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By Robert Fitzwilson of The Portola Group

February 2 (King World News) - Elites Run Systemic Stress Tests Ahead Of More Global Chaos

In the early 1970s, a concept was coined called the “Nifty Fifties.”  These were a subset of the U.S. equity universe that were considered “no brainers.”  Investors could buy these issues and ignore the rest.  During the ‘90s, we saw something very similar with the darlings such as Microsoft, Cisco and Intel.  As more people and institutions focused on a relatively small group of issues, we witnessed a self-fulfilling prophecy:  Prices rose, and more money flowed into the same issues....

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Indexes such as the S&P 500, rose at an accelerated pace as the market capitalizations of these stocks skewed the Index even higher.  The higher the Index went, the more money flowed in not only to chase the Index itself, but the indexed pools of money had to keep buying to maintain the percentage allocation to each issue.

Sometimes crazes take time to play out. In the case of the “Nifty Fifties,” the broad stock market had tailed off in the late ‘60s and continued to do so until everything collapsed in the terrible ’73-’74 bear market.  In the case of the darlings, it took 5-6 years before the outperformance of the large cap stocks mentioned above morphed into grotesque speculation culminating in the bust.

Valuations became relative and stratospheric.  Not too many years before, companies could not even go public without 3 years of demonstrated sales and earnings.  At the end of the ‘90s and early 2000’s with companies like Cisco trading at price-to-earnings multiples in the 70-80 range, less mature public companies in hot sectors could be priced at multiples in the 3 digits so the argument and the reality went.  Private companies in hot sectors that even threatened to go public were acquired at valuations in the $ billions, unheard of a few years before.  And then it all ended as speculative excesses do.

Violent swings last week in the prices of such issues as Apple, Amazon, Netflix and Chipotle Mexican Grill after earnings announcements suggest that there is an intensity around a relatively few issues as we saw in the ‘70s and the ‘90s.  We have also seen it in the price action of J.C. Penney and Herbalife.

That is not to say that there is an absence of fundamental reasons for the moves.  Companies that have been able to embrace new technology and concepts are creating global powerhouses that are generating solid, old fashioned earnings and cash flow.  It is the intensity of the swings that suggests that the pressure on the institutional investors to be in the “right names” and out of the wrong ones is intense.  With margin debt at stratospheric levels and the presence of high frequency trading, the markets are operating within a toxic stew that could devolve rapidly into a very nasty correction or bear market.

The wild cards are the Fed and the underlying economy.  If the Fed cannot get the parade of unsupportive economic indicators to reverse, yet they continue to support the stock market, the separation between valuations and reality will become even more dangerous.  If they are able to pull off this “hat trick” of getting positive momentum in the economy and provide support for stocks, the equity markets could rise significantly from current levels.  The focus on the new “Nifty Fifty” will be correct and rewarding.

The sad part of this is that it relies upon a handful of people at the Fed to make monumental decisions on an immensely complex world economy.  It is an impossible task and is destined for failure, but that is the situation in which we find ourselves.  We are hearing that there was a near revolt within the Fed to exit QE.  It cannot be done without creating more of the turmoil that we are seeing in the emerging markets.  If continued at this pace, that turmoil will spread to the developed countries and markets.

Dr. Roberts touched on the dilemma for the Fed in his recent KWN interview.  We were intrigued by his comment that the Fed must soon choose between the banks and the dollar.  Our fear is that they will choose both, and that there is a third option in their playbook.  That option is a ramp in the financial repression.  The candidates that come to mind are the bail-in and the recently announced “MyIRA.”  There have been recent episodes of banks refusing to allow cash withdrawals above certain amounts or without explanations as to the use of the cash as well as ATM system failures.  We should consider the possibility that this represents stress testing the reaction to the policies by the depositors.  Global wealth taxes have been also proposed.

The MyIRA might also be the trial balloon for the ultimate confiscation of the retirement assets.  The size of the retirement assets is estimated to be $18 trillion.  With $17 trillion of Treasury debt outstanding, the Fed under pressure to limit the size of their balance sheet, and the debt ceiling debate looming on the horizon, those assets are a tempting target.  The MyIRA concept is the latest incarnation of Social Security in our view.  You give your money to the government in exchange for a virtually non-interest bearing promise for something in the future.  Unlike an IRA that can be given to your beneficiaries, the obligation is extinguished with your death.  It sounds like an awfully perfect solution to the problem of choosing between the banks and the dollar for the global elites.

© 2014 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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