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Strategies & Market Trends : Dino's Bar & Grill -- Ignore unavailable to you. Want to Upgrade?

To: Goose94 who wrote (9239)	9/20/2014 11:06:35 AM
From: Goose94	Read Replies (2) \| Respond to of 202721

Gold: Bubble Phase Of Bull Market May Be Nigh That the effects of the Fed's balance sheet expansion will be felt long after QE officially ends. The reason is that the excess liquidity injected via QE remains in the system. No amount of stock purchases by investors and/or no amount of market price increases will reduce the amount of liquidity that is in the system. When one person purchases stock, the cash paid by the buyer merely goes into the pocket of the seller, who then has to decide how to dispose of that cash. As the US economic recovery consolidates - risk aversion and liquidity preference will decline. This means that households and businesses will spend their available liquidity more quickly than before - i.e. their perceived need and desire to hold excess amounts of cash will be reduced. US households and businesses have accumulated unprecedented amounts of cash. A decline in liquidity preference means that they will tend to want less cash relative to other goods that they can buy with that cash. But this creates an irony: Since the total amount of cash in the system cannot be reduced by any amount of increased spending by households and businesses, the only thing that can happen is an increase in "transactional velocity" - i.e. people's typical holding period for retaining a given amount of cash decreases progressively thereby quickening the aggregate rate of purchases in the economy. The question is: What will they purchase? The answer is that the vast majority of households and businesses, more so than increasing their level of consumption very significantly, will most likely increase their purchases of investment assets, and increasingly riskier financial assets (such as stocks) in particular. This will increase the "transactional velocity" of purchases in financial markets that, in turn, will tend to fuel asset price inflation. This occurs because as liquidity preference decreases, the concomitant tendency for investors to "hit the bid" increases and they do so more frequently, a process that naturally tends to drive prices upwards. This dynamic, once started, tends to replicate itself in a feed-back loop, increasing transactional velocity even further whereby higher financial asset prices produce an even greater demand for financial assets by people that want to "get in on the action" or at least "not get left behind." This sort of feed-back loop is a critical element in the development of a stock market bubble. Conclusion Nobody fires a gun to announce the start of a bubble phase in a stock market advance. Furthermore, nobody rings a bell right before a bubble collapses. Having said that, it is also a fact that the processes by which financial markets bubbles develop are theoretically and empirically intelligible by experienced and astute traders and investors. The current environment contains many of the ingredients that are propitious for the formation of a stock market bubble. In particular, present monetary and financial conditions are near ideal, and the recent statement by the FOMC accompanied by Chair Yellen's press conference suggest that these conditions will remain in place for a very long time. Indeed, in retrospect it may be possible to look back to September 18, 2014, as a key date in the development of the next bubble phase in the US stock market. We are not in a bubble yet. Some ingredients necessary for the development of a stock market bubble, such as greater economic optimism, are as of yet lacking. Furthermore, the sort of widespread speculative appetite associated with financial bubbles is not present. However, these missing factors have shown tentative signs of emerging and the likelihood that they will fully manifest will only grow as the present economic recovery proceeds at a relatively vigorous pace. The most recent NY and Philly Fed reports confirm the gathering momentum of economic recovery that I indeed foresaw in my 2014 Economic Outlook. If these economic and financial trends continue apace, a full-fledged stock market bubble is likely to emerge. To be clear, this implies significantly higher prices from here. To also be clear, it is implicit in the use of the term "bubble" that, at some point in a more distant future, most of the bubble gains will likely be wiped out. However, this eventuality of a "crash" does not occupy me now. For now, the most important message that I want to get across to investors is that the most likely trajectory for stocks in the next one to two year time frame is significantly higher. How much higher? Bubble higher. by James A. Kostohryz