Disneyland is known as a place “where dreams come true” and where every story always has a happy ending. But there is going to be no happy ending for the U.S. economy. Wishful thinking has resulted in one of the greatest stock market rallies in history in recent months, but like all childhood fantasies, it won’t last. The real economy continues to deteriorate, and we can see this even right outside of the gates of Disneyland. Every night growing numbers of homeless people sleep on the pavement just steps away from “the happiest place on Earth”. It can be fun to “play make believe” for a while, but eventually reality always catches up with us.
Without a doubt, the stock market has been on a tremendous run. Since Donald Trump’s stunning election victory in November, the market has been setting record high after record high, and it is now up a total of 17 percent…
The Dow Jones Industrial Average recorded its 23rd all time high of 2017 yesterday closing at 21,532. There have been a total of 120 days where the markets have closed since President Trump’s inauguration on January 20th. The ‘DOW’ has closed at all time highs 23 of those days for nearly 20% or one-fifth of the days the market has been open. The market is up 9% since the inauguration.
Since the election on November 8th the DOW has closed at record highs an amazing 40 times! Nearly one-fourth or 24% of the 168 days the markets have closed have been record highs since the November 8th election. The market is up 17% since the election!
If this surge was supported by hard economic data, that would be something to greatly celebrate, but that has not been the case at all.
Instead, stock prices have become completely disconnected from economic reality, and now we are facing one of the greatest stock bubbles of all time. As Graham Summers has pointed out, stocks are now trading at price to sales ratios that we haven’t seen since the very height of the dotcom bubble…
Earnings, cash flow, and book value are all financial data points that can be massaged via a variety of gimmicks. As a result of this, valuing stocks based on Price to Earnings, Price to Cash Flow, and Price to Book Value can often lead to inaccurate valuations.
Sales on the other hand are all but impossible to gimmick. Either money came in the door, or it didn’t And, if a company is caught faking its sales numbers, someone is going to jail.
So the fact that stocks are now trading at a P/S ratio that matches the Tech Bubble (the single largest stock bubble in history) tells us that we’re truly trading at astronomical levels: levels associated with staggering levels of excess.
There is no possible way that this is sustainable, and just like before the 2008 crisis a whole host of experts are warning that disaster is imminent. One of them is John Mauldin…
Looking with fresh eyes at the economic numbers and central bankers’ statements convinced me that we will soon be in deep trouble. I now feel that it’s highly likely we will face a major financial crisis, if not later this year, then by the end of 2018 at the latest. Just a few months ago, I thought we could avoid a crisis and muddle through. Now I think we’re past that point. The key decision-makers have (1) done nothing, (2) done the wrong thing, or (3) done the right thing too late.
Having realized this, I’m adjusting my research efforts. I believe a major crisis is coming. The questions now are, how severe will it be, and how will we get through it?
And even though the stock market has been surging deeper and deeper into bubble territory in recent months, the middle class has continued to shrink and poverty has continued to grow all over the country. In fact, because so many homeless people have been sleeping at bus shelters across from Disneyland lately authorities decided to completely remove the benches that they had been sleeping on…
The vanishing benches were Anaheim’s response to complaints about the homeless population around Disneyland. Public work crews removed 20 benches from bus shelters after callers alerted City Hall to reports of vagrants drinking, defecating or smoking pot in the neighborhood near the amusement park’s entrance, officials said.
The situation is part of a larger struggle by Orange County to deal with a rising homeless population. A survey last year placed the number of those without shelter at 15,300 people, compared with 12,700 two years earlier.
But simply removing benches will not make the problem go away.
Homelessness has been growing so rapidly in Los Angeles that the the L.A. City Council actually asked Governor Jerry Brown to formally declare a state of emergency.
And in New York City, street homelessness is up 39 percent over the past year.
This is where the real economy is heading, but a rising stock market makes for much happier headlines.
Many major cities around the nation are passing laws to essentially make it illegal to be homeless. Forcing homeless people to go somewhere else may mask the problem for a while, but it certainly doesn’t do anything to solve it. In my new book entitled “Living A Life That Really Matters”, I talk about how real love is not just about loving those that are just like us. Rather, real love is about caring for people no matter what they look like and no matter what they are going through.
Unfortunately, the economic suffering that we are seeing right now is just the beginning.
Just like in 2008, the major financial crisis that is coming is going to greatly accelerate our economic problems. And just like last time, millions of people are going to lose their jobs, and millions of people are going to lose their homes.
Homelessness is already worse in many parts of the nation that it was during the depths of the last recession, and what we are going to see during the next economic downturn is going to be absolutely unprecedented.
So don’t look down on those that need a helping hand, because in the not too distant future you may find yourself needing some help.
Michael Snyder is a Republican candidate for Congress in Idaho’s First Congressional District, and you can learn how you can get involved in the campaign on his official website. His new book entitled “Living A Life That Really Matters” is available in paperback and for the Kindle on Amazon.com.
Federal Reserve Chair Janet Yellen is quite convinced that the United States will not experience another financial crisis for a very long time to come. In fact, she is publicly saying that she does not believe that another one will happen “in our lifetimes”. But there are other central bankers that see things very differently. In fact, a new report that was just released by the Bank for International Settlements is warning that a new financial crisis could soon strike “with a vengeance”. So who is right?
It would be nice if it turned out that Yellen was right. Nobody should want to see a repeat of what happened in 2008, and Yellen seems extremely confident that she will never see another crisis of that magnitude…
“Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be,” Yellen said at an event in London.
Even though the U.S. national debt has roughly doubled since the start of the last financial crisis, and even though corporate debt has roughly doubled since then as well, and even though U.S. consumers are more than 12 trillion dollars in debt, and even though the top 25 U.S. banks have 222 trillion dollars of exposure to derivatives, Yellen believes that our financial system “is much safer and much sounder” than it was in 2008…
“I think the system is much safer and much sounder,” she said. “We are doing a lot more to try to look for financial stability risks that may not be immediately apparent but to look in corners of the financial system that are not subject to regulation, outside those areas in order to try to detect threats to financial stability that may be emerging.”
I have a feeling that these words may come back to haunt her, and the fact that she has more power over the performance of the U.S. economy than anyone else does is more than just a little bit frightening.
The truth is that signs of a major new economic downturn are emerging all around us, and many are warning that the next great financial crisis is just around the corner. For example, just consider what a new report from the Bank for International Settlements is saying. The Bank for International Settlements is widely regarded as “the central bank of central banks”, and this new report is warning that we could be heading for “a financial boom gone wrong”…
A new financial crisis is brewing in the emerging economies and it could hit “with a vengeance”, an influential group of central bankers has warned.
Emerging markets such as China are showing the same signs that their economies are overheating as the US and the UK demonstrated before the financial crisis of 2007-08, according to the annual report of the Bank for International Settlements (BIS).
Claudio Borio, the head of the BIS monetary and economic department, said a new recession could come “with a vengeance” and “the end may come to resemble more closely a financial boom gone wrong”.
And of course many of the most trusted analysts in the financial world agree with the BIS. In fact, Dr. Doom Marc Faber is predicting that stocks could soon decline “by 40 percent or more”…
If the man often hailed as the original “Dr. Doom” is right, the stock market could see another “lurch” higher — at which point investors may want to cash out quickly and run for cover.
Marc Faber, the editor of “The Gloom, Boom & Doom Report’ and a perennial bear, isn’t backing down from his latest dire prediction that would send stocks plummeting by 40 percent or more.
A drop of that size could take the S&P 500 Index down from Friday’s closing price of 2,438 to 1,463.
In the end, we shall see who is right and who is wrong.
And let us certainly hope that another crisis like the one we saw in 2008 does not happen any time soon, because tens of millions of Americans are completely unprepared for one.
According to a brand new survey that was just released, almost half the country currently spends as much or more money than they make each month…
Nearly half of Americans say their expenses are equal to or greater than their income, according to a new study from the Center for Financial Services Innovation. And for those 18 to 25 the percentage is over half, up to 54%.
“Half of America has no financial cushion,” says Jennifer Tescher, president and CEO of CFSI, which released the study. “They are living really close to the edge.”
And another recent survey discovered that 69 percent of all Americans do not have an adequate emergency fund.
With so many of us living on the edge, our society is extremely vulnerable to a major financial shock. And when one finally does happen, a lot of people are going to get knocked out of the ranks of the middle class very rapidly.
Even though things seem relatively stable for the moment, poverty is on the rise all over the country. For example, according to the Daily Mail the number of homeless people in Los Angeles has risen by 23 percent over the last year…
According to a new count released in May, the number of homeless people in the Los Angeles area jumped by 23 percent in the last year to reach nearly 58,000. Of those, some 5,000 are veterans, the highest number of homeless veterans of any city in the country and a near 60 percent increase over the previous year.
And we are seeing similar things in cities all over the nation.
The United States is in the midst of a long-term economic decline that goes back for decades. Our economic infrastructure has been gutted, our middle class is now a minority of the population, and we have piled up the biggest mountain of debt in the history of the world in a desperate attempt to maintain a standard of living that we have not earned.
Hopefully Janet Yellen is right and hopefully the next major financial crisis will be put off for as long as possible.
But whether the next financial crisis comes quickly or not, the truth is that the U.S. economy is going to continue to decline if we continue to make the same kinds of incredibly poor decisions that we have been making for a very long time.
If Jim Rogers is right, the worst stock market crash that any of us has ever seen is right around the corner. For the past 15 years, Rogers has been a frequent guest analyst on CNBC, Fox News and elsewhere, and he is immensely respected for the depth of knowledge and experience that he brings to the table. So the fact that he is warning that we are about to see the worst stock market crash in any of our lifetimes is making a lot of waves in the financial community. And of course Rogers is far from alone. Previously, I have written about several other prominent experts that are warning that a new financial crisis is imminent, and I have also discussed how a number of big investors are quietly positioning themselves to make an enormous amount of money when the markets crash. Could it be possible that all of these incredibly sharp minds could be wrong? Yes, but I wouldn’t bet on it.
I was actually quite stunned when I first learned what Jim Rogers had told Henry Blodget of Business Insider during a recent interview. Rogers has built up a tremendous amount of credibility, but now he is putting that credibility on the line by warning that a great stock market crash will happen by the end of next year. Here is the key portion of the interview …
Blodget: Well, yeah, TV ratings do seem to go up during crashes, but then they completely disappear when everyone is obliterated, so no one is hoping for that. So when is this going to happen?
Rogers: Later this year or next.
Blodget: Later this year or next?
Rogers: Yeah, yeah, yeah. Write it down.
There is no backing out of a statement like that.
If Rogers is wrong, he will never hear the end of it.
Subsequently, Blodget and Rogers also discussed how severe the coming crisis would be…
Blodget: And how big a crash could we be looking at?
Rogers: It’s going to be the worst in your lifetime.
Blodget: I’ve had some pretty big ones in my lifetime.
Rogers: It’s going to be the biggest in my lifetime, and I’m older than you. No, it’s going to be serious stuff.
So that means that Rogers is convinced that the coming crisis is going to be even worse than what we went through in 2008.
Of course this is something that I have been warning about for quite a while, but for Jim Rogers to make a statement like this is a really, really big deal.
Later in the interview, Rogers shared more details about what he believes the coming crisis will look like…
You’re going to see governments fail. You’re going to see countries fail, this time around. Iceland failed last time. Other countries fail. You’re going to see more of that.
You’re going to see parties disappear. You’re going to see institutions that have been around for a long time — Lehman Brothers had been around over 150 years. Gone. Not even a memory for most people. You’re going to see a lot more of that next around, whether it’s museums or hospitals or universities or financial firms.
That definitely sounds like an “economic collapse” to me. Of course the truth is that the U.S. economy is already in the midst of a slow-motion economic collapse that stretches back for decades, but this coming crisis that Rogers is talking about is going to great accelerate matters.
Let us hope that it is put off for as long as possible, but at some point we are simply going to run out of time.
And when markets do start falling, they can move very, very rapidly. Just look at what happened on Friday. Technology sector stocks were down 2.7 percent, and the FAANG stocks were some of the biggest movers…
Facebook fell $5.11, or 3.3%, to $149.60.
Apple fell $6.01, or 3.9%, to $148.90.
Amazon fell $31.96, or 3.2%, to $978.31 now demoted from the elect group for 4-digit stocks back to the large group of 3-digit stocks.
Netflix plunged $7.85, or 4.7%, to $158.20.
Alphabet – the G in FAANG – fell $33.58, or 3.4%, to $952.23, moving further away from everyone’s dream of closing at $1,000.
If we are indeed moving toward a new crisis, one of the things that we will want to watch for is an inverting of the yield curve.
We saw this happen in 2000 and in 2006, and on both occasions it foreshadowed that a huge stock market crash was coming in the not too distant future.
Unfortunately, CNBC says that a new inversion of the yield curve could happen “by the end of this year”…
The bounce in Treasury yields witnessed after the election of Donald Trump is now decaying in the D.C. swamp. If the Federal Reserve continues to ignore this slow growth and deflationary signal from the bond market and continues along its current rate hiking path, the yield curve will invert by the end of this year and an equity market plunge and a recession is sure to follow.
An inverted yield curve, which has correctly predicted the last seven recessions going back to the late 1960’s, occurs when short-term interest rates yield more than longer-term rates. Why is an inverted yield curve so crucial in determining the direction of markets and the economy? Because when bank assets (longer-duration loans) generate less income than bank liabilities (short-term deposits), the incentive to make new loans dries up along with the money supply. And when asset bubbles are starved of that monetary fuel they burst. The severity of the recession depends on the intensity of the asset bubbles in existence prior to the inversion.
Another key indicator is the growth of commercial and industrial loans. According to Zero Hedge, this indicator has correctly foreshadowed every single recession since 1960…
While many “conventional” indicators of US economic vibrancy and strength have lost their informational and predictive value over the past decade (GDP fluctuates erratically especially in Q1, employment is the lowest this century yet real wage growth is non-existent, inflation remains under the Fed’s target despite its $4.5 trillion balance sheet and so on), one indicator has remained a stubbornly fail-safe marker of economic contraction: since the 1960, every time Commercial & Industrial loan balances have declined (or simply stopped growing), whether due to tighter loan supply or declining demand, a recession was already either in progress or would start soon.
So considering the fact that this indicator has been so accurate, it is extremely alarming that we could see our “first negative loan growth” since the last financial crisis “in roughly 4 to 6 weeks”…
After growing at a 7% Y/Y pace at the start of the year, which declined to 3% at the end of March and 2.6% at the end of April, the latest bank loan update from the Fed showed that the annual rate of increase in C&A loans is now down to just 1.6%, – the lowest since 2011 – after slowing to 2.3% and 1.8% in the previous two weeks.
Should the current rate of loan growth deceleration persist – and there is nothing to suggest otherwise – the US will post its first negative loan growth, or rather loan contraction since the financial crisis, in roughly 4 to 6 weeks.
And when you throw in all of the other signs that the U.S. economy is slowing down, a very clear picture begins to emerge.
It has been said that those that do not learn from history are doomed to repeat it. As a society, we certainly didn’t learn much from the horrible financial disaster of 2008, and now so many of the exact same patterns are repeating once again.
An unprecedented financial crisis is most definitely heading our way, and the only thing left to be answered is how soon it will get here.
I keep hearing from people that think that the stock market is going to crash by the end of the year. Hopefully that will not happen, but the ridiculous stock prices that we are seeing right now certainly cannot last forever. On Sunday, I was chatting with a friend that had just been to a financial conference. He was quite surprised that one of the things being taught to the attendees of this conference was how to position themselves to make an enormous amount of money when the stock market crashes dramatically in the near future. Markets tend to go down a lot faster than they go up, and so when the inevitable market crash does take place those that have made large bets against the market will make huge fortunes. It happened in 2008, and it will happen again. But it was unsettling to my friend Robert that there were so many people that were gleefully looking forward to this.
Of course some of the biggest names in the investing world are also anticipating a major downturn very soon. I have previously written about how Warren Buffett’s Berkshire Hathaway Inc. is sitting on a pile of 86 billion dollars in cash right now. Nobody ever knows exactly what Buffett is thinking, but it isn’t too hard to figure out that he plans to use those billions to buy up stocks for a song after a big market crash happens.
I have also previously written about many other big names throughout the financial world that are warning that a new financial crisis is imminent. The last time I saw so many prominent investors sounding the alarm was just before the market crash of 2008, but most people didn’t listen that time around either.
And of course those that believe that a market crash is coming are doing a lot more than just talking about it. According to Zero Hedge, there are now more short positions betting against the Russell 2000 than we have seen at any time in the last six years…
The Russell 2000 Index posted a 2.2% decline in May, its worst month since October, and it appears a large swath of investors is now betting it has further to fall.
As Bloomberg notes, hedge funds and other major speculators have a combined net short position of 73,030 contracts in the small-cap index’s futures, according to the latest data from the Commodity Futures Trading Commission.
Russell 2000 sentiment has sharply declined since January, when future contract positioning reached record bullishness. It’s now the most short since May 2011.
The last time investors were this short the Russell 2000, it fell by almost 30 percent.
Can we expect something similar this time?
We will just have to wait and see.
Meanwhile, there has also been a surge in the number of investors betting that we will soon see increased market volatility…
As Bloomberg notes, with the VIX down more than 30% this year through the end of last week, investors have been using options to bet on volatility.
As the chart above shows, the volume of contracts wagering on a resurgence of market turmoil has reached its highest level since last February relative to those calling for a drop in price movements.
Because markets tend to go down much faster than they go up, most of those that bet on increased volatility are typically doing so because they believe that a stock market crash is coming very soon.
And it is also interesting to note that hedge funds are jumping into gold at a rate that we have not seen since 2007…
Hedge funds are jumping back into gold.
Money managers boosted their long positions in U.S. futures by the most in almost a decade in the week ended May 23, Commodity Futures Trading Commission data show.
Gold is a safe haven asset, and it is a very good place to be during a major financial crisis. So if hedge funds are anticipating that we are on the verge of a major market downturn, it would make sense for them to be piling into gold.
All of the moves that I have discussed above will end up looking quite foolish if stocks just keep going up and up and up.
But if the market crashes, those that have positioned themselves ahead of time will end up making a killing.
Today the stock market bears absolutely no resemblance to economic reality, but at some point that will change. And with each passing day we just continue to get more bad economic news.
Yesterday, I showed that according to official U.S. government figures there are 102 million working age Americans that do not have a job right now. Today, we got more confirmation that the U.S. economy is slowing down. We learned that new vehicle sales fell on a year-over-year basis for the fifth month in a row in May, and we learned that factory orders and new orders for durable goods both declined last month. And for a lot more numbers just like those, please see this article.
The U.S. economy is not “healthy” and it hasn’t been for a very long time. Because we have shipped so many jobs overseas, manufacturing’s share of U.S. employment has fallen to an all-time record low. The middle class is shrinking, and somewhere around two-thirds of the country is living paycheck to paycheck. We have been able to maintain our national standard of living by going on the greatest debt binge of all time, but every additional dollar of debt that we take on makes our long-term outlook even worse.
Just because he is living in the White House does not mean that Donald Trump can automatically turn things around. Without the help of Congress, he cannot cut taxes, repeal Obamacare, eliminate unnecessary federal agencies or implement many of the other items on his economic agenda.
And the truth is that because of the way that our system is structured, the Federal Reserve actually has much, much more power over the economy than Donald Trump does. When the financial markets crash and we officially enter the next recession, most of the blame will be placed on Trump, but it won’t be his fault. Instead, it will be primarily the Federal Reserve’s fault, and we need to educate the American people about this ahead of time.
What goes up must come down, and this irrational stock bubble has been living on borrowed time for quite a while now.
It isn’t going to take much to push things over the edge, and there are all sorts of candidates for what the next “trigger event” will be.
How can a company that is going to generate $2,000,000,000 in negative free cash flow in 2017 be worth 70 billion dollars? Netflix has soared in popularity in recent years, but so have their financial losses. Just like during the original tech bubble, investors are ignoring basic fundamentals and are greatly rewarding firms that are bleeding giant mountains of cash year after year just because they are trendy “tech companies”. But somewhere along the line you actually have to quit losing money if you are going to survive. Just ask tech bubble 1.0 victims Pets.com, Webvan and Etoys.com. The investors that poured enormous amounts of money into those companies ended up losing everything, and similar tragedies will play out as tech bubble 2.0 bursts.
So far in 2017, the S&P 500 is up about 8 percent, but FANG stocks (Facebook, Amazon, Netflix and Google) are up a whopping 30 percent.
But at least Facebook, Amazon and Google are making money.
Netflix is not.
So why in the world has the stock shot up by more than 30 percent so far this year? It just doesn’t make any sense at all. According to CNBC, during the first quarter Netflix had $423 million in negative free cash flow, and for the entire year it is being projected that it will have $2 billion in negative free cash flow…
The California-based company is now dumping cash into original content to maintain its dominance over its growing field of rivals. The company’s had $423 million negative free cash flow during the quarter, wider than the $261 million negative free cash flow a year ago. Netflix expects to have $2 billion in negative free cash flow this year.
The bleeding of cash at Netflix only seems to be accelerating. The number for the first quarter of 2017 was 62 percent worse than the number for the first quarter of 2016, and it was more than twice as bad as the number for the first quarter of 2015.
It is hard to imagine that Netflix will ever be more popular than it is right now.
So if Netflix is not making a profit at this point, when will it ever make a profit?
Similar things could be said about Twitter. This is a company that has never made a yearly profit and that is actually starting to see revenues decline. But somehow the stock just continues to go up. Since the last time I wrote about Twitter, the market cap has shot up another 1.5 billion dollars.
At this point, the market values Twitter at 13 billion dollars, but in the entire history of the company it has actually lost 2 billion dollars.
What we are witnessing is a modern day version of “tulip mania”, and at some point this irrational euphoria will come to a sudden end. In fact, there are already some signs that tech bubble 2.0 may be in a significant amount of trouble. The following is an excerpt from a Bloomberg article entitled “Investors Go All-In on Tech Giants”…
The tech-powered rally has catapulted the sector to a price-to-earnings ratio of 24.4, or 41 percent above the 10-year average. But as Google and Amazon stretch to nearly $1,000 a share, not everyone is comfortable with the valuations. Investors pulled more than $716 million from the most popular technology exchange-traded fund last week — the $17.4 billion Technology Select Sector SPDR Fund, or XLK — its largest weekly outflow in over a year, data compiled by Bloomberg show.
“Most everybody remembers 2000, so they might be getting a little nervous with this development,” said Maley. “I just wonder how many people have said to themselves, ‘If AMZN gets to $1,000, I’m going to take at least some profits.’”
All over the financial world, prominent voices are warning that the enormous financial bubbles that we see all around us are not sustainable and that a major crisis is heading our way. I wrote about some of these voices yesterday, and today we can add Paul Singer to the list…
Given groupthink and the determination of policy makers to do ‘whatever it takes’ to prevent the next market ‘crash,’ we think that the low-volatility levitation magic act of stocks and bonds will exist until the disenchanting moment when it does not. And then all hell will break loose (don’t ask us what hell looks like…), a lamentable scenario that will nevertheless present opportunities that are likely to be both extraordinary and ephemeral. The only way to take advantage of those opportunities is to have ready access to capital.
When the financial markets collapse, Donald Trump will likely get most of the blame.
But Donald Trump did not create the stock market bubble, and he will not be responsible for ending it either.
Since the Federal Reserve was created in 1913, we have seen this same story play out over and over again. There have been 18 distinct recessions or depressions since the Fed was established, and the more the Fed interferes in the marketplace the larger the booms and busts tend to be.
And it could be argued that this time around the Fed has manipulated financial markets more than ever before. Interest rates were pushed as low as possible and trillions of dollars were pumped into the financial system during the Fed’s quantitative easing programs. Of course those actions were going to create a huge bubble, and of course that bubble is going to inevitably burst.
Unfortunately, this is not just a game. Real people with real hopes and real dreams are going to be absolutely devastated. Millions of Americans that were carefully saving for retirement are going to be financially crippled, and pension funds all over the nation are going to be wiped out.
I don’t know why we can’t seem to learn from history. And I am not talking about events that happened decades ago. The build up to this coming crisis is so similar to what we witnessed just before the crashes of 2000 and 2008, but we just keep getting fooled over and over again.
But once things fall apart this time, I think that the American people will finally be fed up. I think that they will be sick and tired of an unelected, unaccountable central bank that creates endless booms and busts, and I think that they will finally be ready to push Congress to shut the Federal Reserve down for good.
If everything is going to be “just fine”, why are so many big names in the financial community warning about an imminent meltdown? I don’t think that I have seen so many simultaneous warnings about a market crash since just before the great financial crisis of 2008. And at this point, you would have to be quite blind not to see that stocks are absurdly overvalued and that a correction is going to happen at some point. And when stocks do start crashing, lots of fingers are going to start pointing at President Trump, but it won’t be his fault. The Federal Reserve and other central banks are primarily responsible for creating this bubble, and they should definitely get the blame for what is about to happen to global financial markets.
My regular readers are quite familiar with my thoughts on where the market is headed, so today let me share some thoughts from five highly respected financial experts…
#1 When Altair Asset Management’s chief investment officer Philip Parker was asked if a market crash was coming to Australia, he said that he has “never been more certain of anything in my life”. In fact, he is so sure that the investments that his hedge fund is managing are going to crash that a decision was made to liquidate the fund “and return ‘hundreds of millions’ of dollars to its clients”…
While hardly a novel claim – in the past many have warned that Australia’s housing and stock market are massive asset bubbles (which local banks have been forced to deny as their fates are closely intertwined with asset prices even as the RBA is increasingly worried) – so far few if any have gone the distance of putting their money where their mouth was. That changed, when Australian asset manager Altair Asset Management made the extraordinary decision to liquidate its Australian shares funds and return “hundreds of millions” of dollars to its clients according to the Sydney Morning Herald, citing an impending property market “calamity” and the “overvalued and dangerous time in this cycle”.
“Giving up management and performance fees and handing back cash from investments managed by us is a seminal decision, however preserving client’s assets is what all fund managers should put before their own interests,” Philip Parker, who serves as Altair’s chairman and chief investment officer, said in a statement on Monday quoted by the SMH.
#2 Seth Klarman leads one of the biggest hedge funds in the United States, and he believes that U.S. investors are greatly underestimating the amount of risk in the market right now…
“When share prices are low, as they were in the fall of 2008 into early 2009, actual risk is usually quite muted while perception of risk is very high,” Klarman wrote. “By contrast, when securities prices are high, as they are today, the perception of risk is muted, but the risks to investors are quite elevated.”
Klarman oversees one of the US’s largest hedge fund firms, with some $30 billion under management. He has a huge following on Wall Street — investors named his book, “Margin of Safety,” their favorite investment book in a recent SumZero survey.
#3 Bill Blain is a strategist at Mint Partners, and he is actually specifically pointing to October 12th as the date when things will start to get “horribly interesting”…
But…. Catch a falling knife, why don’t you… I shall spend the summer wondering just how long the Stock Market games continue. When, not if.
At the moment, my prediction is October 12th. Around that day its going to get horribly interesting..
Why that particular day?
Gut feel and knowing how the Bowl of Petunias felt in Hitchhikers. (“Not again.”)
There are just too many contradictory currents out there. The unsustainability of burgeoning consumer debt, unfeasibly tight credit spreads, the sandcastle foundations of student loans, autos, housing and the CLO market, China, Trump, politics.. worries about what follows Brazil in the EM market, and whatever… The risks of a massive consumer sentiment dump..
#4 David Stockman has also been warning about what may happen this fall. According to Stockman, this current stock market bubble “is the greatest sucker’s rally we have ever seen”…
“The market is insanely valued right now. They were trying to tag, the robo machines and day traders, they were trying to tag 2,400 on the S&P 500. They ended up at 2,399, I think, but the point is that represents about 25 times trailing earnings for 2016. We are at a point in the so-called recovery that has already lasted 96 months. It’s almost the longest one in history. What the market is saying is we have reached the point of full employment forever. There will never be another recession or any kind of economic surprise or upset or dislocation. The market is pricing itself for perfection for all of eternity. This is crazy. . . . I think the market could easily drop to 1,600 or 1,300. It could drop by 40% or even more once the fantasy ends. When the government shows its true colors, that it’s headed for a fiscal bloodbath when this crazy notion that there is going to be some Trump fiscal stimulus is put to rest once and for all. I mean it’s not going to happen. They can’t pass a tax cut that big without a budget resolution that incorporated $10 trillion or $15 trillion in debt over the next decade. It’s just not going to pass Congress. . . . I think this is the greatest sucker’s rally we have ever seen.“
#5 Last but certainly not least, David Kranzler seems quite certain “that the stock market bubble is getting ready to pop”…
Anyone happen to notice that several market commentators have argued that is a bubble but the same stock “experts” look the other way as the U.S. stock market becomes more overvalued by the day vs. the deteriorating underlying fundamentals? Bitcoin going “parabolic” triggers alarm bells but it’s okay if the stock price of Amazon.com Inc (NASDAQ:) is hurtling toward parity with the price of one ounce of . Tesla (NASDAQ:) burns a billion per year in cash. It sold 76,000 cars last year vs. 10 million worldwide for General Motors (NYSE:). Yet Tesla’s market cap is $51.7 billion vs. $48.8 billion for GM.
This insanity is the surest sign that the stock market bubble is getting ready to pop. If you read between the lines of the the comments from certain Wall Street analysts, the only justification for current valuations is “Central Bank liquidity” and “Fed support of asset values.” This is the most dangerous stage of a market top because it draws in retail “mom & pop” investors who can’t stop themselves from missing out on the next “sure thing.” There will be millions of people who are permanently damaged financially when the Fed loses control of this market. Or, as legendary “vulture” investor Asher Edelman stated on CNBC, “I don’t want to be in the market because I don’t know when the plug is going to be pulled.”
Could all of these top experts be wrong?
It’s possible, but I wouldn’t bet on it.
Every stock market bubble of this magnitude in U.S. history has ended in a spectacular crash, and this one will not be any different. We can certainly have some good arguments about the exact timing of the next crash, but what everyone should be able to agree on is that a crash is coming.
You only make money in the stock market if you get out at the right time. Many of those that timed things well have made a tremendous amount of money, but most investors will be entirely caught off guard by the market implosion that is rapidly approaching.
As I have explained to my readers repeatedly, markets tend to go down a whole lot faster than they go up, and in the not too distant future we are going to see trillions of dollars of investor wealth wiped out very, very quickly.
Let’s hope that the coming crisis will not be as bad as 2008, but I have a feeling that it is going to be much worse.
We didn’t learn our lessons the last time around, and so now we are going to pay a very high price for our stubbornness.
A stock market crash is coming, and the Democrats and the mainstream media are going to blame Donald Trump for it even though it won’t be his fault. The truth is that we were headed for a major financial crisis no matter who won the election. The Dow Jones Industrial Average is up a staggering 230 percent since the lows of 2009, and no stock market rally in our history has ever reached the 10 year mark without at least a 20 percent downturn. At this point stocks are about as overvalued as they have ever been, and every other time we have seen a bubble of this magnitude a historic stock market crash has always followed. Those that are hoping that this time will somehow be different are simply being delusional.
Since November 7th, the Dow is up by about 3,000 points. That is an extremely impressive rally, and President Trump has been taking a great deal of credit for it.
But perhaps he should not have been so eager to take credit, because what goes up must come down. The following is an excerpt from a recent Vanity Fair article…
According to Douglas Ramsay, chief investment officer of the Leuthold Group, Trump administration officials will come to regret gloating about the market’s performance. That’s because Trump enters the White House during one of the most richly valued stock markets in U.S. history. The last president to come in at such valuations was George W. Bush, and the dot-com bubble burst soon afterward. Bill Clinton began his second term in a more overvalued stock market in 1997, and exited unscathed. But if his timing were different by just a year, he would have been blamed for the early-aughts market crash.
This stock market bubble was not primarily created by Barack Obama, Donald Trump or any other politician. Rather, the Federal Reserve was primarily responsible for creating it by pushing interest rates all the way to the floor during the Obama era and by flooding the financial system with hot money during several stages of quantitative easing.
But now the economy is slowing down. Economic growth on an annual basis was just 0.7 percent during the first quarter, and yet the Federal Reserve is talking about raising interest rates anyway.
The Federal Reserve also raised interest rates in a slowing economy in the late 1930s, and that had the effect of significantly extending the economic problems during that decade.
As I noted in my article entitled “The Federal Reserve Must Go”, there have been 18 recessions or depressions since the Federal Reserve was created in 1913, and now we stand on the precipice of another one.
After this next crisis, hopefully Congress will finally understand that it is time to shut the Federal Reserve down for good, and I am going to do all that I can to make that happen.
Ron Paul is someone that I look up to greatly, and he also agrees that the blame for the coming crisis should be placed on the Federal Reserve instead of on Trump…
“There are some dire predictions that say in the next year, or 18 months, we have something arriving worse than 2008 and 2009, the downturn is much worse,” Paul said in a recent interview with liberty-minded anti-globalist radio host Alex Jones. “They’ll say, ah, it’s all Trump’s fault. No. It wasn’t. 08 and 09 wasn’t Obama’s fault. It was the fault of the Federal Reserve, it was the fault of the Keynesian economic model, the spending too much, the deficit. So, unfortunately, there’s nothing he can do — Trump can’t do it.”
Paul, a medical doctor who took a keen interest in economics throughout his celebrated career as a constitutionalist in Congress, said Trump could “help” the situation by pursuing good policies. “But you can’t avoid the correction, the correction is locked in place, because the deficits are there, the malinvestment, everybody agrees interest rates have been too low too long,” he said in the late January interview. “The only thing he can do is allow the recession to come, get it over with, liquidate the debt. Politically, nobody wants that, so you’re going to see runaway inflation before you see this country wake up.”
Over the past decade, the U.S. economy has grown at an average rate of just 1.33 percent, and there is no possible way to put a positive spin on that.
And now the economy appears to be entering a fresh slowdown. A couple of months ago, banking giant UBS warned about “a sudden slowdown in new credit”…
There’s been a sudden slowdown in new credit extended to businesses over the last year, one that strategists at UBS are calling “drastic” and “highly uncommon outside of economic downturns.”
And since that time, lending has tightened up even more. The following comes from Zero Hedge…
According to the latest Fed data , the all-important C&I loan growth contraction has not only continued, but over the past two months, another 50% has been chopped off, and what in early March was a 4.0% annual growth is now barely positive, down to just 2.0%, and set to turn negative in just a few weeks. This was the lowest growth rate since May 2011, right around the time the Fed was about to launch QE2.
At the same time, total loan growth has likewise continued to decline, and as of the second week of May was down to 3.8%, the weakest overall loan creation in three years.
This is exactly what we would expect to see if we were entering a new recession. Neil Howe, one of the authors of The Fourth Turning, recently warned that “winter is coming” and I have to admit that I agree with him.
So when the stock market finally crashes, how bad could it be?
Well, one analyst that spoke to CNBC said that other historic market crashes have averaged “about 42 percent”…
“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.
And as I have explained many times in the past, stocks would have to fall about 40 to 50 percent from current levels just for the stock market to get back to “normal” again. The valuations that we are seeing today are absolutely insane, and there is no possible way that they are sustainable.
When the crash happens, many people will be pointing their fingers at Trump, but it won’t be his fault.
Instead, it will be the Federal Reserve that will be at fault, and hopefully this coming crisis will convince the American people that it is time to end this insidious debt-based central bank for good.
If a former Reagan administration official is correct, we are likely to see the next major financial collapse by the end of 2017. According to Wikipedia, David Stockman “is an author, former businessman and U.S. politician who served as a Republican U.S. Representative from the state of Michigan (1977–1981) and as the Director of the Office of Management and Budget (1981–1985) under President Ronald Reagan.” He has been frequently interviewed by mainstream news outlets such as CNBC, Bloomberg and PBS, and he is a highly respected voice in the financial community. Like other analysts, Stockman believes that the U.S. economy is in dire shape, and he told Greg Hunter during a recent interview that he is convinced that the S&P 500 could soon crash “by 40% or even more”…
The market is pricing itself for perfection for all of eternity. This is crazy. . . . I think the market could easily drop to 1,600 or 1,300. It could drop by 40% or even more once the fantasy ends. When the government shows its true colors, that it’s headed for a fiscal blood bath when this crazy notion that there is going to be some Trump fiscal stimulus is put to rest once and for all. I mean it’s not going to happen. They can’t pass a tax cut that big without a budget resolution that incorporated $10 trillion or $15 trillion in debt over the next decade. It’s just not going to pass Congress. . . . I think this is the greatest sucker’s rally we have ever seen.”
But even more alarming is what Stockman had to say about the potential timing of such a financial crash. According to Stockman, if he were to pick a time for the next major stock market plunge he would “target sometime between August and November”…
The S&P 500 is going to drop by hundreds and hundreds of points sometime over the next few months as we drift into this unexpected crisis. . . . I would target sometime between August and November because that’s when the rubber is going to meet the road on a debt ceiling increase when they are out of cash. Washington is going to end up in vicious political conflict over what to do about the debt ceiling. . . . It is going to be one giant fiscal bloodbath the likes of which we have never seen.
That really got my attention, because those are the exact months during which the events that I portrayed in The Beginning Of The End play out.
Without a doubt, the U.S. financial system is living on borrowed time, and we cannot keep going into so much debt indefinitely. In 2017, interest on the national debt will be more than half a trillion dollars for the first time ever, and it will be even higher next year because we are likely to add at least another trillion dollars to the debt during this fiscal year.
Meanwhile, the financial markets just keep becoming more absurd with each passing day.
Just look at Tesla. This is a company that somehow managed to lose 620 million dollars during the first quarter of 2017, and it has been consistently losing hundreds of millions of dollars quarter after quarter.
And yet somehow the market values Tesla at a staggering 48 billion dollars.
It is almost as if we are living in an “opposite world” where the more money you lose the more valuable investors think that you are. Companies like Tesla, Netflix and Twitter are burning through gigantic mountains of investor cash without ever making a profit, and nobody seems to care.
Commercial mortgage-backed securities are another red flag that is starting to get a lot of attention…
The percentage of commercial mortgage-backed security (MBS) loans in special servicing hit 6.6% to close April, Commercial Mortgage Alert reported, citing Trepp data. The five basis point move higher from March came as the past-due rate on Fitch-rated commercial mortgage-backed securities (CMBS) climbed by nine basis points to end April at to 3.5%.
Both MBS and CMBS rates hit their highest levels since 2015.
During the crisis of 2008, regular mortgage-backed securities played a major role, and this time around it looks like securities that are backed by commercial mortgages could cause quite a bit of havoc.
One of the reasons for this is because mall owners are having such tremendous difficulties. The number of retail store closings in 2017 is on pace to shatter the all-time record by more than 20 percent, and Bloomberg is projecting that about a billion square feet of retail space will eventually close or be used for another purpose.
So needless to say this is putting an enormous amount of strain on those that are trying to rent space to retailers, and a lot of their debts are starting to go bad.
In 2007 and early 2008, a lot of the analysts that were loudly warning about mortgage-backed securities, a major stock market crash and an imminent recession were being mocked. People kept asking them when “the crisis” was finally going to arrive, and leaders such as Federal Reserve Chairman Ben Bernanke confidently assured the public that the U.S. economy was not going to experience a recession.
But of course then we got to the fall of 2008 and all hell broke loose. Investors suddenly lost trillions of dollars, millions of jobs were lost, and the U.S. economy plunged into the worst recession since the Great Depression of the 1930s.
Now we stand poised on the brink of an even worse disaster. The U.S. national debt has almost doubled since the last crisis, corporate debt has more than doubled, and all of our long-term economic fundamentals have continued to deteriorate.
The only thing that has saved us is our ability to go into enormous amounts of debt, and once that debt bubble finally bursts it will be the biggest standard of living adjustment that Americans have ever seen.
So I don’t know if Stockman’s timing will be 100% accurate or not, but that is not what is important.
What is important is that decades of exceedingly foolish decisions have made the greatest economic crisis in American history inevitable, and when it fully erupts the pain is going to be absolutely off the charts.
Have you ever wondered how tech companies that have been losing hundreds of millions of dollars year after year can somehow be worth billions of dollars according to the stock market? Because I run a website called “The Economic Collapse“, there are naysayers out there that take glee in mocking me by pointing out how well the stock market has been doing. This week, the Dow is flirting with 21,000 and the Nasdaq crossed the 6,000 threshold for the first time ever. But a lot of the “soaring stocks” that have been fueling this rally have been losing giant mountains of money every single year, and just like the first tech bubble this madness will eventually come to an end in a spectacular fiery crash in which investors will lose trillions of dollars.
Anyone that cannot see that we are in the midst of an absolutely insane stock market bubble simply does not understand economics. Every valuation indicator that you can possibly point to says that we are in a bubble of epic proportions, and history teaches us that all bubbles inevitably come to an end at some point.
Earlier today, I came across an article by Graham Summers in which he persuasively argued that the price to sales ratio indicates that stock prices are far more inflated than they were just prior to the great stock market crash of 2008…
Sales cannot be gimmicked. Either money comes in the door, or it doesn’t. And if a company is caught messing around with its sales numbers, someone is going to jail.
For this reason, Price to Sales is perhaps the single most objective and clear means of measuring stock valuations.
This metric, above all others, you can point to and say, “this is definitively accurate and has not been messed with.”
On that note, as Bill King recently noted, today the S&P 500 is sporting a P/S ratio that is massively higher than it was in 2007 and is only marginally lower than it was during the Tech Bubble (the single largest stock bubble of all time for most measures).
To me, looking at profitability is even more important than looking at sales.
Large tech companies such as Twitter certainly have lots of revenue coming in, but many of them are deeply unprofitable.
In fact, Twitter has never made a yearly profit, and over the past decade it has actually lost more than 2 billion dollars.
But despite all of that, investors absolutely love Twitter stock. As I write this article, Twitter has a market cap of 11.5 billion dollars.
How in the world is that possible?
How can a company that has never made a single penny be worth more than 11 billion dollars?
Twitter is never going to be more popular than it is now. If it can’t make a profit at the peak of its popularity, when will it ever happen?
And guess what? ABC News says that Twitter actually just reported a decline in revenue for the most recent quarter…
Twitter has never turned a profit, and for the first time since going public in 2013, it reported a decline in revenue from the previous year. Its revenue was $548.3 million, down 8 percent.
Net loss was $61.6 million, or 9 cents per share, compared with a loss of $79.7 million, or 12 cents per share, a year earlier.
The only reason why financial black holes such as Twitter can continue to exist is because investors have been willing to pour endless amounts of money into them, but now that bubble is starting to burst.
In his most recent article, Simon Black discussed how Silicon Valley investors are starting to become more cautious because so many of these “unicorns” are now going bust. One of the examples that he cited in his article was a company called Clinkle…
(Given that investing in an early stage company is high-risk, investors might provide a few hundred thousand dollars in funding, at most. Clinkle raised $25 million.)
The company went on to burn through just about every penny of its investors’ capital.
There were even photos that surfaced of the 21-year old CEO literally setting bricks of cash on fire.
At the end of the farce, Clinkle never actually managed to build its supposedly ‘world-changing’ product, and the website is now all but defunct.
Most of you may have never even heard of Clinkle, but I bet that you have definitely heard of Netflix.
Netflix has revolutionized how movies are delivered to our homes, and that revolution helped drive movie rental stores to the brink of extinction.
There is just one huge problem. It turns out that Netflix is losing hundreds of millions of dollars…
Netflix might be my favorite example.
The company’s most recent earnings report for the period ending March 31, 2017 shows, yet again, negative Free Cash Flow of MINUS $422 million.
Not only is that a record loss, it’s 62% worse than in Q1/2016, and over twice as bad as Q1/2015.
Netflix just keeps losing more and more money.
But even though Netflix is losing money at a pace that is exceedingly difficult to imagine, investors absolutely love the company.
I just checked, and at this moment Netflix has a market cap of 68.4 billion dollars.
Sometimes I just want to scream because of the absurdity of it all.
Companies that are losing hundreds of millions of dollars a year at the peak of their popularity should not be worth billions of dollars.
Nobody can possibly argue that these enormously inflated stock prices are sustainable. Just like with every other stock market bubble in our history, this one is going to burst too, and I have been warning about this for quite a long time.
But for the moment, the naysayers are having their time to shine. Despite the fact that U.S. consumers are 12 trillion dollars in debt, and despite the fact that corporate debt has doubled since the last financial crisis, and despite the fact that the federal government is 20 trillion dollars in debt, they seem to be convinced that this irrational stock market bubble can keep inflating indefinitely.
Perhaps they can all put their money where their mouth is by pouring all of their savings into Twitter, Netflix and other tech company stocks.
In the end, we will see who was right and who was wrong.