Best of the Week
Most Popular
1. Climate Change Mass Extinction - Birds, Bees and Bugs: Going Going Gone - Richard_Mills
2.A Purrrfect Gold Price Setup! - Peter_Degraaf
3.Who Finances America's Borrowing? Recession Indicator for Independent Thinkers Part 2 - F_F_Wiley
4.America’s One-sided Domestic Financial War - Raymond_Matison
5.Gold Price Summer Doldrums - Zeal_LLC
6.Two Key Events Will Unleash Gold - Jim_Willie_CB
7.Billionaire Schools Teacher in NAFTA Trade Talks - Richard_Mills
8.Get Out Of Crypto Cannabis Bubble Before It Pops and Move Into Bargain Basement Miners - Jeb_Handwerger
9.Stock Market Could Pullback for 1-2 weeks, But Medium Term Bullish - Troy_Bombardia
10.G7 Chaos, Central Banks and US Fed Will Drive Stock Prices This Week - Chris_Vermeulen
Last 7 days
Financial Markets Analysis and Trend Forecasts 2018 - A Message from Nadeem Walayat - 21st Jun 18
SPX Bouncing Above Support - 21st Jun 18
Things You Need To Know If You Want To Invest In Bitcoin Now - 21st Jun 18
The NASDAQ’s Outperformance vs. the Dow is Very Bullish - 21st Jun 18
Warning All Investors: Global Stock Market Are Shifting Away From US Price Correlation - 20th Jun 18
Gold GLD ETF Update… Breakdown ? - 20th Jun 18
Short-term Turnaround in Bitcoin Might Not Be What You Think - 19th Jun 18
Stock Market’s Short Term Downside Will be Limited - 19th Jun 18
Natural Gas Setup for 32% Move in UGAZ Fund - 19th Jun 18
Magnus Collective To Empower Automation And Artificial Intelligence - 19th Jun 18
Trump A Bull in a China Shop - 19th Jun 18
Minor Car Accident! What Happens After You Report Your Accident to Your Insurer - 19th Jun 18
US Majors Flush Out A Major Pivot Low and What’s Next - 18th Jun 18
Cocoa Commodities Trading Analysis - 18th Jun 18
Stock Market Consolidating in an Uptrend - 18th Jun 18
Russell Has Gone Up 7 Weeks in a Row. EXTREMELY Bullish for Stocks - 18th Jun 18
What Happens Next to Stocks when Tech Massively Outperforms Utilities and Consumer Staples - 18th Jun 18
The Trillion Dollar Market You’ve Never Heard Of - 18th Jun 18
The Corruption of Capitalism - 17th Jun 18
North Korea, Trade Wars, Precious Metals and Bitcoin - 17th Jun 18
Climate Change and Fish Stocks – Burning Oxygen! - 17th Jun 18
A $1,180 Ticket to NEW Trading Opportunities, FREE! - 16th Jun 18
Gold Bullish on Fed Interest Rate Hike - 16th Jun 18
Respite for Bitcoin Traders Might Be Deceptive - 16th Jun 18
The Euro Crashed Yesterday. Bearish for Euro and Bullish for USD - 15th Jun 18
Inflation Trade, in Progress Since Gold Kicked it Off - 15th Jun 18
Can Saudi Arabia Prevent The Next Oil Shock? - 15th Jun 18
The Biggest Online Gambling Companies - 15th Jun 18
Powell's Excess Reserve Change and Gold - 15th Jun 18
Is This a Big Sign of a Big Stock Market Turn? - 15th Jun 18
Will Italy Sink the EU and Boost Gold? - 15th Jun 18
Bumper Crash! Land Rover Discovery Sport vs Audi - 15th Jun 18
Stock Market Topping Pattern or Just Pause Before Going Higher? - 14th Jun 18
Is the ECB Ending QE a Good Thing? Markets Think So - 14th Jun 18
Yield Curve Continues to Flatten. A Bullish Sign for the Stock Market - 14th Jun 18
How Online Gambling has Impacted the Economy - 14th Jun 18
Crude Oil Price Targeting $58 ppb Before Finding Support - 14th Jun 18
Stock Market Near Another Top? - 14th Jun 18
Thorpe Park REAL Walking Dead Living Nightmare Zombie Car Park Ride Experience! - 14th Jun 18

Market Oracle FREE Newsletter

5 "Tells" that the Stock Markets Are About to Reverse

Stocks, Bonds and Real Estate Financial Hurricanes Headed Our Way - No Where to Hide!

Stock-Markets / Financial Crash Apr 28, 2015 - 05:33 PM GMT

By: James_Quinn

Stock-Markets

There are three financial hurricanes hurtling towards our country and most people are oblivious to the coming catastrophe. The time to prepare is now, not when the hurricane warnings are issued.

Hussman makes his usual solid case that stocks and bonds are as overvalued as they have ever been in the history of investing. People are under the false impression that bonds are always a safe investment. The fact that you are already getting a negative real return on bonds doesn’t seem to compute with math challenged Americans. Over the next ten years you will absolutely lose money in bonds.


Liquidity in both the stock and bond markets is thinning considerably. In bonds, quantitative easing by global central banks has resulted in a scarcity of available collateral, a collapse in repo liquidity, and increasing frequency of delivery failures, all of which is shorthand for a bond market that is becoming less liquid and more fragile to any credit event. Meanwhile, risk premiums are minuscule. Avoiding a negative total return on 10-year bonds now requires that interest rates must not rise by even one percentage point over the next three years. Bond yields have historically covered investors against a meaningful change in yields before resulting in negative total returns. On a one-year return horizon, bond yields presently cover investors for a yield change amounting to only about 0.25 standard deviations – matching mid-2012 as the lowest level of yield coverage in history.

The fragility of the economic, financial, and social systems of the U.S. is at extreme levels. The median American household has less real income than they had in 1989. The social fabric of the country is tearing as we speak, with Baltimore and Ferguson as the warning shots of coming chaos and civil strife. The ruling elite control the monetary system, so the rigged financial markets continue to rise and have reached bubble proportions. An unexpected pin will be along shortly to pop the bubble. The next crash will make 2008 look like a walk in the park. It may be decades until markets reach these levels again.

Market crashes always reflect two features: extremely thin risk premiums in an environment where investors have shifted toward greater risk-aversion, and lopsided selling into an illiquid market. Under present conditions, we observe the precursors for both. That doesn’t force or ensure a crash, but it creates the underlying fragility that allows one.

Last week, the Nasdaq Composite finally clawed its way to breakeven, 15 years after its spectacular bubble peak in 2000. It’s a testament to the overvaluation of technology stocks in 2000 that it has required the third equity bubble in 15 years to reclaim that 2000 high, at least briefly. As you may remember, the Nasdaq Composite reached its intra-day high of 5132.52 in March 2000, plunging to 795.25 (down -78%) by October 2002. The Nasdaq 100, representing the most glamourous of the group, peaked at 4816.25 in March 2000, plunging to 795.25 (down 83%) by October 2002. Even a decade later, in 2010, both indices were still 60-65% below their 2000 highs. The 2000-2002 decline also took the S&P 500 down by half, wiping out the entire total return of the S&P 500 – in excess of Treasury bill returns – all the way back to May 1996.

The S&P 500 presently teeters near its all-time high at 2,115. Its fair value, based upon multiple historically accurate valuation models is 940. Therefore, this market would have to drop 56% to reach fair value. In the real world, crashes often exceed fair value to the downside. Is there anyone you know prepared for a 50% to 60% decline in the stock market?

On the basis of valuation measures best correlated with actual subsequent market returns, we can say with a strong degree of confidence that the S&P 500 would presently have to drop to the 940 level in order for investors to expect a historically normal 10-year total return of 10% annually. That 940 figure for the S&P 500 would not represent some extreme, catastrophic outcome. It’s not a level that would even represent undervaluation from a historical perspective. It’s the level that we would associate with average, historically run-of-the-mill long-term equity returns. As we observed at the 2000 peak, “if you understand values and market history, you know we’re not joking.”

Many will call Hussman a prophet of doom or the little investment adviser who cried wolf. But, he has been here before. He didn’t buckle to peer pressure in 2000 or 2007. He analyzed the data and reached a logical conclusion. We all know bubbles can grow to epic proportions based on delusion, hope, and lies. Hussman was right in 2000. Hussman was right in 2007. And Hussman will be right this time.

You’ll recall we also made similarly “preposterous” comments in April 2007 (see Fair Value – 40% Off). Though our measures of market internals would finally turn negative in late-July of that year (see Market Internals Go Negative), the S&P 500 was already within 10% of its pre-collapse high of 1565 by April. At the time, we estimated reasonable valuations to be “about 40% below current levels,” adding:

“Again, that doesn’t imply that stocks have to actually suffer a decline of that magnitude. Nor do we need such a decline in order to justify an unhedged investment stance. It’s just that investors should not expect the S&P 500 to reliably deliver long-term returns of 10% annually or better until it does. You’ll note that there are also points in history when the S&P 500 traded substantially below that 10% valuation line. Those were points where stocks were priced to deliver long-term returns reliably above 10% annually, and in fact, they did exactly that.”

By late-October 2008, the S&P 500 had indeed declined by well over 40% from its peak, at which point we observed that stocks were no longer overvalued (see Why Warren Buffett is Right and Why Nobody Cares).

The numbers speak for themselves. There is no new paradigm. The Fed is not infallible. The economy is already in recession. Corporate revenues and profits are falling. The consumer isn’t consuming. The market is being elevated by nothing but Wall Street hot air and HFT computers. This time is not different.

To fully understand the present valuation extreme, recognize that the market cap/GDP ratio is currently about 1.29 versus a pre-bubble norm of just 0.55, with “secular” lows such as 1982 taking the ratio to about 0.33. To fully understand the present valuation extreme, recognize that the S&P 500 price/revenue ratio is currently about 1.80, versus a pre-bubble norm of just 0.8, with “secular” lows taking the ratio to about 0.45.”

As for other investors, the worst mistake they made prior to the 2000-2002 collapse was to believe Wall Street’s claims that stocks were not in a bubble, and that this time was different. The worst mistake that other investors made prior to the 2007-2009 collapse was to believe Wall Street’s claims that stocks were not in a bubble, and that this time was different. The worst mistake that other investors are making today is to believe Wall Street’s claims that stocks are not in a bubble, and that this time is different.

Even brilliant investors can lose their nerve and capitulate to the trend and to peer pressure. Don’t be stupid. Don’t believe Wall Street. Don’t let them screw you again. Get your money out of the market.

Last month, Stan Druckenmiller recounted his own experience with capitulation and performance chasing when he was the lead portfolio manager for George Soros and the Quantum Fund:

“I’ll never forget it. January of 2000 I go into Soros’ office and I say I’m selling all the tech stocks, selling everything. This is crazy… Just kind of as I explained earlier, we’re going to step aside, wait for the next fat pitch. I didn’t fire the two gun slingers. They didn’t have enough money to really hurt the fund, but they started making 3 percent a day, and I’m out. It’s driving me nuts. I mean, their little account is like up 50% on the year. I think Quantum was up seven. It’s just sitting there.

“So like around March I could feel it coming. I just – I had to play. I couldn’t help myself. And three times during the same week I pick up a – don’t do it. Don’t do it. Anyway, I pick up the phone finally. I think I missed the top by an hour. I bought $6 billion worth of tech stocks, and in six weeks I had left Soros and I had lost $3 billion in that one play. You ask me what I learned. I didn’t learn anything. I already knew I wasn’t supposed to do that. I was just an emotional basket case and couldn’t help myself. So maybe I learned not to do it again, but I already knew that.”

Hussman doesn’t address real estate in his weekly letter, but that is the third hurricane headed our way. Despite home ownership reaching three decade lows, stagnant real wage growth, and an economy that has never truly come out of the 2008/2009 recession, home prices have somehow risen 30% since 2012. The combination of keeping foreclosures off the market, the Wall Street hedge fund buy and rent scheme, Chinese billionaires parking their ill-gotten gains in US high end houses, FHA, Fannie, and Freddie encouraging low down payment mortgages, and the return of flippers has produced an echo bubble in the housing market. Home prices are only 18% from the 2006 all-time high. This bubble will burst congruently with the stock and bond bubbles. Anyone who has bought a house with a low down payment since 2012 is going to be deeply underwater in the next few years. Book it. 

Hussman, myself and a few other bloggers will be scoffed at for our warnings. That’s alright. I have thick skin. I don’t really give a shit what anyone thinks about me or my opinions. I deal with facts. As Hussman wrote in 2000, the question now is only about when. It isn’t years. It’s months, weeks or days.

“The issue is no longer whether the current market resembles those preceding the 1929, 1969-70, 1973-74, and 1987 crashes. The issue is only – are conditions more like October of 1929, or more like April? Like October of 1987, or more like July? If the latter, then over the short term, arrogant imprudence will continue to be mistaken for enlightened genius, while studied restraint will be mistaken for stubborn foolishness. We can’t rule out further gains, but those gains will turn bitter… Let’s not be shy: regardless of short-term action, we ultimately expect the S&P 500 to fall by more than half, and the Nasdaq by two-thirds. Don’t scoff without reviewing history first.”

– Hussman Econometrics, February 9, 2000

Join me at www.TheBurningPlatform.com to discuss truth and the future of our country.

By James Quinn

quinnadvisors@comcast.net

James Quinn is a senior director of strategic planning for a major university. James has held financial positions with a retailer, homebuilder and university in his 22-year career. Those positions included treasurer, controller, and head of strategic planning. He is married with three boys and is writing these articles because he cares about their future. He earned a BS in accounting from Drexel University and an MBA from Villanova University. He is a certified public accountant and a certified cash manager.

These articles reflect the personal views of James Quinn. They do not necessarily represent the views of his employer, and are not sponsored or endorsed by his employer.

© 2015 Copyright James Quinn - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

James Quinn Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules