Why the bubble-spotters need stronger glasses

published 2 July 2008

Last night on Kudlow & Company, perpetual 'Bull' Jerry Bowyer at Benchmark Financial was at the top of his vocal cords again, preaching that he doesn't see the case for a US recession. Unfortunately, Bowyer is one of many visually challenged economists who didn't see a global inflation and credit crisis coming nine months ago either. Many of these 'Fed-centric' economists are professional revisionist historians; use their self perceived edge at your own risk.

Now that nine months have passed and plenty of US stock market strategists, economists, and portfolio managers alike missed that we were in 'bubble' territory again, we have the emergence of self-professed bubble experts popping up everywhere from Congress to Park Avenue. They are on CNBC. They are in the blogosphere. They are all over Wall Street trading desks. They don't need a process. Heck, they don't even need models! When these 'bubble watchers' see a high price - they know it's a bubble. These guys are good!

How could so many of these professional bubble-watchers have missed both a US stock market bubble and a global one? Didn't the CFOs who hedge funds pay the Street so much money for 'one-on-one access' give them a heads up? How is it that now, after the fact, they are so synchronously clairvoyant to be able to call bubbles in crude oil and commodities? Their powers of proactive prediction leave me in awe!

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Back to reality, the Dow and S&P 500 have dropped for three straight quarters. Last time this happened for the Dow was 1978, and Paul Volcker had to ditch the political pandering Fed model of Arthur Burns and get busy doing some old school leverage bubble-popping. For 2008 to date, the Dow and S&P 500 are down -14.4% and -12.8%, respectively. Rather than focusing on calling a top in crude oil (which incidentally isn't happening again this morning as geopolitical risk increases within the construct of a potential Israeli/Iranian conflict), maybe the bubble-watchers should consider that the real bubble that's about to pop is the short term reactive investment model they live in.

Asian and European markets are in freefall again this morning after suspiciously 'stagflationary' data points hit the tape. China reported their lowest PMI report in three years; Indian exports slowed to +13% year over year in May versus +32% reported in April; and Thailand's inflation rate shot up to a ten-year high of +8.9%. Chinese stocks got slammed again as a result, trading down another -3.1% overnight, putting the Shanghai Index -57% from its October 16th 2007 "its global this time" bubblelicious high. The Indian stock market fared even worse, closing down another -3.7% to kick off Q3, putting its cumulative decline for the year to date at three times that of the S&P 500. Good thing the private equity community who poured capital into India in Q108 at a record high pace saw that bubble coming!

After Denmark officially got the nod as the first country in the EU to move into recession territory (two consecutive quarters of negative growth), European investors continued to run for the exits. We're seeing a material sell-off in Europe (UK -2.8%, France -2.6%, Spain -3.3%, Germany -2.2%, Ireland -3.9%, Finland -2.4%, etc...) ahead of a very likely rate-hike by the ECB on Thursday. Since German unemployment hit a 16 year low this morning, it is going to be very difficult to get the bankers at the Bundesbank to pander to US investment banking needs and tone down their hawkish rhetoric. The Europeans are proactive bubble-watchers at least. I'll take proactive over reactive risk management all day long.

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