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!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

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:

  • US Financial Markets – Alarm Bells are Ringing
      A Shift in Expectations When discussing the outlook for so-called “risk assets”, i.e., mainly stocks and corporate bonds (particularly low-grade bonds) and their counterparts on the “safe haven” end of the spectrum (such as gold and government bonds with strong ratings), one has to consider different time frames and the indicators applicable to these time frames. Since Donald Trump's election victory, there have been sizable moves in stocks, gold and treasury bonds, as the election...
  • The Great El Monte Public Pension Swindle
      Nowhere City California There are places in Southern California where, although the sun always shines, they haven’t seen a ray of light for over 50-years.  There’s a no man’s land of urban blight along Interstate 10, from East Los Angeles through the San Gabriel Valley, where cities you’ve never heard of and would never go to, are jumbled together like shipping containers on Terminal Island.  El Monte, California, is one of those places.   Advice dispensed on Interstate...
  • A Trade Deal Trump Cannot Improve
      Worst in Class BALTIMORE – People can believe whatever they want. But sooner or later, real life intervenes. We just like to see the looks on their faces when it does. By that measure, 2017 may be our best year ever. Rarely have so many people believed so many impossible things.   Alice laughed. "There's no use trying," she said: "one can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for...
  • Where’s the Outrage?
      Blind to Crony Socialism Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous.  The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class.  In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid.  Believe me.  I’ve been on both sides of this kind of dispute (except, of course, for the “failed”...
  • Trump’s Trade Catastrophe?
      “Trade Cheaters” It is worse than “voodoo economics,” says former Treasury Secretary Larry Summers. It is the “economic equivalent of creationism.” Wait a minute -  Larry Summers is wrong about almost everything. Could he be right about this?   Larry Summers, the man who is usually wrong about almost everything. As we have always argued, the economy is much safer when he sleeps, so his tendency to fall asleep on all sorts of occasions should definitely be welcomed....
  • Pope Francis Now International Monetary Guru
      Neo-Marxist Pope Francis Argues for Global Central Bank As the new year dawns, it seems the current occupant of St. Peter’s Chair will take on a new function which is outside the purview of the office that the Divine Founder of his institution had clearly mandated.   Neo-Papist transmogrification. We highly recommend the economic thought of one of Francis' storied predecessors, John Paul II, which we have written about on previous occasions. In “A Tale of Two Popes” and...
  • Side Notes, January 14 - Red Flags Over Goldman Sachs
      Red Flags Over Goldman Sachs Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold.   The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese's movie “The Wolf of...
  • Trump’s Plan to Close the Trade Deficit with China
      Rags to Riches Jack Ma is an amiable fellow.  Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl.  At a moment of peak inspiration, he executed his first search engine request by typing in the word beer.   Jack Ma, founder and CEO of Alibaba, China's largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and...
  • Money Creation and the Boom-Bust Cycle
      A Difference of Opinions In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote:   I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud...
  • Silver’s Got Fundamentals - Precious Metals Supply-Demand Report
      Supply-Demand Fundamentals Improve Noticeably Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action.   Photo via thedailycoin.org   The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices.   Prices of gold and silver...
  • Regime Change: The Effect of Trump's Victory on Stock Prices
      A Soaring Market On January 20 2017 Donald Trump will be sworn in as the new president of the United States. On the stock market his victory has triggered a lot of advance cheer already: the Dow Jones Industrial Average rose by a sizable 7.80 percent between the election and the turn of the year.   Two big winners: the DJIA and Donald Trump - click to enlarge.   Many investors are now wondering what effect the change in government will have on stock prices in the new...
  • Donald and the Dollar
      No Country Can be Made Great by Devaluation John Connally, President Nixon’s Secretary of the Treasury, once remarked to the consternation of Europe’s financial elites over America’s inflationary monetary policy, that the dollar “is our currency, but your problem.”  Times have certainly changed and it now appears that the dollar has become an American problem.   Richard Nixon and his treasury secretary John Connally. The latter is today mainly remembered for his...

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