Mark Hulbert is the dean of market chart-watchers. So his warning that three key signals of a market correction are now flashing in unison, and that this condition has invariably led to a 20% market drop over the last 45 years, should not be taken lightly under any circumstance. But the present situation is rife with far greater peril than Hulbert’s half-century of market data implies. That’s because the Fed’s “all-in†plunge into bubble finance during the last two decades has rendered financial markets increasingly fragile and unstable.
On the on hand, ZIRP has fueled the most massive carry-trade speculation ever recorded. Indeed, zero money market rates inherently tilt the scales toward relentless gambling in risk assets by essentially eliminating the carry cost of speculative positions. At the same time, the Fed’s implied “put†under the market has generated a relentless “buy on the dips†reflex among fast money traders and computerized algos. Accordingly, as the stock market bubble has inflated to ever more precarious heights since March 2009, the dips have become increasingly shallow and short-lived, as dramatically illustrated by the S&P 500 chart below:
The meaning of this pattern is straight forward. This parabolic rise would never occur in an honest capital market unless the underlying economy was going through a surge of growth that has no precedent in recorded history. In fact, the US economy is impaled in more nearly the opposite condition—-that is, real GDP growth since the era of bubble finance hit full stride in 1999-2000, has been the lowest in modern history. Compared to a trend rate of 3.3% in the last half of the 20th century, real GDP growth has averaged just 1.8% per annum during the last 14 years. And that’s based on the understated GDP price deflators published by the Washington statistical mills. The true rate of growth is surely far lower, if positive at all.
