The post-election stock market rally is officially over. After hovering near record highs for the past couple of weeks, U.S. stocks had their worst day in six months on Tuesday. For quite some time it has been clear that the momentum of the post-election rally had been exhausted, and a pullback of this nature was widely anticipated. But even though stocks fell by more than 1 percent during a single trading session for the first time since last September, it is going to take a whole lot more than that to bring stock prices back into balance. In fact, stocks are so overvalued at this point that it would take a total decline of about 40 to 50 percent before key stock valuation measures return to their long-term averages.
So we are still in a giant stock market bubble. All Tuesday did was shave about one percent off of that bubble.
Let’s review some of the numbers from the carnage that we witnessed…
-The Dow was down 237.85 points (1.14 percent)
-The S&P 500 was down 1.2 percent on the day
-The Nasdaq was down 1.8 percent at the closing bell
-Financial stocks were down more than 2.5 percent
-Overall, it was the worst day for banking stocks since the Brexit vote
-Bank of America is now down more than 10 percent since Trump’s speech to Congress
-The Russell 2000 (small-cap stocks) dropped about 2 percent
Some prominent names on Wall Street were warning ahead of time that this was coming. Marko Kolanovic was one of those voices…
Marko Kolanovic has done it again.
Last Thursday, one day ahead of the massive quad-witching where over $1.4 trillion in options expired in relatively tame fashion, the JPM quant warned of “near-term market weakness” and suggested “reducing US equity exposure. And, sure enough, JP Merlin’s Gandalf timed it impeccably yet again. To be sure, the jury is still out on what caused the selloff – lack of votes to repeal Obamacare, fears about Trump’s fiscal policy agenda, the market’s sudden realization that it is at 30 CAPE, or just a technical revulsion – what matters is that once again, like clockwork, Kolanovic called a key inflection point just days in advance.
Of course the mainstream media is telling everyone not to worry. They are insisting that this is just a temporary blip and that a market “correction” is highly unlikely. The following comes from CNN…
Few experts are predicting a correction — which is a 10% pullback from a market high. Even fewer see a bear market, a 20% drop or more, on the horizon.
Hopefully CNN is correct.
But it should be noted that experts such as Kolanovic are warning that more panic selling may be coming in the days ahead…
Furthermore, the modest but rising uptick in realized volatility is starting to cause outflows from volatility-sensitive investors the JPM quant calculated and, as a result, the break in short-term momentum may cause modest equity selling by trend following strategies.
In other words, in the absence of a positive catalyst over the next few days – and with uncertainty ahead of the Thursday Trumpcare vote only growing by the hour we fail to see one emerging – the double whammy of gamma positioning and the CTA momentum “flip” will be the catalyst for the next, extremely overdue, move lower.
It is going to take quite a few more days like today before we can talk about the kind of “financial crisis” that I have been warning about for a long time, but we may have already reached a key turning point.
So much of the post-election stock market rally was based purely on hope, and meanwhile the underlying economic numbers have continued to deteriorate. Corporate earnings are down, it is being projected that U.S. GDP growth will be about one percent during the first quarter, and used vehicle prices are dropping for the first time since the last recession…
In its March report, the National Association of Auto Dealers (NADA) reported an anomaly: dropping used vehicle prices in February, which occurred only for the second time in the past 20 years. It was a big one: Its Used Car Guide’s seasonally adjusted used vehicle price index plunged 3.8% from January, “by far the worst recorded for any month since November 2008 as the result of a recession-related 5.6% tumble.”
The index has now dropped eight months in a row and hit the lowest level since September 2010. The index is down 8% year over year, and down 13% from its peak in 2014.
When the Federal Reserve raised rates, that was very bad news for stocks, and if Donald Trump cannot get his Obamacare replacement through Congress that will be more bad news for stocks.
But even if there was no bad news, it is inevitable that stock prices would decline at some point anyway.
It is simply not rational to have price-earnings ratios up around 30. The only other times when price-earnings ratios have become so bloated were right before the stock market crash of 1929, right before the stock market crash of 2000 and right before the stock market crash of 2008.
Whenever it ultimately happens, the truth is that stocks always eventually return to their historical averages. And if a “black swan event” or two are thrown in, that could push stocks well below their historical averages.
Never before has there been this much debt in the world, and not even in 2008 were global financial markets so primed for a crash.
Many people get caught up in trying to predict what month or what day the markets will crash, and if you could predict that accurately you could make a lot of money.
But that is not the point.
What everyone should be able to agree on is that this temporary stock market bubble that has been fueled by reckless intervention from the Federal Reserve is not sustainable and that it is inevitable that stock prices will be a lot lower in the future than they are right now.
We should be thankful that this bubble has lasted much longer than it should have, because what is going to come after this bubble bursts is going to be absolutely horrible.
Markets tend to go down a lot faster than they go up, and when the coming crash finally occurs it is going to make 2008 look like a Sunday picnic.
So whatever you need to do financially, you should think about doing it soon, because the alarm bells on Wall Street are starting to ring.
Has the Federal Reserve gone completely insane? On Wednesday, the Fed raised interest rates for the second time in three months, and it signaled that more rate hikes are coming in the months ahead. When the Federal Reserve lowers interest rates, it becomes less expensive to borrow money and that tends to stimulate more economic activity. But when the Federal Reserve raises rates , that makes it more expensive to borrow money and that tends to slow down economic activity. So why in the world is the Fed raising rates when the U.S. economy is already showing signs of slowing down dramatically? The following are 12 reasons why the Federal Reserve may have just made the biggest economic mistake since the last financial crisis…
#1 Just hours before the Fed announced this rate hike, the Federal Reserve Bank of Atlanta’s projection for U.S. GDP growth in the first quarter fell to just 0.9 percent. If that projection turns out to be accurate, this will be the weakest quarter of economic growth during which rates were hiked in 37 years.
#2 The flow of credit is more critical to our economy than ever before, and higher rates will mean higher interest payments on adjustable rate mortgages, auto loans and credit card debt. Needless to say, this is going to slow the economy down substantially…
The Federal Reserve decision Wednesday to lift its benchmark short-term interest rate by a quarter percentage point is likely to have a domino effect across the economy as it gradually pushes up rates for everything from mortgages and credit card rates to small business loans.
Consumers with credit card debt, adjustable-rate mortgages and home equity lines of credit are the most likely to be affected by a rate hike, says Greg McBride, chief analyst at Bankrate.com. He says it’s the cumulative effect that’s important, especially since the Fed already raised rates in December 2015 and December 2016.
#3 Speaking of auto loans, the number of people that are defaulting on them had already been rising even before this rate hike by the Fed…
The number of Americans who have stopped paying their car loans appears to be increasing — a development that has the potential to send ripple effects through the US economy.
Losses on subprime auto loans have spiked in the last few months, according to Steven Ricchiuto, Mizuho’s chief US economist. They jumped to 9.1% in January, up from 7.9% in January 2016.
“Recoveries on subprime auto loans also fell to just 34.8%, the worst performance in over seven years,” he said in a note.
#4 Higher rates will likely accelerate the ongoing “retail apocalypse“, and we just recently learned that department store sales are crashing “by the most on record“.
#5 We also recently learned that the number of “distressed retailers” in the United States is now at the highest level that we have seen since the last recession.
#6 We have just been through “the worst financial recovery in 65 years“, and now the Fed’s actions threaten to plunge us into a brand new crisis.
#7 U.S. consumers certainly aren’t thriving, and so an economic slowdown will hit many of them extremely hard. In fact, about half of all Americans could not even write a $500 check for an unexpected emergency expense if they had to do so right now.
#8 The bond market is already crashing. Most casual observers only watch stocks, but the truth is that a bond crash almost always comes before a stock market crash. Bonds have been falling like a rock since Donald Trump’s election victory, and we are not too far away from a full-blown crisis. If you follow my work on a regular basis you know this is a hot button issue for me, and if bonds continue to plummet I will be writing quite a bit about this in the weeks ahead.
#9 On top of everything else, we could soon be facing a new debt ceiling crisis. The suspension of the debt ceiling has ended, and Donald Trump could have a very hard time finding the votes that he needs to raise it. The following comes from Bloomberg…
In particular, the markets seem to be ignoring two vital numbers, which together could have profound consequences for global markets: 218 and $189 billion. In order to raise or suspend the debt ceiling (which will technically be reinstated on March 16), 218 votes are needed in the House of Representatives. The Treasury’s cash balance will need to last until this happens, or the U.S. will default.
The opening cash balance this month was $189 billion, and Treasury is burning an average of $2 billion per day – with the ability to issue new debt. Net redemptions of existing debt not held by the government are running north of $100 billion a month. Treasury Secretary Steven Mnuchin has acknowledged the coming deadline, encouraging Congress last week to raise the limit immediately.
If something is not done soon, the federal government could be out of cash around the beginning of the summer, and this could create a political crisis of unprecedented proportions.
#10 And even if the debt ceiling is raised, that does not mean that everything is okay. It is being reported that U.S. government revenues just experienced their largest decline since the last financial crisis.
#11 What do corporate insiders know that the rest of us do not? Stock purchases by corporate insiders are at the lowest level that we have seen in three decades…
It’s usually a good sign when the CEO of a major company is buying shares; s/he is an insider and knows what’s going on, so their confidence is a positive sign.
Well, according to public data filed with the Securities and Exchange Commission, insider buying is at its LOWEST level in THREE DECADES.
In other words, the people at the top of the corporate food chain who have privileged information about their businesses are NOT buying.
#12 A survey that was just released found that corporate executives are extremely concerned that Donald Trump’s policies could trigger a trade war…
As business leaders are nearly split over the effectiveness of Washington’s new leadership, they are in unison when it comes to fears over trade and immigration. Nearly all CFOs surveyed are concerned that the Trump administration’s policies could trigger a trade war between the United States and China.
A decline in global trade could deepen the economic downturns that are already going on all over the planet. For example, Brazil is already experiencing “its longest and deepest recession in recorded history“, and right next door people are literally starving in Venezuela.
After everything that you just read, would you say that the economy is “doing well”?
Of course not.
But after raising rates on Wednesday, that is precisely what Federal Reserve Chair Janet Yellen told the press…
“The simple message is — the economy is doing well.” Federal Reserve Chair Janet Yellen said at a news conference. “The unemployment rate has moved way down and many more people are feeling more optimistic about their labor prospects.”
However, after she was challenged with some hard economic data by a reporter, Yellen seemed to change her tune somewhat…
Well, look, our policy is not set in stone. It is data- dependent and we’re — we’re not locked into any particular policy path. Our — you know, as you said, the data have not notably strengthened. I — there’s noise always in the data from quarter to quarter. But we haven’t changed our view of the outlook. We think we’re on the same path, not — we haven’t boosted the outlook, projected faster growth. We think we’re moving along the same course we’ve been on, but it is one that involves gradual tightening in the labor market.
Just like in 2008, the Federal Reserve really doesn’t understand the economic environment. At that time, Federal Reserve Chair Ben Bernanke assured everyone that there was not going to be a recession, but when he made that statement a recession was actually already underway.
And as I have said before, I wouldn’t be surprised in the least if it is ultimately announced that GDP growth for the first quarter of 2017 was negative.
Whether it happens now or a bit later, the truth is that the U.S. economy is heading for a new recession, and the Federal Reserve has just given us a major shove in that direction.
Is the Fed really so clueless about the true state of the economy, or could it be possible that they are raising rates just to hurt Donald Trump?
I don’t know the answer to that question, but clearly something very strange is going on…
Most Americans do not understand this, but the truth is that the Federal Reserve has far more power over the U.S. economy than anyone else does, and that includes Donald Trump. Politicians tend to get the credit or the blame for how the economy is performing, but in reality it is an unelected, unaccountable panel of central bankers that is running the show, and until something is done about the Fed our long-term economic problems will never be fixed. For an extended analysis of this point, please see this article. In this piece, I am going to explain why the Federal Reserve is currently setting the stage for a recession, a new housing crisis and a stock market crash, and if those things happen unfortunately it will be Donald Trump that will primarily get the blame.
On Wednesday, the Federal Reserve is expected to hike interest rates, and there is even the possibility that they will call for an acceleration of future rate hikes…
Economists generally believe the central bank’s median estimate will continue to call for three quarter-point rate increases both this year and in 2018. But there’s some risk that gets pushed to four as inflation nears the Fed’s annual 2% target and business confidence keeps juicing markets in anticipation of President Trump’s plan to cut taxes and regulations.
During the Obama years, the Federal Reserve pushed interest rates all the way to the floor, and this artificially boosted the economy. In a recent article, Gail Tverberg explained how this works…
With falling interest rates, monthly payments can be lower, even if prices of homes and cars rise. Thus, more people can afford homes and cars, and factories are less expensive to build. The whole economy is boosted by increased “demand” (really increased affordability) for high-priced goods, thanks to the lower monthly payments.
Asset prices, such as home prices and farm prices, can rise because the reduced interest rate for debt makes them more affordable to more buyers. Assets that people already own tend to inflate, making them feel richer. In fact, owners of assets such as homes can borrow part of the increased equity, giving them more spendable income for other things. This is part of what happened leading up to the financial crash of 2008.
But the opposite is also true.
When interest rates rise, borrowing money becomes more expensive and economic activity slows down.
For the Federal Reserve to raise interest rates right now is absolutely insane. According to the Federal Reserve Bank of Atlanta’s most recent projection, GDP growth for the first quarter of 2017 is supposed to be an anemic 1.2 percent. Personally, it wouldn’t surprise me at all if we actually ended up with a negative number for the first quarter.
As Donald Trump has explained in detail, the U.S. economy is a complete mess right now, and we are teetering on the brink of a new recession.
So why in the world would the Fed raise rates unless they wanted to hurt Donald Trump?
Raising rates also threatens to bring on a new housing crisis. Interest rates were raised prior to the subprime mortgage meltdown in 2007 and 2008, and now we could see history repeat itself. When rates go higher, it becomes significantly more difficult for families to afford mortgage payments…
The rate on a 30-year fixed mortgage reached its all-time low in November 2012, at just 3.31%. As of this week, it was 4.21%, and by the end of 2018, it could go as high as 5.5%, forecasts Matthew Pointon, a property economist for Capital Economics.
He points out that for a homeowner with a $250,000 mortgage fixed at 3.8%, annual payments are $14,000. If that homeowner moved to a similarly-priced home but had a 5.5% rate, their annual payments would rise by $3,000 a year, to $17,000.
Of course stock investors do not like rising rates at all either. Stocks tend to rise in low rate environments such as we have had for the past several years, and they tend to fall in high rate environments.
And according to CNBC, a “coming stock market correction” could be just around the corner…
Investors are in for a rude awakening about a coming stock market correction — most just don’t know it yet. No one knows when the crash will come or what will cause it — and no one can. But what’s worse for most investors is they have no clue how much they stand to lose when it inevitably happens.
“If you look at the market historically, we have had, on average, a crash about every eight to 10 years, and essentially the average loss is about 42 percent,” said Kendrick Wakeman, CEO of financial technology and investment analytics firm FinMason.
If stocks start to fall, how low could they ultimately go?
One technical analyst that has a stunning record of predicting short-term stock market declines in recent years is saying that the Dow could potentially drop “by more than 6,000 points to 14,800”…
But if the technical stars collide, as one chartist predicts, the blue-chip gauge could soon plunge by more than 6,000 points to 14,800. That’s nearly 30% lower, based on Friday’s close.
Sandy Jadeja, chief market strategist at Master Trading Strategies, claims several predicted stock market crashes to his name — all of them called days, or even weeks, in advance. (He told CNBC viewers, for example, that the August 2015 “Flash Crash” was coming 18 days before it hit.) He’s also made prescient calls on gold and crude oil.
And he’s extremely concerned about what this year could bring for investors. “The timeline is rapidly approaching” for the next potential Dow meltdown, said Jadeja, who shares his techniques via workshops and seminars.
Most big stock market crashes tend to happen in the fall, and that is what I portray in my novel, but the truth is that they can literally happen at any time. If you have not seen my recent rant about how ridiculously overvalued stocks are at this moment in history, you can find it right here. Whether you want to call it a “crash”, a “correction”, or something else, the truth is that a major downturn is coming for stocks and the only question is when it will strike.
And when things start to get bad, most of the blame will be dumped on Trump, but it won’t primarily be his fault.
It was the Federal Reserve that created this massive financial bubble, and they will also be responsible for popping it. Hopefully we can get the American people to understand how these things really work so that accountability for what is coming can be placed where it belongs.
Current stock market valuations are not sustainable. If there is one thing that I want you to remember from this article, it is that cold, hard fact. In 1929, 2000 and 2008, stock prices soared to absolutely absurd levels just before horrible stock market crashes. What goes up must eventually come down, and the stock market bubble of today will be no exception. In fact, virtually everyone in the financial community acknowledges that stock prices are irrationally high right now. Some are suggesting that there is still time to jump in and make money before the crash comes, while others are recommending a much more cautious approach. But what almost everyone agrees on is the fact that stocks cannot go up like this forever.
On Tuesday, the Dow, the S&P 500 and the Nasdaq all set brand new record highs once again. Overall, U.S. stocks are now up more than 10 percent since the election, and this is probably the greatest post-election stock market rally in our entire history.
But stocks were already tremendously overvalued before the election, and at this point stock prices have reached a level of ridiculousness only matched a couple of times before in the past 100 years.
Only the most extreme optimists will try to tell you that stock prices can stay this disconnected from economic reality indefinitely. We are in the midst of one of the most outrageous stock market bubbles of all time, and as MarketWatch has noted, all stock market bubbles eventually burst…
The U.S. stock market at this level reflects a combination of great demand, great complacency, and great greed. Stocks are clearly in a bubble, and like all bubbles, this one is about to burst.
If corporations were making tremendous amounts of money, rapidly rising stock prices would make logical sense.
But that is not the case at all. Corporate earnings for the fourth quarter of 2016 were actually quite dismal, and this disconnect between Wall Street and economic reality is starting to really bug financial analysts such as Brian Sozzi…
The S&P 500 has gone 89 straight sessions without a 1% decline. Considering that Corporate America didn’t exactly light up on the top and bottom lines during the fourth quarter, such a streak is rather troublesome. Granted, the stock market is a forward-looking mechanism that appears to be trading on hopes that Trump’s unannounced stimulus and tax plans will be lifting economic growth in 2018. Even so, the inability of investors to at least acknowledge persistent struggles among companies and ongoing chaos in Washington is starting to become disturbing.
It is a basic fact of economics that stock prices should accurately reflect current and future earnings.
So if corporate earnings are at the same level they were at in 2011, why has the S&P 500 risen by 87 percent since then? The following comes from Wolf Richter…
The S&P 500 stock index edged up to an all-time high of 2,351 on Friday. Total market capitalization of the companies in the index exceeds $20 trillion. That’s 106% of US GDP, for just 500 companies! At the end of 2011, the S&P 500 index was at 1,257. Over the five-plus years since then, it has ballooned by 87%!
These are superlative numbers, and you’d expect superlative earnings performance from these companies. Turns out, reality is not that cooperative. Instead, net income of the S&P 500 companies is now back where it first had been at the end of 2011.
The cyclically adjusted price-to-earnings ratio was originally created by author Robert Shiller, and it is widely regarded as one of the best measures of the true value of stocks in existence. According to the Guardian, there have only been two times in our entire history when this ratio has been higher. One was just before the stock market crash of 1929, and the other was just before the bursting of the dotcom bubble…
Traditionally, one of the best yardsticks for whether shares are over-valued or under-valued has been the cyclically adjusted price earnings ratio constructed by the economist Robert Shiller. This ratio is currently at about 29 and has only twice been higher: in 1929 ahead of the Wall Street Crash, and in the last frantic months of the dotcom bubble of the late 1990s.
We can definitely wish for the current euphoria on Wall Street to last for as long as possible, but let there be absolutely no doubt that it is going to end at some point.
It would take a market decline of 40 or 50 percent to get the cyclically adjusted price-to-earnings ratio back to a level that makes economic sense. Let us hope that the market does not make such a violent move very rapidly, because that would likely be absolutely crippling for our financial system.
Markets tend to go down a lot faster than they go up, and every other major stock market bubble in U.S. history has ended very badly.
And this bubble is definitely overdue to burst. The bull market that led up to the great crash of 1929 lasted for 2002 days, and this week the current bull market will finally exceed that record.
Trying to pick a specific date for a market crash is typically a fruitless exercise, but market watchers are becoming very concerned about some of the signs that we are now seeing. For example, the “CCT indicator” is currently showing “the lowest bullish energy ever”…
The first factor is the CCT indicator. This indicator is a proprietary internal measurement of the general volume of the New York Stock Exchange. The measurements take into account the institutional participation as a ratio of the overall volume. Also measured is the duration of heavy block buying in rallies.
The sum total of all the measurements now shows the lowest bullish energy ever — even lower than in 2008, just before the market crash.
In other words, this current bull market appears to be completely and utterly exhausted.
The laws of economics cannot be defied forever. Traditionally, commodity prices and stock prices have tended to move in unison. And this makes perfect sense, because commodity prices tend to rise when economic conditions are good, and in such an environment stock prices are typically going to move up.
But now we are in a time when commodity prices and stock prices have become completely disconnected. In order to bring this ratio back into line, the S&P 500 would need to fall by about 1000 points, and such a decline would cause a level of financial chaos that would be absolutely unprecedented.
This current stock market bubble has lasted much longer than many of the experts originally anticipated, but that just means that the eventual crash will likely be that much more devastating.
In the end, you don’t need to know all of the technical details in this article.
But what you do need to know is that current stock market valuations are not sustainable and that a great crash is coming.
It may not happen next week or next month, but it is going to happen. And when it does happen, it is likely to make what happened in 2008 look like a Sunday picnic.
A new recession is coming, and Donald Trump needs it to begin sooner rather than later. As I explained last week, most American voters tend to care about their pocketbooks more than anything else. If the next recession were to officially start during the first quarter of 2017, it would be very easy for Trump to blame it on Obama, and then he could portray himself as the one that pulled the U.S. economy out of recession in time for the 2020 election. But if the next recession does not begin until 2018 or 2019, everybody is going to blame it on Trump even if it is not his fault. In politics, who gets the blame for whatever goes wrong is often the most important thing, and if Trump wants to avoid blame for the next recession he needs for it to start as quickly as possible.
For most of 2016, the mainstream media was warning that a new recession was probably coming no matter who won the election. For one example, just check out this Bloomberg article.
And for once, the mainstream media was precisely correct. Barack Obama left us with an enormous economic mess, and it would take an economic miracle of unprecedented proportions to keep the U.S. economy from going into a recession at this point.
During the Obama years, the U.S. went on a debt binge unlike anything we have ever seen before.
The U.S. national debt almost doubled. During Obama’s time in the White House, it increased from 10.6 trillion dollars to nearly 20 trillion dollars, and that means that over 9 trillion dollars of future consumption was brought into the present. That incredible boost to spending would have shot U.S. economic growth into the stratosphere during normal times, but because we were struggling so much all we got out of it was eight years of economic stagnation.
In fact, Barack Obama was the only president in modern American history never to have a single year when the U.S. economy grew by at least 3 percent, and he had two terms to try to accomplish that goal.
And remember, Obama also had the benefit of doctored economic numbers. John Williams of shadowstats.com tracks what the figures would look like if honest numbers were being used, and according to his calculations the U.S. economy has actually continually been in a recession since 2005.
In addition to government debt, other forms of debt are way out of control as well. The total amount of consumer debt in the United States has now hit 12 trillion dollars, and corporate debt has approximately doubled since the last recession.
When levels of debt grow much, much faster than the overall economy, it is inevitable that a crash will come.
If you look back throughout history, I don’t know if you can find a single example where debt has grown this quickly and a crash has not happened afterwards.
By some miracle if we are able to avoid a major economic downturn this time, we will literally be defying the laws of economics.
The employment crisis also threatens to get a lot worse in the months ahead. The mainstream media keeps trying to tell us that we are almost at “full employment”, but the truth is that more than 100 million Americans do not have a job right now.
Yes, there are a few areas of the country where jobs appear to be plentiful, but there are many more areas where they are not.
For example, you will never, ever be able to convince 23-year-old Tyler Moore that the job market is good…
Tyler Moore’s late-December drive to Louisville, Ky., was one of desperation. He was headed four hours west on Interstate 64 to interview for a job. Even if he landed the position, filling his gas tank had left him with $8 to his name. He would have to sleep at a friend’s place until he could earn enough to pay rent.
The 23-year-old had run out of options. He’d applied for dozens of jobs within an hour and a half of his hometown of Lovely, once a coal-mining stronghold. Instead of opportunities, he had found waiting lists.
“Minimum-wage jobs, fast-food restaurants, Wal-Mart, anything like that, a lot of them has already been took,” he says in an Appalachian drawl, explaining that the backlog just to interview was as long as a year. “There are no jobs.”
If the U.S. economy is in “good shape”, then why can’t people like Moore find a job?
Yes, there is a tremendous amount of optimism in the financial markets right now and the stock market has been soaring.
But the exact same things were true in 2007, and we remember how that turned out.
There is no possible way that the S&P 500 can continue to generate an 18% annual return without corresponding economic growth. The following comes from David Stockman…
Altogether the S&P 500 now stands at 3.4X its post-crisis low, having generated an 18% annual return (including dividends) for nearly eight years running.
To be sure, in an honest free market that very fact would be a flashing red light, warning that exceptionally high gains over an extended period necessitate a regression to the mean in the period ahead.
A lot of people get caught up in trying to predict exactly when the stock market will crash, but what everybody should be able to agree on is that it will crash.
There is no possible way that stocks can stay at such ridiculously overpriced levels indefinitely.
Throughout history, stocks have always moved back in the direction of the long-term averages, and this time will be no exception.
And just like last time, the beginning of a new recession will likely be accompanied by a major financial correction.
In recent articles, I have been highlighting some of the reasons why it appears that a new recession is imminent…
-Federal tax receipts have gone negative for the first time since the last recession.
-Job growth at S&P 500 companies has gone negative for the very first time since the last recession.
-The U.S. trade deficit in 2016 was the largest in four years.
-Lending standards have tightened up for medium and large sized firms for six quarters in a row.
-Lending standard are also tightening up for consumers.
-We just saw the largest percentage decline in average weekly hours since the recession of 2008.
-Gross private domestic investment is down.
-Consumer bankruptcies are rising.
-Commercial bankruptcies are rising.
All of this is not necessarily bad news for Trump.
A horrible recession started during the early years of Ronald Reagan’s presidency, but the U.S. economy turned around later in his first term and that momentum helped propel him to an easy victory in 1984.
Similarly, Trump could actually take advantage of the coming economic downturn as long as he is able to pin all of the blame for it on the previous administration.
If there is one thing that is true about U.S. voters, it is the fact that they tend to care about their own economic well-being more than anything else.
If you doubt this, just check out the results of a recent Fox News poll…
The latest Fox News Poll also asks, what defines the American Dream today? At the top, according to the national survey released Wednesday, is “retiring comfortably.” Some 88 percent feel that is extremely or very important to realizing the dream.
Next, 76 percent say “having a successful career” is important. That’s followed by “raising a family” (74 percent) and “making a valuable contribution” to their community (74 percent).
“Owning a home” is seen as a big part of achieving the dream for nearly 7 in 10 (69 percent). About 6 in 10 say “graduating college” (61 percent) and “being better off” than their parents (57 percent).
To most Americans, being “successful in life” comes down to how much money they have.
That should not be true, but it is.
And this is ultimately what Trump will be judged on.
If the economy is improving by 2020, voters will tend to evaluate him favorably. But if the economy is faltering during the next election season, it will be more difficult for him to get a second term.
So what Trump and all those that support Trump should want is for the coming recession to begin and end as quickly as possible.
However, there is also the possibility that the next recession may be a particularly bad one. Because we are in the midst of the biggest debt bubble in human history, any major downturn could ultimately spiral completely out of control. In other words, we may be facing the kind of crisis from which we never quite recover.
One expert that is warning about such a scenario is legendary investor Jim Rogers…
…get prepared because we’re going to have the worst economic problems we’ve had in your lifetime or my lifetime and when that happens a lot of people are going to disappear.
In 2008 Bear Stearns disappeared, Bear Stearns had been around over 90 years. Lehman Brothers disappeared. Lehman Brothers had been around over 150 years. A long, long time, a long glorious history they’ve been through wars, depression, civil war they’ve been through everything and yet they disappear.
So the next time around it’s going to be worse than anything we’ve seen and a lot of institutions, people, companies even countries, certainly governments and maybe even countries are going to disappear. I hope you get very worried.
when you start having bear markets as you I’m sure well know one bad thing happens and another bad thing happens and these things snowball just like in bull markets good news comes out then more good news comes out the next thing you know you’re five or six or seven years into a bull market.
Well bear markets do the same thing and so we have a lot of bad news on the horizon. I haven’t even gotten to war. I haven’t even gotten to trade war or anything like that but you know things do go wrong.
If it is as bad as Rogers is suggesting, it wouldn’t be too long before conditions in America would begin to resemble those portrayed in my novel.
Let’s hope that does not turn out to be the case.
Let’s hope that the next recession begins and ends as quickly as possible and that the U.S. economy is on a solid upswing by 2020.
And if you are a Trump supporter, don’t be too dismayed if the U.S. economy takes a major downturn in 2017. As I discussed above, it could actually be just the thing that Trump needs to set the stage for another election victory in 2020.
Will the financial bubble that has been rapidly growing ever since Donald Trump won the election suddenly be popped once he takes office? Could it be possible that we are being set up for a horrible financial crash that he will ultimately be blamed for? Yesterday, I shared my thoughts on the incredible euphoria that we have seen since Donald Trump’s surprise victory on November 8th. The U.S. dollar has been surging, companies are announcing that they are bringing jobs back to the U.S., and we are witnessing perhaps the greatest post-election stock market rally in Wall Street history. In fact, the Dow, the Nasdaq and the S&P 500 all set new all-time record highs again on Thursday. What we are seeing is absolutely unprecedented, and many believe that the good times will continue to roll as we head into 2017.
What has been most surprising to me is how well the stocks of the big Wall Street banks have been doing. It is no secret that those banks poured a tremendous amount of money into Hillary Clinton’s campaign, and Donald Trump had some tough things to say about them leading up to election day.
So you wouldn’t think that it would be particularly good news for those banks that Trump won the election. However, we seem to be living in “Bizarro World” at the moment, and in so many ways things are happening exactly the opposite of what we would expect. Since Trump’s victory, all of the big banking stocks have been skyrocketing…
Financial stocks in particular have been on fire. Citigroup (C) and JPMorgan Chase (JPM) are up about 20% since Donald Trump defeated Hillary Clinton — and that makes them laggards!
Morgan Stanley (MS) has gained more than 25%. So has troubled Wells Fargo (WFC), despite the lingering fallout from its fake account scandal. Bank of America (BAC) is up more than 30%.
And so is Goldman Sachs (GS) — the former employer of both Treasury Secretary nominee Steven Mnuchin and Trump chief strategist Steve Bannon.
But are these stock prices justified by the fundamentals?
Of course not, but during times of euphoria the fundamentals never seem to matter much. Stocks were incredibly overvalued before the election, and now they are ridiculously overvalued.
Earlier today, a CNBC article pointed out that the cyclically-adjusted price to earnings ratio has only been higher than it is today at three points in our history…
“The cyclically adjusted P/E (CAPE), a valuation measure created by economist Robert Shiller now stands over 27 and has been exceeded only in the 1929 mania, the 2000 tech mania and the 2007 housing and stock bubble,” Alan Newman wrote in his Stock Market Crosscurrents letter at the end of November.
Newman said even if the market’s earnings increase by 10 percent under Trump’s policies “we’re still dealing with the same picture, overvaluation on a very grand scale.”
And of course a historic stock market crash immediately followed each of those three bubbles.
So are we being set up for a huge crash in early 2017?
There are some out there that believe that this is purposely being orchestrated. For example, Mike Adams of Natural News believes that the markets “will be deliberately and destructively imploded under President Trump”…
Right now, the U.S. stock market is surging, with the Dow leaping toward 20,000, a number rooted in fiscal insanity and delusional expectations. There are no fundamentals that support a 20,000 Dow, but fundamentals have long since ceased to matter in a financial world hyperventilating on debt fumes while hallucinating about utopian economic models that will soon prove to generate fools instead of real wealth.
Today I’m going on the record with a prediction that I’ll offer with near absolute certainty: The rigged markets that now seem to defy gravity will be deliberately and destructively imploded under President Trump for all the obvious reasons. There will be financial chaos like we’ve never seen before: Investors leaping off tall buildings, banks declaring extended “holidays” that freeze transactions, and California pensioners slitting their wrists after they discover their promised pension funds were just vaporized by incompetent bureaucrats.
On the other hand, there are others that believe that Trump is just walking into a very bad situation and that a crash would be inevitable no matter who was president.
History tells us that there is no possible way that stock prices can stay at this irrational level indefinitely. But for now a wave of optimism is sweeping the nation, and many of those that are caught up in it will get seriously angry with you if you try to inject a dose of reality into the conversation.
But like I said yesterday, let’s hope that the optimists are correct. A survey that was just taken of 600 business executives found that 62 percent of them were optimistic about the U.S. economy over the next 12 months.
Incredibly, that number was sitting at just 38 percent the previous quarter.
For the moment, business leaders seem to be quite thrilled that we have a business executive in the White House.
Hopefully Donald Trump’s business experience will translate well to his new position. And it is certainly my hope that he is as successful as possible.
But even during the campaign Trump talked about how stocks were in a giant bubble, and the euphoria that we have seen since his election victory has just made that bubble even larger.
Throughout U.S. history, every giant financial bubble has always ended very badly, and this time around will not be any exception.
Trump may get the blame for it when it bursts, but the truth is that the conditions for the coming crisis have been building for a very, very long time.
Since Donald Trump’s victory on election night we have seen the worst bond crash in 15 years. Global bond investors have seen trillions of dollars of wealth wiped out since November 8th, and analysts are warning of another tough week ahead. The general consensus in the investing community is that a Trump administration will mean much higher inflation, and as a result investors are already starting to demand higher interest rates. Unfortunately for all of us, history has shown that higher interest rates always cause an economic slowdown. And this makes perfect sense, because economic activity naturally slows down when it becomes more expensive to borrow money. The Obama administration had already set up the next president for a major recession anyway, but now this bond crash threatens to bring it on sooner rather than later.
For those that are not familiar with the bond market, when yields go up bond prices go down. And when bond prices go down, that is bad news for economic growth.
So we generally don’t want yields to go up.
Unfortunately, yields have been absolutely soaring over the past couple of weeks, and the yield on 10 year Treasury notes has now jumped “one full percentage point since July”…
The 10-year Treasury yield jumped to 2.36% in late trading on Friday, the highest since December 2015, up 66 basis point since the election, and up one full percentage point since July!
The 10-year yield is at a critical juncture. In terms of reality, the first thing that might happen is a rate increase by the Fed in December, after a year of flip-flopping. A slew of post-election pronouncements by Fed heads – including Yellen’s “relatively soon” – have pushed the odds of a rate hike to 98%.
As I noted the other day, so many things in our financial system are tied to yields on U.S. Treasury notes. Just look at what is happening to mortgages. As Wolf Richter has noted, the average rate on 30 year mortgages is shooting into the stratosphere…
The carnage in bonds has consequences. The average interest rate of the a conforming 30-year fixed mortgage as of Friday was quoted at 4.125% for top credit scores. That’s up about 0.5 percentage point from just before the election, according to Mortgage News Daily. It put the month “on a short list of 4 worst months in more than a decade.”
If mortgage rates continue to shoot higher, there will be another housing crash.
Rates on auto loans, credit cards and student loans will also be affected. Throughout our economic system it will become much more costly to borrow money, and that will inevitably slow the overall economy down.
Why bond investors are so on edge these days is because of statements such as this one from Steve Bannon…
In a nascent administration that seems, at best, random in its beliefs, Bannon can seem to be not just a focused voice, but almost a messianic one:
“Like [Andrew] Jackson’s populism, we’re going to build an entirely new political movement,” he says. “It’s everything related to jobs. The conservatives are going to go crazy. I’m the guy pushing a trillion-dollar infrastructure plan. With negative interest rates throughout the world, it’s the greatest opportunity to rebuild everything. Ship yards, iron works, get them all jacked up. We’re just going to throw it up against the wall and see if it sticks. It will be as exciting as the 1930s, greater than the Reagan revolution — conservatives, plus populists, in an economic nationalist movement.”
Steve Bannon is going to be one of the most influential voices in the new Trump administration, and he is absolutely determined to get this “trillion dollar infrastructure plan” through Congress.
And that is going to mean a lot more borrowing and a lot more spending for a government that is already on pace to add 2.4 trillion dollars to the national debt this fiscal year.
Sadly, all of this comes at a time when the U.S. economy is already starting to show significant signs of slowing down. It is being projected that we will see a sixth straight decline in year-over-year earnings for the S&P 500, and industrial production has now contracted for 14 months in a row.
The truth is that the economy has been barely treading water for quite some time now, and it isn’t going to take much to push us over the edge. The following comes from Lance Roberts…
With an economy running at below 2%, consumers already heavily indebted, wage growth weak for the bulk of American’s, there is not a lot of wiggle room for policy mistakes.
Combine weak economics with higher interest rates, which negatively impacts consumption, and a stronger dollar, which weighs on exports, and you have a real potential of a recession occurring sooner rather than later.
Yes, the stock market soared immediately following Trump’s election, but it wasn’t because economic conditions actually improved.
If you look at history, a stock market crash almost always follows a major bond crash. So if bond prices keep declining rapidly that is going to be a very ominous sign for stock traders.
And history has also shown us that no bull market can survive a major recession. If the economy suffers a major downturn early in the Trump administration, it is inevitable that stock prices will follow.
The waning days of the Obama administration have set us up perfectly for higher interest rates, a major recession and a giant stock market crash.
Of course any problems that occur after January 20th, 2017 will be blamed on Trump, but the truth is that Obama will be far more responsible for what happens than Trump will be.
Right now so many people have been lulled into a sense of complacency because Donald Trump won the election.
That is an enormous mistake.
A shaking has already begun in the financial world, and this shaking could easily become an avalanche.
Now is not a time to party. Rather, it is time to batten down the hatches and to prepare for very rough seas ahead.
All of the things that so many experts warned were coming may have been delayed slightly, but without a doubt they are still on the way.
So get prepared while you still can, because time is running out.
Are we about to witness one of the largest stock market crashes in U.S. history? Swiss investor Marc Faber is the publisher of the “Gloom, Boom & Doom Report”, and he has been a regular guest on CNBC for years. And even though U.S. stocks have been setting new record high after new record high in recent weeks, he is warning that a massive stock market crash is in our very near future. According to Faber, we could “easily” see the S&P 500 plunge all the way down to 1,100. As I sit here writing this article, the S&P 500 is sitting at 2,181.74, so that would be a drop of cataclysmic proportions. The following is an excerpt from a CNBC article that discussed the remarks that Faber made on their network on Monday…
The notoriously bearish Marc Faber is doubling down on his dire market view.
The editor and publisher of the Gloom, Boom & Doom Report said Monday on CNBC’s “Trading Nation” that stocks are likely to endure a gut-wrenching drop that would rival the greatest crashes in stock market history.
“I think we can easily give back five years of capital gains, which would take the market down to around 1,100,” Faber said, referring to a level 50 percent below Monday’s closing on the S&P 500.
Of course Faber is far from alone in believing that the market is heading for hard times. Just recently, I wrote about how legendary investor Jeffrey Gundlach is warning that “stocks should be down massively” and that he believes this is the time to “sell everything“.
And on Tuesday, Donald Trump told Fox News that the stock market is “a big bubble”…
“If rates go up, you’re going to see something that’s not pretty,” the billionaire businessman told Fox News during a Tuesday morning phone interview. “It’s all a big bubble.”
Worries that the Fed has created a market bubble have shadowed the second-longest bull market in history as the central bank has kept its key rate near zero and expanded its balance sheet by $3.8 trillion in order to pump liquidity into the financial system.
Trump actually has a vested interest in seeing the stock market go down, because that would help his chances in November.
In a previous article on The Most Important News, I explained that the stock market has indicated who would win the presidential election 86 percent of the time since 1928. During the final three months before election day, if the stock market goes up the incumbent party almost always wins. But if the stock market goes down, the incumbent party almost always loses. The only times this correlation has not held up since 1928 were in 1956, 1968 and 1980.
For the moment, the stock market is defying the laws of economics, and that is a very good thing for Hillary Clinton. But if this bubble suddenly bursts and the market starts catching up with economic reality, that is going to turn out to be very favorable for Donald Trump.
And without a doubt, the fundamental economic numbers just continue to get worse. Earlier today, we learned that productivity in the U.S. has now been falling for three quarters in a row…
Productivity, a sore spot for the U.S. economy over the past few years, has now declined in three straight quarters, according to data released Tuesday.
Productivity in the second quarter unexpectedly fell 0.5%, well below expectations, the Labor Department said. Economists surveyed by MarketWatch had forecast a 0.3% gain in productivity in the quarter.
Productivity is down 0.4% from a year earlier, the first year-over-year decline since the second quarter of 2013.
On Tuesday we also learned that real estate sales in Las Vegas were down about 10 percent in July compared to the same period a year ago, and things are not looking so good in San Francisco either. Just check out what has been going on at Twitter…
Twitter is shaking up San Francisco. It’s the city’s 10th largest employer, and second largest tech employer, after Salesforce. But it hasn’t yet figured out, despite a decade of trying, how to make money. Last October, it announced that it would lay off 8% of its workforce. A couple of weeks ago, it reported a second-quarter net loss of $107 million along with disappointing user metrics and lousy projections. Its shares have lost 74% since their miracle-IPO-hype peak at the end of December 2014.
And now Twitter is dumping nearly one third of its total office space on the San Francisco sublease market.
Las Vegas and San Francisco are both prone to huge “booms” and “busts”. So the fact that it appears that both cities are starting to move into the “bust” end of the cycle is a very ominous sign.
Conditions are changing, and now is the time to position yourself for the exceedingly challenging times that are coming. As I end this article today, I want to share with you something written by Jim Quinn. He recently went out to visit his son Kevin in Colorado for a couple of weeks, and the following is how he ended his article about that trip…
After spending a week in this stunning paradise, it’s tougher than you know to go back to my two and half hour daily round trip commute into the slums of West Philly. John Muir’s words were right 100 years ago and they are right today. I am losing precious days and my days are spent trying to make money. I’ve got responsibilities. I’ve got bills to pay. I’ve got kids to get through college. We’ve got aging parents to help. I work because I have to.
I’m not learning anything in this trivial world of distractions and iGadgets. I don’t fit into this materialistic society. I don’t do small talk. I have no patience for fools. I prefer solitude. If I can survive this despicable rat race for seven more years, I’ll be joining Kevin in Colorado and living the life I’d like to live. The sun is setting and time is slipping away. Those mountains are calling me home.
I can definitely identify with what Jim is going through, because I once experienced similar emotions.
To Jim and everyone else that hopes that someday in the future they will be able to live the lives that they would like to be living right now, I would say this…
Don’t put it off.
Seize the day and find a way to make your dreams a reality.
Things are rapidly changing in this country, and if you keep putting off the life you want to be living for too long it may end up slipping away for good.
One thing that you have to appreciate about Donald Trump is that unlike most politicians, he actually says what is on his mind. On Tuesday, Trump told Fox Business that he had already gotten out of the stock market, and that he foresees “very scary scenarios” ahead for investors. And of course things have already started to get a bit ominous for those holding stocks over the last week and a half. The Dow Jones Industrial Average has now closed down for seven days in a row, and that is the longest losing streak that we have seen since the panic of last August. Over the past 12 months we have seen virtually every other major global stock market experience at least one major crash. Could the U.S. markets be next?
What Trump told Fox Business earlier today was actually right on the money. Our financial markets have been artificially inflated by the Federal Reserve, and all artificial bubbles of this nature eventually burst. The following comes from a Bloomberg article that was posted on Tuesday entitled “Trump Urges Exit From Market Boosted by ‘Artificially Low’ Rates“…
Donald Trump on Tuesday said interest rates set by the Federal Reserve are inflating the stock market and recommended 401(k)-holders to get out of equities, just like he did.
“I did invest and I got out, and it was actually very good timing,” the Republican presidential nominee said in a phone interview with Fox Business. “But I’ve never been a big investor in the stock market.”
“Interest rates are artificially low,” Trump said. “The only reason the stock market is where it is is because you get free money.”
Trump’s comments come at a time when we are getting a whole host of bad news about the U.S. economy. We just learned that U.S. GDP grew at a meager 1.2 percent annual rate during the second quarter, the rate of homeownership in the United States just hit an all-time record low, and corporate earnings have now been falling for five quarters in a row.
But perhaps most alarming of all is what is happening to the price of oil. As I discussed yesterday, the price of oil has plunged well over 20 percent since June 8th, and it was down again on Tuesday.
As I write this article, the price of U.S. oil is sitting at just $39.66. The psychologically-important 40 dollar barrier has been broken, but the price of oil doesn’t even have to go down another penny to do immense damage to the U.S. economy. If it just stays at this price, we are going to bleed more energy industry jobs, more energy companies are going to default on their debts, and more financial institutions that are exposed to the energy industry are going to get into serious trouble.
All the ingredients are there for a major financial crisis, and perhaps that explains why so many investors are flocking to precious metals such as gold and silver right now.
The price of gold has gone up for six trading days in a row, and silver is approaching 21 dollars an ounce.
Meanwhile, things continue to unravel on the other side of the planet. In Europe, let’s just say that the recent bank stress tests did not go as well as many were hoping…
If the goal of the EBA Stress Tests was to reassure investors and regain confidence that ‘all is well’ in Europe’s increasingly fragile and systemically interconnected banking system, then it has utterly failed. The broadest European bank stock index is now down 7% from the post-stress-test spike highs, Italian banks are at record lows and being halted (despite Renzi’s promises), Commerzbank is struggling with capital raise chatter, and Deutsche Bank and Credit Suisse are tumbling after being booted from the Stoxx 50.
It is funny – every time I write a major article about Deutsche Bank, their stock goes to a new record low.
And it has just happened again. Less than a week ago, I posted this article, and on Tuesday Deutsche Bank plummeted to a brand new record low as renewed fears about the health of the bank spooked investors.
Problems at Deutsche Bank and Credit Suisse are now becoming so obvious that even mainstream analysts are admitting that they are “causing some anxiety”…
“Deutsche Bank and Credit Suisse … are dropping to where they were after the Brexit vote,” said Bruce Bittles, chief investment strategist at Baird. “That’s causing some anxiety.”
Deutsche and Credit Suisse’s U.S.-listed shares closed down 3.75 percent and 4.67 percent, respectively.
In Europe nobody is waiting for financial stocks to crash, because they are already crashing.
A “too big to fail” crisis is rapidly unfolding across the entire continent, but most Americans are totally oblivious to what is going on over there. Instead, our major news outlets are feeding us an endless barrage of negative headlines about Donald Trump and a steady stream of positive headlines about Hillary Clinton.
I wonder who they want to win the election?
Of course I am being sarcastic. The days when the mainstream media at least pretended to be “independent” are long gone.
But as far as the stock market is concerned, I am quite confident that Donald Trump will be vindicated.
And if you don’t want to believe Donald Trump, I would encourage you to consider what Jeffrey Gundlach, the chief executive of DoubleLine Capital, has been saying. He has been right about the markets in recent years over and over again, and just a few days ago he publicly stated that “stocks should be down massively” and that now is the time to “sell everything“.
Unfortunately, very few people are likely to change course at this stage. Most of those that could see the warning signs have already gotten out of the market, and those that prefer to have blind faith in the system are not likely to listen to warnings from men like Trump and Gundlach.
So now it is just a waiting game.
We shall see if Trump and Gundlach are right, and those that end up on the correct side of the equation are probably going to make a boatload of money during the months ahead.