endlessly rising government deficit-spending stimulus in sight, the market sagged. No wonder; without the hot air supplied by the Fed and $1.6 trillion deficit borrowed and blown annually, what the heck is going to keep the Central Planning "recovery" inflating?

Nothing. Where does that leave The Powers That Be? Horribly exposed to the chill wind of reality. And what's the easiest way to engineer a perception that all is well? A massive stock market rally that forces everyone who bet against the Fed to cover their bets, a rally so sharp and powerful that it triggers every technical "buy" on the planet: Advance-decline line: BUY! Rising moving averages: BUY! Dow Theory: BUY! etc.--except for volume, which is declining, insider buying, which is as usual swamped by insider selling, and a few other indicators that the players can't control.

Doesn't it strike you as a bit too perfect? The central bank ceases officially propping up of risk assets to the tune of $100 billion a month, and in the normal course of events it would be natural for doubts about the future to weigh on risk assets. Instead, they all go nuts in a straight line up. Interesting, to say the least.

The entire ramp in corporate profits was a see-saw result of the Fed trashing the U.S. dollar. Dollar goes down, profits earned abroad in non-dollar currencies go up. Simple. But unfortunately for the Fed and global Corporate America, the dollar, despite the Fed's numerous arrows in its back, is still alive and is heading for its see-saw date with the euro, a.k.a. the DXY. If the euro implodes--and what exactly is holding it up other than empty promises and ECB duct tape?--then the dollar will necessarily rise, regardless of other conditions.

And when the dollar rises, Corporate America's ever-rising profits hit the reef and sink. It's really that simple.

The stench of official desperation is in the air. The release of oil reserves, the stunning rally on threadbare "good news," the touting of absurdly trivial increases in consumer debt--it rose by $5 billion in a $14 trillion economy, oh happy day, we're saved!--it's all so transparently designed to manage perceptions, because perceptions are what drive the "animal spirits" of borrowing and spending.

It's nice that luxury auto sales have skyrocketed to new highs--good going, guys. Wealth is back, baby, and everything's fantastic.

But soaring luxury auto sales might not create the perception the handlers intended. Note to Fed, Treasury, White House, Congress, mainstream financial media: you need to get out more. Goosing the stock market works for "your people," just like that last big rally in 1644 gave a warm and fuzzy feeling to the Ming Dynasty insiders. But it didn't move the needle on the real economy or dissolve the perception that the whole rotten edifice was crumbling.

In case you missed these recent entries:

The Shape of Things To Come (July 8, 2011)

The Great Reset (July 7, 2011)

The Promises That Cannot Be Kept (July 6, 2011)

Now Playing: Cognitive Dissonance and Wishful Thinking (July 5, 2011)

The Cycle of Dependency and the Atrophy of Self-Reliance (July 2, 2011)

The Three Ds: Delegitimization, Definancialization, Deglobalization (July 1, 2011)

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