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It's 2007 All Over… Except the Fed is Effectively Out of Ammo

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Published : November 03rd, 2014
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Category : Crisis Watch

The markets erupted last week to new highs on the Bank of Japan’s announcement that it would increase its massive QE program.

The Yen collapsed on the news and is now on the cusp of breaking a multi-decade support line:

While US stocks eked out a new high:

This move is very reminiscent of the 2007 top. At that time we had a top, followed by a quick correction and then a final blow off to eke out new record highs:

It is not merely the market that is mirroring the 2007 top.

1.     Corporate debt is back to 2007 PEAK levels.

2.     Stock buybacks are back to 2007 PEAK levels.

3.     Investor bullishness is back to 2007 PEAK levels.

4.     Margin debt (money borrowed to buy stocks) is at 2007 PEAK levels.

5.     The leveraged loan market is flashing major warnings.

6.     Corporate insiders are dumping shares at a pace not seen since the TECH BUBBLE TOP

7.     Numerous investment legends have warned of a coming crash.

8.     Investor complacency is at a record LOW.

9.     The Fed has confirmed QE is ending this week, so the juice is cut off for now.

The Fed has succeeded in recreating the same environment that existed in 2007. Once again we have rampant risk taking, excessive leverage, and a stock market bubble.

The only difference is that WHEN (it’s no longer a question of IF), stocks collapse this time around, the Fed has already spent just about ALL of its ammunition.

·      Interest rates are at ZERO, so the Fed cannot cut rates.

·      The Fed has spent nearly $4 trillion in QE, so announcing a new QE program won’t accomplish much.

This leaves other minor policy changes, verbal interventions, and of course, the nuclear option of outright buying stocks. The Fed has been effectively doing this via QE for four years by giving money to Wall Street to buy stocks, but the Fed could always opt to do what the Bank of Japan does and simply buy stocks itself.

However, it’s not clear what any of this would accomplish. Stocks might move higher, but the accompanying economic woes wouldn’t go over well, especially given that the Fed is already in the political hot seat due to its total lack of oversight and its cozy relationship with the Big Banks.

Given that the Bank of Japan’s latest increase in QE was in fact made by a VERY divided board (the vote was 5-4 in favor of the increase), we can assume that the Fed would face similar pushback both internally and externally (particularly if the GOP takes the Senate).

In simple terms… we’re back in 2007, but the Fed will have very real limitations to what it can do when this bubble pops. And it will pop in the not so distant future.

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Data and Statistics for these countries : Japan | All
Gold and Silver Prices for these countries : Japan | All
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