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The Dow Peaked At 14,000 Before The Last Stock Market Crash, And Now Dow 24,000 Is Here

The absurdity that we are witnessing in the financial markets is absolutely breathtaking.  Just recently, a good friend reminded me that the Dow peaked at just above 14,000 before the last stock market crash, and stock prices were definitely over-inflated at that time.  Subsequently the Dow crashed below 7,000 before rebounding, and now thanks to this week’s rally we on the threshold of Dow 24,000.  When you look at a chart of the Dow Jones Industrial Average, you would be tempted to think that we must be in the greatest economic boom in American history, but the truth is that our economy has only grown by an average of just 1.33 percent over the last 10 years.  Every crazy stock market bubble throughout our history has always ended badly, and this one will be no exception.

And even though the Dow showed a nice gain on Wednesday, the Nasdaq got absolutely hammered.  In fact, almost every major tech stock was down big.  The following comes from CNN

Meanwhile, big tech stocks — which have propelled the market higher all year — were tanking. The Nasdaq fell more than 1%, led by big drops in Google (GOOGL, Tech30) owner Alphabet, Amazon (AMZN, Tech30), Apple (AAPL, Tech30), Facebook (FB, Tech30) and Netflix (NFLX, Tech30).

Momentum darlings Nvidia (NVDA, Tech30) and PayPal (PYPL, Tech30) and red hot gaming stocks Electronic Arts (EA, Tech30) and Activision Blizzard (ATVI, Tech30) plunged too. They have been some of the market’s top stocks throughout most of 2017.

Many believe that the markets are about to turn down in a major way.  What goes up must eventually come down, and at this point even Goldman Sachs is warning that a bear market is coming

“It has seldom been the case that equities, bonds and credit have been similarly expensive at the same time, only in the Roaring ’20s and the Golden ’50s,” Goldman Sachs International strategists including Christian Mueller-Glissman wrote in a note this week. “All good things must come to an end” and “there will be a bear market, eventually” they said.

As central banks cut back their quantitative easing, pushing up the premiums investors demand to hold longer-dated bonds, returns are “likely to be lower across assets” over the medium term, the analysts said. A second, less likely, scenario would involve “fast pain.” Stock and bond valuations would both get hit, with the mix depending on whether the trigger involved a negative growth shock, or a growth shock alongside an inflation pick-up.

Nobody believes that this crazy stock market party can go on forever.

These days, the real debate seems to be between those that are convinced that the markets will crash violently and those that believe that a “soft landing” can be achieved.

I would definitely be in favor of a “soft landing”, but those that have followed my work for an extended period of time know that I do not think that this will happen.  And with each passing day, more prominent voices in the financial world are coming to the same conclusion.  Here is one recent example

Vanguard’s chief economist Joe Davis said investors need to be prepared for a significant downturn in the stock market, which is now at a 70 percent chance of crashing.  That chance is significantly higher than it has been over the past 60 years.

The economist added, It’s unreasonable to expect rates of returns, which exceeded our own bullish forecast from 2010, to continue.”

A stock market crash has followed every major stock bubble in our history, and right at this moment we are in the terminal phase of one of the greatest stock market bubbles ever.  There are so many indicators that are screaming that we are in danger, and one of the favorite ones that I like to point to is margin debt.  The following commentary and chart were recently published by Wolf Richter

This chart shows margin debt (red line, left scale) and the S&P 500 (blue line, right scale), both adjusted for inflation to tune out the effects of the dwindling value of the dollar over the decades (chart by Advisor Perspectives):

Stock market leverage is the big accelerator on the way up. Leverage supplies liquidity that has been freshly created by the lender. This isn’t money moving from one asset to another. This is money that is being created to be plowed into stocks. And when stocks sink, leverage becomes the big accelerator on the way down.

Markets tend to go down much faster than they go up, and I have a feeling that when this market crashes it is going to happen very, very rapidly.

The only reason stock prices ever got this high in the first place was due to unprecedented intervention by global central banks.  They created trillions of dollars out of thin air and plowed those funds directly into the financial markets, and of course that was going to inflate asset prices.

But now global central banks are putting on the brakes simultaneously, and this has got to be one of the greatest sell signals that we have ever witnessed in modern financial history.

Even Federal Reserve Chair Janet Yellen says that she is concerned about causing “a boom-bust condition in the economy”, and yet she insists that the Fed is going to continue to gradually raise rates anyway

Federal Reserve Chair Janet Yellen said the central bank is concerned with growth get out of hand and thus is committed to continuing to raise rates in a gradual manner.

“We don’t want to cause a boom-bust condition in the economy,” Yellen told Congress in her semiannual testimony Wednesday.

While Yellen did not specifically commit to a December rate hike, her comments indicated that her views have not changed with her desire for the central bank to continue normalizing policy after years of historically high accommodation.

I never thought that this stock market bubble would get this large.  We are way, way overdue for a financial correction, but right now we are in a party that never seems to end.

But end it will, and when that happens the pain that will be experienced on Wall Street will be unlike anything that we have ever seen before.

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.

Bank Of America Analyst: A ‘Flash Crash’ In Early 2018 ‘Seems Quite Likely’

Is the stock market bubble about to burst?  I know that I have been touching on this theme over and over and over again in recent weeks, but I can’t help it.  Red flags are popping up all over the place, and the last time so many respected experts were warning about an imminent stock market crash was just before the last major financial crisis.  Of course nobody can guarantee that global central banks won’t find a way to prolong this bubble just a little bit longer, but at this point they are all removing the artificial support from the markets in coordinated fashion.  Without that artificial support, it is inevitable that financial markets will experience a correction, and the only real question is what the exact timing will be.

For example, Bank of America’s Michael Hartnett originally thought that the coming correction would come a bit sooner, but now he is warning of a “flash crash” during the first half of 2018

Having predicted back in July that the “most dangerous moment for markets will come in 3 or 4 months“, i.e., now, BofA’s Michael Hartnett was – in retrospect – wrong (unless of course the S&P plunges in the next few days). However, having stuck to his underlying logic – which was as sound then as it is now – Hartnett has not given up on his “bad cop” forecast (not to be mistaken with the S&P target to be unveiled shortly by BofA’s equity team and which will probably be around 2,800), and in a note released overnight, the Chief Investment Strategist not only once again dares to time his market peak forecast, which he now thinks will take place in the first half of 2018, but goes so far as to predict that there will be a flash crash “a la 1987/1994/1998” in just a few months.

That certainly sounds quite ominous.

Just so that there is no confusion, let me give you his exact quote

“A flash crash (à la ’87/’94/’98) in H1 2018 seems quite likely, in our view, as the major sedative of volatility, the central banks, start to withdraw liquidity.”

Hartnett is making the same point that I have made repeatedly in recent weeks.  As the central banks withdraw the artificial support that has been propping up the markets ever since the last financial crisis, we will see if the markets can really maintain these absolutely ridiculous price levels on their own.

And we are not just talking about stock prices either.  In fact, Bill Blain believes that the coming crash will actually originate in the bond market

The 2008 crisis, which was about consumer debt, was triggered by mortgages. We still have consumer debt crisis problems ahead, warns Blain, adding the next financial crisis is likely to be in corporate debt.

“More immediately, the realization a crisis is coming feels very similar to June 2007 when the first mortgage-backed funds in the US started to wobble.” He said it explains why “we’re seeing the highly levered sector of the junk bond markets struggle, and companies correlated to struggling highly levered consumers (such as health and telecoms) also in trouble.”

Stock markets don’t matter, according to the strategist. “The truth is in bond markets. And that’s where I’m looking for the dam to break. The great crash of 2018 is going to start in the deeper, darker depths of the credit market,” he said.

Asset prices of all classes have been pushed to absolutely absurd levels by the central banks.

If it wasn’t for central bank manipulation, stock prices would have never gotten this high, and the bond market would have never been pushed to such irrational extremes.

And it isn’t just the Federal Reserve that has been intervening directly in U.S. markets.

For example, did you know that the Swiss National Bank is now the eighth largest public holder of U.S. stocks in the entire world?

According to John Mauldin, the Swiss central bank has poured 17 billion dollars into our stock market so far this year, and overall they now own approximately 80 billion dollars worth of our stocks…

The SNB owns about $80 billion in US stocks today (June, 2017) and a guesstimated $20 billion or so in European stocks (this guess comes from my friend Grant Williams, so I will go with it).

They have bought roughly $17 billion worth of US stocks so far this year. And they have no formula; they are just trying to manage their currency.

Think about this for a moment: They have about $10,000 in US stocks on their books for every man, woman, and child in Switzerland, not to mention who knows how much in other assorted assets, all in the effort to keep a lid on what is still one of the most expensive currencies in the world.

Switzerland is now the eighth-largest public holder of US stocks. And apparently they are concentrating on the largest of the large-cap stocks. The own 19 million shares of Apple (as of March 31).

They have made these purchases with money that they have literally created out of thin air.

If that sounds like “cheating” to you, that is because that is exactly what it is.

How in the world can stock prices possibly fall when global central banks are creating colossal mountains of money out of thin air and are using that money to buy stocks?

The central banks created this ridiculous stock market bubble, and they can also burst the bubble by pulling back on the level of artificial support, and that is precisely what we see happening right now.

So don’t buy into the hype.  All that really matters is what the central banks choose to do, and if they wanted to continue to pump enormous amounts of money into the financial markets they could continue to pump up this absurd financial bubble that we are currently witnessing.

But at the moment they appear to be pulling back, and that makes a very “interesting” 2018 for the financial markets much more likely.

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.

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