Juggling Dynamite

David Einhorn, co-founder & president at Greenlight Capital, discusses his dinner conversation with former Federal Reserve Chairman Ben Bernanke on quantitative easing and Fed policy.Here is a direct video link.

This clip offers a good overview on today’s global stock market bubble. The multitrillion dollar question of course, is not if, but when, this bubble will burst once more. Since precise timing is always illusive, each person much bet according to their own rules, risk appetite and conscience. Here is a direct video link.

To hedge his bets and appease the requirements of his company GMO’s now “long always” equity mandate, Jeremy Grantham has said the S&P could rise for perhaps a further 15% before it implodes again. He may be right, but it is a total guess.(Grantham learned the pains of moving away from bubbles early in 1998 when he pulled out of stocks 2 years before the 2000 collapse and was punished with a 50% redemption of assets under management, before attracting billions of inflows again after others lost money and their clients in the 2000-2003  -50% bear market.)

Or possibly this stock bubble burst is already in process as tech, momentum and small cap leaders are in the midst of a significant price correction year to date. Twitter, as an example, is now down more than 50% from its December peak.

Whatever the precise timing turns out to be, the most important question to grasp here is not when will stocks correct by 5 or 10%, but rather when will stocks next fulfill their half-life destiny for the third time since the secular bear began in 2000. Half-life, because fulfilling the secular bear destiny would mean wiping out all of the price gains seen since 1997 and possibly longer. Believe it or not.

As China’s manufacturing contracted for the 4th consecutive month in April, the OECD has lowered its global growth forecasts yet again for 2014, and major investment banks are now slashing their Q1 US GDP growth forecasts into negative numbers. Although creative accounting and share-buybacks on debt (longer-term suicidal) have managed to keep profit growth advancing in the short term, earnings growth is still slowing and sales trends are looking bleaker still.

Sure there are now about 1645 billionaires in the world (double the number from 2006), but magic accounting aside, companies and economies still do need customers from the other 99.9% of the world, it turns out. Who would have thunk that was necessary?

Meanwhile cash strapped Americans (who are still the wealthiest households in the world don’t forget) are busily redeeming funds from their incredibly meager retirement savings to make ends meet.  See: Early tap of 401(k) replaces homes as American piggy-bank.

The Internal Revenue Service collected $5.7 billion in 2011 from 401(k) early redemption penalties, meaning that Americans took out about $57 billion from retirement funds before retirement.  This is not a sustainable solution though as funds are extremely limited and spending now simply means less spending capacity later:

“The median size of a 401(k) is $24,400 as of March 31, with people older than 55 having $65,300, according to Fidelity Investments. Those funds can disappear quickly in retirement, and the early withdrawals indicate that the coming retirement crisis could be even more acute than expected.”