Global Credit Bubble in the Midst of Being Popped

Gary Kaltbaum is an investment advisor with over 18 years experience, and a Fox News Channel Business Contributor. Gary is the author of The Investors Edge. Mr. Kaltbaum is also the host of the nationally syndicated radio show "Investors Edge" on over 50 radio stations. Gary is also editor and publisher of "Gary Kaltbaum's Trendwatch"...a weekly and monthly technical analysis research report for the institutional investor. If you would like a free trial to Gary's Daily Market Alerts click here or call 888.484.8220 ext. 1.

I must say, in my years in this business, I have never seen the mood so down in the mouth. I have never seen so much worry...even about our whole financial system. I still remember back in 98, rumors were floating that the contagion at that time was going to cause Morgan Stanley and JP Morgan to go out of business. Hey yo! Please realize that bad markets do happen. Please realize that cycles do end. They then correct...they wash out the imbeciles and they then move forward. There is no one...and I mean no one...who knows where this is going to take us. Just keep in mind, whenever there is a problem, the PERMABEARS come out to tell you the end of the world is at hand...and they are now out of their caves in droves. The permabears are nothing more than the Morlocks from the Time Machine.

But that does not mean there are some rough times ahead. Whenever you have an unwinding of leverage, it affects markets. And due to the massive leverage that was out there, this may take some time. I do have a few thoughts today.

The global credit bubble is in the midst of being popped. I begged people to listen a couple of years back at what I was seeing. Most did not want to listen. Why? Because markets were going up. The people who were and are responsible for what happened and is happening were masters at obtaining other people's money. They were masters at selling and marketing opaque financial products that Einstein could not figure out. Frankly, I am amazed at the actual numbers and leverage that were and are out there. What the hell were the regulators doing? What were the rating's services doing? Oh yeah, the ratings services were being paid by the bad guys...but no conflict of interest there!

That leads me to the Fed. They are now announcing all their intraday moves in order to calm the markets. I ahve been one to believe they need to ease...but not to save the perpetrators and not to save the investors. I believe the Fed should lower rates because they remain behind the curve. It is normal for the Fed to be a half point lower than the 10 year...which is at approximately 4.72%...so I believe there is room. The Fed disagrees.

The central banks do bear responsibility. After 9/11, they cut interest rates dramatically and provided the ridiculously cheap money that helped create the housing problem as well as this leverage problem. I am in hopes they do not start dropping money from helicopters like Ben once said he would do. This would do nothing more than sustain the bubble. The Fed should let the markets do what they are supposed to do...penalize the imbeciles who took ridiculous amounts of risk. I believe in free markets. Free markets have worked throughout history. I hope this Fed recognizes that. Alan Greenspan used to flood the market with liquidity during times of financial instability. As long as the bad guys expect to be bailed out...and as long as they continue to be bailed out, the longer and worse the unwinding will be.

Now...back to the market.

There is no doubt in my mind that somewhere, somehow, some day, we are going to get a great rally. The ingredients are there. Everyone is depressed...everyone is bearish...many are talking about the end of the world and the financial system. On top of that, the FINANCIALS are probably the most extended to the downside I have seen since 1990...deservedly so. But when things go too far too fast, in either direction, contra-moves occur. So don't be surprised.

But that is the trees. The squiggly intraday moves and the bounces are the trees. The forest is the overall market and to be nice, the market is a mess. Instead of discussing where things are right now, I wanted to show you a couple of important charts I was emailed. I already knew the numbers but I had not seen the charts. Take a gander.

1) Cash Position in Mutual Funds

This first chart is how much cash is sitting in mutual funds right now. It is at its lowest ever...dropping below the 3.9% from 1972. It is now at 3.8%. In other words, mutual funds are not sitting on a load of ammo here.

2) Margin Debt vs S&P 500 Market Cap



The second chart is of margin debt. As you can see, margin debt has risen to all-time highs. Margin debt cuts both ways. It is bullish when it goes up because there is more ammo to buy stocks. There is actually quite a good correlation between the expansion of margin debt and rising markets. But the other side is that after margin debt skyrockets and markets top, margin debt will top and drop off quickly because of how scared margin money is. Just look at the drop in margin debt from the top in 00. The combination of a lack of ammo in the mutual funds as well as the potential for contraction in margin debt is a potentially negative 1-2 punch the market will not be thrilled with. I thought it was of import because of how well the correlations have worked.

Once again, this market is way overdue to bounce. So far, recent bounces have been anemic at best, and have been sold into quickly. I suspect a bigger bounce is due soon. If one occurs, I will know a lot more by its tone and its duration. Right now, any rally is nothing but an overdue bounce. Should continue to be spastic.