Some really weird things are happening in the financial world right now. If you go back to 2008, there was lots of turmoil bubbling just underneath the surface during the months leading up to the great stock market crash in the second half of that year. When Lehman Brothers finally did collapse, it was a total shock to most of the planet, but we later learned that their problems had been growing for a long time. I believe that we are in a similar period right now, and the second half of this year promises to be quite chaotic. Apparently, those that run some of the largest exchange-traded funds in the entire world agree with me, because as you will see below they are quietly preparing for a “liquidity crisis” and a “market meltdown”. About a month ago, I warned of an emerging “liquidity squeeze“, and now analysts all over the financial industry are talking about it. Could it be possible that the next great financial crisis is right around the corner?
According to Reuters, the companies that run some of the largest exchange-traded funds in existence are deeply concerned about what a lack of liquidity would mean for them during the next financial crash. So right now they are quietly “bolstering bank credit lines” so that they will be better positioned for “a market meltdown”…
The biggest providers of exchange-traded funds, which have been funneling billions of investor dollars into some little-traded corners of the bond market, are bolstering bank credit lines for cash to tap in the event of a market meltdown.
Vanguard Group, Guggenheim Investments and First Trust are among U.S. fund companies that have lined up new bank guarantees or expanded ones they already had, recent company filings show.
The measures come as the Federal Reserve and other U.S. regulators express concern about the ability of fund managers to withstand a wave of investor redemptions in the event of another financial crisis. They have pointed particularly to fixed-income ETFs, which tend to track less liquid markets such as high yield corporate bonds or bank loans.
So why are Vanguard Group, Guggenheim Investments and First Trust all making these kinds of preparations right now?
Do they know something that the rest of us do not?
Over recent months, I have been writing about how so many of the exact same patterns that we witnessed just prior to previous financial crashes seem to be repeating once again in 2015.
One of the things that we would expect to see happen just before a major event would be for the “smart money” to rush out of long-term bonds and into short-term bonds and other more liquid assets. This is something that had not been happening, but during the past couple of weeks there has been a major change. All of a sudden, long-term yields have been spiking dramatically. The following comes from Martin Armstrong…
The amount of cash rushing around on the short-end is stunning. Yields are collapsing into negative territory and this is the same flight to quality we began to see at the peak in the crisis back in 2009. The big money is selling the 10 year or greater paper and everyone is rushing into the short-term. There is not enough paper around to satisfy the demands. Capital is unwilling to hold long-term even the 10 year maturities of governments including Germany. This is illustrating the crisis that is unfolding and there is a collapse in liquidity.
There is that word “liquidity” once again. It is funny how that keeps popping up.
Here is a chart that shows what has been happening to the yield on 30 year U.S. Treasuries in 2015. As you can see, there has been a big move recently…
And what this chart doesn’t show is that the yield on 30 year Treasuries shot up to about 3.08% on Wednesday.
Of course it isn’t just yields in the U.S. that are skyrocketing. This is happening all over the globe, and many analysts are now openly wondering if the 76 trillion dollar global bond bubble is finally imploding. For instance, just consider what Deutsche Bank strategist Jim Reid recently told the Telegraph…
Financial regulations introduced since the crisis have required banks to hold more bonds, as quantitative easing schemes have meant central banks hold many on their own balance sheets, reducing the number available to trade on the open market.
Simultaneously, central banks have attempted to boost so-called “high money liquidity” with quantitative easing schemes and their close to zero interest rates. “What has become increasingly clear over the last couple of years is that the combination of high money liquidity and low trading liquidity creates air pockets,” said Mr Reid.
He continued: “It’s a worry that these events are occurring in relatively upbeat markets. I can’t helping thinking that when the next downturn hits the lack of liquidity in various markets is going to be chaotic. These increasingly regular liquidity issues we’re seeing might be a mild dress rehearsal.”
Those are sobering words.
And without a doubt, we are in the midst of a massive stock market bubble as well. The chaos that is coming is not just going to affect bonds. In fact, I believe that the greatest stock market crash in U.S. history is coming.
So when will it happen?
Well, Phoenix Capital Research seems to think that we have reached an extremely important turning point…
This is something of a last hurrah for stocks. We are now officially in May. And historically the period from May to November has been one of the worst periods for stocks from a seasonal perspective.
Moreover, the fundamentals are worsening dramatically for the markets. By the look of things, 2014 represented the first year in which corporate sales FELL since 2009. Sales track actual economic activity much more closely than earnings: either the money comes in or it isn’t. The fact that sales are falling indicates the economy is rolling over and the “recovery” has ended.
Having cut costs to the bone and issued debt to buyback shares, we are likely at peak earnings as well. Thus far 90% of companies in the S&P 500 have reported earnings. Year over year earnings are down 11.9%.
So sales are falling and earnings are falling… at a time when stocks are so overvalued that even the Fed admits it. This has all the makings of a serious market collapse. And smart investors are preparing now BEFORE it hits.
Personally, I have a really bad feeling about the second half of 2015. Everything seems to be gearing up for a repeat of 2008 (or even worse). Let’s hope that does not happen, but let’s not be willingly blind to the great storm on the horizon either.
And once the next great crisis does hit us, governments around the world will have a lot less “ammunition” to fight it than the last time around. For example, the U.S. national debt has approximately doubled since the beginning of the last recession, and the Federal Reserve has already pushed interest rates down as far as they can. Similar things could also be said about other governments all over the planet. This is something that HSBC chief economist Stephen King recently pointed out in a 17 page report entitled “The world economy’s titanic problem”. The following is a brief excerpt from that report…
“Whereas previous recoveries have enabled monetary and fiscal policymakers to replenish their ammunition, this recovery — both in the US and elsewhere — has been distinguished by a persistent munitions shortage. This is a major problem. In all recessions since the 1970s, the US Fed funds rate has fallen by a minimum of 5 percentage points. That kind of traditional stimulus is now completely ruled out.”
For a long time, I have had a practice of ending my articles by urging people to get prepared. But now time for preparing is rapidly running out. My new book entitled “Get Prepared Now” was just released, but honestly my co-author and I should have had it out last year. In the very small amount of time that we have left before the financial markets crash, the amount of “prepping” that people are going to be able to do will be fairly limited.
I am not just pointing to a single event. Once the financial markets crash this time, I believe that there is not going to be any sort of a “recovery” like we experienced after 2008. I believe that the long-term economic collapse that we have been experiencing will accelerate very greatly, and it will usher in a horrible period of time for the United States unlike anything that we have ever seen before.
So what do you think?
Could I be wrong?
Please feel free to share your thoughts by posting a comment below…
If a major financial crisis was approaching, we would expect to see the “smart money” getting out of stocks and pouring into government bonds that are traditionally considered to be “safe” during a crisis. This is called a “flight to safety” or a “flight to quality“. In the past, when there has been a “flight to quality” we have seen yields for German government bonds and U.S. government bonds go way down. As you will see below, this is exactly what we witnessed during the financial crisis of 2008. U.S. and German bond yields plummeted as money from the stock market was dumped into bonds at a staggering pace. Well, it is starting to happen again. In recent months we have seen U.S. and German bond yields begin to plummet as the “smart money” moves out of the stock market. So is this another sign that we are on the precipice of a significant financial panic?
Back in 2008, German bonds actually began to plunge well before U.S. bonds did. Does that mean that European money is “smarter” than U.S. money? That would certainly be a very interesting theory to explore. As you can see from the chart below, the yield on 10 year German bonds started to fall significantly during the summer of 2008 – several months before the stock market crash in the fall…
So what are German bonds doing today?
As you can see from this next chart, the yield on 10 year German bonds has been steadily falling since the beginning of last year. At this point, the yield on 10 year German bonds is just barely above zero…
And amazingly, most German bonds that have a maturity of less than 10 years actually have a negative yield right now. That means that investors are going to get back less money than they invest. This is how bizarre the financial markets have become. The “smart money” is so concerned about the “safety” of their investments that they are actually willing to accept negative yields. I don’t know why anyone would ever put their money into investments that have a negative yield, but it is actually happening. The following comes from Yahoo…
The world’s scarcest resource right now is safe yield, and the shortage is getting more extreme. Most German government bonds that mature in less than 10 years now have negative yields – part of some $2 trillion worth of paper with yields below zero.
This is what happens when the European Central Bank begins a trillion-euro bond-buying binge with rates already miniscule.
Yesterday, ECB boss Mario Draghi – unfazed by the protest stunt at his press conference – reaffirmed his plan to keep bidding for paper that yields more than -0.2% – that’s minus 0.2%.
Yes, the ECB is driving a lot of this, but it is still truly bizarre.
So what about the United States?
Well, first let’s take a look at what happened back in 2008. In the chart below, you can see the “flight to safety” that took place in late 2008 as investors started to panic…
And we have started to witness a similar thing happen in recent months. The yield on 10 year U.S. Treasuries has plummeted as investors have looked for safety. This is exactly the kind of chart that we would expect to see if a financial crisis was brewing…
What makes all of this far more compelling is the fact that so many other patterns that we have witnessed just prior to past financial crashes are happening once again.
Yes, there are other potential explanations for why bond yields have been going down. But when you add this to all of the other pieces of evidence that a new financial crisis is rapidly approaching, quite a compelling case emerges.
For those that do not follow my website regularly, I encourage you to check out the following articles to get an idea of what I am talking about…
-“Guess What Happened The Last Time The Price Of Oil Crashed Like This?…”
-“Not Just Oil: Guess What Happened The Last Time Commodity Prices Crashed Like This?…”
-“10 Key Events That Preceded The Last Financial Crisis That Are Happening Again RIGHT NOW”
-“Guess What Happened The Last Time The U.S. Dollar Skyrocketed In Value Like This?…”
-“7 Signs That A Stock Market Peak Is Happening Right Now”
-“Guess What Happened The Last Two Times The S&P 500 Was Up More Than 200% In Six Years?”
Of course no two financial crashes ever look exactly the same.
The crisis that we are moving toward is not going to be precisely like the crisis of 2008.
But there are similarities and patterns that we can look for. When things start to get bad, investors act in predictable ways. And so many of the things that we are watching right now are just what we would expect to see in the lead up to a major financial crisis.
Sadly, most people are not willing to learn from history. Even though it is glaringly apparent that we are in a historic financial bubble, most investors on Wall Street cannot see it because they do not want to see it. They want to believe that somehow “things are different this time” and that stocks will just continue to go up indefinitely so that they can keep making lots and lots of money.
And despite what you may think, I actually want this bubble to continue for as long as possible. Despite all of our problems, life is still relatively good in America today – at least compared to what is coming.
I like to refer to this next crisis as our “third strike”.
Back in 2000 and 2001, the dotcom bubble burst and we experienced a painful recession, but we didn’t learn any lessons. That was strike number one.
Then came the financial crash of 2008 and the worst economic downturn since the Great Depression. But we didn’t learn any lessons from that either. Instead, we just reinflated the same old financial bubbles and kept on making the exact same mistakes as before. That was strike number two.
This next financial crisis will be strike number three. After this next crisis, I don’t believe that there will ever be a return to “normal” for the United States. I believe that this is going to be the crisis that unleashes hell in our nation.
So no, I am not eager for that to come. Even though there is no way that this bubble of debt-fueled false prosperity can last indefinitely, I would like for it to last at least a little while longer.
Because what comes after it is going to be truly terrible.
The higher financial markets rise, the harder they fall. By any objective measurement, the stock market is currently well into bubble territory. Anyone should be able to see this – all you have to do is look at the charts. Sadly, most of us never seem to learn from history. Most of us want to believe that somehow “things are different this time”. Well, about the only thing that is different this time is that our economy is in far worse shape than it was just prior to the last major financial crisis. That means that we are more vulnerable and will almost certainly endure even more damage this time around. It would be one thing if stocks were soaring because the U.S. economy as a whole was doing extremely well. But we all know that isn’t true. Instead, what we have been experiencing is clearly artificial market behavior that has nothing to do with economic reality. In other words, we are dealing with an irrational financial bubble, and all irrational financial bubbles eventually burst. And as I wrote about yesterday, the way that stocks have moved so far this year is eerily reminiscent of the way that stocks moved in early 2008. The warning signs are there – if you are willing to look at them.
The first chart that I want to share with you today comes from Doug Short. It is a chart that shows that the ratio of corporate equities (stocks) to GDP is the second highest that it has been since 1950. The only other time it has been higher was just before the dotcom bubble burst…
Does that look like a bubble to you?
It sure looks like a bubble to me.
In order for the corporate equities to GDP ratio to get back to the mean (average) level, stock prices would have to fall nearly 50 percent.
If that happens, people will be calling it a crash, but in truth it would just be a return to normalcy.
This next chart comes from Phoenix Capital Research. The CAPE ratio (cyclically adjusted price-to-earnings ratio) is considered to be an extremely accurate measure of the true value of stocks…
As I’ve noted before, the single best predictor of stock market performance is the cyclically adjusted price-to-earnings ratio or CAPE ratio.
Corporate earnings are heavily influenced by the business cycle. Typically the US experiences a boom and bust once every ten years or so. As such, companies will naturally have higher P/E’s at some points and lower P/E’s at other. This is based solely on the business cycle and nothing else.
CAPE adjusts for this by measuring the price of stocks against the average of ten years’ worth of earnings, adjusted for inflation. By doing this, it presents you with a clearer, more objective picture of a company’s ability to produce cash in any economic environment.
Based on a study completed Vanguard, CAPE was the single best metric for measuring future stock returns.
When the CAPE ratio is too high, that means that stocks are overpriced and are not a good value. And right now the CAPE ratio is the 3rd highest that it has been since 1890. That only times it has been higher than this were in 1929 (we all remember what happened then) and just before the dotcom bubble burst…
The funny thing is that stocks have continued to rise even as corporate revenues have begun to fall.
According to Wolf Richter, in the first quarter of 2015 corporate revenues are projected to decline at the fastest pace that we have seen since the depths of the last recession…
Week after week, corporations and analysts have been whittling down their estimates. By now, revenues of the S&P 500 companies are expected to decline 2.8% in Q1 from a year ago – the worst year-over-year decline since Q3 of crisis year 2009.
This next chart I want to share with you shows how the Nasdaq has performed over the past decade. Looking at this chart alone, you would think that the U.S. economy must have been absolutely roaring since the end of the last recession. But what is really going on is rampant speculation. Some of the tech companies that make up the Nasdaq are not making any profits at all and yet they are supposedly worth billions of dollars. If you cannot see a bubble in this chart, you need to get your vision checked…
And this kind of irrational euphoria is not just happening in the United States.
For example, Chinese stocks are up nearly 80 percent over the past nine months.
Meanwhile, the overall Chinese economy is growing at the slowest pace that we have seen in about 20 years.
Right now, we are in the calm before the storm. We are right at the door of the next great financial crisis, and most of the people that work in the industry know this.
And once in a while they let the cat out of the bag.
For example, consider what Hans-Jörg Vetter, the CEO of Landesbank Baden-Württemberg in Germany, had to say during one recent press conference…
“Risk is no longer priced in,” he said. And these investors aren’t paid for the risks they’re taking. This applies to all asset classes, he said. The stock and the bond markets, he said, are now both seeing “the mother of all bubbles.”
This can’t go on forever. Or for very long. But he couldn’t see the future either and pin down a date, which is what everyone wants to know so that they can all get out in time. “I cannot tell you when it will rumble,” he said, “but eventually it will rumble again.”
By “again” he meant the sort of thing that had taken the bank down last time, the Financial Crisis. It had been triggered by horrendous risk-taking, where risks hadn’t been priced into all kinds of securities. When those securities – mortgage-backed securities, for example, that were hiding the inherent risks under a triple-A rating – blew up, banks toppled.
What Vetter is telling us is what I have been warning about for a long time.
Another great stock market crash is coming.
It is just a matter of time.
Are we watching a replay of the last financial crisis? Over the past six months, the price of oil has collapsed, the U.S. dollar has soared, and a whole bunch of other patterns that we witnessed just before the stock market crash of 2008 are repeating once again. But what we have not seen yet is the actual stock market crash. So will there be one this year? In this article, I am going to compare the performance of the Dow Jones Industrial Average during the first three months of 2008 to the performance of the Dow Jones Industrial Average during the first three months of 2015. As you will see, there are some striking similarities. And without a doubt, we are overdue for a major market downturn. The S&P 500 has risen for six years in a row, but it has never had seven up years consecutively. In addition, there has not even been a 10 percent stock market “correction” is almost three and a half years. So will stocks be able to continue to defy both gravity and the forces of economic reality? Only time will tell.
Below is a chart that shows how the Dow Jones Industrial Average performed during the first three months of 2008. It was a time of increased volatility, but the market pretty much went nowhere. This is typical of what we see in the months leading up to a market crash. The markets start getting really choppy with large ups and large downs…
This next chart shows how the Dow Jones Industrial Average has performed during the first three months of 2015. Once again, we are witnessing a time of increased volatility, but the market is not really going anywhere. In fact, after falling about 200 points on Tuesday (not shown on this chart) it is just barely below where it started the year…
When the market becomes quite restless but it doesn’t really move anywhere, that is a sign that we have reached a turning point. The following is what a recent CNN article had to say about the rising volatility that we have been witnessing…
The Dow fell nearly 3.7% in January, surged 5.6% in February and is down about 2% this month. The S&P 500 and Nasdaq have gone through similar sentiment swings. The Dow ended the quarter slightly in the red while the S&P 500 and Nasdaq were up a little bit.
Charles Schwab chief investment officer Liz Ann Sonders summed up this volatility the best — with a nod to U2. “Running to Stand Still: Wild Swings Taking Market Nowhere” is the title of her most recent market commentary.
What can investors expect for the rest of 2015? Probably a lot more of the same.
Now let’s look at a chart for the entire year of 2008. After peaking for the year in early May, the Dow started to slide. Things started to get really crazy in September, and by the end of the year the U.S. economy was plunged into the greatest crisis since the Great Depression…
Will the rest of 2015 follow a similar pattern?
A lot of investors are actually betting that this will be the case.
Right now, hundreds of millions of dollars are flowing into VXX – an ETF that makes money when the Chicago Board Options Exchange Volatility Index goes up. In other words, these investors are betting that we are going to see a lot more stock market volatility in the weeks and months to come.
And as I have said so many times before, stocks tend to rise in calm markets and they tend to fall when the markets become volatile.
So essentially these investors are betting that we are headed for a stock market crash.
The following is more on the massive inflow of money into VXX that we have been seeing from the Crux…
Ways to speculate on how noisy the stock market will be have exploded in the last decade with the advent of products tied to the Chicago Board Options Exchange Volatility Index. Strategies include relatively simple hedges against equity losses, such as owning a security that aims to mimic the VIX.
VXX, one of the most popular ways to bet on bigger market swings, has absorbed $715 million in seven consecutive weeks of inflows, its longest streak of inflows since one ending in July 2012. The infusion of fresh cash has continued this week, swelling its market value to $1.5 billion, the highest since September 2013.
At the same time, short-sellers in VXX — people effectively betting the bull market will persist — have dropped out. Short interest has slid 35 percent since October, falling to the lowest in more than seven months last week, data compiled by Markit Ltd. show.
And many of the exact same people that warned us about the financial crisis of 2008 in advance are warning that another crisis is rapidly approaching. For example, check out the following quote from Ann Pettifor that recently appeared in an article in the Guardian…
As Janet Yellen’s Federal Reserve prepares to raise interest rates, boosting the value of the dollar, while the plunging price of crude puts intense pressure on the finances of oil-exporting countries, there are growing fears of a new debt crisis in the making.
Ann Pettifor of Prime Economics, who foreshadowed the credit crunch in her 2003 book The Coming First World Debt Crisis, says: “We’re going to have another financial crisis. Brazil’s already in great trouble with the strength of the dollar; I dread to think what’s happening in South Africa; then there’s Malaysia. We’re back to where we were, and that for me is really frightening.”
Pettifor is right on two counts – another major financial crisis is approaching, and it is going to be global in scope.
Before I end this article, there are two more items that I would like to share with you.
Firstly, it is being reported that the IPO market has really cooled off in 2015. When the number of companies going public starts to decline, that is a clear sign that a stock market bubble is on borrowed time. The following comes from Business Insider…
The number of US companies going public has really dropped off lately.
“After a record year in 2014, the IPO market slowed dramatically in the first quarter of 2015,” Renaissance Capital analysts said.
The first quarter of 2015, which ended Tuesday, was the slowest quarter for IPOs since the first quarter of 2013. While stock prices have been near all-time highs, market volatility has been escalating, turning companies off from trying to unload shares onto the public markets.
Secondly, the San Francisco housing market has been a pretty reliable indicator of previous economic booms and busts. The San Francisco housing market started to cool off before the dotcom bubble burst, it started to cool off before the stock market crash of 2008, and now it is cooling off once again. The following chart comes from Zero Hedge…
The warning signs are there.
But as with so many other things in life, most people are going to end up believing precisely what they want to believe.
So what do you believe about what the rest of the year will bring? Please feel free to share your thoughts by posting a comment below…
When an economic crisis is coming, there are usually certain indicators that appear in advance. For example, commodity prices usually start to plunge before a recession begins. And as you can see from the Bloomberg Commodity Index which you can find right here, this has already been happening. In addition, I have previously written about how the U.S. dollar went on a great run just before the financial collapse of 2008. This is something that has also been happening over the past few months. Some people would have you believe that nobody can anticipate the next great economic downturn and that to try to do so is just an exercise in “guesswork”. But that is not the case at all. We can look back over history and see patterns that keep repeating. And a lot of the exact same patterns that happened just before previous stock market crashes are happening again right now.
For example, let’s talk about the price of oil. There are only two times in history when the price of oil has fallen by more than 50 dollars in a six month time period. One was just before the financial crisis in 2008, and the other has just happened…
As a result of crashing oil prices, we are witnessing oil rigs shut down in the United States at a blistering pace. In fact, almost half of all oil rigs in the U.S. have already shut down. The following commentary and chart come from Wolf Richter…
In the latest week, drillers idled another 41 oil rigs, according to Baker Hughes. Only 825 rigs were still active, down 48.7% from October. In the 23 weeks since, drillers have idled 784 oil rigs, the steepest, deepest cliff-dive in the history of the data:
We are looking at a full-blown fracking bust, and this bust is already having a dramatic impact on the economies of states that are heavily dependent on the energy industry.
For example, just check out the disturbing number that just came out of Texas…
The crash in oil prices is hammering the Texas economy.
The latest manufacturing outlook index from the Dallas Fed plunged again in March, to -17.4 from -11.2 in February, indicating deteriorating business conditions in the state.
But this pain is going to be felt far beyond Texas. In recent years, Wall Street banks have made a massive amount of money packaging up energy industry loans, bonds, etc. and selling them off to investors.
If that sounds similar to the kind of behavior that preceded the subprime mortgage meltdown, that is because it is.
Now those loans, bonds, etc. are going bad as the fracking bust intensifies, and whoever is left holding all of this worthless paper at the end of the day is going to lose an extraordinary amount of money. Here is more from Wolf Richter…
It suited Wall Street just fine: according to Dealogic, banks extracted $31 billion in fees from the US oil and gas industry and its investors over the past five years by handling IPOs, spin-offs, “leveraged-loan” transactions, the sale of bonds and junk bonds, and M&A.
That’s $6 billion in fees per year! Over the last four years, these banks made over $4 billion in fees on just “leveraged loans.” These loans to over-indebted, junk-rated companies soared from about $40 billion in 2009 to $210 billion in 2014 before it came to a screeching halt.
For Wall Street it doesn’t matter what happens to these junk bonds and leveraged loans after they’ve been moved on to mutual funds where they can decompose sight-unseen. And it doesn’t matter to Wall Street what happens to leverage loans after they’ve been repackaged into highly rated Collateralized Loan Obligations that are then sold to others.
At the same time, we are also witnessing a slowdown in global trade. This usually happens when economic conditions are about to turn sour, and that is why it is so alarming that the total volume of global trade in January was down 1.4 percent from December. According to Tyler Durden of Zero Hedge, that was the largest drop since 2011…
Presenting the latest data from the CPB Netherlands Bureau for Economic Policy Analysis, according to which in January world trade by volume dropped by a whopping 1.4% from December: the biggest drop since 2011!
We are seeing some troubling signs in the U.S. as well.
I shared the following chart in a previous article, but it bears repeating. It comes from Charles Hugh Smith, and it shows that new orders for consumer goods are falling at a rate not seen since the last recession…
Well, what about the stock market? It was up more than 200 points on Monday. Isn’t that good news?
Yes, but the euphoria on Wall Street will not last for long.
When corporate earnings per share either start flattening out or start to decline, that is a huge red flag. We saw this just prior to the stock market crash of 2008, and it is happening again right now. The following commentary and chart come from Phoenix Capital Research…
Take a look at the below chart showing current stock levels and changes in forward Earnings Per Share (EPS). Note, in particular how divergences between EPS and stocks tend to play out (hint look at 2007-2008).
We all know what came next.
And guess what?
According to CNBC, a lot of the “smart money” is pulling their money out of the stock market right now while the getting is good…
Recent market volatility has sent stock market investors rushing for the exits and into cash.
Outflows from equity-based funds in 2015 have reached their highest level since 2009, thanks to a seesaw market that has come under pressure from weak economic data, a stronger dollar and the the prospect of monetary tightening.
Funds that invest in stocks have seen $44 billion in outflows, or redemptions, year to date, according to Bank of America Merrill Lynch. Equity funds have seen outflows in five of the last six weeks, including $6.1 billion in just the last week.
It doesn’t matter if you are a millionaire “on paper” today.
What matters is if the money is going to be there when you really need it.
At the moment, a whole lot of people have been lulled into a false sense of complacency by the soaring stock market and by the bubble of false economic stability that we have been enjoying.
But under the surface, there is a whole lot of turmoil going on.
Those that are looking for the signs are going to see the next crisis approaching well in advance.
Those that are not are going to get absolutely blindsided by what is coming.
Don’t let that happen to you.
If you believe that ignorance is bliss, you might not want to read this article. I am going to dispel the notion that there has been any sort of “economic recovery”, and I am going to show that we are much worse off than we were just prior to the last economic crisis. If you go back to 2007, people were feeling really good about things. Houses were being flipped like crazy, the stock market was booming and unemployment was relatively low. But then the financial crisis of 2008 struck, and for a while it felt like the world was coming to an end. Of course it didn’t come to an end – it was just the first wave of our problems. The waves that come next are going to be the ones that really wipe us out. Unfortunately, because we have experienced a few years of relative stability, many Americans have become convinced that Barack Obama, Janet Yellen and the rest of the folks in Washington D.C. have fixed whatever problems caused the last crisis. Even though all of the numbers are screaming otherwise, there are millions upon millions of people out there that truly believe that everything is going to be okay somehow. We never seem to learn from the past, and when this next economic downturn strikes it is going to do an astonishing amount of damage because we are already in a significantly weakened state from the last one.
For each of the charts that I am about to share with you, I want you to focus on the last shaded gray bar on each chart which represents the last recession. As you will see, our economic problems are significantly worse than they were just before the financial crisis of 2008. That means that we are far less equipped to handle a major economic crisis than we were the last time.
#1 The National Debt
Just prior to the last recession, the U.S. national debt was a bit above 9 trillion dollars. Since that time, it has nearly doubled. So does that make us better off or worse off? The answer, of course, is obvious. And even though Barack Obama promises that “deficits are under control”, more than a trillion dollars was added to the national debt in fiscal year 2014. What we are doing to future generations by burdening them with so much debt is beyond criminal. And so what does Barack Obama want to do now? He wants to ramp up government spending and increase the debt even faster. This is something that I covered in my previous article entitled “Barack Obama Says That What America Really Needs Is Lots More Debt“.
#2 Total Debt
Over the past 40 years, the total amount of debt in the United States has skyrocketed to astronomical heights. We have become a “buy now, pay later” society with devastating consequences. Back in 1975, our total debt level was sitting at about 2.5 trillion dollars. Just prior to the last recession, it was sitting at about 50 trillion dollars, and today we are rapidly closing in on 60 trillion dollars.
#3 The Velocity Of Money
When an economy is healthy, money tends to change hands and circulate through the system quite rapidly. So it makes sense that the velocity of money fell dramatically during the last recession. But why has it kept going down since then?
#4 The Homeownership Rate
Were you aware that the rate of homeownership in the United States has fallen to a 20 year low? Traditionally, owning a home has been a sign that you belong to the middle class. And the last recession was really rough on the middle class, so it makes sense that the rate of homeownership declined during that time frame. But why has it continued to steadily decline ever since?
#5 The Employment Rate
Barack Obama loves to tell us how the unemployment rate is “going down”. But as I will explain later in this article, this decline is primarily based on accounting tricks. Posted below is a chart of the civilian employment-population ratio. Just prior to the last recession, approximately 63 percent of the working age population of the United States was employed. During the recession, this ratio fell to below 59 percent and it stayed there for several years. Just recently it has peeked back above 59 percent, but we are still very, very far from where we used to be, and now the next economic downturn is rapidly approaching.
#6 The Labor Force Participation Rate
So how can Obama get away with saying that the unemployment rate has gone down dramatically? Well, each month the government takes thousands upon thousands of long-term unemployed workers and decides that they have been unemployed for so long that they no longer qualify as “part of the labor force”. As a result, the “labor force participation rate” has fallen substantially since the end of the last recession…
#7 The Inactivity Rate For Men In Their Prime Working Years
If things are “getting better”, then why are so many men in their prime working years doing nothing at all? Just prior to the last recession, the inactivity rate for men in their prime working years was about 9 percent. Today it is just about 12 percent.
#8 Real Median Household Income
Not only is a smaller percentage of Americans employed today than compared to just prior to the last recession, the quality of our jobs has gone down as well. This is one of the factors which has resulted in a stunning decline of real median household income.
I have shared these next numbers before, but they bear repeating. In America today, most Americans do not make enough to support a middle class lifestyle on a single salary. The following figures come directly from the Social Security Administration…
-39 percent of American workers make less than $20,000 a year.
-52 percent of American workers make less than $30,000 a year.
-63 percent of American workers make less than $40,000 a year.
-72 percent of American workers make less than $50,000 a year.
We all know people that are working part-time jobs because that is all that they can find in this economy. As the quality of our jobs continues to deteriorate, the numbers above are going to become even more dismal.
Even as our incomes have stagnated, the cost of living just continues to rise steadily. For example, the cost of food and beverages has gone up nearly 50 percent just since the year 2000.
#10 Government Dependence
As the middle class shrinks and the number of Americans that cannot independently take care of themselves soars, dependence on the government is reaching unprecedented heights. For instance, the federal government is now spending about twice as much on food stamps as it was just prior to the last recession. How in the world can anyone dare to call this an “economic recovery”?
So you tell me – are things “getting better” or are they getting worse?
To me, it is crystal clear that we are in much worse condition than we were just prior to the last economic crisis.
And now things are setting up in textbook fashion for the next great economic crisis. Unfortunately, most Americans are totally clueless about what is going on and the vast majority are completely and totally unprepared for what is coming.
Or could it be possible that I am wrong? Whether you agree or disagree with me, please feel free to add to the discussion by posting a comment below…
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…