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"We’re creating a bigger bubble than before....It’s going to go crashing down, in an ugly way." Nouriel Roubini



October 27, 2009 – Comments (9) | RELATED TICKERS: GS , JPM

MY COMMENT: This is the second part of: Stock Bulls are Going to get Hit Hard. S&P P/E = 140, which I posted on 06 OCT 09.

GW has the post:

Gross, Roubini, Ritholtz and Smithers All Forecast a Correction

Bill Gross says assets are overvalued and the rally is over.

Nouriel Roubini - who called last year's crash - said last week that "a big crash is coming":

There’s a huge bubble, because we have zero rates in the U.S., zero rates around the world and a huge carry trade. Everyone is borrowing at zero interest rates in dollars and getting a capital gain because the dollar is weakening, so they are borrowing at negative rates. And then they invest in risky assets:commodities, equities, credit. We’re creating a bigger bubble than before.

It’s going to go crashing down, in an ugly way. That’s the basics of the argument...

There is a wall of liquidity chasing assets. That liquidity can chase those assets higher for the time being until the huge carry trade—the asset bubble and the wall of liquidity—comes crashing down. You can still have all the risky assets going higher. Of course, the higher they go, the more they diverge from fundamentals, and the riskier the situation becomes. But eventually, if the recovery of the economy is going to be anemic, sub-par, below-trend and U-shaped, there is going to be a correction. And therefore my view is to stay away from risky assets. Stay in liquid assets. I don’t know when the correction is going to occur, it could be a while longer, but eventually it will be a pretty ugly correction, across many different asset classes.

Barry Ritholtz, who has been very bullish for some time, is now looking for a correction:

I see a significant increase in the odds for a fairly substantial correction — in the 5 – 15% range — over the next 60 days.

5 factors are making me more cautious:

1) Over the past 4 days, we have had 3 failed rallies;

2) The number of New Highs on the major indices is contracting;

3) Stocks seem to be reacting far less enthusiastically to earnings beats then they had been;

4) The Transports have been acting squirrelly lately;

5) The S&P is forming an Ascending Wedge (more on this later today).

Here's the Ascending Wedge he's talking about.

And, as Bloomberg writes:

The U.S. Standard & Poor’s 500 Index is about 40 percent overvalued and headed for a drop as central banks pull back on securities purchases that pushed up asset prices, according to economist Andrew Smithers.

9 Comments – Post Your Own

#1) On October 27, 2009 at 6:26 PM, abitare (29.61) wrote:

If you want to see some beautiful charts on the Bearish view go here:

A Trader's Intuition (with Charts)
(October 26, 2009)

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#2) On October 27, 2009 at 7:04 PM, silverminer (30.06) wrote:

Great post, Abit ... thanks!

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#3) On October 27, 2009 at 7:43 PM, kdakota630 (28.90) wrote:

One more analyst helping me to confirm my beliefs.  My target is Dow 10,500 - 11,000 before things start to begin falling again.

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#4) On October 27, 2009 at 10:38 PM, Judochop172 (< 20) wrote:

Good job abit. I caught the smithers article yestereday. Keep posting the videos of truth.

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#5) On October 28, 2009 at 12:33 AM, XtremeNeoCon (< 20) wrote:

Thanks for a great post!  And the replys are top shelf as well. I'm not much of a TA guy, so I really enjoy seeing charts I can understand. Double thanks for that link.

Yall might think I'm crazy, but I don't see oil going over $100.00 a blr. (like was predicted in one of the articles) In fact, I don't see it going any higher than it is right now. IN FACT, I'll go out on a limb and predict its demise over the next few weeks.

Everybody's full! When the price fell last year, refiners made the decision to filled R up. As did all the countries with strategic oil reserves. Who could blame them? Refiners, in an effort to suppress supplies of finished product shut down for early repairs. Took their time with said repairs. Days only for most of them, no overtime, few contracotors. None of them were in a hurry to start back up. They all wanted the finished product supplies to fall, so as to get the price back up. 

They took on feedstocks and haven't done much with it. So like I said, the bottom line is: Everybody's FULL.

Strategic reserves all over the world are full too. China is still building more capacity, but the abnormal demand stretegic reserves created -- is pretty much over with.

I could be wrong. I didn't believe oil would go over $75.00 and it did. But I'm laughing out loud at the notion of $100.00 oil anytime soon. I believe we'll be back under $50.00 before Christmas.

Here and Now: I'm predicting $40.00 oil in Jan 2010

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#6) On October 28, 2009 at 5:11 AM, Oraclepicks (< 20) wrote:


 oil is priced in dollars, inflation equals oil price up. its not just supply and demand

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#7) On October 28, 2009 at 6:38 AM, abitare (29.61) wrote:

Another piles on:

Multi-Year Stock Market Top Could Be In

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#8) On October 28, 2009 at 12:42 PM, HansHauge (46.04) wrote:

Wow...good find.

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#9) On October 28, 2009 at 2:31 PM, XtremeNeoCon (< 20) wrote:

Oraclepicks  Yea, I know. I over simplified my post. Working night this week.


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