Irrational Exuberance Sweet 16 ~ The Risk Averse Alert

Monday, April 23, 2012

Irrational Exuberance Sweet 16

Much to Team Fraud's chagrin the German plan to wreck euro scrip by natural means moved forward in France yesterday and Holland today. Yet another leverage prop stands weakened. Thus, the deflationary collapse-o-meter continues reading a resounding "it's not risk on," while at the same time the hyperinflationary blowout-o-meter is in its worst state in a long time, with its 50-day moving average falling below its [still decidedly rising] 200-day for the first time in several years.

Being that uncontrolled debt destruction has a known history, what of the same might sooner be in store probably was the guide ushering "risk" to the exits today. What more flight might be in store as we head into summer still remains a mystery. It could be just breathtaking. Say, something decidedly crushing any hope for recovery. This would be along lines I suggested in "Alternate View, Take II."

In light of this risk the following view toward prior threats turned back in the travails and triumphs of Ponzi finance offers a guidepost for assessing the present threat as it develops over days and weeks ahead...

$SPX weekly

Coincidentally enough, both lines I have drawn virtually intersect the moment Alan Greenspan spoke of "irrational exuberance" whose predicted effect would bring "unduly escalated asset values, which then become subject to unexpected and prolonged contractions." An incompetent central banker, yes, but the evidence certainly vindicates this, his 1996 forecast.

As you can see, any time the S&P 500 has fallen below its top line of support there was a perceived danger threatening what were otherwise highly accommodating credit market mechanics feeding "irrational exuberance." That each new threat increased in gravity and required evermore radical intervention to reverse it — with but the first in 1996 inspiring Greenspan's insightful forecast — is evidenced by a bottom line of support that is descending, thus the more vindicating the maestro's warning.

Best case going into summer the S&P 500's top line of support will hold. Worst case, its bottom line of support might not even find opportunity to be tested, and instead become overhead resistance in a fast-evolving panic unlike anything ever to hit the financial world.

It practically goes without saying the architecture of U.S. stock exchanges these days is well-suited for facilitating calamity: built to make a cold shoulder the answer to great need. We see this sort of sentiment in actions negatively affecting European banks holding sovereign debt. So, securities at the bottom of the capital structure — equities — could just as well meet a moment when, indeed, they are similarly shunned. In such a climate exchange circuit breakers might prove useful only in prolonging misery some number of days. Of course, were this prospect but remote there would be no sane reason, really, to raise its possibility. Yet with the euro-zone's fate appearing anything but secure comes rational cause to fear the worst. Further support of credit market mechanisms feeding irrational exuberance across the spectrum might just be impossible to come by.

Fast Money
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