Since the beginning of the year equity bulls have had to concede that a tactical correction might be necessary after 2013’s incredible bull run, and after a difficult month some are arguing that the market is already working out valuation problems without a precipitous drop.

“Earlier this month, [Jim Cramer] assured his viewers that there was no reason to be concerned about a bursting bubble in tech and other go-go/mo-mo issues… because IT HAS ALREADY POPPED!” writes Gavekal/ Evergreen Capital Management chief investment officer David Hay.

Hay is clearly teasing Jim Cramer in his article, but he’s also genuinely frustrated with Wall Street analysts who share the same sanguine attitude toward the market. He points to record inflows to US equities, unprofitable companies holding IPOs at a rate not seen since the dotcom bubble, and price growth that’s as steep as anything seen ahead of the last two market tops.

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Fed stimulus has made investors complacent

If you accept that stocks are overpriced, there still has to be some catalyst that forces investors to reevaluate their position and starts to sell-off, and Hay identifies a couple of possibilities. First, Federal Reserve stimulus programs have a soothing effect on the market; the beginning of each new phase has pushed the VIX towards its floor, and the end has precipitated a sudden jump in volatility. With the current round of QE ending in a couple of months, we could see volatility finally take off again.

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Immaculate correction: Credit markets a ‘bodacious bubble’

While Hay believes that stocks are overvalued, he argues that the real danger is from the bond market, where spreads are compressed so tightly that they practically have nowhere to go but up. And credit spread widen too quickly they can knock a few points off GDP growth: Hay says that even a half point spread increase could cause a 2% contraction.

The growth in fixed-income ETFs makes this situation even more dangerous as leveraged investors struggle to find counterparties when the time comes to exit their fixed income positions. The resulting sell-off could result in fire sale prices in the corporate bond market and damage the broader economy.

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“I love the idea of an immaculate correction. I’ll even admit it’s possible in the stock market,” writes Hay, but when it comes to the credit markets he says, “I’m not going to mince words: This is one bodacious bubble.”