The Biggest Bubble of All Time is About to Be Popped

Money Daily stopped being a daily post blog in March, 2014. While the name remains the same, the posts are now on an intermittent basis, as conditions warrant, though it is advised to read the archives (from 2006-2014) regularly, even daily, for insights and historical perspective.

The handwriting, so to speak, is all over Wall Street. What has been the biggest financial bubble in the history of the world is on the verge of busting, or, what could be better still, slowly deflating.

After the crash of 2008-09, the Federal Reserve, in conjunction with central banks around the globe, injected massive amounts of liquidity into the fiat world currency markets, bolstering everything from junk bonds to consumer credit, but especially equities, otherwise known as stocks.

Since March 9, 2009, the major equity indices in the US - and, to a large degree, around the world - have rebounded on the strength of the Fed's largesse, nothing else. Now that the Fed has begun unwinding QE, the "juice" is being withdrawn. There will be no backstop for equities in the guise of unlimited liquidity from the Fed. The plan - already underway - is to reduce the amount of asset (bond) purchases by the Fed from their high of $85 billion per month, to zero. While it is unlikely the Fed will ever get to zero without reversing course or, at least, slowing the pace of their withdrawal, the March FOMC meeting will mark the third consecutive lowering of the monthly purchase level, timed in accordance with the 10-per-year FOMC schedule.

The Fed first announced in December, 2013 that it would be reducing purchases in January, 2014, and did the same in their first meeting of 2014, in January, lowering their purchase level to $65 billion in February. Since there was no meeting in February, they are expected to announce another $10 billion reduction at the March meeting next week (March 18-19). If they carry through with this expected drop to $55 billion, the market cracks which first occurred in January of this year, may turn into wholesale breaks, sending index levels below their recent lows, highlighted by the January 31 selloff.

With the S&P recovering all of its January and February losses and making new all-time highs earlier this month (the NASDAQ also made new 14-year highs), the Dow Jones Industrials did not, setting up the scenario for a bear market, according to strict Dow Theory.

If the Dow, having fallen short of its most recent high (16,588.25), continues on its path lower, exceeding the interim low of 15,340.69 (Feb. 4), this will confirm that a change in the primary tend has occurred, and a secular bear market is underway. This bear market could last anywhere from five to 20 years, possibly longer, because the recent, primary bull market - the second longest in market history - was built upon a foundation of incredibly easy money, low interest rates and global fiat currencies, unprecedented in financial history.

The fallout could be severe, popping the biggest financial asset bubble of all time, in stocks, affecting everything from individual stocks to your pension, IRA or 401k to muni bonds. In other words, be prepared for the biggest financial collapse of all time, because the last five years have been nothing but pure financial fantasy, and it's all about to come crashing to an end.

There are sure signs that the global economy is shrieking and straining to remain relevant and above water, but after blowing bubbles recently in dotcom stocks (1997-2001) and real estate (2003-2007), the Fed has reflated the economy with trillions of paper dollars, augmented by similarly spurious activities in Europe, China and Japan. The financial bubble created by central banks is of a magnitude much larger - possibly four to six times larger - than the sub-prime-induced housing meltdown, putting the figure of financial assets seriously at risk somewhere between $20 and $40 trillion dollars, an amount so unfathomable that nothing short of pure currency collapses can sufficiently make account.

(As this post is being composed (March 13, 2014, 1:10 pm EDT), the Dow Jones Industrial average has broken through its 50-day-moving average, down 194 points on the day.)

Beyond just charts and the scary finances of the central banks, China is the linchpin by which the financial dam may be breached. For the past two to three months, data out of the world's second-largest economy has been trending lower, especially in the areas of industrial production and exporting. In fact, China actually released data that showed it suffered a current account deficit, with imports exceeding exports, a very frightening development for one of the world's few export economies and a major trading partner with the US and Europe.

What the China data underscores is the overall weakness in US and European (developed) markets. The fraud of financialization has finally produced a result incompatible with the ponzi-scheme-like mantra of the central bankers. Consumers have been and are strapped for cash, a result of over-exuberant government spending, massive income disparity between the rich and poor and stagnant or declining wages in the middle of a labor shortfall crisis.

There are signs everywhere that the global economy is about to be brought back to reality, including, but by no means limited to, recent poor US unemployment data, a false housing recovery (inundated with cash buyers, flippers and speculation), inability of the government to prosecute bankers and financial operatives for mortgage and other frauds, declining adherence to the constitution and the trampling of civil rights, bogus car sales data with channel stuffing rampant, blaming the weather for poor economic results (seriously, the holiday shopping season was a complete bust), and overvaluation of speculative IPOs, tech stocks and other momentum stocks, enterprise valuations of stocks in the billions of dollars, based on nothing but pure speculation.

Nothing will stop the wreckage that the Fed and global central banks working in collusion have set in motion. The numbers are ghastly and overwhelming and the warnings have been written about for years. The time to prepare was yesterday, though there is still time, but thought processes must change. Status and wealth should not be measured by the size of one's McMansion, the price of one's car or the depth of one's stock portfolio. True wealth consists of something along these lines: a fully-paid-for home on five or more acres of land, two-thirds of it arable, food and water storage to last at least a year, a horde of cash, gold and/or silver, absolutely ZERO DEBT, and the ability and weaponry to defend it all.

Ask yourself, who among you can make claim to that, because that is real wealth, not the paper promises from Wall Street or Washington.

It's coming. And it may be approaching even faster than anyone wants to consider (think Ukraine).

Good luck.