Macro Morsels report
Comment of the Day

August 04 2017

Commentary by Eoin Treacy

Macro Morsels report

Thanks to a subscriber for this edition of Richard Harding’s report for Maybank. Here is a section:

These are the conditions we’re seeing develop in the index funds and index ETFs right now, Puplava stated, and this is the epicenter of the current bubble. He thinks we’ll enter into the final stages at the end of this year or the beginning of next year.

This move toward passive investing in the form of an index ETF or an index mutual fund is generating the same behavior we’ve see in past bubbles.

“It’s being driven by computers,” Puplava said. “No thought is given to what is bought or sold. It’s the downfall of human psychology.”

Right now, it is estimated that $800 billion will flow into index ETFs this year, up 60 percent from the previous year, and next year it’s estimated we will top over $1 trillion.

As we’ve seen in every crisis, the implosion of margin debt eventually brings this to an end. As this happens, it accelerates the stampede out of the bubble asset. That’s how every cycle always ends.

Echoing Ray Dalio's recent comments, Puplava, who has been managing money for over 30 years, ended by saying, “Right now, we’re still dancing.” However, as we move into the final phase of the bubble, Puplava intends to take profits, raise cash, and take advantage of potentially cheaper prices once the tide turns.

Eoin Treacy's view

There is an increasing number of investors coming out to clearly state they believe the eight- year bull market is developing into a bubble. The final stages of a bull market, particularly If the ending is a Type-1 acceleration, is the time when the prices rise fastest.

There is no evidence of spectacular acceleration in the wider market yet although there is certainly some evidence of exaggerated valuations in the technology sector. The contrarian point of course is that when so many people are talking about a bubble the market is less likely to be close peaking. The Fed is a serial bubble blower and the massive scale of monetary accommodation certainly has created the conditions where a bubble could form. The obvious strategy if one believes a bubble is forming is to be long while remaining vigilant for signs of top formation development. 

The full article can be found here.


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