Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Virgin Media Fibre Broadband Installation - What to Expect, Quality of Wiring, Service etc. - 21st Jun 21
Feel the Inflationary Heartbeat - 21st Jun 21
The Green Superfuel That Could Disrupt Global Energy Markers - 21st Jun 21
How Binance SCAMs Crypto Traders with UP DOWN Coins, Futures, Options and Leverage - Don't Get Bogdanoffed! - 20th Jun 21
Smart Money Accumulating Physical Silver Ahead Of New Basel III Regulations And Price Explosion To $44 - 20th Jun 21
Rambling Fed Triggers Gold/Silver Correction: Are Investors Being Duped? - 20th Jun 21
Gold: The Fed Wreaked Havoc on the Precious Metals - 20th Jun 21
Investing in the Tulip Crypto Mania 2021 - 19th Jun 21
Here’s Why Historic US Housing Market Boom Can Continue - 19th Jun 21
Cryptos: What the "Bizarre" World of Non-Fungible Tokens May Be Signaling - 19th Jun 21
Hyperinflationary Expectations: Reflections on Cryptocurrency and the Markets - 19th Jun 21
Gold Prices Investors beat Central Banks and Jewelry, as having the most Impact - 18th Jun 21
Has the Dust Settled After Fed Day? Not Just Yet - 18th Jun 21
Gold Asks: Will the Economic Boom Continue? - 18th Jun 21
STABLE COINS PONZI Crypto SCAM WARNING! Iron Titan CRASH to ZERO! Exit USDT While You Can! - 18th Jun 21
FOMC Surprise Takeaways - 18th Jun 21
Youtube Upload Stuck at 0% QUICK FIXES Solutions Tutorial - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations Video - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations and Trend Analysis into Market Correction - 17th Jun 21
Stocks, Gold, Silver Markets Inflation Tipping Point - 17th Jun 21
Letting Yourself Relax with Activities That You Might Not Have Considered - 17th Jun 21
RAMPANT MONEY PRINTING INFLATION BIG PICTURE! - 16th Jun 21
The Federal Reserve and Inflation - 16th Jun 21
Inflation Soars 5%! Will Gold Skyrocket? - 16th Jun 21
Stock Market Sentiment Speaks: Inflation Is For Fools - 16th Jun 21
Four News Events That Could Drive Gold Bullion Demand - 16th Jun 21
5 ways that crypto is changing the face of online casinos - 16th Jun 21
Transitory Inflation Debate - 15th Jun 21
USDX: The Cleanest Shirt Among the Dirty Laundry - 15th Jun 21
Inflation and Stock Market SPX Record Highs. PPI, FOMC Meeting in Focus - 15th Jun 21
Stock Market SPX 4310 Right Around the Corner! - 15th Jun 21
AI Stocks Strength vs Weakness - Why Selling Google or Facebook is a Big Mistake! - 14th Jun 21
The Bitcoin Crime Wave Hits - 14th Jun 21
Gold Time for Consolidation and Lower Volatility - 14th Jun 21
More Banks & Investors Are NOT Believing Fed Propaganda - 14th Jun 21
Market Inflation Bets – Squaring or Not - 14th Jun 21
Is Gold Really an Inflation Hedge? - 14th Jun 21
The FED Holds the Market. How Long Will It Last? - 14th Jun 21
Coinbase vs Binance for Bitcoin, Ethereum Crypto Trading & Investing During Bear Market 2021 - 11th Jun 21
Gold Price $4000 – Insurance, A Hedge, An Investment - 11th Jun 21
What Drives Gold Prices? (Don't Say "the Fed!") - 11th Jun 21
Why You Need to Buy and Hold Gold Now - 11th Jun 21
Big Pharma Is Back! Biotech Skyrockets On Biogen’s New Alzheimer Drug Approval - 11th Jun 21
Top 5 AI Tech Stocks Trend Analysis, Buying Levels, Ratings and Valuations - 10th Jun 21
Gold’s Inflation Utility - 10th Jun 21
The Fuel Of The Future That’s 9 Times More Efficient Than Lithium - 10th Jun 21
Challenges facing the law industry in 2021 - 10th Jun 21
SELL USDT Tether Before Ponzi Scheme Implodes Triggering 90% Bitcoin CRASH in Cryptos Lehman Bros - 9th Jun 21
Stock Market Sentiment Speaks: Prepare For Volatility - 9th Jun 21
Gold Mining Stocks: Which Door Will Investors Choose? - 9th Jun 21
Fed ‘Taper’ Talk Is Back: Will a Tantrum Follow? - 9th Jun 21
Scientists Discover New Renewable Fuel 3 Times More Powerful Than Gasoline - 9th Jun 21
How do I Choose an Online Trading Broker? - 9th Jun 21
Fed’s Tools are Broken - 8th Jun 21
Stock Market Approaching an Intermediate peak! - 8th Jun 21
Could This Household Chemical Become The Superfuel Of The Future? - 8th Jun 21
The Return of Inflation. Can Gold Withstand the Dark Side? - 7th Jun 21
Why "Trouble is Brewing" for the U.S. Housing Market - 7th Jun 21
Stock Market Volatility Crash Course (VIX vs VVIX) – Learn How to Profit From Volatility - 7th Jun 21
Computer Vision Is Like Investing in the Internet in the ‘90s - 7th Jun 21
MAPLINS - Sheffield Down Memory Lane, Before the Shop Closed its Doors for the Last Time - 7th Jun 21
Wire Brush vs Block Paving Driveway Weeds - How Much Work, Nest Way to Kill Weeds? - 7th Jun 21
When Markets Get Scared and Reverse - 7th Jun 21
Is A New Superfuel About To Take Over Energy Markets? - 7th Jun 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Are US Stocks in a Bubble

Stock-Markets / Stock Market 2017 Jul 24, 2017 - 07:51 AM GMT

By: The_Gold_Report

Stock-Markets

Rudi Fronk and Jim Anthony, the cofounders of Seabridge Gold, examine the role of risk when trying to differentiate between a bull market and a bubble.

As we have noted, there is a very important difference between a bull market and a bubble. Valuations are certainly one means of distinguishing them. In retrospect, we can recognize previous historic bubbles such as 1929 and 2000. When basic ratios such as Price-to-Sales and Tobins' Q have reached the levels that marked these bubbles, as they have, we can make a reasonable inference that another bubble has formed.


But there are other measures besides valuation. The most characteristic indicator of a bubble vs. a bull market is that bubbles ignore risk. Bubbles don't discount risk, they don't sniff out the next recession, they ignore or even fight the Fed, they don't fall when earnings do and they do not herd into the long end of the Treasury curve for safety.

Aleksandar Kocic, an analyst at Deutsche Bank, has developed some insightful charts on market response to risk. He uses the Economic Policy Uncertainty (EPU) index as an objective measure of risk. The EPU quantifies three underlying indicators: newspaper coverage of economic policy uncertainty; the number of federal tax code provisions set to expire in future years; and disagreement among economic forecasters. Kocic then compares the EPU to the VIX, which measures the market's perception of risk for the S&P 500.

The chart below shows the EPU in blue and the VIX in black going back to 1996. Note that the two indices track each other well until 2012 and then they diverge.

The divergence above is confirmed in the chart below, where the S&P 500 is in red and the VIX is in black. Note that risk and the S&P tend once again to track each other. . .major spikes in risk correlate with a drop in stocks and vice versa. . .until 2012 when we had the last major spike in volatility.

What these charts tell us is that the equity market essentially stopped discounting risk in late 2012. That's our primary definition of a bubble. What happened in 2012 to nullify investor risk perception? QE3, the last and most aggressive Fed Quantitative Easing program.

Following weeks of advance signalling, QE3 was announced on September 13, 2012. In an 11–1 vote, the Federal Reserve decided to launch a new $40 billion per month, open-ended bond purchasing program, which quickly became known as "QE-Infinity." Additionally, the Fed announced that it would maintain the Federal Funds Rate near zero "at least through 2015." On December 12, 2012, the Fed announced an increase in the amount of open-ended purchases from $40 billion to $85 billion per month.

The markets understood this policy as a massive risk-on signal and the bubble began to inflate. The first casualty was the premier haven during periods of enhanced risk, gold. Even though gold hit a new record high of $1,900 in September 2011, its average annual price was higher in 2012 at $1,669 than it was the prior year at $1,571. But gold was hammered at the end of 2012 and into the beginning of 2013. This conforms exactly to the historical record for bubbles. In the expansion phase, gold underperforms, first commodities and then financial assets. In our view, the collapse of the bubble will bring the reverse (see our post of July 13, 2017).

Kyle Beard of Bloomsbury Advisory notes that, as of July 14, 2017 the VIX had only traded below 10 a total of 41 times since the beginning of 1993. An amazing 21 of those occurrences took place since May 1, 2017. When you consider there have been 6,179 trading days since 1993, you can see how incredibly complacent (pro risk) the equity market is.

Here are the numbers:

It's not just the VIX: as Bank of America's David Woo points out, volatility across all financial markets has collapsed in recent months. To us, this is the most salient fact about today's markets.

The Fed has inflated a new bubble, as it intended to do. Chairman Bernanke explained it in terms of creating a "wealth effect" that would stimulate economic demand. This aim has proved elusive. What QE3 did stimulate was a speculation-induced financial asset inflation that anesthetized the perception of risk. Those who threw caution to the wind profited; those who were cautious lost. This is what a bubble looks like.

This article is the collaboration of Rudi Fronk and Jim Anthony, cofounders of Seabridge Gold, and reflects the thinking that has helped make them successful gold investors. Rudi is the current Chairman and CEO of Seabridge and Jim is one of its largest shareholders. The authors are not registered or accredited as investment advisors. Information contained herein has been obtained from sources believed reliable but is not necessarily complete and accuracy is not guaranteed. Any securities mentioned on this site are not to be construed as investment or trading recommendations specifically for you. You must consult your own advisor for investment or trading advice. This article is for informational purposes only.

Want to read more Gold Report articles like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent articles and interviews with industry analysts and commentators, visit our Streetwise Interviews page.

Disclosures:
1) Statements and opinions expressed are the opinions of Rudi Fronk and Jim Anthony and not of Streetwise Reports or its officers. The authors are wholly responsible for the validity of the statements. Streetwise Reports was not involved in any aspect of the content preparation. The authors were not paid by Streetwise Reports LLC for this article. Streetwise Reports was not paid by the authors to publish or syndicate this article.
2) Seabridge Gold is a billboard sponsor of Streetwise Reports. Streetwise Reports does not accept stock in exchange for its services. Click here for important disclosures about sponsor fees. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
3) This article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.

Charts provided by the authors.


© 2005-2019 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