Fed Governor Dares Say 'Bubble': Dave's Daily

As a dissenter Fed Governor Thomas Hoenig dared speak of bubbles and other heresies away from the official line. At the same time, Bernanke was testifying regarding current economic fragility. Who's right?
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Dave's Daily

By Dave Fry, founder and publisher of

ETF Digest

and author of the best-selling book

Create Your Own ETF Hedge Fund.

April 7, 2010

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HOENIG SEES A BUBBLE & STOCKS SEE RED

As a dissenter Fed Governor Thomas Hoenig dared speak of

bubbles

and other heresies away from the official line. At the same time, Bernanke was testifying regarding current economic fragility. Who's right?

Hoenig stated:

"In particular, what are the hazards of holding the Federal Funds rate target close to zero? The risks of raising too soon are clear and compelling. My comments, however, concern the risks of raising rates too late. Such risks also can be significant but all too often seem more distant and less compelling, and therefore hold great long-term danger for us all...I have dissented at the last two FOMC meetings specifically because I believe the 'extended period' language is no longer warranted and I am concerned about the buildup of financial imbalances creating long-run risks....And, the market appears to interpret the extended period as at least six months. Such actions, moreover, have the effect of encouraging investors to place bets that rely on the continuance of exceptionally easy monetary policy.  I have no doubt that many on Wall Street are looking at this as a rare opportunity."

At least he's articulating what many are thinking--an asset bubble is brewing and it's being fed by current easy money policies.

Lacking other news and with volume light before his remarks, investors took his words to heart Wednesday and started selling.  

So as volume picks up it follows previous patterns of heavier volume on down days as stops are hit and positions liquidated.  Breadth was mostly negative per the WSJ.

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The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE.  When readings are +60/-60 markets are extended short-term.

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Per Investopedia:  The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends.  I believe readings of +1000/-1000 reveal markets as much extended.

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Per Investopedia: The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge".  Our own interpretation is highlighted in the chart above.  The VIX measures the level of put option activity over a 30-day period.  Greater buying of put options (protection) causes the index to rise.

Continue to Major U.S. Markets

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Continue to U.S. Market Sectors, Selected Stocks & Bonds

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Continue to ProShares, Direxion & PowerShares/DB Leveraged ETFs

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Continue to Currency & Commodity Markets

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Continue to Overseas & Emerging Markets

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Continue to Concluding Remarks

Was there anything new about Hoenig's speech that we didn't already know? Nothing. He's been a dissenting vote and wants interest rates increased sooner rather than six months from now.  He did throw down the gauntlet to Wall Street warning them to mind their risks and beware of an unfolding asset bubble (stocks) as he sees it. 

Meanwhile, back at the

ranch

congress, Greenspan was being grilled and Bernanke was doing his speaking in tongues shtick. I didn't disagree with

Greenspan's point

how congress and others promoted a housing bubble through the CRA (he didn't mention the sacred cow by name) and FNM/ FRE. That was the political deal made to repeal Glass-Steagall by putting the CRA on steroids. But, he was for the repeal and did keep interest rates too low too long after 9/11. His oversight of what happened next was reprehensible.

Little noticed was the contraction in Consumer Credit Wednesday. Thursday is Jobless Claims data and that should provide a shove one way or another.

Let's see what happens.  You can follow our pithy comments on

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Disclaimer: Among other issues the ETF Digest maintains positions in: MDY, IWM, QQQQ, XLB, XLF, XLI, XLY, IYR, SEA, TBT, TBF, BGU, DIG, UYM, BDD, UCO, MVV, DZK, AGQ, EDC, XPP, EFA, EEM, EWJ, EWY, EWA, EWC, TUR, RSX, EPI and XPP.

The charts and comments are only the author's view of market activity and aren't recommendations to buy or sell any security.  Market sectors and related ETFs are selected based on his opinion as to their importance in providing the viewer a comprehensive summary of market conditions for the featured period.  Chart annotations aren't predictive of any future market action rather they only demonstrate the author's opinion as to a range of possibilities going forward. More detailed information, including actionable alerts, are available to subscribers at

www.etfdigest.com

.

Dave Fry is founder and publisher of

ETF Digest

, Dave's Daily blog and the best-selling book author of

Create Your Own ETF Hedge Fund, A DIY Strategy for Private Wealth Management

, published by Wiley Finance in 2008. A detailed bio is here:

Dave Fry.