Are we right on the verge of one of the greatest financial collapses in American history? I have been repeatedly warning that our ridiculously over-inflated stock market bubble could burst at any time, but former Federal Reserve Chairman Alan Greenspan believes that the bond bubble actually presents an even greater danger. When you look at the long-term charts, you will see that an epic bond bubble has been growing since the early 1980s, and when it finally collapses the financial carnage is going to be unlike anything we have ever seen before.
Since the last financial crisis, global central banks have purchased trillions of dollars worth of bonds, and this has pushed interest rates to absurdly low levels. But of course this state of affairs cannot go on indefinitely, and Greenspan is extremely concerned about what will happen when interest rates start going in the other direction…
Former Federal Reserve Chairman Alan Greenspan issued a bold warning Friday that the bond market is on the cusp of a collapse that also will threaten stock prices.
In a CNBC interview, the longtime central bank chief said the prolonged period of low interest rates is about to end and, with it, a bull market in fixed income that has lasted more than three decades.
“The current level of interest rates is abnormally low and there’s only one direction in which they can go, and when they start they will be rather rapid,” Greenspan said on “Squawk Box.”
And of course Greenspan is far from alone. In recent months there have been a whole host of prominent voices warning about the devastation that will take place when the bond market begins to shift. For example, the following comes from Nasdaq.com…
Advisors and investors beware, the long-swelling bubble in the bond market looks set to pop. Major bond investors are as worried as they have ever been, mostly because of the reduction in easing that is finally coming to markets. Central banks are letting off the gas pedal for the first time in almost a decade, which could have a devastating effect on the bond market. According to the head of fixed income at JP Morgan Asset Management, who oversees almost half a trillion in AUM, “The next 18 months are going to be incredibly challenging. I am not an equity investor, but I can just imagine how equity investors felt in 1999, during the dotcom bubble”. He continued, “Right now, central banks are printing money at a rate of around $1.5tn per year. That is a lot of money going into bonds. By this time next year, we think this will turn negative”.
So how will we know when a crisis is imminent?
Some analysts are telling us to watch the 30-year yield. When it finally moves above its “mega moving average” and stays there, that will be a major red flag…
It’s still too soon to tell, but this could be the beginning of a realignment with both rates getting in sync again. This will not be confirmed, however, until the 30-year yield rises and stays above its mega moving average, currently at 3.18%.
As you know, this moving average is super important.
It’s identified and confirmed the mega downtrend in long-term interest rates ever since the 1980s. In other words, it doesn’t change often. So, if this trend were to change and turn up, it would be a huge deal.
Today, the 30-year yield moved up to 2.83 percent, and so we aren’t too far away.
There are so many prominent voices that are warning of imminent financial disaster, but there are others that believe that we have absolutely nothing to be concerned about. In fact, Jim Paulsen just told CNBC that he believes that this current bull market “could continue to forever”…
The stock market “has an awful good gig going,” with the economic recovery reaching all corners of the globe and U.S. inflation and interest rates still at historic lows, Leuthold Chief Investment Strategist Jim Paulsen told CNBC on Friday.
“We’ve got a fully employed economy, rising real wages. We restarted the corporate earnings cycle. We’ve got strong confidence among business and consumers,” he said on “Squawk Box.”
“The kick is we can do all of this without aggravating inflation and interest rates,” he said. “If that’s going to continue, I think the bull market could continue to forever.”
I think that Paulsen will end up deeply regretting those words.
No bull market lasts forever, and analysts at Goldman Sachs are warning that there is a 99 percent chance that stock market returns will be sub-optimal over the next decade.
But most people believe what they want to believe no matter what the facts may say, and Paulsen apparently wants to believe that things will never be bad for the financial markets ever again.
In the aftermath of the financial crisis of 2008, the powers that be decided to patch the old system up. Instead of addressing the root causes of the crisis, they chose to paper over our problems instead, and now we are in the terminal phase of the biggest financial bubble in history.
This time around, it is absolutely imperative that we do things differently. The Federal Reserve is the primary reason why our economy is on an endless roller coaster ride. We have had 18 distinct recessions or depressions since 1913, and now another one is about to begin. By endlessly manipulating the system, they have caused these cycles of booms and busts, and it is time to get off of this roller coaster once and for all.
Like Ron Paul, I believe that we need to shut down the Federal Reserve and get our banks under control. I also believe that we should abolish the federal income tax and go to a much fairer system. From 1872 to 1913, there was no central bank and no federal income tax, and it was the greatest period of economic growth in U.S. history. If we rebuild our financial system on sound principles, we could actually have a shot at a prosperous future. If not, the long-term future for our economy looks exceedingly bleak.
If you believe in what I am trying to do, I would like to ask for your help. I am running for Congress in Idaho’s First Congressional District, and since there is no incumbent running for this seat the race is completely wide open. Every time I share my message, more voters are coming over to my side, and if I am able to get my message out to every voter in this district I will win.
And I would like to encourage like-minded people to run for positions all over the country on the federal, state and local levels. Individually, there is a limit to what we can do, but if we work together we can build a movement which could turn this nation completely upside down.
Michael Snyder is a Republican candidate for Congress in Idaho’s First Congressional District, and you can learn how you can get involved in the campaign on his official website. His new book entitled “Living A Life That Really Matters” is available in paperback and for the Kindle on Amazon.com.
S&P 500 tech stocks have now fallen for 9 days in a row. The last time tech stocks declined for so many days in a row was in 2012, and that was the only other time in history when we have seen such a long losing streak. As I have stated before, the post-election “Trump rally” is officially done, and the market is starting to roll over as investors begin to realize that all of the buying momentum has completely evaporated. Tech stocks tend to be particularly volatile, and so the fact that they are starting to lead the way down should definitely be alarming to many in the investing community.
Of course it isn’t just tech stocks that are falling. The Dow was down another 59 points on Wednesday, and the S&P 500 has closed beneath its 50 day moving average for the very first time since the election. For those that have been waiting for a key technical signal before getting out of the market, there is one for you.
The price of gold was up again, and that is definitely not surprising in this geopolitical environment. The closer we get to war the higher gold and silver prices will go, and if we actually get into a major conflict we will see them blast into the stratosphere.
Another key indicator that I am watching very closely is the VIX. On Wednesday it shot up above 16 for the very first time since the day after Trump’s election victory, and many believe that it could soon go much higher. The following is an excerpt from a CNBC report…
The VIX measures the size of the S&P 500’s expected moves over the next 30 days, and consequently tends to run just a bit hotter than volatility over the past 30 days. Yet one-month realized volatility is just 6.7, meaning the VIX is at a roughly 9-point premium, which Chintawongvanich calls “highly unusual.”
That said, he notes that implied volatility was also at a large premium preceding the U.K. referendum to leave the EU and the U.S. presidential election. The obvious conclusion is that the market is now similarly preparing itself for the French presidential election, which is set to be held on April 23. Some fear that a populist candidate could prevail, which may cause more problems for the European Union and thus for economic stability.
As noted in that excerpt, the upcoming French election is absolutely huge. If the election goes “the wrong way” according to the globalists, it could literally mean the end of the European Union as it is configured today.
And of course of even greater concern is the global march toward war. It is being reported that North Korea is on the verge of a major nuclear weapons test, and such an act of defiance could be enough to push Donald Trump into conducting a major military strike.
But if Trump does hit North Korea, it is quite likely that North Korea will hit back. The North Koreans are promising to use nuclear weapons in any conflict with the United States, and if Trump bungles this thing we could easily be looking at a scenario in which millions of people end up dead.
Things also continue to get more tense in the Middle East. The Russians and the Iranians are promising to respond to any additional U.S. strikes “with force”, and on Wednesday Trump declared that our relationship with Russia “may be at an all-time low”.
Of course this came shortly after Secretary of State Rex Tillerson used similar language following his face to face meeting with Russian President Vladimir Putin…
Secretary of State Rex Tillerson and Russian President Vladimir Putin held more than two hours of “very frank” talks Wednesday in the Kremlin amid tensions over a U.S. airstrike against a Syria air base blamed for last week’s deadly chemical attack.
In remarks to reporters after the meeting, Tillerson said he told the Russian leader that current relations between the two countries are at a “low point.”
If the Trump administration conducts any more strikes on Syria, it is quite likely that the Russians and Iranians will make good on their threats and will start firing back.
And once U.S. aircraft or U.S. naval vessels come under fire, the calls for war in Washington will become absolutely deafening.
Unfortunately, Trump is not likely to back down any time soon because the recent missile strike in Syria has dramatically boosted his popularity. According to every recent survey, the American people overwhelmingly approve of what Trump did…
A Morning Consult/Politico poll released Wednesday found that 57% of Americans supported airstrikes in Syria, 58% supported establishing a no-fly zone over parts of Syria including strikes against Syria’s air-defense systems, and 63% of Americans thought the US should do more to end the Syrian conflict. Even more, 66% of respondents said they supported the Trump administration’s strike last week specifically.
This mirrored results of another recent poll from CBS News in which 57% of Americans said they approved of the US strike. A Pew Research Center survey from this week showed a similar level of support, with 58% of Americans approving of the strike.
Sadly, this is a time when the majority is dead wrong. Many of those that are supporting military action against Syria now were vehemently against it when Barack Obama was considering it.
Even Donald Trump spoke out very strongly against military intervention in Syria in 2013, and he was quite right to do so, and so what has suddenly changed that now makes it okay?
There is nothing to be gained in Syria, but we could very easily end up in a direct military conflict with Russia, Iran and Hezbollah which could ultimately prove to be the spark that sets off World War III.
And of course a military strike on North Korea could also potentially spark a global war. The first Korean War resulted in a direct military conflict between the United States and China, and the second Korean War could easily result in the exact same thing happening again.
Do the American people really want war with both Russia and China at the same time?
It has been said that you should be careful what you wish for, because you just might get it.
You would think that the simultaneous crashing of all of the largest stock markets around the world would be very big news. But so far the mainstream media in the United States is treating it like it isn’t really a big deal. Over the last sixty days, we have witnessed the most significant global stock market decline since the fall of 2008, and yet most people still seem to think that this is just a temporary “bump in the road” and that the bull market will soon resume. Hopefully they are right. When the Dow Jones Industrial Average plummeted 777 points on September 29th, 2008 everyone freaked out and rightly so. But a stock market crash doesn’t have to be limited to a single day. Since the peak of the market earlier this year, the Dow is down almost three times as much as that 777 point crash back in 2008. Over the last sixty days, we have seen the 8th largest single day stock market crash in U.S. history on a point basis and the 10th largest single day stock market crash in U.S. history on a point basis. You would think that this would be enough to wake people up, but most Americans still don’t seem very alarmed. And of course what has happened to U.S. stocks so far is quite mild compared to what has been going on in the rest of the world.
Right now, stock market wealth is being wiped out all over the planet, and none of the largest global economies have been exempt from this. The following is a summary of what we have seen in recent days…
#1 The United States – The Dow Jones Industrial Average is down more than 2000 points since the peak of the market. Last month we saw stocks decline by more than 500 points on consecutive trading days for the first time ever, and there has not been this much turmoil in U.S. markets since the fall of 2008.
#2 China – The Shanghai Composite Index has plummeted nearly 40 percent since hitting a peak earlier this year. The Chinese economy is steadily slowing down, and we just learned that China’s manufacturing index has hit a 78 month low.
#3 Japan – The Nikkei has experienced extremely violent moves recently, and it is now down more than 3000 points from the peak that was hit earlier in 2015. The Japanese economy and the Japanese financial system are both basket cases at this point, and it isn’t going to take much to push Japan into a full-blown financial collapse.
#4 Germany – Almost one-fourth of the value of German stocks has already been wiped out, and this crash threatens to get much worse. The Volkswagen emissions scandal is making headlines all over the globe, and don’t forget to watch for massive trouble at Germany’s biggest bank.
#5 The United Kingdom – British stocks are down about 16 percent from the peak of the market, and the UK economy is definitely on shaky ground.
#6 France – French stocks have declined nearly 18 percent, and it has become exceedingly apparent that France is on the exact same path that Greece has already gone down.
#7 Brazil – Brazil is the epicenter of the South American financial crisis of 2015. Stocks in Brazil have plunged more than 12,000 points since the peak, and the nation has already officially entered a new recession.
#8 Italy – Watch Italy. Italian stocks are already down 15 percent, and look for the Italian economy to make very big headlines in the months ahead.
#9 India – Stocks in India have now dropped close to 4000 points, and analysts are deeply concerned about this major exporting nation as global trade continues to contract.
#10 Russia – Even though the price of oil has crashed, Russia is actually doing better than almost everyone else on this list. Russian stocks have fallen by about 10 percent so far, and if the price of oil stays this low the Russian financial system will continue to suffer.
What we are witnessing now is the continuation of a cycle of financial downturns that has happened every seven years. The following is a summary of how this cycle has played out over the past 50 years…
- It started in 1966 with a 20 percent stock market crash.
- Seven years later, the market lost another 45 percent (1973-74).
- Seven years later was the beginning of the “hard recession” (1980).
- Seven years later was the Black Monday crash of 1987.
- Seven years later was the bond market crash of 1994.
- Seven years later was 9/11 and the 2001 tech bubble collapse.
- Seven years later was the 2008 global financial collapse.
- 2015: What’s next?
A lot of people were expecting something “big” to happen on September 14th and were disappointed when nothing happened.
But the truth is that it has never been about looking at any one particular day. Over the past sixty days we have seen absolutely extraordinary things happen all over the planet, and yet some people are not even paying attention because they did not meet their preconceived notions of how events should play out.
And this is just the beginning. We haven’t even gotten to the great derivatives crisis that is coming yet. All of these things are going to take time to fully unfold.
A lot of people that write about “economic collapse” talk about it like it will be some type of “event” that will happen on a day or a week and then we will recover.
Well, that is not what it is going to be like.
You need to be ready to endure a very, very long crisis. The suffering that is coming to this nation is beyond what most of us could even imagine.
Even now we are seeing early signs of it. For instance, the mayor of Los Angeles says that the growth of homelessness in his city has gotten so bad that it is now “an emergency”…
On Tuesday, Los Angeles officials announced the city’s homelessness problem has become an emergency, and proposed allotting $100 million to help shelter the city’s massive and growing indigent population.
LA Mayor Eric Garcetti also issued a directive on Monday evening for the city to free up $13 million to help house the estimated 26,000 people who are living on the city’s streets.
According to the Los Angeles Homeless Services Authority, the number of encampments and people living in vehicles has increased by 85% over the last two years alone.
And in recent years we have seen poverty absolutely explode all over the nation. The “bread lines” of the Great Depression have been replaced with EBT cards, and there is a possibility that a government shutdown in October could “suspend or delay food stamp payments”…
A government shutdown Oct. 1 could immediately suspend or delay food stamp payments to some of the 46 million Americans who receive the food aid.
The Agriculture Department said Tuesday that it will stop providing benefits at the beginning of October if Congress does not pass legislation to keep government agencies open.
“If Congress does not act to avert a lapse in appropriations, then USDA will not have the funding necessary for SNAP benefits in October and will be forced to stop providing benefits within the first several days of October,” said Catherine Cochran, a spokeswoman for USDA. “Once that occurs, families won’t be able to use these benefits at grocery stores to buy the food their families need.”
In the U.S. alone, there are tens of millions of people that could not survive without the help of the federal government, and more people are falling out of the middle class every single day.
Our economy is already falling apart all around us, and now another great financial crisis has begun.
When will the “nothing is happening” crowd finally wake up?
Hopefully it will be before they are sitting out on the street begging for spare change to feed their family.
Warren Buffett believes “that bonds are very overvalued“, and a recent survey of fund managers found that 80 percent of them are convinced that bonds have become “badly overvalued“. The most famous bond expert on the planet, Bill Gross, recently confessed that he has a sense that the 35 year bull market in bonds is “ending” and he admitted that he is feeling “great unrest”. Nobel Prize–winning economist Robert Shiller has added a new chapter to his bestselling book in which he argues that bond prices are “irrationally high”. The global bond bubble has ballooned to more than 76 trillion dollars, and interest rates have never been lower in modern history. In fact, 25 percent of all government bonds in Europe actually have a negative rate of return at this point. There is literally nowhere for the bond market to go except for the other direction, and when this bull market turns into a bear it will create chaos and financial devastation all over the planet.
In a recent piece entitled “A Sense Of Ending“, bond guru Bill Gross admitted that the 35 year bull market in bonds that has made him and those that have invested with him so wealthy is now coming to an end…
Stanley Druckenmiller, George Soros, Ray Dalio, Jeremy Grantham, among others warn investors that our 35 year investment supercycle may be exhausted. They don’t necessarily counsel heading for the hills, or liquidating assets for cash, but they do speak to low future returns and the increasingly fat tail possibilities of a “bang” at some future date. To them, (and myself) the current bull market is not 35 years old, but twice that in human terms. Surely they and other gurus are looking through their research papers to help predict future financial “obits”, although uncertain of the announcement date. Savor this Bull market moment, they seem to be saying in unison. It will not come again for any of us; unrest lies ahead and low asset returns. Perhaps great unrest, if there is a bubble popping.
And the way that he ended his piece sounds rather ominous…
I wish to still be active in say 2020 to see how this ends. As it is, in 2015, I merely have a sense of an ending, a secular bull market ending with a whimper, not a bang. But if so, like death, only the timing is in doubt. Because of this sense, however, I have unrest, increasingly a great unrest. You should as well.
Bill Gross is someone that knows what he is talking about. I would consider his words very carefully.
Another renowned financial expert, Yale professor Robert Shiller, warned us about the stock bubble in 2000 and about the real estate bubble in 2005. Now, he is warning about the danger posed by this bond bubble…
In the first edition of his landmark book “Irrational Exuberance,” published in 2000, the Yale professor of economics and 2013 Nobel Laureate presciently warned that stocks looked especially expensive. In the second edition, published in 2005 shortly before the real estate bubble crashed, he added a chapter about real estate valuations. And in the new edition, due out later this month, Shiller adds a fresh chapter called “The Bond Market in Historical Perspective,” in which he worries that bond prices might be irrationally high.
For years, ultra-low interest rates have enabled governments around the world to go on a debt binge unlike anything the world has ever seen. Showing very little restraint since the last financial crisis, they have piled up debts that are exceedingly dangerous. If interest rates were to return to historical norms, it would instantly create the greatest government debt crisis in history.
A recent letter from IceCap Asset Management summarized where we basically stand today…
1) governments are unable to eliminate deficits
2) global government debt is increasing exponentially
3) 0% interest rates are allowing governments to borrow more to pay off old loans and fund deficits
4) Global growth is declining despite money printing and bailouts And, we’ve saved the latest and greatest fact for last: as stunning as 0% interest rates sound, the mathematically-challenged-fantasyland called Europe has just one upped everyone by introducing NEGATIVE INTEREST RATES.
As of writing, over 25% of all bonds issued by European governments has a guaranteed negative return for investors.
Germany can borrow money for 5 years at an interest rate of NEGATIVE 0.10%. Yes, instead of Germany paying you interest when you lend them money, you have to pay them interest.
These same negative interest rate conditions exist across many of the Eurozone countries, as well as Denmark, Sweden and Switzerland.
Negative interest rates are by nature irrational.
Why in the world would you pay someone to borrow money from you?
It doesn’t make any sense at all, and this irrational state of affairs will not last for too much longer.
At some point, investors are going to come to the realization that the 35 year bull market for bonds is finished, and then there will be a massive rush for the exits. This rush for the exits will be unlike anything the bond market has ever seen before. Robert Wenzel of the Economic Policy Journal says that this coming rush for the exits will set off a “death spiral”…
Anyone who holds the view that the Fed will not soon raise interest rates,and soon, fails to understand the nature of the developing crisis. It will be led by a collapse of the bond market.
Market forces, somewhat misleadingly called bond-vigilantes, will lead the charge.
I am not as bearish in the short-term on the stock market. The equity markets will be volatile because of the climb in rates and look scary at times but the death spiral will be in the bond market.
As this death spiral accelerates, we are going to see global interest rates rise dramatically. And considering the fact that more than 400 trillion dollars in derivatives are directly tied to interest rates, that is a very scary thing.
And in case you are wondering, the stock market will be deeply affected by all of this as well. I believe that we are going to witness a stock market crash even greater than what we experienced in 2008, and other experts are projecting similar things. For example, just consider what Marc Faber recently told CNBC…
“For the last two years, I’ve been thinking that U.S. stocks are due for a correction,” Faber said Wednesday on CNBC’s “Trading Nation.” “But I always say a bubble is a bubble, and if there’s no correction, the market will go up, and one day it will go down, big time.”
“The market is in a position where it’s not just going to be a 10 percent correction. Maybe it first goes up a bit further, but when it comes, it will be 30 percent or 40 percent minimum!” Faber asserted.
Where we are right now is at the end of the party. There are some that want to keep on dancing to the music for as long as possible, but most can see that things are winding down and people are starting to head for the exits.
The irrational global financial bubble that investors have been enjoying for the past few years has stretched on far longer than it should have. But that is the way irrational bubbles work – they just keep going even when everyone can see that they have become absolutely absurd. However, eventually something always comes along and bursts them, and once that happens markets can crash very, very rapidly.
Just a few days ago, the bull market for the S&P 500 turned six years old. This six year period of time has been great for investors, but what comes next? On March 9th, 2009 the S&P 500 hit a low of 676.53. Since that day, it has risen more than 200 percent. As you will see below, there are only two other times within the last 100 years when the S&P 500 performed this well over a six year time frame. In both instances, the end result was utter disaster. And as you take in this information, I want you to keep in mind what I said in my previous article entitled “7 Signs That A Stock Market Peak Is Happening Right Now“. What we are witnessing at this moment is classic “peaking behavior”, and there is a long way to go down from here. So if historical patterns hold up, those with lots of money in the stock market could soon be in for a whole lot of trouble.
According to Societe Generale analyst Andrew Lapthorne, there was an S&P 500 bull market run of more than 200 percent over a six year time period that ended in 1929.
We all know what happened that year.
And there was another S&P 500 bull market run of more than 200 percent over a six year time period that ended in 1999. In the end, all of those gains were wiped out when the dotcom bubble burst.
And now we are near the end of another great bull market for the S&P 500. The following is an excerpt from a recent Business Insider article…
“Such a strong six year run up in US equities has only been seen twice since 1900, i.e., back in 1929 and 1999, neither of which ended well,” Lapthorne wrote.
It’s anyone’s guess what happens next. But Lapthorne and his colleagues have slanted bearish.
So how will this current bull market end?
Needless to say, a lot of people are not very optimistic about that right now.
And there was another very interesting bull market that ended in 1987…
On Aug. 12, the S&P 500 dipped to 102.42, setting the stage for the third-biggest bull market in stocks since 1929. Inflation and unemployment fell. In 1984, President Reagan would cruise to reelection with an ad telling voters “It’s morning again in America.” By 1987, the stock market had tripled. Shareholders who were able to see beyond the gloom of the early 1980s reaped a huge return.
Of course a lot of those huge stock market returns were eliminated in a single day. On October 19th, 1987 the Dow declined by more than 22 percent during a single trading session. That day is still known as “Black Monday” up to this present time.
Markets tend to go down a lot faster than they go up. So if your stock portfolio has gone up substantially over the past few years, good for you. But keep in mind that all of your gains can be wiped out very rapidly. Millions of people experienced this during the last financial crisis, and millions more will experience this during the next one.
And as I keep reminding people, so many of the exact same patterns that we witnessed just prior to the last great stock market collapse are happening once again.
For example, just yesterday I explained that there has been only one other time over the past decade when we have seen the U.S. dollar surge in value in such a short period of time.
That was in 2008, just prior to the last financial crisis.
Another example is what has happened to the price of oil. Since the middle of last year, the price of oil has fallen by more than 50 dollars a barrel.
In all of history, that has happened only one other time.
That was in 2008, just prior to the last financial crisis.
I could go on and on. I could talk about margin debt, price/earnings ratios, industrial commodities, etc.
But you know what? Despite all of the warning signs there are still people out there that are eagerly pouring money into the stock market.
Back in 2005 and 2006, I knew people that were hurrying to buy homes before they got “priced out of the market”. So they did everything that they could to scrape together down payments and they took on mortgages that were larger than they could really afford.
And in the end they got burned.
Today, people are doing similar things. For instance, my friend Bob recently sent me an article that I could hardly believe. It turns out that an “expert” on CNBC is encouraging people “to take out a 7 year loan with a rapidly amortizing asset as collateral in order to buy stocks.”
Let me be clear. The really, really, really dumb money is jumping into the stock market right now. Those that are pouring money into stocks today are really going to get hit hard when the crash comes.
And it isn’t just me saying this.
Just consider the words of billionaire hedge fund manager Crispin Odey…
Mr Odey is best known for his big macroeconomic calls, including foreseeing the 2008 global credit crisis; piling into insurers in the wake of September 2001 attacks; and picking the recent oil price rout. He famously paid himself £28 million in 2008 after shorting credit crisis casualties, including British lender Bradford & Bingley. Mr Odey’s fund returned 54.8 per cent that year.
“The market’s reaction to all of this is leave it to the professionals, leave it to those great guys, the central bankers, because they saved the day in 2009,” he said. “These guys are kind of relying on central banks pulling a rabbit out of a hat.”
The risk is that this time, monetary policy may be ineffective: “We need the crisis to reformulate policy. Central banks are not all singing and all dancing, they cannot basically avoid the natural consequences of what we are doing.”
An inadequate supply-side response to the plunge in commodity prices as the resources industry declines to reduce production was in effect stimulating supply into falling demand.
“The trouble is today the players, whether they are the miners or the oil companies or the Saudis or anybody else, they are not doing the right things. This is the first time in my career where economics 101 doesn’t work at all.”
But it was also true that the world has not had a major recession for 25 years and thanks to frequent interventions, “there is a sensation we don’t have a business cycle”. Stocks are enjoying a six-year bull market but he also hinted at liquidity issues bubbling under the surface.
“I just think that you and I have got grandstand seats here [to an imminent market shock] and my point is having found myself in the second quarter of last year selling a lot of equities and starting to go short, I found out just how illiquid it all was. You never actually see it until people try and get out of these things.”
It was unclear to Mr Odey what central banks could do to prevent a crash.
The warning signs are clear.
Soon the time for warning will be over and the crisis will be here.
I hope that you are getting ready.
Is this the end of the last great run for the U.S. stock market? Are we witnessing classic “peaking behavior” that is similar to what occurred just before other major stock market crashes? Throughout 2014 and for the early stages of 2015, stocks have been on quite a tear. Even though the overall U.S. economy continues to be deeply troubled, we have seen the Dow, the S&P 500 and the Nasdaq set record after record. But no bull market lasts forever – particularly one that has no relation to economic reality whatsoever. This false bubble of financial prosperity has been enjoyable, and even I wish that it could last much longer. But there comes a time when we all must face reality, and the cold, hard facts are telling us that this party is about to end. The following are 7 signs that a stock market peak is happening right now…
#1 Just before a stock market crash, price/earnings ratios tend to spike, and that is precisely what we are witnessing. The following commentary and chart come from Lance Roberts…
The chart below shows Dr. Robert Shiller’s cyclically adjusted P/E ratio. The problem is that current valuations only appear cheap when compared to the peak in 2000. In order to put valuations into perspective, I have capped P/E’s at 30x trailing earnings. The dashed orange line measures 23x earnings which has been the level where secular bull markets have previously ended. I have noted the peak valuations in periods that have exceeded that 30x earnings.
At 27.85x current earning the markets are currently at valuation levels where previous bull markets have ended rather than continued. Furthermore, the markets have exceeded the pre-financial crisis peak of 27.65x earnings. If earnings continue to deteriorate, market valuations could rise rapidly even if prices remain stagnant.
#2 The average bull market lasts for approximately 3.8 years. The current bull market has already lasted for six years.
#3 The median total gain during a bull market is 101.5 percent. For this bull market, it has been 213 percent.
#4 Usually before a stock market crash we see a divergence between the relative strength index and the stock market itself. This happened prior to the bursting of the dotcom bubble, it happened prior to the crash of 2008, and it is happening again right now…
The first technical warning sign that we should heed is marked by a significant divergence between the relative strength index (RSI) and the market itself. This is noted by a declining pattern of lower highs in the RSI as stocks continue to make higher highs, a sign that the market is “topping out”. In the late ‘90s this divergence persisted for many years as the tech bubble reached epic valuation levels. In 2007 this divergence lasted over a much shorter period (6 months) before the market finally peaked and succumbed to massive selling. With last month’s strong rally to new records, we now have a confirmed divergence between the long-term relative strength index and the market’s price action.
#5 In the past, peaks in margin debt have been very closely associated with stock market peaks. The following chart comes from Doug Short, and I included it in a previous article…
#6 As I have discussed previously, we usually witness a spike in 10 year Treasury yields just about the time that the stock market is peaking right before a crash.
Well, according to Business Insider, we just saw the largest 5 week rate rally in two decades…
Lots of guys and gals went home this past weekend thinking about the implications of the recent rise in the 10-year Treasury bond’s yield.
Chris Kimble notes it was the biggest 5-week rate rally in twenty years!
#7 A lot of momentum indicators seem to be telling us that we are rapidly approaching a turning point for stocks. For example, James Stack, the editor of InvesTech Research, says that the Coppock Guide is warning us of “an impending bear market on the not-too-distant horizon”…
A momentum indicator dubbed the Coppock Guide, which serves as “a barometer of the market’s emotional state,” has also peaked, Stack says. The indicator, which, “tracks the ebb and flow of equity markets from one psychological extreme to another,” is also flashing a warning flag.
The Coppock Guide’s chart pattern is flashing a “double top,” which suggests that “psychological excesses are present” and that “secondary momentum has peaked” in this bull market, according to Stack.
“All of this is just another reason for concern about an impending bear market on the not-too-distant horizon,” Stack writes.
So if we are to see a stock market crash soon, when will it happen?
Well, the truth is that nobody knows for certain.
It could happen this week, or it could be six months from now.
In fact, a whole lot of people are starting to point to the second half of 2015 as a danger zone. For example, just consider the words of David Morgan…
“Momentum is one indicator and the money supply. Also, when I made my forecast, there is a big seasonality, and part of it is strict analytical detail and part of it is being in this market for 40 years. I got a pretty good idea of what is going on out there and the feedback I get. . . . I’m in Europe, I’m in Asia, I’m in South America, I’m in Mexico, I’m in Canada; and so, I get a global feel, if you will, for what people are really thinking and really dealing with. It’s like a barometer reading, and I feel there are more and more tensions all the time and less and less solutions. It’s a fundamental take on how fed up people are on a global basis. Based on that, it seems to me as I said in the January issue of the Morgan Report, September is going to be the point where people have had it.”
Time will tell if Morgan was right.
But without a doubt, lots of economic warning signs are starting to pop up.
One that is particularly troubling is the decline in new orders for consumer goods. This is something that Charles Hugh-Smith pointed out in one of his recent articles…
The financial news is astonishingly rosy: record trade surpluses in China, positive surprises in Europe, the best run of new jobs added to the U.S. economy since the go-go 1990s, and the gift that keeps on giving to consumers everywhere, low oil prices.
So if everything is so fantastic, why are new orders cratering? New orders are a snapshot of future demand, as opposed to current retail sales or orders that have been delivered.
Posted below is a chart that he included with his recent article. As you can see, the only time things have been worse in recent decades was during the depths of the last financial crisis…
To me, it very much appears that time is running out for this bubble of false prosperity that we have been living in.
But what do you think? Please feel free to contribute to the discussion by posting a comment below…
Are we at the tail end of the stock market bubble to end all stock market bubbles? Wall Street was full of glee Monday when the Nasdaq closed above 5000 for the first time since the peak of the dotcom bubble in March 2000. And almost everyone in the financial world seems convinced that things are somehow “different” this time around. Even though by almost every objective measure stocks are wildly overpriced right now, and even though there are a whole host of signs that economic trouble is on the horizon, the overwhelming consensus is that this bull market is just going to keep charging ahead. But of course that is what they thought just before the last two stock market crashes in 2001 and 2008 as well. No matter how many times history repeats, we never seem to learn from it.
Back in October 2002, the Nasdaq hit a post-dotcom bubble low of 1108. From there, it went on an impressive run. In late 2007, it briefly moved above 2800 before losing more than half of its value during the stock market crash of 2008.
So the fact that the Nasdaq has now closed above 5000 is a really big deal. The following is how USA Today described what happened on Monday…
The Nasdaq Composite capped its long march back to 5000 Monday, eclipsing, then closing above the long-hallowed mark for the first time since March 2000.
The arduous climb came on the heels of a 10-day winning streak that ended last week, Nasdaq’s longest since July 2009. That helped fuel the technology-heavy market index to a 7% gain in February, the sixth-largest monthly climb since its 1971 launch.
The chart below shows how the Nasdaq has performed over the past decade. As you can see, we are coming dangerously close to doubling the peak that was hit just before the last stock market collapse…
By looking at that chart, you would be tempted to think that the overall U.S. economy must be doing great.
But of course that is not the case at all.
For example, just take a look at what has happened to the employment-population ratio over the past decade. The percentage of the working age U.S. population that is currently employed is actually far lower than it used to be…
So why is the stock market doing so well if the overall economy is not?
Well, the truth is that stocks have become completely divorced from economic reality at this point. Wall Street has been transformed into a giant casino, and trading stocks has been transformed into a high stakes poker game.
And one of the ways that we can tell that a stock market bubble has formed is when people start borrowing massive amounts of money to invest in stocks. As you can see from the commentary and chart from Doug Short below, margin debt is peaking again just like it did just prior to the last two stock market crashes…
Unfortunately, the NYSE margin debt data is a month old when it is published. Real (inflation-adjusted) debt hit its all-time high in February 2014, after which it margin declined sharply for two months, but by June it had risen to a level about two percent below its high and then oscillated in a relatively narrow range. The latest data point for January is four percent off its real high eleven month ago.
So why can’t more people see this?
We are in the midst of a monumental stock market bubble and most on Wall Street seem willingly blind to it.
Fortunately, there are a few sober voices in the crowd. One of them is John Hussman. He is warning that now is the time to get out of stocks…
Unless we observe a rather swift improvement in market internals and a further, material easing in credit spreads – neither which would relieve the present overvaluation of the market, but both which would defer our immediate concerns about downside risk – the present moment likely represents the best opportunity to reduce exposure to stock market risk that investors are likely to encounter in the coming 8 years.
Last week, the cyclically-adjusted P/E of the S&P 500 Index surpassed 27, versus a historical norm of just 15 prior to the late-1990’s market bubble. The S&P 500 price/revenue ratio surpassed 1.8, versus a pre-bubble norm of just 0.8. On a wide range of historically reliable measures (having a nearly 90% correlation with actual subsequent S&P 500 total returns), we estimate current valuations to be fully 118% above levels associated with historically normal subsequent returns in stocks. Advisory bullishness (Investors Intelligence) shot to 59.5%, compared with only 14.1% bears – one of the most lopsided sentiment extremes on record. The S&P 500 registered a record high after an advancing half-cycle since 2009 that is historically long-in-the-tooth and already exceeds the valuation peaks set at every cyclical extreme in history but 2000 on the S&P 500 (across all stocks, current median price/earnings, price/revenue and enterprise value/EBITDA multiples already exceed the 2000 extreme). Equally important, our measures of market internals and credit spreads, despite moderate improvement in recent weeks, continue to suggest a shift toward risk-aversion among investors. An environment of compressed risk premiums coupled with increasing risk-aversion is without question the most hostile set of features one can identify in the historical record.
Everyone knows that the stock market cannot stay detached from economic reality forever.
At some point the bubble is going to burst.
If you want to know what the real economy is like, just ask Alison Norris of Detroit, Michigan…
When Alison Norris couldn’t find work in Detroit, she searched past city limits, ending up with a part-time restaurant job 20 miles away, which takes at least two hours to get to using public transportation.
Norris has to take two buses to her job at a suburban mall in Troy, Michigan, using separate city and suburban bus systems.
For many city residents with limited skills and education, Detroit is an employment desert, having lost tens of thousands of blue-collar jobs in manufacturing cutbacks and service jobs as the population dwindled.
Sadly, her story is not an anomaly. I get emails from readers all the time that are out of work and just can’t seem to find a decent job no matter how hard they try.
It would be one thing if the stock market was soaring because the U.S. economy was thriving.
But we all know that is not true.
So that means the current stock market mania that we are witnessing is artificial.
How long will it last?
Give us your opinion by posting a comment below…
The unelected central planners at the Federal Reserve have decided that the time has come to slightly taper the amount of quantitative easing that it has been doing. On Wednesday, the Fed announced that monthly purchases of U.S. Treasury bonds will be reduced from $45 billion to $40 billion, and monthly purchases of mortgage-backed securities will be reduced from $35 billion to $30 billion. When this news came out, it sent shockwaves through financial markets all over the planet. But the truth is that not that much has really changed. The Federal Reserve will still be recklessly creating gigantic mountains of new money out of thin air and massively intervening in the financial marketplace. It will just be slightly less than before. However, this very well could represent a very important psychological turning point for investors. It is a signal that “the party is starting to end” and that the great bull market of the past four years is drawing to a close. So what is all of this going to mean for average Americans? The following are 8 ways that “the taper” is going to affect you and your family…
1. Interest Rates Are Going To Go Up
Following the announcement on Wednesday, the yield on 10 year U.S. Treasuries went up to 2.89% and even CNBC admitted that the taper is a “bad omen for bonds“. Thousands of other interest rates in our economy are directly affected by the 10 year rate, and so if that number climbs above 3 percent and stays there, that is going to be a sign that a significant slowdown of economic activity is ahead.
2. Home Sales Are Likely Going To Go Down
Mortgage rates are heavily influenced by the yield on 10 year U.S. Treasuries. Because the yield on 10 year U.S. Treasuries is now substantially higher than it was earlier this year, mortgage rates have also gone up. That is one of the reasons why the number of mortgage applications just hit a new 13 year low. And now if rates go even higher that is going to tighten things up even more. If your job is related to the housing industry in any way, you should be extremely concerned about what is coming in 2014.
3. Your Stocks Are Going To Go Down
Yes, I know that stocks skyrocketed today. The Dow closed at a new all-time record high, and I can’t really provide any rational explanation for why that happened. When the announcement was originally made, stocks initially sold off. But then they rebounded in a huge way and the Dow ended up close to 300 points.
A few months ago, when Fed Chairman Ben Bernanke just hinted that a taper might be coming soon, stocks fell like a rock. I have a feeling that the Fed orchestrated things this time around to make sure that the stock market would have a positive reaction to their news. But of course I absolutely cannot prove this at all. I hope someday we learn the truth about what actually happened on Wednesday afternoon. I have a feeling that there was some direct intervention in the markets shortly after the announcement was made and then the momentum algorithms took over from there.
In any event, what we do know is that when QE1 ended stocks fell dramatically and the same thing happened when QE2 ended. If you doubt this, just check out this chart.
Of course QE3 is not being ended, but this tapering sends a signal to investors that the days of “easy money” are over and that we have reached the peak of the market.
And if you are at the peak of the market, what is the logical thing to do?
Sell, sell, sell.
But in order to sell, you are going to need to have buyers.
And who is going to want to buy stocks when there is no upside left?
4. The Money In Your Bank Account Is Constantly Being Devalued
When a new dollar is created, the value of each existing dollar that you hold goes down. And thanks to the Federal Reserve, the pace of money creation in this country has gone exponential in recent years. Just check out what has been happening to M1. It has nearly doubled since the financial crisis of 2008…
The Federal Reserve has been behaving like the Weimar Republic, and this tapering does not change that very much. Even with this tapering, the Fed is still going to be creating money out of thin air at an absolutely insane rate.
And for those that insist that what the Federal Reserve is doing is “working”, it is important to remember that the crazy money printing that the Weimar Republic did worked for them for a little while too before ending in complete and utter disaster.
5. Quantitative Easing Has Been Causing The Cost Of Living To Rise
The Federal Reserve insists that we are in a time of “low inflation”, but anyone that goes to the grocery store or that pays bills on a regular basis knows what a lie that is. The truth is that if the inflation rate was still calculated the same way that it was back when Jimmy Carter was president, the official rate of inflation would be somewhere between 8 and 10 percent today.
Most of the new money created by quantitative easing has ended up in the hands of the very wealthy, and it is in the things that the very wealthy buy that we are seeing the most inflation. As one CNBC article recently stated, we are seeing absolutely rampant inflation in “stocks and bonds and art and Ferraris and farmland“.
6. Quantitative Easing Did Not Reduce Unemployment And Tapering Won’t Either
The Federal Reserve actually first began engaging in quantitative easing back in late 2008. As you can see from the chart below, the percentage of Americans that are actually working is lower today than it was back then…
The mainstream media continues to insist that quantitative easing was all about “stimulating the economy” and that it is now okay to cut back on quantitative easing because “unemployment has gone down”. Hopefully you can see that what the mainstream media has been telling you has been a massive lie. According to the government’s own numbers, the percentage of Americans with a job has stayed at a remarkably depressed level since the end of 2010. Anyone that tries to tell you that we have had an “employment recovery” is either very ignorant or is flat out lying to you.
7. The Rest Of The World Is Going To Continue To Lose Faith In Our Financial System
Everyone else around the world has been watching the Federal Reserve recklessly create hundreds of billions of dollars out of thin air and use it to monetize staggering amounts of government debt. They have been warning us to stop doing this, but the Fed has been slow to listen.
The greatest damage that quantitative easing has been causing to our economy does not involve the short-term effects that most people focus on. Rather, the greatest damage that quantitative easing has been causing to our economy is the fact that it is destroying worldwide faith in the U.S. dollar and in U.S. debt.
Right now, far more U.S. dollars are used outside the country than inside the country. The rest of the world uses U.S. dollars to trade with one another, and major exporting nations stockpile massive amounts of our dollars and our debt.
We desperately need the rest of the world to keep playing our game, because we have become very dependent on getting super cheap exports from them and we have become very dependent on them lending us trillions of our own dollars back to us.
If the rest of the world decides to move away from the U.S. dollar and U.S. debt because of the incredibly reckless behavior of the Federal Reserve, we are going to be in a massive amount of trouble. Our current economic prosperity greatly depends upon everyone else using our dollars as the reserve currency of the world and lending trillions of dollars back to us at ultra-low interest rates.
And there are signs that this is already starting to happen. In fact, China recently announced that they are going to quit stockpiling more U.S. dollars. This is one of the reasons why the Fed felt forced to do something on Wednesday.
But what the Fed did was not nearly enough. It is still going to be creating $75 billion out of thin air every single month, and the rest of the world is going to continue to lose more faith in our system the longer this continues.
8. The Economy As A Whole Is Going To Continue To Get Even Worse
Despite more than four years of unprecedented money printing by the Federal Reserve, the overall U.S. economy has continued to decline. If you doubt this, please see my previous article entitled “37 Reasons Why ‘The Economic Recovery Of 2013’ Is A Giant Lie“.
And no matter what the Fed does now, our decline will continue. The tragic downfall of small cities such as Salisbury, North Carolina are perfect examples of what is happening to our country as a whole…
During the three-year period ending in 2009, Salisbury’s poverty rate of 16% was about 3% higher than the national rate. In the following three-year period between 2010 and 2012, the city’s poverty rate was approaching 30%. Salisbury has traditionally relied heavily on the manufacturing sector, particularly textiles and fabrics. In recent decades, however, manufacturing activity has declined significantly and continues to do so. Between 2010 and 2012, manufacturing jobs in Salisbury — as a percent of the workforce — shrank from 15.5% to 8.3%.
But the truth is that you don’t have to travel far to see evidence of our economic demise for yourself. All you have to do is to go down to the local shopping mall. Sears has experienced sales declines for 27 quarters in a row, and at this point Sears is a dead man walking. The following is from a recent article by Wolf Richter…
The market share of Sears – including K-Mart – has dropped to 2% in 2013 from 2.9% in 2005. Sales have declined for years. The company lost money in fiscal 2012 and 2013. Unless a miracle happens, and they don’t happen very often in retail, it will lose a ton in fiscal 2014, ending in January: for the first three quarters, it’s $1 billion in the hole.
Despite that glorious track record, and no discernible turnaround, the junk-rated company has had no trouble hoodwinking lenders into handing it a $1 billion loan that matures in 2018, to pay off an older loan that would have matured two years earlier.
And J.C. Penney is suffering a similar fate. According to Richter, the company has lost a staggering 1.6 billion dollars over the course of the last year…
Then there’s J.C. Penney. Sales plunged 27% over the last three years. It lost over $1.6 billion over the last four quarters. It installed a revolving door for CEOs. It desperately needed to raise capital; it was bleeding cash, and its suppliers and landlords had already bitten their fingernails to the quick. So the latest new CEO, namely its former old CEO Myron Ullman, set out to extract more money from the system, borrowing $1.75 billion and raising $785 million in a stock sale at the end of September that became infamous the day he pulled it off.
So don’t believe the hype.
The economy is getting worse, not better.
Quantitative easing did not “rescue the economy”, but it sure has made our long-term problems a whole lot worse.
And this “tapering” is not a sign of better things to come. Rather, it is a sign that the bubble of false prosperity that we have been enjoying for the past few years is beginning to end.