Doug Noland: Unsound Finance

wallstreetexaminer.com / by Doug Noland • April 29, 2017

With Emanuel Macron and Marine Le Pen moving on to next Sunday’s (May 7) runoff French presidential election, first-round results proved right in line with the polls. One would typically expect “as expected” results to elicit minimal market reaction. But we live in the age of derivatives, hedging and speculation. Markets – especially European – were buoyed, once again, this week by the reversal of hedges and short positions.

In Europe, the French CAC 40 index surged 4.1%. Italian stocks (MIB) jumped 4.4%, with Spanish equities (IBEX) up 3.3%. Germany’s DAX rose 3.2%. European bank stocks (STOXX 600) advanced 4.8%, with Italian banks up 7.6%. French sovereign CDS collapsed 22 to a five-month low 33 bps. Italian CDS declined 18 to a one-month low 168 bps. Here at home, the S&P500 gained 1.5%, trading Wednesday within a whisker of all-time highs. The week saw record highs for the Nasdaq composite, the Nasdaq 100, the Morgan Stanley High Tech index, the small cap Russell 2000 and the large-cap Russell 3000. The VIX collapsed to a near three-year low. With the yen sinking 2.2%, Japan’s Nikkei 225 jumped 3.1%.

I start with a simple definition: “A Bubble is a self-reinforcing but inevitably unsustainable inflation.” Bubble terminology is used in various contexts and means different things to different folks. To most analysts, talk of a “Bubble” connotes something that is about to burst. I take a different approach, working to identify initial factors and characteristics that are favorable for Bubble formation – and then monitoring and analyzing developments and ramifications. I covered the mortgage finance Bubble from every angle on a weekly basis for over six years, after initially warning of its development in early-2002. It’s now been over eight years analyzing the global government finance Bubble – the “Granddaddy of All Bubbles.”

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