Financial Bubbles have been a characteristic of markets since their inception. These phenomena represent a collective view in the value of an asset that ultimately differs markedly from reality. Once everyone is of the same view and everyone then owns the assets at the focus of the bubble, surprisingly there is no one else to buy said asset, and the price collapses.
Since before 2000 Western governments and especially the US government have consciously embarked on a series of bubble blowing exercises to compensate for their empire going into decline. Each one has risen and fallen, and each successive bubble has required more drastic injections of hot air to force it to rise to the required dizzy heights.
Since the 2008 credit crunch we have been subject to the most recent of their expansive bubbles in which the Fed have been pumping money into the system, without really affecting the wealth of the general population. Unlike real growth of a nation's economy where the lower and middle classes through industry hard work and innovation, create wealth, this artificially induced growth has none of those healthy characteristics. Indeed we in the western world have been suffering from a period of stagflation caused by higher import prices driven by the emerging world and climate change that have increased our cost of living faster than incomes have grown, making the majority of households poorer in the last decade, not wealthier as the levels of the stock markets might suggest.
Since the start of 2013, the stock markets have worked their way higher in response to the mass of retail money flooding into the markets finally being convinced that it was safe to invest. This flood of retail money was buoyed up by government's so called quantative easing and thus has lasted until yesterday May 22 2013. Over that past few weeks the rally has turned into an incremental grind, and then finally yesterday before the US Fed Chairman’s Ben Bernanke’s speech, the stock markets miraculously rushed up in what could be termed a blow off, and then once he started to speak reversed violently to end up lower on the day.
Such a reversal signal is very powerful and could in all probability mark the end of the 2013 bull market, which we expect will be followed by a significant decline. There is some irony that a Bubble driven by the FED might end with a Speech by its Architect.