The Music Is About to Stop

06/17/2013 9:00 am EST


Shah Gilani of Money Morning is not yet pulling out of the market, but he does think it is very near a top.

Party like it's 1999.

I'm not talking about celebrating the new millennium all over again. I'm talking about celebrating the markets roaring ahead like they did in 1999.

Just remember: There will be a price to pay. Last week, we got some weaker-than-expected economic numbers and the Dow cut its gains in half—for about a minute.

Then it was, wait a minute, those bad numbers are good numbers for the stock market, because the Federal Reserve won't be tapering anytime soon if the economy is tapering. And the Dow roared up by about 65 points—in about a minute.

So go ahead and party like it's 1999. But if you get hammered by the coming crash, you've got no one to blame but yourself. And it is coming.

The only thing that's different this time is that the Fed is ahead of this rally. Don't forget, it is actually the Fed's articulated policy to be driving people into risk assets. They want equity markets higher to "create a wealth effect."

The Federal Reserve has commandeered free markets in order to execute part deux of its "dual mandate." In case you forgot, the Fed is supposed to be in charge of making the porridge (inflation and deflation) not too hot and not too cold, but just right. But back in 1977 they got another mandate from Congress: To "promote effectively the goals of maximum employment."

Congress passed the buck to the Fed on job creation in America. If unemployment is high, Congress can blame the Fed for tightening the money supply and causing recessions, and use their offices to yell and scream that the Fed is harming Americans. And of course, if we have full employment or robust times, Congress says, "Look how good we are to you."

So how does the Fed plan on getting unemployed Americans back to work?

They are creating the wealth effect. By flooding bankrupt banks with money—which they don't want to lend out—they will instead park it with short-term borrowers, including themselves—who then park that money in short-term investments (stocks), which makes the markets go higher and higher to new all-time highs.

The feeling of wealth enjoyed by the 1% who own most of the stocks is actually supposed to trickle down into everybody's pockets...they'll reach in and find nothing, but because they are feeling wealthy, will take out their credit cards and spend, spend, spend.

It's the most brilliant formula ever. Except it won't work. We are about to discover that quantitative easing has diminishing returns; and worse.

We are getting close, very close, to a top. We may have just gotten there. But if we didn't, the next new all-time high will probably be the last one for a while.

It takes a lot of guts to call the top of a market. If I'm wrong, I'm wrong. Don't worry about me being wrong, because I'm not saying sell everything. I'm still in. You should stay in, too.

But I'm taking profits and tightening my stops. I'm redeploying some capital into betting against the Australian dollar, as well as betting that high-yield bonds and leveraged loans are near a top, and prices could come down, maybe hard.

I'm still dancing in the stock market until the music stops. It's still playing, but if I'm not mistaken, it's tapering off.

Read more from Money Morning here...

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