Connecting the Dots
DUBLIN – Dow down 252 on Wednesday – or 1.5%. Chevron, Apple, and Goldman Sachs leading the retreat. The press blamed China, North Korea, oil, and “geopolitical concerns.”
So far this year, the Dow has lost 3% of its value [ed. note: as of Thursday’s close it has lost a little over 5%]. Let’s see… We believe it is headed for a 50% loss. So, at this rate… we’ll be there by June!
Readers frequently accuse us of being “negative” or “depressing.” Yesterday, one even charged us with fanning the fires of fear and fright to sell newsletter services. We deny it. Fear doesn’t sell financial services.
Ask Goldman. Wall Street sells greed, not fear. It promises profits, not losses. It offers dreams of wealth, not nightmares of poverty. Besides, when you see prices falling, you just go to cash. You don’t need expensive trading advice.
At the Diary, we monger neither fear nor greed. Our only mission is to try – feebly… humbly… uncertainly – to connect the dots. Of course, the dots are many… and they are everywhere. Like a Rorschach test, we risk seeing only what we want to see. But you can’t see anything if you don’t look. So, we squint… we strain our eyes. And what do we see? A top! And then what?
A secular downturn, when stocks will go down – or nowhere – for the next 10 years. If we’re right, a lot of fortunes, jobs, reputations, and mojos will be lost. Defaults, depressions, disruptions, deflation – we’ll probably see a little of them (or a lot!).
Many dear readers find this unappealing; and they mistrust our motives. They seem to think that because we see clouds on the horizon, we must want it to rain!
But wait… They are right. That is the pattern we’ve been looking for!
This parched earth needs a good soaking… and a healthy wash. But if readers think this is “negative,” they should blame themselves, not us. They are looking at the glass as half empty; we only see the part that is full of St. Emilion Grand Cru 2006.
Debt and Claptrap
Look on the bright side: If we’re right, you’ll get a lot more for your money in the stock market 10 years from now. Not only that, but also much of the debt and claptrap that now strangles the system will have been purged.
Greenspan, Bernanke, and Yellen will finally be regarded as the rascals and flimflam artists they really are. Businesses that should have gone bust in 2008 will finally hit the wall. And the speculators, bankers, and bamboozlers who should have been bankrupted in the last crisis will finally get what’s coming to them in the next one.
All the major central planning charlatans in one place. Ms. Yellen looks slightly worried, which she has every reason to be. Alan Greenspan looks like he would like to run away at the earliest opportunity. Mr. Bernanke’s self-satisfied grin can be explained by his timely exit from the job as central planning head honcho and the new and far better paid job offers he has accepted since then.
Photo credit: Federal Reserve Board
Yes, some investors will feel the pain. The economy will suffer. It will be bent by bitter fate and outrageous fortune…but into a better shape! A stock market correction is not something to be feared. It is something to look forward to… something to be embraced, like a plumber who has come to unclog your bathroom drains.
It may get messy; but what a relief it will be to have the toilet working again. We saw a headline from our colleagues at Casey Research yesterday (our old friend Doug Casey’s outfit). It recommended that investors short – that is, bet against – U.S. stocks.
That will probably turn out to be good advice. But it suggests a level of confidence we don’t have. Getting out is good enough for us.
Cash Is (Still) King
But get out of stocks and into what? Cash, dear reader… cash. No financial services needed. Cash is king now. And it will be until we come to the next major pivot point. Study those dots…
The Fed has favored easy credit for at least the last 20 years – quickly cutting rates in the face of even the smallest signs of adversity and dragging its feet when it was time to raise them. Each time a contraction of credit begins, the Fed reacts with even lower short-term interest rates. And each time it drops the price of credit… it creates another bubble.
The Nasdaq bubble in the late 1990s… the housing bubble that followed… and now the nascent bubble in student debt, corporate debt, sovereign debt… and a small group of tech stocks that has raised U.S. stock market indexes to rare and dangerous highs.
And now, the Fed imagines that it is going to return to “normal”! That was the way the dots looked when 2015 adjourned. In 2016, there are new dots appearing… and old patterns are coming into sharper focus. What do we see now?
Uh-oh… As we reported yesterday, Nobel prize winner Robert Shiller’s cyclically adjusted price-to-earnings ratio – or CAPE ratio – tries to get a truer picture of value by looking at the average of the past 10 years of earnings and adjusting for inflation.
Real S&P 500 (adjusted by CPI) and the P/E 10 (or CAPE) since 1871. No matter how one looks at it, the stock market is in the upper 10% range of historical valuations. In short, it is extremely overvalued – click to enlarge.
And by this measure, only three times in the last 135 years has the S&P 500 been more expensive – in 1929, 2000, and 2007. All three times were followed by major market crashes.
Some excitement is coming… Stay tuned.
Charts by stockcharts, Doug Short/advisorperspectives
Image captions by PT
The above Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.at the Diary of a Rogue Economist, written for
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
Most read in the last 20 days:
- Modi’s Great Leap Forward
India’s Currency Ban – Part VIII India’s Prime Minister, Narendra Modi, announced on 8th November 2016 that Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes would no longer be legal tender. Linked are Part-I, Part-II, Part-III, Part-IV, Part-V, Part-VI and Part-VII, which provide updates on the demonetization saga and how Modi is acting as a catalyst to hasten the rapid degradation of India and what remains of its institutions. India’s Pride and Joy Indians are...
- Global Recession and Other Visions for 2017
Conjuring Up Visions Today’s a day for considering new hopes, new dreams, and new hallucinations. The New Year is here, after all. Now is the time to turn over a new leaf and start afresh. Naturally, 2017 will be the year you get exactly what’s coming to you. Both good and bad. But what else will happen? Image of a recently discarded vision... Image by Michael Del Mundo Here we begin by closing our eyes and slowing our breath. We let our mind...
- 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...
- 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...
- 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....
- 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...
- 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...
- 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...
- 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...