When the “Melt-Up” Melts Down

The comments above & below is an edited and abridged synopsis of an article by Brian Maher

Today’s bull market has entered the same terminal ‘melt-up’ phase as the dot-com bubble did. When fear gives way, the bears give up and the crowd gives in. The same crowd ultimately gives back, as it did when the dot-com bubble melted down in 2001.

The critical question: If stocks have entered their final melt-up phase, when does the meltdown start?

The Fed is in a tightening cycle. Last month it also began draining a major source of liquidity—the behemoth $4.5 trillion balance sheet it inflated after the last crisis.

A mere $10 billion a month for now, that figure is expected to reach $50 billion a month by the end of next year. But if the Fed is tightening, how could stocks melt up?

The Fed isn’t alone; the ECB, Bank of England, Swiss National Bank, Bank of Japan and Bank of China all produce liquidity of their own, and many are still soaking markets in combustible credit.

But what happens when those same balance sheets stop expanding? The ECB is expected to taper its bond purchases this month, as is the Bank of England.

At the projected rate, global central bank bond purchases taper to zero by the end of next year. Does the melt-up melt down by then as the credit runs dry? If the relationship between central bank credit and markets holds true, maybe.

Maybe markets take fright and the central banks flood markets with more kerosene. Then the cycle starts over again with even more combustible fuel in the system.

“The danger is that [central banks] have let the party go on too long, and it’s already too late,” says Bloomberg. Maher agrees.