Pre-market Note to Self: Back to Stage 6

Feeling like sharing from my personal log is apropos this morning. FYI, I tend to be a bit more blunt in my notes to self...

6/16/2020 Tuesday

Trump’s promising a trillion dollars in infrastructure, Fed’s buying corporate bonds, retail sales and industrial production will be bouncing off the bottom this morning, Asia screamed higher overnight, Europe’s rallying hard and U.S. equity futures look to open 3% higher…

I can absolutely see why mf managers and hedge funds are suddenly reengaging in stocks; if they don’t they fear they’ll lose their jobs if the market continues to melt higher.

Per the huge resurgence in corporate debt issuance, and of course the rally almost back to even in stocks, looks like the leak in the bubble may have been effectively patched for now. I.e., we’ve a world of hurt at some point to come.

Essentially, we’re back to stage 6 of the boom/bust cycle. Perhaps we never left it:

It starts with a prevailing bias and a prevailing trend: Today’s prevailing bias being the CEO’s thirst/desperation for per/share earnings growth, the prevailing trend spawning from his/her resorting to the easiest way of manufacturing it; share buybacks. And by any means available, including leverage.

1. In the initial phase the trend is not yet recognized.

2. A period of acceleration, when the trend is recognized and reinforced by the prevailing bias; that is when the process approaches far from equilibrium territory.

3. A period of testing when prices suffer a setback.

4. If the bias and trend survive the testing both emerge stronger than ever and far from equilibrium conditions in which the normal rules no longer apply become firmly established. If the bias and trend fail to survive the testing no bubble ensues.

5. The moment of truth when reality can no longer sustain the exaggerated expectations.

6. A twilight period when people continue to play the game, although they no longer believe in it.

7. A crossover or tipping point when the trend turns down and the bias is reversed.

8. A catastrophic downward acceleration; commonly known as the crash.

The process tends to start slowly, accelerate gradually, and then fall steeper than it has risen.