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

 

results 

Year-End Fund Raising Drive

Dear readers, our year-end funding drive has become a “beginning of the year funding drive” as we have yet to reach our target. By now you will be familiar with the many advantages a donation can secure for you, which range from sounder sleep, to children including you in their songs, to potentially obtaining privileges in the afterlife (no guarantees, but it seems highly likely). Lastly, a special thanks to all readers who have already made a contribution, we are greatly honored by your support.

   

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:

  • goldmine-700x360Gold and Gold Stocks – A Meaningful Reversal?
      A Negated Breakdown There have been remarkable gyrations in the gold sector lately. The typical rebound out of a November/December low (typical in recent years after the end of the tax loss selling period) was initially cut short in January in the course of the global stock market decline. This was a bit surprising, because it was widely held that the recovery in the gold price was a result of said stock market decline.   Photo via genius.com We suspect that in it was...
  • wizard bank 2The Walking Dead: Something is Rotten in the Banking System
      A Curious Collapse     Ever since the ECB has begun to implement its assorted money printing programs in recent years - lately culminating in an outright QE program involving government bonds, agency bonds, ABS and covered bonds - bank reserves and the euro area money supply have soared. Bank reserves deposited with the central bank can be seen as equivalent to the cash assets of banks. The greater the proportion of such reserves (plus vault cash) relative to their...
  • sauvequipeutThe Bank of Japan – Ringing in the Endgame?
      Let's Do More of What Doesn't Work It is the Keynesian mantra: the fact that the policies recommended by Keynesians and monetarists, i.e., deficit spending and money printing, routinely fail to bring about the desired results is not seen as proof that they simply don't work. It is regarded as evidence that there hasn't been enough spending and printing yet.   BoJ governor Haruhiko “Fly” Kuroda: is that a windshield I'm seeing? Photo credit: Yuya Shino / Reuters   At the...
  • eyes-1The FOMC Decision: The Boxed in Fed
      An Imaginary Bogeyman What's a Keynesian monetary quack to do when the economy and markets fail to remain “on message” within a few weeks of grandiose declarations that this time, printing truckloads of money has somehow “worked”, in defiance of centuries of experience, and in blatant violation of sound theory? In the weeks since the largely meaningless December rate hike, numerous armchair central planners, many of whom seem to be pining for even more monetary insanity than the...
  • 0715_socialmedia_630x420The Bubble Deflates - And Crash Risk Rises
      A Harrowing Friday – Momentum Stocks Continue to Break Down The release of Friday's payrolls report was the worst of all worlds for the US stock market. This typically happens in bear markets: suddenly fundamental data that wouldn't have bothered anyone a few months ago are seen as a huge problem. Why was it seen as problematic? The report somehow managed to be weak and strong at the same time – it showed weakness in payrolls growth, but the entirely artificial U3 unemployment rate,...
  • rock drilling south africaGold's “Monkey Magic” - An Update on Gold and Gold Stocks
      Has a Bull Market Begun? Gold stocks have risen so much and so fast recently that a pullback, resp. consolidation either has begun already or is likely to begin soon. We have therefore decided to post a brief update on the situation in order to discuss what might happen next. Back in late November, we made a few remarks in order to clarify why we have focused so much on the gold sector again since last summer.   Processing plant of the Driefontein mine in South Africa Photo...
  • Super-Tall ScrapersSkyscraper Mania Goes Global
      New Skyscrapers Wherever one Looks Readers may recall our recent discussion of the construction of the Jeddah Tower (see “Soaring to Bankruptcy” for details). This skyscraper is a typical symptom of an artificial boom that has moved past its due date, so to speak. The idea behind the skyscraper index is that in light of the immensity of projects that involve the construction of the tallest building in the world (or one of the tallest), they are only realized once the notion that boom...
  • Pile-of-CashSoftening up the Rubes – the War on Cash Continues
      More Anti-Cash Propaganda by Bloomberg Former NYC mayor Bloomberg is probably one of the worst nannycrats who ever strode upon the US political scene. No-one has done more to take the fun out of New York than this man (we have chronicled the efforts of people of his ilk in “America's Killjoys”). It always amazes us to no end when successful businessmen - once they have made enough money to last them a thousand lifetimes – suddenly discover their penchant for socialism and State...
  • P1180759China’s $6.6 Trillion Toxic Loan Problem
      Rotting Vegetables “As long as you’re green, you’re growing.  As soon as you’re ripe, you start to rot,” once remarked Ray Kroc, mastermind of the McDonald’s franchise empire. At the moment, no truer words can be spoken for China’s ripe economy.  The Middle Kingdom’s 30-year economic boom is being overcome with the unpleasant odor that befalls rotting vegetables.  What’s more, there’s no way to reverse it.   Photo credit: fmh   Economic...
  • 160114_inv_bearmarketIn Praise of Sarah Palin…
      Up and Down MUMBAI, India – The Dow dropped 208 points on Monday – or about 1.3%. After last week’s pause, it will be interesting to see if the sell-off resumes. “Global equities in turmoil,” reads a CNBC headline. “A month after raising rates, Fed faces darker global economy,” suggests an AP newswire report. Neither of these is true. The world has not changed significantly in the last month.   What has changed? The squiggly lines are going down instead...

Support Acting Man

350x200

Archive

j9TJzzN

Own physical gold and silver outside a bank

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