Log Periodic Bubbles

Maverick: He's going vertical, so am I.
Goose: We're going ballistic, man!
--Top Gun

Another excellent weekly missive by John Hussman. In this letter (which should be read mult times), he makes many lucid points. Investors have faith in alchemy--of the positive influence of printed pieces of paper (or bits and bytes) on economic performance. Although central banks are trying to create maximum discomfort in owning these printed pieces of paper, that does not change the fact that all of these dollars must be owned by someone.

Meanwhile, discomfort with owning dollars is driving investors in a search for yield. This is bidding up prices of all securities under the sun that generate income. Thus, the bubble is inflating in yield producing securities.

This gets us to the 'new ground' part of Dr J's missive for me. Bubbles hit their apex as dip buyers become increasingly more aggressive. As the bubble builds, every little dip is bought. Buying the dip becomes so frequent that dips disappear into a 'melt up.'

Hussman demonstrates this phenomenon using a 'log periodic bubble' model. Several examples from 1929, oil in 2008, stocks in 2011, and...stocks now. Here is the 1929 model:

What this model demonstrates is the tendency of prices to experience increasingly frequent but shallower dips that culminate into a spike higher at the apex of the up move. Here, btw, is the model corresponding to the stock price action since 2010.

Belief in quantitative easing et al has inspired confidence in buying dips. Mindless yield seeking behavior should produced the type of bubble pattern that is now becoming evident.

As Dr J notes, conditions that have preceded other major market losses are now well in place.

position in SPX, Treasuries