Crash Alert!

Our operating hunch is that US stocks, Treasuries and gold have all turned over recent months. After 33 years of falling, Treasury yields are now climbing higher … After two years of correcting, gold prices are rising again … And after 4 years … or 12 years … or 31 years of rising prices, depending on how you count it, US stocks are starting to look vulnerable to a real setback. It’s still summertime. We don’t expect much action in the next few days. But already, kids are going back to school and parents are getting back to work. And pretty soon, investors could notice that Mr. Market is taking over the controls from the Mr. Bernanke.

 

 

Mom and Pop are back in stocks. Meanwhile, sentiment, prices, margin debt – all are at extremely high levels. (There is $377 billion in margin debt on Wall Street, for example. That’s just below its all-time high… and well above its highs before the dot-com crash and the collapse of Lehman Brothers.)

Take away the jive profits of the big banks, and real earnings are weak. The relationship between Fed policy and stock prices is weakening too.

From John Hussman at Hussman Funds:

 

Our estimates of prospective risk are surging … At present, we have what might best be characterized as a broken speculative peak, in that market internals (particularly interest-sensitive groups), breadth and leadership have broken down uniformly following an extreme overvalued, overbought, overbullish syndrome. If you recall, the market also recovered to new highs in October 2007, weeks after the initial, decisive break in market internals at that time. Presently, we’re looking at the same set of circumstances. On some event related to tapering or the Fed Chair nomination, we may even see another push higher. It isn't simply short-term risk, but deep cyclical risk that is of concern.

 

Deep Cyclical Risk

What’s the “deep cyclical risk” Hussman is talking about? It’s the risk of a market that has been bubbled up due too much cheap credit. Like any bubble, it floats around until it finds its pin. This leads us to do something we do very rarely. Today, we’re hoisting our tattered “Crash Alert” flag over our Diary headquarters here in Baltimore. Watch out!

Not that we know anything you don’t know. We gave up trying to predict the future long ago, after we realized we were no good at it. Our Crash Alert flag is not a forecast. It is like a tornado warning. Market conditions are exceptionally ripe for a bad storm. Yesterday, the Dow fell 105 points. Gold barely moved. Treasury prices continued to fall. Markets move in cycles of trust. They begin tentatively, with investors unwilling to pay more than eight or nine times for a dollar’s worth of reported earnings… and too scared to lend money without at least 10% interest coming their way. Gradually, as things improve and asset prices rise, investors become more confident. Soon, they are buying stocks with P/Es of 12 to 15… and borrowing at only 5% interest. Then investors become convinced that the good times will last forever. They put aside their doubts. They find reasons to believe that what never happened before is now guaranteed to go on forever. Ordinary people have come to think that Wall Street is there to help them make money. Progress, prosperity and rising asset prices – now and everlasting. Amen.

 

Blind Faith

These beliefs are tested. There are setbacks. Shocks. And brief corrections. But if these are overcome quickly enough, say by Fed policy, a kind of blind faith takes hold. Investors begin to believe the impossible. Now, for example, investors think the Fed “will not allow” a serious correction. It should be pointed out, tout de suite, that the Fed can influence the markets. But it does not control them. And the more it influences them, the harder they are to control. Why? Investors trust the Fed to protect their money… just as the Fed makes their investments less trustworthy! Because the more influence the Fed exerts over prices, the farther they move away from where they ought to be.

If the Fed offers makes credit too cheap for too long, for example, stock prices adjust…and soon become higher than they should be. At some point, they are so high – and so far removed from solid values – that the proud tower wobbles, and then collapses, regardless of what the Fed is doing. And based on what’s happening in the bond market, it appears as though the Fed has already lost control. Ah yes, dear reader, that is one of the curious, always-fascinating feedback loops that keeps life on planet Earth ‘normal.’ Whenever things get too weird, something intervenes to make them less weird. And one of those things is a certain Mr. Market. It’s all very well for investors to believe the Fed won’t allow them to lose money. That’s what makes it possible for non-delusional investors to make a lot of money.

Again, John Hussman:

 

Collective belief can create its own reality, and at least for the past few years, collective belief is that Fed actions simply make stocks go up, and so they have. The problem is that this outcome is based almost wholly on perception and confidence bordering on superstition – not on any analytical or mechanistic link that closely relates the quantity of monetary base created by the Fed to the equity prices (despite the correlation-presumed-to-be-causation between the two when one measures precisely from the 2009 market low).

Some of the deepest market losses in history have occurred in environments of aggressive Fed easing. Markets move in cycles, bear markets wipe out more than half of the preceding bull market gains, and this one is likely to be no different.

 

(emphasis added)

Mr. Market is watching. He allows bulls to make money. He allows bears to make money. He allows smart people to make money. And dumb people too.

But at some point, Mr. Market gets tired of watching people make money. He likes to see them all lose money too. This could be one of those times …

 


 

 
 

Emigrate While You Can... Learn More

 
 

 

Dear Readers! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

3 Responses to “Crash Alert!”

  • Vidocq:

    They will need to work very hard to defeat the ever present drag by the debt mountains, to get a Zimbabwe effect…… a drag, that has grown enormously and systemically during the world wide QE experiment.

    We’ll know soon enough, crash alert or no crash alert.

  • Vidocq:

    Geeperz Bill, a Crash ALERT!! ???

    The contrary investor inside me wants to buy calls. Please advise.

    • JasonEmery:

      I like the guy’s analysis, but Hussman has been awfully bearish for quite some time now. One could argue that the the broken clock principle might be in play, but that is a weak, vague argument.

      I look at it more like a region that has distinct rainy and dry seasons. If the rain doesn’t arrive near the appointed start date for the rainy season, the odds increase daily that rain will come soon. But after a certain grace period, one has to start discounting the possibility the annual monsoon will fail, and the odds of rain start dropping.

      Hyperinflation episodes aren’t that rare. If that is what’s on tap, I wouldn’t want to be short anything but bonds.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • safe spaceReality is a Formidable Enemy
      Political Correctness Comedy We have recently come across a video that is simply too funny not be shared. It also happens to dovetail nicely with our friend Claudio's recent essay on political correctness and cultural Marxism. Since this is generally a rather depressing topic, we have concluded that having a good laugh at it might not be the worst idea.   How to most effectively create a “safe space” on campus Cartoon by Nate Beeler   It is especially funny (or...
  • Gold bars are displayed at a gold jewellery shop in the northern Indian city of Chandigarh May 8, 2012. Gold imports by India, the world's biggest buyer of bullion, could rise on pent-up demand from jewellers after the federal government decided to scrap an excise duty on jewellery it imposed in March, the head of a trade body said on Monday. REUTERS/Ajay Verma (INDIA - Tags: BUSINESS COMMODITIES)Fresh Mainstream Nonsense on Gold Demand
      They Will Never Get It... We and many others have made a valiant effort over the years to explain what actually moves the gold market (as examples see e.g. our  article “Misconceptions About Gold”, or Robert Blumen's excellent essay “Misunderstanding Gold Demand”).  Sometimes it is a bit frustrating when we realize it has probably all been for naught.   Gold wants to know what it has done now... Photo credit: Ajay Verma / Reuters   This was brought home to...
  • fir wateringDrowning the Fir
      Presidential Duties Our editor recently stumbled upon an image in one of the more obscure corners of the intertubes which we felt we had to share with our readers. It provides us with a nice metaphor for the meaningfulness of government activity. First, here is a look at the picture – just quietly contemplate it for while and let it work its magic on you:   Yes, these two gentlemen are actually watering a tree in the middle of a downpour... Photo via...
  • Hollande 2The Wonder Years Are Over
      Everybody Is Unhappy PARIS – “France?” We were in a cab on the way from Charles de Gaulle Airport yesterday. We had innocently asked our cab driver how things were going in the country. He had some thoughts...   French president Francois Hollande: against all odds, he managed to attain the most powerful position in French society. And yet, even he is unhappy. Photo credit: Patrick Kovarik / AFP   “France is a mess. We have 5 million people unemployed. And...
  • swiss-cultureSwitzerland About to Vote on “Free Lunch” for Everyone
      Will the Swiss Guarantee CHF 75,000 for Every Family? In early June the Swiss will be called upon to make a historic decision. Switzerland is the first country worldwide to put the idea of an Unconditional Basic Income to a vote and the outcome of this referendum will set a strong precedent and establish a landmark in the evolution of this debate.   The Swiss Basic Income Initiative in a demonstration in front of parliament. As we have previously reported (see “Swiss...
  • mossack fonsecaGold – The Commitments of Traders
      Commercial and Non-Commercial Market Participants The commitments of traders in gold futures are beginning to look a bit concerning these days – we will explain further below why this is so. Some readers may well be wondering why an explanation is even needed. Isn't it obvious? Superficially, it sure looks that way.     As the following chart of the net position of commercial hedgers illustrates, their position is currently at quite an extended...
  • 5-SPX vs. tax receipts from 2007Corporate Tax Receipts Reflect Economic Slowdown
      Tax Receipts vs. the Stock Market Following the US Treasury's update of April tax receipts, our friend Mac mailed us a few charts showing the trend in corporate tax payments. Not surprisingly, corporate tax payments and refunds mirror the many signs of a slowing economy that have recently emerged. An overview in chart form follows below. First up, corporate tax receipts in absolute figures.   Corporate tax receipts in absolute dollars and cents – this is quite astonishing...
  • picture-social-contract-not-foundHeretical Thoughts and Doing the Unthinkable
      Heresy! NORMANDY, France – The Dow rose 222 points on Tuesday – or just over 1%. But we agree with hedge-fund manager Stanley Druckenmiller: This is not a good time to be a U.S. stock market bull.   Legendary former hedge fund manager Stanley Druckenmiller at the Ira Sohn conference – not an optimist at present, to put it mildly. Photo credit: David A. Grogan / CNBC   Speaking at an investment conference in New York last week, George Soros’ former partner...
  • ClintotrumpStaying Home on Election Day
      Pretenses and Conceits The markets are eerily quiet… like an angry man with something on his mind and a shotgun in his hand. We will leave them to brood… and return to the spectacle of the U.S. presidential primaries. On display are all the pretenses, conceits, and absurdities of modern government. And now, the race narrows to the two most widely distrusted and loathed candidates.   US election circus: Deep State Rep vs. Rage Channeller   The first, a loose...
  • Jackboot 2How the Deep State’s Cronies Steal From You
      Expanding in Ireland DUNMORE EAST, Ireland – We came down the coast from Dublin to check on our new office building. For this visit, we wanted to stay somewhere different than we normally do. So we chose a small hotel on the coast, called the Strand Inn.   Irish landscape with alien landing pads. Even the guys from Rigel II have heard about Ireland's corporate tax rate. Photo credit: Tourism Ireland   It is an excellent place for seafood and soda bread on a...
  • time100-grid-covers-whiteThe World's 100 Most Influential Hacks, Yahoos and Monkey Shiners
      Hacks and Has-Beens NORMANDY, France – What has happened to TIME magazine? Henry Luce, who started TIME – the first weekly news magazine in the U.S. – would be appalled to see what it has become.   Time cover featuring the sunburned mummy heading the globalist IMF bureaucracy (which inter alia advocates that governments should confiscate a portion of the wealth of their citizens overnight, even while its own employees don't have to pay a single cent in taxes). Once you...
  • YenThe Japanese Popsicle Affair
      Policy-Induced Contrition in Japan As we keep saying, there really is no point in trying to make people richer by making them poorer – which is what Shinzo Abe and Haruhiko Kuroda have been trying to do for the past several years. Not surprisingly, they have so to speak only succeeded in achieving the second part of the equation: they have certainly managed to impoverish their fellow Japanese citizens.   Shinzo Abe and Haruhiko Kuroda, professional yen assassins Photo credit:...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com