Posted on: Monday, December 09, 2013
Written By:"The Elemental Economist" Jim Purnell
Zerohedge.com reports: [ The markets are entering a blow off top.
For 5 yrs., by keeping interest rates near zero, the Fed has been hoping to push investors into the stock market. The hope here was that as stock prices rose, investors would feel wealthier (the “wealth effect”) & would be more inclined to start spending more, thereby jump-starting the economy.
This has not been the case.
From 2007-early 2013, individual investors fled stocks for the perceived safety (& more consistent returns) of bonds. During that time, investors have pulled over $405 billion out of stock based mutual funds & moved into the perceived safety of bonds.
The pace did not slow throughout this period either with investors pulling $90 billion out of stock based mutual funds in 2012: the largest withdrawal since 2008.
In contrast, over the same time period, investors put over $1.14 trillion into bond funds. They brought in $317 billion in 2012 alone, the most since 2008.
Throughout this period, the market rose, largely due to institutional buying. Every time the market started to collapse, “someone” stepped in and propped it up. Consequently, institutional traders were not committed to a collapse, and gradually the market moved higher.
At this point the “mom & pop, average Joe investor” crowd was, for the most part, not participating in the rally.
That all changed in early 2013. Suddenly the “crowd” began to get religion about the Fed’s monetary madness & piled into stocks. We’ve now reached truly manic proportions: thus far in 2013, investors have put $277 billion into stock mutual funds.
This is the single largest allocation of investor capital to stock based mutual funds since 2000: at the height of the Tech bubble. That year, investors put $324 billion into stocks. We might actually match that inflow this year as we still have time left in 2013.
Indeed, investors are reaching a type of mania for stocks. They put $45.5 billion into stock based mutual funds in the month of October alone. If they maintain even half of that pace ($22.75 billion) for the remainder of the year, we’ll virtually tie the all-time record for stock fund inflows in a single year.
As a result of this, the market has entered a blow off top from a rising wedge pattern. You can clearly see the mania beginning to hit in the middle of 2013.
So, we have investor sentiment showing record bullishness, investors are piling into stocks at a pace not seen since 1999-2000: at the height of the Tech Bubble, earnings are generally falling in these companies they are buying stock in, the global economy is contracting & the Fed is already buying $85 billion worth of assets per month.
We all know how this bubble will burst: badly. It’s just a question of when. The smart money is either selling into this rally (Fortress & Apollo Group) or sitting on cash (Buffett). They know what’s coming and are waiting. ]
Lets rewind & observe the chronological series of events that has brought us to this point so that we can establish a timeline in order to document the current paradigm. First it is established above that the average investor, after losing roughly 50% of their investment portfolios value in the 2008 housing crash (according to the FED’s own data) panicked & while rushing to acquire assets to stabilize their retirement investments were conveniently ushered into the bond market when many of them intended to go directly into precious metals. This happened while those “connected individuals” who had seemingly received a heads up before this correction manifested had already gone to cash & were lying in wait to step back into the market in the first quarter of 2009 after the damage was done, allowing them to buy stocks in legacy companies for pennies on the dollar thus creating the ‘dead cat bounce’ in the new year.
From there the average person was starting to feel the pain while their jobs began to be thinned out, mortgage payments skyrocketed, lending dried up, banks closed ranks, disposable income dried up, & the cost of living began to rise. This was very discouraging to the average investor & therefor caused them to sit on their money even though the controlled media was parroting the “green shoots are everywhere in the economy” garbage they were paid to broadcast in hopes of luring the average Joe back into the slaughterhouse of Wall Street now that the “connected few” had stepped into the markets & established the bottom of the correction. From this point, every single dollar that came back into the markets would be making those players unspeakable returns, but the little guy wasn’t feeling like playing ball after losing half of what they worked their whole life to acquire.
Enter the quantitative easing fallacy that was intended to create the “wealth effect” which would falsely give the nation the perception of the wealth being created around them & hopefully entice them into stepping back into the slaughterhouse in pursuit of their piece of the action. This too didn’t get the little guy too fired up so the anointed ones who benefitted from the free money became dependent upon this money as it hid their insolvency from the public who was being told to buy their stocks ironically. Then came the second round of QE in hopes of finishing what QE1 didn’t quite accomplish. This also happened at the point where China had made it clear that they would no longer be acquiring US Treasury debt as a direct result of the money printing madness the FED. This resulted in the QE scam being converted into a three card monty game that would have the government borrowing money from the private federal reserve at interest so they could give it directly to the insolvent banks to recapitalize them & avoid collapse, who then quietly gave the money back to the FED with TRILLIONS of dollars in toxic investments in order to make the banks appear more stable, the FED then lent the money back to the government by purchasing Treasuries which the FED then secretly allocated to the insider mega banks & deposited into their accounts at the fed so the govt. could pay the interest payments on the bonds to the very banks they borrowed money at interest to bail out in the first place! This is how the banks have posted record profits every quarter while not lending any money whatsoever to the public which has caused the economy to shrivel farther.
As the years rolled on & the economy wasn’t regaining any of its luster the need to create the perception that it was on the verge of happening any day now grew to epic proportions which resulted in the direct injection of capital into the stock market by the plunge protection team inside the federal reserve, also known as the PPT. Their job was to take free money that fell from the sky (which the fed was printing nonstop) & purchase stocks in order to create the perception that “real investors were jumping back into the markets” which would in turn start the exodus from safety assets back into riskier assets, specifically stocks. This too didn’t gain any real traction because as the talking heads on the TV were saying everyday that the economy was rocketing back to pre-crash territory the average Joe was watching his job go away, unemployment benefits run out, energy costs rising as Obama kept obsessively shutting down coal burning power plants, healthcare costs skyrocketing all while gas prices were climbing as well.
It wasn’t until the middle of 2013 (after the fed had recreated the pre-crash high of 14,100 on the DOW in February 2013 even though 1/3 of the nation was on food stamps & millions had lost their homes) when the DOW was several hundred points above the bubble bursting level of 2008 that the talking heads on the TV had hypnotized the public into thinking the good times were here again did the average Joe start to jump back into Wall Streets clutches again. And step back in did they. There is such a massive volume of leveraged margin investments in stocks right now by small investors that it rivals the scenario that brought about the DOTCOM bubble bursting fiasco that the nation still hasn’t fully recovered from. Let this be evidence of the “herd mentality” of investors who never dare to step into an investment first & make the real returns but wait until the movement has been well established & the TV tells the sheep to jump onboard before they miss the big show. This is why roughly 85% of investing money comes into a trade in the last 3-5% of a move up & also why the average Joe gets clobbered while the big boys reap the private losses as their gains.
Here we have that precise scenario yet again. As shown above the little guys didn’t come into the market until the middle of 2013 & leveraged themselves to the hilt trying to get a piece of the action since they are arriving at the party late which always proves to be a toxic combination of variables. Ironically these Wall Street insiders have been holding these stocks since they were purchased literally for pennies on the dollar & with all the inflationary QE money that has been pumped into the stock markets in hopes of creating that wealth effect & now sprinkled with the average Joe’s money on top, don’t you think the big boys will probably comfortably step out of the markets with hundreds of percent in returns leaving the ‘Johnny come latelies” holding the bag, AGAIN? And what better time than when the stock markets are at ridiculously inflated levels while the economy is grinding to a halt? What better time than over the Christmas shopping holidays that even though the same corporate media is telling you shopping will thrust the market higher & higher are shaping up to be lackluster at best? What happens when the big boys take their money & run when we find out the consumer spending for Christmas shopping was shockingly lower than expected? How much of that inflated stock bubble will give way to new lows when the vacuum is created in the wake of the exit of the big money & how will this effect those heavily leveraged mom & pops who were coaxed back into the markets by the ‘experts on TV’? Why are these same players waiting to pull the rug out from under the average Joes in the stock market cornering the gold & silver markets right now? Are they planning their exit strategies to inflation proof hard assets that are poised for a long overdue explosion in response to the inflationary policies of the global central banks who have been waging a global currency war for the past 4 years? What are your exit strategies? Do you have an insurance policy if another 2008 correction takes place again? Do you have faith that our elected officials will all of the sudden develop a conscience regarding fiscal responsibility when the debt ceiling fiasco resumes in the middle of January? This will be coming at a point where investors will be selling off their holiday investments that didn’t quite do what they were projected to do & shifting their assets into the first quarter investing strategies which often send precious metals towards making their highs of the year. Remember that in January of this year, right out of the gates, gold was up 12.5% & silver was up a whopping 27.5% & there wasn’t an over inflated stock market nor a debt ceiling debate to drive it higher. What will you do differently this time around? Will you wait for the TV to tell you what & when to do it, or will you take a bold move to protect yourself proactively by acquiring the best performing asset of the decade less than $1.00 off the bottom of a $31 trading range before the herd comes to you? Time to pick a side folks, either stay in the herd of sheep who were lured into the stock market at or above the 15,000 point level or disengage the rigged Wall Street slaughterhouse now & quietly move into a diversified strategy that hedges part of your portfolio with inflation proof hard assets in gold & silver bullion just as the nations, central banks, hedge funds & mega banks are currently doing at a record pace. Time to choose.
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