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: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

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:

  • Trade War Game On!
      Interesting Times Arrive “Things sure are getting exciting again, ain’t they?”  The remark was made by a colleague on Tuesday morning, as we stepped off the elevator to grab a cup of coffee.   Ancient Chinese curse alert... [PT]   “One moment markets are gorging on financial slop like fat pigs in mud.  The next they’re collectively vomiting on themselves. I’ll tell you one thing.  President Trump’s trade war with China won’t end well.  I mean, come...
  • The Dollar Cancer and the Gold Cure
      The Long Run is Here The dollar is failing. Millions of people can see at least some of the major signs, such as the collapse of interest rates, record high number of people not counted in the workforce, and debt rising from already-unpayable levels at an accelerating rate.   Total US credit market debt has hit a new high of $68.6 trillion at the end of 2017. That's up from $22.3 trillion a mere 20 years ago. It's a fairly good bet this isn't sustainable....
  • Rise of the Japanese Androids
      Good Intentions One of the unspoken delights in life is the rich satisfaction that comes with bearing witness to the spectacular failure of an offensive and unjust system. This week served up a lavish plate of delicious appetizers with both a style and refinement that’s ordinarily reserved for a competitive speed eating contest. What a remarkable time to be alive.   It seemed a good idea at first... [PT]   Many thrilling stories of doom and gloom were published...
  • US Stock Market: Happy Days Are Here Again? Not so Fast...
      A “Typical” Correction? A Narrative Fail May Be in Store Obviously, assorted crash analogs have by now gone out of the window – we already noted that the market was late if it was to continue to mimic them, as the decline would have had to accelerate in the last week of March to remain in compliance with the “official time table”. Of course crashes are always very low probability events – but there are occasions when they have a higher probability than otherwise, and we will...
  • Getting High on Bubbles
      Turn on, Tune in, Drop out Back in the drug-soaked, if not halcyon, days known at the sexual and drug revolution—the 1960’s—many people were on a quest for the “perfect trip”, and the “perfect hit of acid” (the drug lysergic acid diethylamide, LSD).   Dr. Albert Hoffman and his famous bicycle ride through Basel after he ingested a few drops of LSD-25 by mistake. The photograph in the middle was taken at the Woodstock festival and inter alia serves as a...
  • Claudio Grass on Cryptocurrencies and Gold – An X22 Report Interview
       The Global Community is Unhappy With the Monetary System, Change is Coming Our friend Claudio Grass of Precious Metal Advisory Switzerland was recently interviewed by the X22 Report on cryptocurrencies and gold. He offers interesting perspectives on cryptocurrencies, bringing them into context with Hayek's idea of the denationalization of money. The connection is that they have originated in the market and exist in a framework of free competition, with users determining which of them...
  • From Fake Boom to Real Bust
      Paradise in LA LA Land More is revealed with each passing day.  You can count on it.  But what exactly the ‘more is of’ requires careful discrimination.  Is the ‘more’ merely more noise?  Or is it something of actual substance?  Today we endeavor to pass judgment, on your behalf.   Normally, judgment would be passed on a Thursday, but we are making an exception. [PT]   For example, here in the land of fruits and nuts, things are whacky, things are...
  • No Revolution Just Yet - Precious Metals Supply and Demand Report
      Irredeemably Yours... Yuan Stops Rallying at the Wrong Moment The so-called petro-yuan was to revolutionize the world of irredeemable fiat paper currencies. Well, since its launch on March 26 — it has gone down. It was to be an enabler for oil companies who were desperate to sell oil for gold, but could not do so until the yuan oil contract.   After becoming progressively stronger over the past year, it looks as thought the 6.25 level in USDCNY is providing support for the...
  • The “Turn of the Month Effect” Exists in 11 of 11 Countries
      A Well Known Seasonal Phenomenon in the US Market – Is There More to It? I already discussed the “turn-of-the-month effect” in a previous issues of Seasonal Insights, see e.g. this report from earlier this year. The term describes the fact that price gains in the stock market tend to cluster around the turn of the month. By contrast, the rest of the time around the middle of the month is typically less profitable for investors.   Due to continual monetary inflation in the...
  • Flight of the Bricks - Precious Metals Supply and Demand
      The Lighthouse Moves Picture, if you will, a brick slowly falling off a cliff. The brick is printed with green ink, and engraved on it are the words “Federal Reserve Note” (FRN). A camera is mounted to the brick. The camera shows lots of things moving up. The cliff face is whizzing upwards at a blur. A black painted brick labeled “oil” is going up pretty fast, but not so fast as the cliff face. It is up 26% in a year. A special brick, a government data brick of sorts, labeled...

Support Acting Man

Item Guides

Top10BestPro
j9TJzzN

The Review Insider

Austrian Theory and Investment

Archive

350x200

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

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]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com

Diary of a Rogue Economist