It is widely expected that the Federal Reserve is going to announce the end of quantitative easing this week. Will this represent a major turning point for the stock market? As you will see below, since 2008 stocks have risen dramatically throughout every stage of quantitative easing. But when the various phases of quantitative easing have ended, stocks have always responded by declining substantially. The only thing that caused stocks to eventually start rising again was a new round of quantitative easing. So what will happen this time? That is a very good question. What we do know is that the the performance of the stock market has become completely divorced from economic reality, and in recent weeks there have been signs of market turmoil that we have not seen in years. Could the end of quantitative easing be the thing that finally pushes the financial markets over the edge?
After all this time, many Americans still don’t understand what quantitative easing actually is. Since the end of 2008, the Federal Reserve has injected approximately 3.5 trillion dollars into the financial system. Of course the Federal Reserve didn’t actually have 3.5 trillion dollars. The Fed created all of this money out of thin air and used it to buy government bonds and mortgage-backed securities.
If that sounds like “cheating” to you, that is because it is cheating. If you or I tried to print money, we would be put in prison. When the Federal Reserve does it, it is called “economic stimulus”.
But the overall economy has not been helped much at all. If you doubt this, just look at these charts.
Instead, what all of this “easy money” has done is fuel the greatest stock market bubble in history.
As you can see from the chart below, every round of quantitative easing has driven the S&P 500 much higher. And when each round of quantitative easing has finally ended, stocks have declined substantially…
And of course the chart above tells only part of the story. Since April 2013, the S&P 500 has gone much higher…
If someone from another planet looked at that chart, they would be tempted to think that the U.S. economy must be expanding like crazy.
But of course that is not happening.
This market binge has been solely fueled by reckless money printing by the Federal Reserve. It is not backed up by economic fundamentals in any way, shape or form.
And now that quantitative easing is ending, many are wondering if the party is over.
For example, just check out what CNN is saying about the matter…
Even in this bull market, all good things must come to an end.
The Federal Reserve is expected to close a chapter in history this week and announce the conclusion of its massive stimulus program. Known as quantitative easing, the program is widely credited with driving investors back into stocks in the aftermath of the financial crisis.
“I think to some extent quantitative easing has provided an assurance to investors that (has) kept them optimistic,” said Bruce McCain, Chief Investment Strategist of Key Private Bank in Cleveland, Ohio. “Now we’re going to have to see whether investors can ride without training wheels.”
Everyone knows that quantitative easing was a massive gift to those that own stocks.
So how will the stock market respond now that the monetary heroin is ending?
We shall see.
Meanwhile, deflationary pressures are already starting to take hold around the rest of the globe. The following is an excerpt from a recent Reuters report…
After months of focus on slack in U.S. labor markets, the Federal Reserve faces a new challenge: the possibility that weak inflation may be so firmly entrenched it upends the return to normal monetary policy.
The soft global inflation backdrop, from sliding oil prices to stagnant wages in advanced economies, has triggered debate over whether the Fed and its peers merely need to wait for a slow-motion business cycle to improve, or face a shift in the underlying nature of inflation after the global recession.
That uncertainty has become the Fed’s chief concern in recent weeks, likely to shape upcoming policy statements and delay even further the moment when interest rates, pinned near zero for nearly six years, will start rising again.
If the Federal Reserve and other global central banks were not printing money like mad, the global economy would have almost certainly entered a deflationary depression by now.
But all the Federal Reserve and other global central banks have done is put off the inevitable and make our long-term problems even worse.
Instead of fixing the fundamental problems that caused the great financial crash of 2008, the central bankers decided to try to paper over our problems instead. They flooded the global financial system with easy money, but today our financial system is shakier than ever.
In fact, we just learned that 10 percent of the biggest banks in Europe have failed their stress tests and must raise more capital…
The European Central Bank says 13 of Europe’s 130 biggest banks have flunked an in-depth review of their finances and must increase their capital buffers against losses by 10 billion euros ($12.5 billion).
The ECB said 25 banks in all were found to need stronger buffers — but that 12 have already made up their shortfall during the months in which the ECB was carrying out its review. The remaining 13 now have two weeks to tell the ECB how they plan to increase their capital buffers.
Most people do not realize how vulnerable our financial system truly is. It is essentially a pyramid of debt and credit that could fall apart at any time.
Right now, the “too big to fail” banks account for 42 percent of all loans and 67 percent of all banking assets in the United States.
Without those banks, we essentially do not have an economy.
But instead of being careful, those banks have taken recklessness to unprecedented heights.
At this moment, five of the “too big to fail” banks each have more than 40 trillion dollars of exposure to derivatives.
Most Americans don’t even understand what derivatives are, but when the next great financial crisis strikes we are going to be hearing a whole lot about them.
The big banks have transformed Wall Street into the biggest casino in the history of the planet, and there is no way that this is going to end well.
A great collapse is coming.
It is just a matter of time.
Is Ebola going to cause another of the massive October stock market crashes that Wall Street is famous for? At one point on Wednesday, the Dow was down a staggering 460 points. It ultimately closed down just 173 points, but this was the fifth day in a row that the Dow has declined. And of course Ebola is one of the primary things that is being blamed for this stunning stock market drop. Since September 19th, we have seen the S&P 500 fall about 7 percent and the Nasdaq fall nearly 10 percent. The VIX (the most important measure of volatility on Wall Street) shot up an astounding 22 percent on Wednesday. So many of the ominous signs for the markets that I wrote about on Tuesday are now even worse. If a handful of Ebola cases in the United States can cause this much panic in the financial world, what would a full-blown pandemic look like?
Of course Ebola is not the only reason why stocks are declining. Just look at what is happening over in Europe. The European Stoxx 600 index is already down a whopping 11.4 percent from the high that it hit just 18 days ago. That is officially considered to be “correction” territory.
And Greece experienced a full-blown stock market collapse on Wednesday…
As if the world didn’t have enough to be worried about (ISIS, Ebola, slowing China, Ukraine, slowing Germany, Fed tightening, etc.) now look what’s back: Greece. And in a big way.
The stock market is down over 9% on Wednesday, which is about as big as crashes come.
And the banks are getting absolutely smashed.
In general, markets tend to fall faster than they rise.
When there is a sudden downturn, the price action can be violent. And just like we saw back in 2008, financial stocks are leading the way. Just check out what happened to some of the biggest banks in America before the final bell sounded…
Volume leader Bank of America, down 5%, Citigroup, off 5.5%, and JP Morgan, down 4.6%, were particularly hard hit.
And thanks to Ebola fears, airline stocks plummeted as well…
Airline stocks were roiled by the prospects of curtailed travel due to the spreading Ebola virus. United Continental fell 4% and American Airlines was off 4.3%. Among tech stocks, Intel lost 3.3%. Apple fell 1.7% and Microsoft slipped 2.3%.
An increasing number of voices are concerned that we could be on the verge of a repeat of what happened back in 2008.
For example, Professor Steve Keen, the head of Economics, History & Politics at Kingston University in London, wrote the following in a piece for CNN entitled “Brace yourself for another financial crash“…
My acceleration indicator has been flagging that the stock market was due for a fall since mid-2013.
It’s a tribute to the power of the Fed’s Quantitative Easing that the market continued to defy the gravity of decelerating debt for so long. QE was really a program to inflate asset prices since, as my colleague Michael Hudson puts it, “the Fed’s helicopter money fell on Wall Street, not Main Street”.
But with QE being unwound, the stock market is now back under the control of the not so tender mercies of excessive private debt.
So welcome to the New Crisis — same as the Old Crisis. The roller coaster ride is likely to continue.
Others are even more pessimistic. For example, just check out what Daniel Ameduri of Future Money Trends recently told his readers…
“If it drops below 15,000 points I would suggest people start buying food and ammo, because this depression is about to turn nasty.”
However, keep in mind that not that much has really changed from a month or two ago.
Yes, we now have had three confirmed cases of Ebola in the United States, but this could be just the beginning.
At first, the fear of Ebola will be worse than the disease.
But if a worst-case scenario does develop in the United States where hundreds of thousands of people are getting the virus, the fear such a pandemic will create will be off the charts.
In the midst of a full-blown Ebola pandemic, we wouldn’t just be talking about a 10 percent, 20 percent or 30 percent stock market decline.
Rather, we would be talking about the greatest stock market collapse in the history of stock market collapses. In essence, there would not be much of a market at all at that point.
And if Ebola does start spreading wildly in this country, we would have a credit crunch that would make 2008 look like a Sunday picnic.
During times of extraordinary fear, financial institutions do not want to lend money to each other or to consumers. But our economy is entirely based on debt. If credit were to stop flowing, we would essentially not have an economy.
That is why we need to pray that this Ebola crisis stops here. But thanks to the incompetence of Barack Obama and the CDC, there has been a series of very grave errors in trying to contain this disease. This display of incompetence would be absolutely hilarious if we weren’t talking about a disease that could potentially kill millions of us.
Let us hope for the best, but let us also prepare for the worst. That means stocking up on the food and supplies that you will need to stay isolated for an extended period of time. As we have seen so many times in the past, basic essentials fly off of store shelves during any type of an emergency. During an extended Ebola pandemic, those essentials would be in very short supply and prices on the basics would absolutely skyrocket. Those that have taken the time to get prepared now will be way ahead of the game.
And if there were dozens or hundreds of people in your community that were contagious, you would definitely not want to go to a grocery store or anywhere else where large numbers of people circulate.
The key during any major pandemic is to keep yourself and your family isolated from the virus. This is basic common sense, but it is something that Barack Obama does not seem to understand. As I write this, he still has not done anything to restrict air travel between the United States and West Africa. Hopefully this very foolish decision will not result in scores of dead Americans.
All of a sudden, the Nasdaq is absolutely tanking. On Monday, it fell more than 1 percent after dropping 3.6 percent on Thursday and Friday combined. At this point, the Nasdaq is off to the worst start to a year that we have seen since 2008, and we all remember what happened back then. So why is this happening? In recent years, the Nasdaq has been ground zero for “dotcom bubble 2.0”. The hottest stocks in the entire world are on the Nasdaq – we are talking about stocks like Yahoo, Netflix, Apple, Tesla, Google and Facebook. Those stocks have gone to absolutely incredible heights, but now they are starting to fall. Some are blaming insider selling, and without a doubt the “smart money” is starting to flee the stock market. Just check out this chart. Others are blaming low expectations for first-quarter earnings or the tapering of quantitative easing by the Federal Reserve. But whatever is causing this decline, it is starting to get alarming. The Nasdaq just experienced its largest three day fall since November 2011.
No stock can resist gravity forever. What goes up must eventually come down. This is especially true for stock prices that become grotesquely distorted.
On Wall Street, a price to earnings ratio of 20 to 25 is usually considered fairly normal. In recent years, the price to earnings ratios for many of these “hot tech stocks” have gone way, way beyond that. For example, posted below is a screen capture from Bloomberg TV that was featured in a recent Zero Hedge article…
There is no way in the world that such valuations are justified.
We have been living in another dotcom bubble, and it was inevitable that it was going to burst at some point.
The following is how one financial industry insider described the carnage that we have seen on the Nasdaq over the past few days…
Gary Kaltbaum, president of money-management firm Kaltbaum Capital Management, describes the carnage of once high-flying “growth” names in the Nasdaq composite, that have come crashing down to earth: “The best we can describe what we have been recently seeing in ‘growth-land’ is a 50-car pileup,” Kaltbaum told clients in a morning research note. “Call them what you want … risk areas, growth stocks, froth areas … they are melting away.“
And of course it isn’t just the Nasdaq that has been seeing declines over the past few days. On Monday, some of the biggest names on the Dow also fell precipitiously…
Visa, Goldman Sachs and Boeing are among the biggest drags on the Dow Monday, falling 2.1%, 2.9% and 1.4% respectively. Weakness in these stocks is especially problematic since the Dow gives greatest weight to the stocks with the highest per-share prices. And at $203.41, $158.56 and $125.59 respectively, Visa, Goldman and Boeing are the stocks that really matter to the measure.
And the trouble in these stocks isn’t just today. So far this year, Visa is down 8.7%, Goldman is off 10.5% and Boeing is down 8.0%.
This recent decline has many analysts groping for answers.
Some believe that it is simply a “rotation” as investors leave growth stocks that have become overvalued and move into safer, more traditional stocks.
Others are pointing their fingers at the Federal Reserve…
Peter Boockvar, chief market strategist at Lindsey Group, believes it’s all about the Fed. “I’m still amazed at the complacency with the Fed taper, and a lot of people still don’t think it’s a big deal,” he said. “I just don’t think it’s a coincidence that the high-fliers are getting popped when the Fed is half way done with QE. We’ve got tightening smack in front of your face with the taper.”
In fact, some believe that the really big stock market decline will happen later this year when the Fed starts to wrap up quantitative easing completely…
Once the Fed begins to truly reduce its massive bond buying program later this year, markets could see a quarter of their value wiped off the books, a private equity pro told CNBC on Friday.
Jay Jordan, founder of the Jordan Company, issued the dire warning during an interview on CNBC’s “Squawk Box,” saying a 25 percent drop could extend to all asset classes. He blames the monetary policies of former Fed chair Ben Bernanke for artificially inflating asset prices through super-low interest rates.
Yet others point to the fact that we are now moving into earnings season, and it is being projected that corporate earnings will come in at very poor levels. In fact, it is being estimated that overall earnings for companies in the S&P 500 for the first quarter will be down 1.2 percent.
So what should we expect to see next?
Whether it happens this month or not, at some point a massive stock market correction is coming. In recent years, the financial markets have become completely and totally divorced from economic reality, and that is a state of affairs that cannot last indefinitely.
Many have compared the current state of affairs to 2008, but to me what is happening right now is eerily reminiscent of 2007. The Dow soared to record heights quite a few times that year, but there were constant rumblings of economic trouble in the background. Stocks began to drop steadily late in the year, and 2008 ultimately turned out to be an utter bloodbath.
I believe that what is happening right now is setting the stage for another financial bloodbath. I truly believe that we will look back on this two year time period and regard it as a major “turning point” for America.
And as I have written about previously, we are in far worse shape as a nation than we were back in 2008. We have far more debt, the “too big to fail banks” have a much larger share of the banking industry, the derivatives bubble has gotten completely and totally out of control, and our overall economy is far weaker than it was back then.
In other words, we are now even more vulnerable. When the next great financial crisis strikes us, it is going to be absolutely crippling.
Now is not the time to get complacent.
Now is the time to get prepared, because time is running out.
Did you see what just happened in Japan? The stock market of the 3rd largest economy on the planet is imploding. On Tuesday, the Nikkei fell by more than 610 points. If that sounds like a lot, that is because it is. The largest one day stock market decline in U.S. history is only 777 points. So far, the Dow is only down about 1000 points during this “correction”, but the Nikkei is down more than 2,300 points. The Nikkei has dropped more than 14 percent since the peak of the market, and many analysts believe that this is only just the beginning. Those that have been waiting for a full-blown stock market collapse may be about to get their wish. Japan is absolutely drowning in debt, their central bank is printing money like crazy and the Japanese population is aging rapidly. As far as economic fundamentals go, there is very little good news as far as Japan is concerned. So will an Asian financial collapse precede the next great financial crisis in the United States? That is what some have been predicting, and it starting to look increasingly likely.
What happened to the Nikkei early on Tuesday was absolutely breathtaking. The following is how Bloomberg described the carnage…
At the end of January 2013, Japanese stocks trailed only Portugal for the biggest rally among developed markets. Now the Nikkei 225 Stock Average is leading declines, slumping 8.5 percent last month and today capping a 14 percent drop from its Dec. 30 peak.
Losses snowballed in Tokyo during a global retreat that has erased $2.9 trillion from equity values worldwide this year amid signs of slower growth in China and stimulus cuts by the U.S. Federal Reserve.
As Bloomberg noted, much of the blame for the financial problems that we are seeing all over the planet right now is being placed on the Federal Reserve.
The Fed created this bubble by pumping trillions of fresh dollars into the global financial system, and now they are bursting this bubble by starting to cut off the flow of easy money.
This is something that I warned would happen when the Fed decided to taper, and now RBS is warning of a “market bloodbath” unless the Federal Reserve immediately stops tapering.
Most Americans simply do not realize that our financial markets no longer resemble a free market system. Instead, they are highly manipulated and distorted by the central banks, and the trillions of dollars of “hot money” that the Fed has poured into the global financial system has infected virtually every financial market on Earth…
On Wall Street they call it “hot money”—that seemingly endless flow of cash that goes to the most profitable country du jour—but in the real economy it’s gone cold.
That hot money has come mostly in the form of a low-yielding U.S. dollar, which investors have borrowed en masse to fund investments in other higher-yielding currencies across the globe. The so-called carry trade has helped fuel an investment bonanza across the world that has boosted risk assets thanks primarily to the U.S. Federal Reserve‘s easy-money policy.
But with the Fed tiptoeing away from what initially was an $85 billion-a-month infusion of liquidity, investors are beginning to prepare themselves for a world of rising rates in which the endless cash flow to emerging market economies begins to ebb, then cease.
We never fixed any of the fundamental problems that caused the last financial crisis. Instead, the Fed seemed to think that the solution to any problem was just to create more money.
It was an incredibly stupid approach, and now our fundamental problems are worse than ever as Marc Faber recently noted…
“Total credit as a percent of the global economy is now 30 percent higher than it was at the start of the economic crisis in 2007, we have had rapidly escalating household debt especially in emerging economies and resource economies like Canada and Australia and we have come to a point where household debt has become burdensome on the system—that is, where an economic slowdown follows.”
So what comes next?
Well, unless the Fed or other central banks intervene, we are probably going to have even more carnage.
At least that is what Dennis Gartman, the editor and publisher of “The Gartman Letter”, told CNBC on Tuesday…
“I just think you’re going to have a very severe, very substantive and really quite ugly correction that will probably make a lot of people wail and gnash their teeth before it’s done.”
Other analysts share his pessimism. According to Doug Short, the vice president of research at Advisor Perspectives, the U.S. stock market “still looks 67% overvalued“.
Most sobering of all is what Richard Russell is saying. In his 60 years of writing about financial issues, he has never been “so filled with foreboding regarding what lies ahead”…
I’d be lying if I said that I wasn’t worried about the way things are going. Frankly, I’m truly scared for myself, my family and the nation. I have the sinking feeling that the stock market is on the edge of a crash. If that happens, investor sentiment will turn quickly bearish. And the bear market will start feeding on itself. Ironically, the recent action occurred in the face of almost insane bullishness on the part of the crowd and on the part of investors.
Obviously smart heads and institutional money managers know that the US is semi dead in the water. And all the talk about an improving economy is just wishes and hopes. Bernanke’s dream of a flourishing new economy, improving without the need of the Fed’s help, is an idle dream.
I’ve been writing about the stock market for over 60 years and I can’t remember a time when I was so filled with foreboding regarding what lies ahead. The primary trend of the market, like the tide of the ocean, is irresistible, and waits for no man. What scares me the most in this current situation is that I see no clear island of safety.
You can read the rest of his very disturbing remarks right here.
U.S. stocks may not totally crash this week, this month or even this year, but without a doubt a day of reckoning is coming. As a society, our total consumer, business and government debt is now equivalent to approximately 345 percent of GDP.
The only way that the game can continue is to keep pumping up the debt bubble even more.
Once the debt bubble stops expanding, it will start collapsing very rapidly.
Those that foolishly still have lots of money in the stock market better hope that the Federal Reserve decides to intervene in a major way very soon.
Because if they don’t, there is a very good chance that we could indeed have a “market bloodbath” on our hands.
That didn’t take long. On Monday, the Dow was down another 326 points. Overall, the Dow has now fallen more than 1000 points from the peak of the market (16,588.25) back in late December. This is the first time that we have seen the Dow drop below its 200-day moving average in more than a year, and there are many that believe that this is just the beginning of a major stock market decline. Meanwhile, things are even worse in other parts of the world. For example, the Nikkei is now down about 1700 points from its 2013 high. This is causing havoc all over Asia, and the sharp movement that we have been seeing in the USD/JPY is creating a tremendous amount of anxiety among Forex traders. For those that are not interested in the technical details, what all of this means is that global financial markets are starting to become extremely unstable.
Unfortunately, there does not appear to be much hope on the horizon for investors. In fact, troubling news just continues to pour in from all over the planet. Just consider the following…
-Major currencies all over South America continue to collapse.
-Massive central bank intervention has done little to slow down the currency collapse in Turkey.
-Investors pulled more than 6 billion dollars out of emerging market equity funds last week alone.
-The CBOE Volatility Index (VIX) has risen above 20 for the first time in four months.
-Last month, new manufacturing orders in the United States declined at the fastest pace that we have seen since December 1980.
-Real disposable income in the United States has just experienced the largest year over year drop that we have seen since 1974.
-In January, vehicle sales for Ford were down 7.5 percent and vehicle sales for GM were down 12 percent. Both companies are blaming bad weather.
-A major newspaper in the UK is warning that “growing problems in the Chinese banking system could spill over into a wider financial crisis“.
-U.S. Treasury Secretary Jack Lew is warning that the federal government could hit the debt ceiling by the end of this month if Congress does not act.
-It is being reported that Dell Computer plans to lay off more than 15,000 workers.
-The IMF recently said that the the probability that the global economy will fall into a deflation trap “may now be as high as 20%“.
-The Baltic Dry Index is now down 50 percent from its December highs.
If our economic troubles continue to mount, could we be facing a global “financial avalanche” fairly quickly?
That is what some very prominent analysts believe.
Below, I have posted quotes from five men that are greatly respected in the financial world. What they have to say is quite chilling…
#1 Doug Casey: “Now is a very good time to start thinking financially because I’m afraid that this year, in 2014, we’re going to go back into the financial hurricane. We’ve been in the eye of the storm since 2009, but now we’re going to go back into the trailing edge of the storm, and it’s going to be much longer lasting and much worse and much different than what we had in 2008 and 2009.”
#2 Bill Fleckenstein: “The [price-to-earnings ratio] is 16, 17 times earnings,” Fleckenstein said on Tuesday’s episode of “Futures Now.” “Why would you pay 16 times for an S&P company? I don’t care about where rates are, because rates are artificially suppressed. Why isn’t that worth 11 or 12 times? Just by that analysis, you’d be down by a quarter or 30 percent. So there’s a huge amount of downside.”
#3 Egon von Greyerz of Matterhorn Asset Management: “Nothing goes (down) in a straight line, but the emerging market problems will accelerate and it will spread to the very overbought and the very overvalued stock markets and economies in the West.
So stock markets are now starting a secular bear trend which will last for many years, and we could see falls of massive proportions. At the end of this, the wealth that has been created in the last few decades will be destroyed.”
#4 Peter Schiff: “The crisis is imminent,” Schiff said. “I don’t think Obama is going to finish his second term without the bottom dropping out. And stock market investors are oblivious to the problems.”
“We’re broke, Schiff added. “We owe trillions. Look at our budget deficit; look at the debt to GDP ratio, the unfunded liabilities. If we were in the Eurozone, they would kick us out.”
#5 Gerald Celente: “This selloff in the emerging markets, with their currencies going down and their interest rates going up, it’s going to be disastrous and there are going to be riots everywhere…
…So as the decline in their economies accelerates, you are going to see the civil unrest intensify.”
Those that do not believe that we could ever see “civil unrest” on the streets of America should take note of what just happened in Seattle.
After the Seahawks won the Super Bowl, fans celebrated by “lighting fires, damaging historic buildings and ripping down street signs“.
If that is how average Americans will behave when something good happens, how will they act when the economy totally collapses and nobody can find work for an extended period of time?
We are rapidly approaching another great financial crisis. Unfortunately, we didn’t learn any of the lessons that we should have learned last time. It is being projected that the debt of the federal government will more than double during the Obama years, the “too big to fail banks” have collectively gotten 37 percent larger over the past five years, and the big banks have become more financially reckless than ever before.
When the next great financial crisis arrives (and without a doubt it is inevitable), millions more Americans will lose their jobs and millions more Americans will lose their homes.
Now is not the time to be buying lots of expensive new toys, going on expensive vacations or piling up lots of debt.
Now is the time to build up an emergency fund and to do whatever you can to get prepared for the great storm that is coming.
As you can see from the financial headlines, time is rapidly running out.
Why has Goldman Sachs chosen this moment to publicly declare that stocks are overpriced? Why has Goldman Sachs suddenly decided to warn all of us that the stock market could decline by 10 percent or more in the coming months? Goldman Sachs has to know that when they release a report like this that it will move the market. And that is precisely what happened on Monday. U.S. stocks dropped precipitously. So is Goldman Sachs just honestly trying to warn their clients that stocks may have become overvalued at this point, or is another agenda at work here? To be fair, the truth is that all of the big banks should be warning their clients about the stock market bubble. Personally, I have stated that the stock market has officially entered “crazytown territory“. So it would be hard to blame Goldman Sachs for trying to tell the truth. But Goldman Sachs also had to know that a warning that the stock market could potentially fall by more than 10 percent would rattle nerves on Wall Street.
This report that has just been released by Goldman Sachs has gotten a lot of attention. In fact, an article about this report was featured at the top of the CNBC website for quite a while on Monday. Needless to say, news of this report spread on Wall Street like wildfire. The following is a short excerpt from the CNBC article…
A stock market correction is approaching the level of near certainty as Wall Street faces a major paradigm shift in how to achieve price gains, according to a Goldman Sachs analysis.
In a market outlook that garnered significant attention from traders Monday, the firm’s strategists called the S&P 500 valuation “lofty by almost any measure” and attached a 67 percent probability to the chance that the market would fall by 10 percent or more, which is the technical yardstick for a correction.
Of course Goldman Sachs is quite correct to be warning about an imminent stock market correction. Right now stocks are overvalued according to just about any measure that you could imagine…
The current valuation of the S&P 500 is lofty by almost any measure, both for the aggregate market as well as the median stock: (1) The P/E ratio; (2) the current P/E expansion cycle; (3) EV/Sales; (4) EV/EBITDA; (5) Free Cash Flow yield; (6) Price/Book as well as the ROE and P/B relationship; and compared with the levels of (6) inflation; (7) nominal 10-year Treasury yields; and (8) real interest rates. Furthermore, the cyclically-adjusted P/E ratio suggests the S&P 500 is currently 30% overvalued in terms of (9) Operating EPS and (10) about 45% overvalued using As Reported earnings.
There is a lot of technical jargon in the paragraph above, but essentially what it is saying is that stock prices are unusually high right now according to a whole host of key indicators.
And in case you were wondering, stocks did fall dramatically on Monday. The Dow fell by 179 points, which was the biggest decline of the year by far.
So is Goldman Sachs correct about what could be coming?
Well, the truth is that there are many other analysts that are far more pessimistic than Goldman Sachs is. For example, David Stockman, the Director of the Office of Management and Budget under President Reagan, believes that the U.S. stock market is heading for “a pretty rude day of awakening”…
“This (2014) is the year of the end game. The party is over. We are now just at the point where they are rounding up the Wall Street drunks who are swilling on the fifth consecutive seasonally maladjusted phony recovery. That will become evident in the weeks and months ahead. Then I think the markets are going to have a pretty rude day of awakening.”
For many more forecasts that are similar to this, please see my previous article entitled “Dent, Faber, Celente, Maloney, Rogers – What Do They Say Is Coming In 2014?”
There are also some other signs that we are rapidly heading toward a major “turning point” in the financial world in 2014. One of those signs is the continual decline of Comex gold inventories. Someone out there (China?) is voraciously gobbling up physical gold. The following is a short excerpt from a recent article by Steve St. Angelo…
After a brief pause in the decline of Comex Gold inventories, it looks like it has continued once again as there were several big withdrawals over the past few days. Not only was there a large removal of gold from the Comex today, the Registered (Dealer) inventories are now at a new record low.
And of course the overall economy continues to get even weaker. The Baltic Dry Index (a very important indicator of global economic activity) has fallen by more than 40 percent over the past couple of weeks…
We noted Friday that the much-heralded Baltic Dry Index has seen the worst start to the year in over 30 years. Today it got worse. At 1,395, the the Baltic Dry index, which reflects the daily charter rate for vessels carrying cargoes such as iron ore, coal and grain, is now down 18% in the last 2 days alone (biggest drop in 6 years), back at 4-month lows. The shipping index has utterly collapsed over 40% in the last 2 weeks.
So does this mean that tough times are just around the corner?
Or perhaps things will stabilize again and this little bubble of false prosperity that we have been enjoying will be extended for a little while longer.
The important thing is to not get too caught up in the short-term numbers.
If you look at our long-term national “balance sheet numbers” and the long-term trends that are systematically destroying our economy, it becomes abundantly clear that a massive economic collapse is on the way. Our national debt is on pace to more than double during the Obama years, our “too big to fail” banks are now much bigger and much more reckless than they were before the financial crash of 2008, and the middle class in America is steadily shrinking. In other words, our long-term national “balance sheet numbers” are worse than ever.
We consume far more wealth than we produce, and our entire nation is drowning in a massive ocean of red ink that stretches from sea to shining sea.
This is not sustainable, and it is inevitable that the stock market will catch up with economic reality at some point.
It is just a matter of time.
Is the stock market going to crash by the end of this year? Are we on the verge of major financial chaos on a global scale? Well, this is the time of the year when investors start getting nervous. We all remember what happened during the fall of 1929, the fall of 1987 and the fall of 2008. However, it is important to keep in mind that we do not see a stock market crash in the fall of every year. Some years the stock market cruises through the months of September, October, November and December without any problems whatsoever. But this year conditions certainly seem to be right for a “perfect storm” to develop. Technical indicators are screaming that a stock market decline is imminent and sources in the financial industry all over the world are warning that a massive crisis is on the way. What you are about to read should alarm you. But it is not a guarantee that anything will or will not happen. When Ben Bernanke gives his speech at the Jackson Hole summit on Friday he could announce to the rest of the world that the Federal Reserve has decided to launch QE3 and that the Fed will be printing up trillions of new dollars. If that happened global financial markets would leap for joy. So it is always a dangerous thing when anyone out there tries to tell you that they can “guarantee” what is about to happen in the financial world. There are just so many moving parts. But if we do not see major intervention by the governments of the world or by global central banks a major financial crisis could rapidly develop this fall. The conditions are certainly right for a stock market collapse, and we could easily see a repeat of what happened back in 2008.
The truth is that the second half of 2012 looks a little bit more like the second half of 2008 with each passing day.
Just check out what Bob Janjuah of Nomura Securities has been saying….
Based on the reasons set out earlier and also covered in my two prior notes, over the August to November period I am looking for the S&P500 to trade off down from around 1400 to 1100/1000 – in other words, I expect over the next four months to see global equity markets fall by 20% to 25% from current levels and to trade at or below the lows of 2011! US equity markets, along with parts of the EM spectrum, will I think underperform eurozone equity markets, where already very little hope resides.
Others are issuing similar warnings. For example, the following is what a couple of Bank of America analysts said in a report the other day….
Our strategists see an unusually high number of macro catalysts over the next 3-6 months that could take markets lower. We expect economic growth to disappoint in the second half of the year in anticipation of the fiscal cliff. This would exacerbate any slowdown from the deepening recession in Europe and decelerating growth in emerging markets. There is also the ongoing tension in the Middle East, the potential for a US credit downgrade and accelerating downward analyst estimate revisions. To top it off, September is seasonally the weakest month of the year for stock price returns.
There has been an unusual amount of chatter in the financial world about the September to December time frame.
That could mean something or it could mean nothing.
But is is very interesting to watch what some top financial insiders are doing with their stocks right now.
Dennis Gartman, the publisher of the Gartman Leter, has dumped all of his stocks at this point.
As I have written about previously, George Soros has dumped all of his stock in banking giants JP Morgan, Citigroup and Goldman Sachs.
Are they just being paranoid?
Or do they know something that we do not?
If you are looking for the next “Lehman Brothers moment” in the United States, you might want to watch Morgan Stanley. Morgan Stanley was heavily involved in the Facebook IPO disaster, earlier this year their credit rating was downgraded, and now there are persistent rumors that Morgan Stanley is in big trouble and that it will be allowed to fail. You can check out some of these rumors for yourself here, here and here.
But of course as I have said all along the center of the coming crisis is going to be in Europe, and many analysts agree with me. For example, the following is what the chairman of Casey Research, Doug Casey, had to say during a recent interview….
Europe is a full cycle ahead of the U.S. Its governments and its banks are both bankrupt. It’s a couple of drunks standing on the street corner holding each other up at this point. Europe is in much worse shape than the U.S. It’s highly regulated, highly taxed and much more socially unstable.
Europe is going to be the epicenter of the coming storm. Japan is waiting in the wings, as is China. This is going to be a worldwide phenomenon. Of course, the U.S. will be in it, too. We’re going to see this all over the world.
Much of southern Europe is already experiencing depression-like conditions. Unemployment in both Greece and Spain is well above 20 percent and both economies are steadily shrinking.
Money is flowing out of Spanish banks at an unprecedented rate right now. Just take a look at these charts. The only thing that is going to keep the Spanish banking system from totally collapsing is outside intervention.
But the truth is that all of Europe is in big trouble. Even German companies are slashing job right now. For example, check out what Siemens is up to….
German engineering conglomerate Siemens (SIEGn.DE) is in early internal talks to cut thousands of jobs in response to a weakening economy, particularly in Europe, a German newspaper reported.
Decisions could be made in October or November, according to daily Boersen-Zeitung, which did not specify its sources.
A Siemens spokesman declined to comment.
We are living in the greatest debt bubble in the history of the world, and at some point that bubble is going to burst in a very messy way.
It is vital that people understand that our system is not even close to sustainable.
Knowing exactly when it will collapse is not nearly as important as understanding that a collapse is absolutely inevitable.
I think what former World Bank economist Richard Duncan had to say recently is very helpful….
“The explosion in credit drove economic growth in the U.S. and around the world, and now that’s the only thing that’s keeping us from collapsing in a debt/deflation spiral,” he said. “[What] I think everybody needs to understand is that the kind of economy that we have now, it’s not capitalism. It has very little in common with capitalism. Capitalism was an economic system in which the government played very little role …. Under capitalism, gold was money and the government had nothing to do with it. Now the central bank creates the money and manipulates its value.”
And he is very right.
We aren’t seeing a failure of capitalism.
What we are witnessing is the failure of debt-based central banking.
And if you think that the global elite are not aware of what is happening then you have not been paying attention.
This summer the global elite have been preparing very hard. Either they are getting very paranoid or they know things that we do not.
If you want to catch up on what the global elite have been up to recently, check out these three articles that I have published previously….
-“Are The Government And The Big Banks Quietly Preparing For An Imminent Financial Collapse?”
-“Startling Evidence That Central Banks And Wall Street Insiders Are Rapidly Preparing For Something BIG”
-“Jacob Rothschild, John Paulson And George Soros Are All Betting That Financial Disaster Is Coming”
If you are waiting for the nightly news to tell you what to do, then you have not learned anything.
Did anyone in the mainstream media warn you about what was about to happen back in 2008?
Of course not.
The “authorities” insisted that everything was going to be just fine and many average Americans were absolutely wiped out.
So don’t expect someone to come along and nicely inform you that your retirement savings are about to be absolutely devastated.
In this day and age it is absolutely critical for people to learn to think for themselves.
Barack Obama is not going to save you.
Mitt Romney is not going to save you.
The U.S. Congress is not going to save you. They are too busy living the high life at taxpayer expense.
The system is not looking out for you. Nobody is really going to care if your financial planning gets turned upside down. This is a cold, cruel world and you need to understand how the game is played. The financial insiders are looking out for themselves and most of them usually are able to avoid financial disaster.
Average folks like you and I are normally not so fortunate.
There are lots of warning signs that indicate that this fall could be a very turbulent time for global financial markets.
Ignore them at your own peril.