Current stock market valuations are not sustainable. If there is one thing that I want you to remember from this article, it is that cold, hard fact. In 1929, 2000 and 2008, stock prices soared to absolutely absurd levels just before horrible stock market crashes. What goes up must eventually come down, and the stock market bubble of today will be no exception. In fact, virtually everyone in the financial community acknowledges that stock prices are irrationally high right now. Some are suggesting that there is still time to jump in and make money before the crash comes, while others are recommending a much more cautious approach. But what almost everyone agrees on is the fact that stocks cannot go up like this forever.
On Tuesday, the Dow, the S&P 500 and the Nasdaq all set brand new record highs once again. Overall, U.S. stocks are now up more than 10 percent since the election, and this is probably the greatest post-election stock market rally in our entire history.
But stocks were already tremendously overvalued before the election, and at this point stock prices have reached a level of ridiculousness only matched a couple of times before in the past 100 years.
Only the most extreme optimists will try to tell you that stock prices can stay this disconnected from economic reality indefinitely. We are in the midst of one of the most outrageous stock market bubbles of all time, and as MarketWatch has noted, all stock market bubbles eventually burst…
The U.S. stock market at this level reflects a combination of great demand, great complacency, and great greed. Stocks are clearly in a bubble, and like all bubbles, this one is about to burst.
If corporations were making tremendous amounts of money, rapidly rising stock prices would make logical sense.
But that is not the case at all. Corporate earnings for the fourth quarter of 2016 were actually quite dismal, and this disconnect between Wall Street and economic reality is starting to really bug financial analysts such as Brian Sozzi…
The S&P 500 has gone 89 straight sessions without a 1% decline. Considering that Corporate America didn’t exactly light up on the top and bottom lines during the fourth quarter, such a streak is rather troublesome. Granted, the stock market is a forward-looking mechanism that appears to be trading on hopes that Trump’s unannounced stimulus and tax plans will be lifting economic growth in 2018. Even so, the inability of investors to at least acknowledge persistent struggles among companies and ongoing chaos in Washington is starting to become disturbing.
It is a basic fact of economics that stock prices should accurately reflect current and future earnings.
So if corporate earnings are at the same level they were at in 2011, why has the S&P 500 risen by 87 percent since then? The following comes from Wolf Richter…
The S&P 500 stock index edged up to an all-time high of 2,351 on Friday. Total market capitalization of the companies in the index exceeds $20 trillion. That’s 106% of US GDP, for just 500 companies! At the end of 2011, the S&P 500 index was at 1,257. Over the five-plus years since then, it has ballooned by 87%!
These are superlative numbers, and you’d expect superlative earnings performance from these companies. Turns out, reality is not that cooperative. Instead, net income of the S&P 500 companies is now back where it first had been at the end of 2011.
The cyclically adjusted price-to-earnings ratio was originally created by author Robert Shiller, and it is widely regarded as one of the best measures of the true value of stocks in existence. According to the Guardian, there have only been two times in our entire history when this ratio has been higher. One was just before the stock market crash of 1929, and the other was just before the bursting of the dotcom bubble…
Traditionally, one of the best yardsticks for whether shares are over-valued or under-valued has been the cyclically adjusted price earnings ratio constructed by the economist Robert Shiller. This ratio is currently at about 29 and has only twice been higher: in 1929 ahead of the Wall Street Crash, and in the last frantic months of the dotcom bubble of the late 1990s.
We can definitely wish for the current euphoria on Wall Street to last for as long as possible, but let there be absolutely no doubt that it is going to end at some point.
It would take a market decline of 40 or 50 percent to get the cyclically adjusted price-to-earnings ratio back to a level that makes economic sense. Let us hope that the market does not make such a violent move very rapidly, because that would likely be absolutely crippling for our financial system.
Markets tend to go down a lot faster than they go up, and every other major stock market bubble in U.S. history has ended very badly.
And this bubble is definitely overdue to burst. The bull market that led up to the great crash of 1929 lasted for 2002 days, and this week the current bull market will finally exceed that record.
Trying to pick a specific date for a market crash is typically a fruitless exercise, but market watchers are becoming very concerned about some of the signs that we are now seeing. For example, the “CCT indicator” is currently showing “the lowest bullish energy ever”…
The first factor is the CCT indicator. This indicator is a proprietary internal measurement of the general volume of the New York Stock Exchange. The measurements take into account the institutional participation as a ratio of the overall volume. Also measured is the duration of heavy block buying in rallies.
The sum total of all the measurements now shows the lowest bullish energy ever — even lower than in 2008, just before the market crash.
In other words, this current bull market appears to be completely and utterly exhausted.
The laws of economics cannot be defied forever. Traditionally, commodity prices and stock prices have tended to move in unison. And this makes perfect sense, because commodity prices tend to rise when economic conditions are good, and in such an environment stock prices are typically going to move up.
But now we are in a time when commodity prices and stock prices have become completely disconnected. In order to bring this ratio back into line, the S&P 500 would need to fall by about 1000 points, and such a decline would cause a level of financial chaos that would be absolutely unprecedented.
This current stock market bubble has lasted much longer than many of the experts originally anticipated, but that just means that the eventual crash will likely be that much more devastating.
In the end, you don’t need to know all of the technical details in this article.
But what you do need to know is that current stock market valuations are not sustainable and that a great crash is coming.
It may not happen next week or next month, but it is going to happen. And when it does happen, it is likely to make what happened in 2008 look like a Sunday picnic.
The Dow Jones Industrial Average provides us with some pretty strong evidence that our “stock market boom” has been fueled by debt. On Wednesday, the Dow crossed the 20,000 mark for the first time ever, and this comes at a time when the U.S. national debt is right on the verge of hitting 20 trillion dollars. Is this just a coincidence? As you will see, there has been a very close correlation between the national debt and the Dow Jones Industrial Average for a very long time.
For example, when Ronald Reagan took office in 1991, the U.S. national debt had just hit 994 billion dollars and the Dow was sitting at 951. And as you can see from this chart by Matterhorn.gold via David Stockman, roughly that same ratio has held true throughout subsequent presidential administrations…
During the Clinton years the Dow raced out ahead of the national debt, but an “adjustment” during the Bush years brought things back into line.
The cold hard truth is that we have been living way above our means for decades. Our “prosperity” has been fueled by the greatest debt binge in the history of the world, and we are greatly fooling ourselves if we think otherwise.
We would never have gotten to 20,000 on the Dow if Barack Obama and Congress had not gotten us into an extra 9.3 trillion dollars of debt over the past eight years.
The average began tracking the most powerful corporate stocks in 1896, and has served as a broad measure of the market’s health through 22 presidents, 22 recessions, a Great Depression, at least two crashes and innumerable rallies, corrections, bull and bear markets. The blue chip reading finally cracked the 20,000 benchmark for the first time early Wednesday.
During the current bull market, the second longest in history, the Dow has more than tripled since March 2009.
Since Donald Trump’s surprise election victory, the Dow has now climbed by approximately 2150 points.
And it took just 64 calendar days for the Dow to go from 19,000 to 20,000. That is an astounding pace, and financial markets around the rest of the planet are doing very well right now too. In fact, global stocks rose to a 19 month high on Wednesday.
So where do we go from here?
Well, if Donald Trump wants to see Dow 30,000 during his presidency, then history tells us that he needs to take us to 30 trillion dollars in debt.
Of course that would be absolute insanity even if it was somehow possible. Each additional dollar of debt destroys the future of our country just a little bit more, and at some point this colossal bubble is going to burst.
The “market always goes higher over time,” Todd Morgan, chairman of Bel Air Investment Advisors. “The lesson here is that through wars, recessions, elections, impeachments, financial crises, and on and on, investing for the long term in high-quality stocks is the key to building wealth. … We are telling our clients that you can’t time the market. Think long term. Stay the course. We expect the market to see Dow 30,000 in my lifetime, and for my grandchildren to see Dow 50,000 in their lifetime.”
My hope is that the market will continue to go up. But nobody can deny that valuations are already at absurdly high levels, and the only way that this party can keep going is to continue to fuel it with more and more debt.
But for the moment, there is a tremendous amount of optimism out there, and most experts expect the Dow to continue to set new highs. In fact, CNBC says that whenever the Dow crosses a new threshold like this it usually means good things for investors…
CNBC looked at market data from the past 30 years and zeroed in on the times when the Dow has crossed levels like 2,000, 3,000, 4,000 … all the way up to the 19,000 level it hit in November. At those times, investors can typically expect traders to push it up even higher, according to data from Kensho. Not only does the Dow go up, but it outperforms the S&P 500 index along the way.
But as USA Today has explained, not all Americans are benefiting from this stock market rally…
The breakthrough came just four trading days into Trump’s presidency, a whirlwind in which the billionaire has reaffirmed his commitment to strengthen the U.S. economy and create more jobs and higher wages for workers. Still, nearly half of Americans have not benefited from the so-called “Trump Rally,” which has generated more than $2.2 trillion in paper gains for the Wilshire 5000 Total Stock Index since Election Day. The reason: only 52% of Americans polled by Gallup last April said they “have money invested in stocks” — the lowest stock ownership rate in the 19 years Gallup has tracked the data and down sharply from 65% in 2007 before the financial crisis.
Hopefully the good times will continue to roll for as long as possible.
But there is no possible way that they can keep going indefinitely.
For decades, our debt has been growing much faster than our GDP has. By definition, this is an unsustainable situation. At some point we will have accumulated so much debt that our financial system will no longer be able to hold up under the strain.
Many were convinced that we would reach that point before the U.S. national debt hit 20 trillion dollars, and yet here we are.
So how much higher can we go before the bubble bursts?
That is a very good question, and I don’t know if anyone has the right answer.
But for President Trump, this is going to present him with quite a dilemma.
Either he can keep the debt party going for as long as possible, or he can try to get us to take some tough financial medicine right now.
If an attempt is made to deal with our debt problems now, we will experience severe economic pain almost immediately.
But if the can keeps being kicked down the road, our long-term prognosis is just going to keep getting worse and worse.
And if we try to delay the inevitable indefinitely, at some point the laws of economics are going to make our hard choices for us.
So let us celebrate “Dow 20,000″, but let us also understand that it is far more likely that we will see “Dow 10,000″ again before we ever see “Dow 30,000″.
Will the financial bubble that has been rapidly growing ever since Donald Trump won the election suddenly be popped once he takes office? Could it be possible that we are being set up for a horrible financial crash that he will ultimately be blamed for? Yesterday, I shared my thoughts on the incredible euphoria that we have seen since Donald Trump’s surprise victory on November 8th. The U.S. dollar has been surging, companies are announcing that they are bringing jobs back to the U.S., and we are witnessing perhaps the greatest post-election stock market rally in Wall Street history. In fact, the Dow, the Nasdaq and the S&P 500 all set new all-time record highs again on Thursday. What we are seeing is absolutely unprecedented, and many believe that the good times will continue to roll as we head into 2017.
What has been most surprising to me is how well the stocks of the big Wall Street banks have been doing. It is no secret that those banks poured a tremendous amount of money into Hillary Clinton’s campaign, and Donald Trump had some tough things to say about them leading up to election day.
So you wouldn’t think that it would be particularly good news for those banks that Trump won the election. However, we seem to be living in “Bizarro World” at the moment, and in so many ways things are happening exactly the opposite of what we would expect. Since Trump’s victory, all of the big banking stocks have been skyrocketing…
Financial stocks in particular have been on fire. Citigroup (C) and JPMorgan Chase (JPM) are up about 20% since Donald Trump defeated Hillary Clinton — and that makes them laggards!
Morgan Stanley (MS) has gained more than 25%. So has troubled Wells Fargo (WFC), despite the lingering fallout from its fake account scandal. Bank of America (BAC) is up more than 30%.
And so is Goldman Sachs (GS) — the former employer of both Treasury Secretary nominee Steven Mnuchin and Trump chief strategist Steve Bannon.
But are these stock prices justified by the fundamentals?
Of course not, but during times of euphoria the fundamentals never seem to matter much. Stocks were incredibly overvalued before the election, and now they are ridiculously overvalued.
Earlier today, a CNBC article pointed out that the cyclically-adjusted price to earnings ratio has only been higher than it is today at three points in our history…
“The cyclically adjusted P/E (CAPE), a valuation measure created by economist Robert Shiller now stands over 27 and has been exceeded only in the 1929 mania, the 2000 tech mania and the 2007 housing and stock bubble,” Alan Newman wrote in his Stock Market Crosscurrents letter at the end of November.
Newman said even if the market’s earnings increase by 10 percent under Trump’s policies “we’re still dealing with the same picture, overvaluation on a very grand scale.”
And of course a historic stock market crash immediately followed each of those three bubbles.
So are we being set up for a huge crash in early 2017?
Right now, the U.S. stock market is surging, with the Dow leaping toward 20,000, a number rooted in fiscal insanity and delusional expectations. There are no fundamentals that support a 20,000 Dow, but fundamentals have long since ceased to matter in a financial world hyperventilating on debt fumes while hallucinating about utopian economic models that will soon prove to generate fools instead of real wealth.
Today I’m going on the record with a prediction that I’ll offer with near absolute certainty: The rigged markets that now seem to defy gravity will be deliberately and destructively imploded under President Trump for all the obvious reasons. There will be financial chaos like we’ve never seen before: Investors leaping off tall buildings, banks declaring extended “holidays” that freeze transactions, and California pensioners slitting their wrists after they discover their promised pension funds were just vaporized by incompetent bureaucrats.
On the other hand, there are others that believe that Trump is just walking into a very bad situation and that a crash would be inevitable no matter who was president.
History tells us that there is no possible way that stock prices can stay at this irrational level indefinitely. But for now a wave of optimism is sweeping the nation, and many of those that are caught up in it will get seriously angry with you if you try to inject a dose of reality into the conversation.
But like I said yesterday, let’s hope that the optimists are correct. A survey that was just taken of 600 business executives found that 62 percent of them were optimistic about the U.S. economy over the next 12 months.
Incredibly, that number was sitting at just 38 percent the previous quarter.
For the moment, business leaders seem to be quite thrilled that we have a business executive in the White House.
Hopefully Donald Trump’s business experience will translate well to his new position. And it is certainly my hope that he is as successful as possible.
But even during the campaign Trump talked about how stocks were in a giant bubble, and the euphoria that we have seen since his election victory has just made that bubble even larger.
Throughout U.S. history, every giant financial bubble has always ended very badly, and this time around will not be any exception.
Trump may get the blame for it when it bursts, but the truth is that the conditions for the coming crisis have been building for a very, very long time.
The election of Donald Trump has sent shockwaves through the U.S. economy and the U.S. financial system. Since November 8th, the Dow has hit a brand new all-time record high, the U.S. dollar has strengthened greatly, and bank stocks are way up. But not all of the economic news is good news. Unlike stocks, bonds have reacted very negatively to Trump’s election victory. The past week has been an absolute bloodbath for bond traders, and as you will see below this is going to have dramatic implications for all U.S. consumers moving forward.
Over just a two day period, more than a trillion dollars was wiped out as bond yields spiked all over the globe. As CNN has noted, this type of “violent reaction” in the bond market has only happened three other times within the past ten years…
The rate on 10-year Treasury notes has surged to 2.3%, from 1.77% before the election. Last week’s spike in Treasury rates was so big, that it had only happened three times before in the last decade.
BlackRock’s Russ Koesterich called it a “violent reaction.”
The move stands to have broad repercussions for all Americans. Not only will the U.S. government have to pay more to borrow money, but mortgage rates and car loan costs should also rise. That’s because Treasuries are used as the benchmark for many other forms of credit.
As interest rates rise, virtually everyone in our society is going to feel the pain.
Those that need an auto loan in order to purchase a vehicle are going to find that loan payments are significantly higher than they were before.
Credit card rates will also go up, and those just getting out of school will discover that their student loan payments are even more suffocating.
The average contract rate on the popular 30-year fixed mortgage hit 4 percent, according to Mortgage News Daily, a level most didn’t expect to see until the middle of next year. Rates have now moved nearly a half a percentage point higher since Donald Trump was elected president.
“The situation on the ground is panicked. Damage control,” said Matthew Graham, chief operating officer of Mortgage News Daily. “People were trying to lock loans quickly last week and are now facing a tough choice to lock today or hope for a bounce. Many hoped for a bounce last week heading into the long weekend and we obviously didn’t get it.”
Rising interest rates was one of the key factors that precipitated the financial crisis of 2008, and many fear that it could happen again.
“If you’re going to buy a house and your mortgage payment went up by $200 or $300, you may buy a smaller house. There’s impact on interest rate sensitive sectors, like autos and housing, and also corporate bonds themselves, where financial engineering has helped juice up the equity market,” said George Goncalves, head of rate strategy at Nomura.
In addition, rising rates will make it more difficult for those with adjustable rate mortgages to keep their homes. Foreclosure activity was already up 27 percent during the month of October, and many are projecting that we could see another giant spike in foreclosures during the months ahead that is similar to what we saw during the last financial crisis.
Many Trump supporters don’t really care what the rest of the world thinks of our new president, but this is an area where what the rest of the world thinks really, really matters.
The truth is that the rest of the planet is not all too fond of Trump, and if that makes them a lot less eager to lend us money that is a major problem.
The only way that we can maintain our massively inflated debt-fueled standard of living is to continue to borrow gigantic mountains of money from the rest of the world at ultra-low interest rates.
If the rest of the world starts demanding higher rates of return now that Trump is president, we are going to experience economic pain on a scale that most Americans don’t believe is possible.
One of our big lenders has been China, and right now they are deeply concerned about what a Trump presidency might mean. Trump has talked very tough about trade with China, and the Chinese are gearing up for a major trade war. The following comes from CNBC…
During his election campaign this year, Trump spoke of a 45 percent import tariff on all Chinese goods while failing to outline how it would work. Should any such policy come into effect, China will take a “tit-for-tat approach”, according to an opinion piece in the Global Times, a newspaper backed by the Communist party.
“A batch of Boeing orders will be replaced by Airbus. U.S. auto and iPhone sales in China will suffer a setback, and U.S. soybean and maize imports will be halted. China can also limit the number of Chinese students studying in the U.S.,” the Global Times article read.
Most Trump supporters assume that since Trump has been a very successful businessman that he will be able to strengthen the U.S. economy.
But it isn’t that simple.
The only reason we are able to live the way that we live today is because we have been able to borrow trillions upon trillions of dollars at irrationally low interest rates.
The moment the rest of the world decides that they are not going to loan us money at irrationally low interest rates any longer the game is over, and it won’t really matter who is in the White House at that point.
So watch interest rates very carefully. If they keep going up, it is inevitable that a major economic slowdown will follow no matter what economic policies the new Trump administration implements.
One thing that you have to appreciate about Donald Trump is that unlike most politicians, he actually says what is on his mind. On Tuesday, Trump told Fox Business that he had already gotten out of the stock market, and that he foresees “very scary scenarios” ahead for investors. And of course things have already started to get a bit ominous for those holding stocks over the last week and a half. The Dow Jones Industrial Average has now closed down for seven days in a row, and that is the longest losing streak that we have seen since the panic of last August. Over the past 12 months we have seen virtually every other major global stock market experience at least one major crash. Could the U.S. markets be next?
What Trump told Fox Business earlier today was actually right on the money. Our financial markets have been artificially inflated by the Federal Reserve, and all artificial bubbles of this nature eventually burst. The following comes from a Bloomberg article that was posted on Tuesday entitled “Trump Urges Exit From Market Boosted by ‘Artificially Low’ Rates“…
Donald Trump on Tuesday said interest rates set by the Federal Reserve are inflating the stock market and recommended 401(k)-holders to get out of equities, just like he did.
“I did invest and I got out, and it was actually very good timing,” the Republican presidential nominee said in a phone interview with Fox Business. “But I’ve never been a big investor in the stock market.”
“Interest rates are artificially low,” Trump said. “The only reason the stock market is where it is is because you get free money.”
Trump’s comments come at a time when we are getting a whole host of bad news about the U.S. economy. We just learned that U.S. GDP grew at a meager 1.2 percent annual rate during the second quarter, the rate of homeownership in the United States just hit an all-time record low, and corporate earnings have now been falling for five quarters in a row.
But perhaps most alarming of all is what is happening to the price of oil. As I discussed yesterday, the price of oil has plunged well over 20 percent since June 8th, and it was down again on Tuesday.
As I write this article, the price of U.S. oil is sitting at just $39.66. The psychologically-important 40 dollar barrier has been broken, but the price of oil doesn’t even have to go down another penny to do immense damage to the U.S. economy. If it just stays at this price, we are going to bleed more energy industry jobs, more energy companies are going to default on their debts, and more financial institutions that are exposed to the energy industry are going to get into serious trouble.
All the ingredients are there for a major financial crisis, and perhaps that explains why so many investors are flocking to precious metals such as gold and silver right now.
The price of gold has gone up for six trading days in a row, and silver is approaching 21 dollars an ounce.
If the goal of the EBA Stress Tests was to reassure investors and regain confidence that ‘all is well’ in Europe’s increasingly fragile and systemically interconnected banking system, then it has utterly failed. The broadest European bank stock index is now down 7% from the post-stress-test spike highs, Italian banks are at record lows and being halted (despite Renzi’s promises), Commerzbank is struggling with capital raise chatter, and Deutsche Bank and Credit Suisse are tumbling after being booted from the Stoxx 50.
It is funny – every time I write a major article about Deutsche Bank, their stock goes to a new record low.
Problems at Deutsche Bank and Credit Suisse are now becoming so obvious that even mainstream analysts are admitting that they are “causing some anxiety”…
“Deutsche Bank and Credit Suisse … are dropping to where they were after the Brexit vote,” said Bruce Bittles, chief investment strategist at Baird. “That’s causing some anxiety.”
Deutsche and Credit Suisse’s U.S.-listed shares closed down 3.75 percent and 4.67 percent, respectively.
In Europe nobody is waiting for financial stocks to crash, because they are already crashing.
A “too big to fail” crisis is rapidly unfolding across the entire continent, but most Americans are totally oblivious to what is going on over there. Instead, our major news outlets are feeding us an endless barrage of negative headlines about Donald Trump and a steady stream of positive headlines about Hillary Clinton.
I wonder who they want to win the election?
Of course I am being sarcastic. The days when the mainstream media at least pretended to be “independent” are long gone.
But as far as the stock market is concerned, I am quite confident that Donald Trump will be vindicated.
And if you don’t want to believe Donald Trump, I would encourage you to consider what Jeffrey Gundlach, the chief executive of DoubleLine Capital, has been saying. He has been right about the markets in recent years over and over again, and just a few days ago he publicly stated that “stocks should be down massively” and that now is the time to “sell everything“.
Unfortunately, very few people are likely to change course at this stage. Most of those that could see the warning signs have already gotten out of the market, and those that prefer to have blind faith in the system are not likely to listen to warnings from men like Trump and Gundlach.
So now it is just a waiting game.
We shall see if Trump and Gundlach are right, and those that end up on the correct side of the equation are probably going to make a boatload of money during the months ahead.
The Dow and the S&P 500 both closed at all-time record highs on Tuesday, and that is very good news. You might think that is an odd statement coming from the publisher of The Economic Collapse Blog, but the truth is that I am not at all eager to see the financial system crash and burn. We all saw what took place when it happened in 2008 – millions of people lost their jobs, millions of people lost their homes, and economic suffering was off the charts. So no, I don’t want to see that happen again any time soon. All of our lives will be a lot more comfortable if the financial markets are stable and stocks continue to go up. If the Dow and the S&P 500 can keep on soaring, that will suit me just fine. Unfortunately, I don’t think that is going to be what happens.
Of course I never imagined we would be talking about new record highs for the stock market in mid-July 2016. We have seen some crazy ups and downs for the financial markets over the last 12 months, and the downs were pretty severe. Last August, we witnessed the greatest financial shaking since the historic financial crisis of 2008, and that was followed by an even worse shaking in January and February. Then in June everyone was concerned that the surprising result of the Brexit vote would cause global markets to tank, and that did happen briefly, but since then we have seen an unprecedented rally.
So what is causing this sudden surge?
We’ll get to that in a moment, but first let’s review some of the numbers from Tuesday. The following comes from USA Today…
All three major indexes gained 0.7% apiece, as the Dow jumped 121 points to a new all-time closing high and the S&P 500 built upon its record close notched Monday. The blue chips now stand at 18,347.67, about 35 points above the previous record set May 19, 2015.
The new mark for the S&P 500 is 2,152.14, a 15-point improvement on its Monday close.
Overall, we have seen stocks shoot up more than eight percent over the last two weeks. Normally, a rise of 10 percent for an entire yearis considered to be quite healthy…
Interior Minister Theresa May is set to become the U.K.’s prime minister on Wednesday. Stock markets across the globe have risen sharply, after a steep sell-off, following the United Kingdom’s decision to leave the European Union.
“In the past two weeks, post Brexit, the S&P 500 has vaulted over 8 percent,” said Adam Sarhan, CEO at Sarhan Capital. “Typically, a 10 percent move for the entire year is considered normal.”
What makes all of this even stranger is the fact that investors have been pulling money out of stocks as if it was 2008 all over again. In fact, Zero Hedge tells us that on balance investors have been taking money out of equity funds for 17 weeks in a row.
So why are stocks still going up?
If your guess is “central bank intervention”, you are right on the nose.
Across the Pacific, the Bank of Japan has been voraciously gobbling up assets, and the architect of “Abenomics” just won a major electoral victory which has fueled a huge market rally over there…
Meanwhile, in Japan, Prime Minister Shinzo Abe ordered new stimulus after his coalition won an election in Japan’s upper chamber by a landslide. Japan’s Nikkei 225 rose nearly 2.5 percent overnight, while the yen erased all of its post-Brexit gains against the dollar.
“In the short term, I think it’s going to help, but in the long term, we’ll see,” said JJ Kinahan, chief strategist at TD Ameritrade. “I feel like a lot of people are getting themselves into situations that they can’t get out of.”
Fast forward six months when Matt King reports that “many clients have been asking for an update of our usual central bank liquidity metrics.”
What the update reveals is “a surge in net global central bank asset purchases to their highest since 2013.”
And just like that the mystery of who has been buying stocks as everyone else has been selling has been revealed.
So now you know the rest of the story.
The economic fundamentals have not changed. China is still slowing down. Japan is still mired in a multi-year economic crisis. Much of Europe is still dealing with a full-blown banking crisis. Much of South America is still experiencing a full-blown depression.
The economic and financial suffering that are coming are inevitable, but they are not going to be pleasant for any of us. So let us all hope that we still have a little bit more time before the party is over and it is time to turn out the lights.
Over the last two trading days, European banks have lost 23 percent of their value. Let that number sink it for a bit. In just a two day stretch, nearly a quarter of the value of all European banks has been wiped out. I warned you that the Brexit vote “could change everything“, and that is precisely what has happened. Meanwhile, the Dow was down another 260 points on Monday as U.S. markets continue to be shaken as well. Overall, approximately three trillion dollars of global stock market wealth has been lost over the last two trading days. That is an all-time record, and any doubt that we have entered a new global financial crisis has now been completely eliminated.
But of course the biggest news on Monday was what happened to European banks. The Brexit vote has caused financial carnage for those institutions unlike anything that we have ever seen before. Just check out this chart from Zero Hedge…
I knew that things would be bad if the UK voted to leave the European Union, but I didn’t know that they would be this bad.
Prior to all of this, a whole bunch of “too big to fail” banks all over Europe were already in the process of imploding, and now this chaotic financial environment may push several of them into full-blown collapse mode simultaneously. Just consider the following commentary from Wolf Richter…
Healthy big banks would get over Brexit and the political turmoil it is spawning, particularly non-UK banks. But there are no healthy big banks in Europe. And non-UK banks are crashing just as hard, and some harder. This is about a banking crisis morphing into a financial crisis.
These bank stocks got crushed on Friday. And they got crushed again today. Italian banks have been reduced to penny stocks. Spanish banks are getting closer. Commerzbank, Germany’s second largest bank, and still partially owned by the German government as a consequence of the last bailout, is well on the way.
One institution that I have been warning about for months is German banking giant Deutsche Bank. On Monday, their stock fell another 5.77 percent to a fresh all-time closing low of 13.87. I have been convinced that Deutsche Bank is going to zero for a long time, but these days it seems in quite a hurry to get there.
Of course Deutsche Bank is far from alone. The following are other “too big to fail” European banks that have lost at least one-fifth of their value over the past two trading days…
-Royal Bank of Scotland
-Lloyds Banking Group
-Banca Monte dei Paschi di Siena
The Brexit contagion is spreading as USD liquidity and counterparty risk in the interconnected global financial system has reached US banks with Goldman at 3 year lows and BofA and Citi plunging over 12%. This happens just two days after the Fed released its latest stress test results finding that none of the 33 banks tested would need additional capital in case of a “severe” financial crisis. That conclusion may be tested soon.
Meanwhile, the British pound continues to get absolutely pummeled. As I write this, the GBP/USD is down to 1.32, and some are now warning that the British pound may hit parity with the U.S. dollar by the end of the year.
One of the reasons why I expect the British pound to continue to tumble is because the global elite have to show the British people that they made the wrong decision, and they need to scare off any other countries that would consider holding similar votes.
Two major rating agencies downgraded the United Kingdom’s credit rating on Monday.
S&P Global Ratings lowered the UK to AA from AAA, with a “negative” outlook. And, Fitch cut its rating to AA from AA+, with a negative outlook as well.
And as I mentioned yesterday, Bank of America and Goldman Sachs have already projected that the UK economy is heading into recession.
As much economic and financial pain as possible will be inflicted upon the British people, and meanwhile they will be bombarded by mainstream news stories telling them that they made a stupid decision.
Hopefully the British people will stand strong and will not give in to the pressure.
But of course it isn’t just the British people that will be feeling the pain. The Brexit vote has sent shockwaves all over the planet, and global investors are losing tremendous amounts of money. For instance, here in the United States approximately 1.3 trillion dollars of stock market wealth has been wiped out so far…
Brexit isn’t just a European problem after all. The United Kingdom’s decision to quit the European Union is costing U.S. investors a pretty penny.
U.S.-based companies in the broad Russell 3000, including online advertising company Alphabet (GOOGL), software maker Microsoft (MSFT) and global bank JPMorgan Chase (JPM), have suffered a collective loss of $1.3 trillion since Friday’s shocker from the United Kingdom, according to a USA TODAY analysis of data from S&P Global Market Intelligence.
Hopefully tomorrow will be better. It is very rare for global financial markets to crash for three days in a row, but it could happen. More likely, however, is that we will see some kind of temporary bounce as long as some really negative event doesn’t hit the news.
But let there be no doubt about what has just happened. The collapse of Lehman Brothers was the “trigger event” that really accelerated the crisis of 2008, and now it appears as though the Brexit vote will be the “trigger event” that greatly accelerates the crisis of 2016.
Global investors had already lost trillions over the past 12 months, and a full-blown financial implosion was going to happen no matter how the vote turned out, but thanks to British voters the fun and games have arrived early.
Unfortunately, only a very small fraction of the population understands just how bad things are going to get in the months ahead…
We have seen this story before, and it never ends well. From mid-March until early May 2008, a vigorous stock market rally convinced many investors that the market turmoil of late 2007 and early 2008 was over and that happy days were ahead for the U.S. economy. But of course we all know what happened. It turned out that the market downturns of late 2007 and early 2008 were just “foreshocks” of a much greater crash in late 2008. The market surge in the spring of 2008 was just a mirage, and it masked rapidly declining economic fundamentals. Well, the exact same thing is happening right now. The Dow rose another 222 points on Tuesday, but meanwhile virtually every number that we are getting is just screaming that the overall U.S. economy is steadily falling apart. So don’t be fooled by a rising stock market. Just like in the spring of 2008, all of the signs are pointing to an avalanche of bad economic news in the months ahead. The following are 11 signs that the U.S. economy is rapidly deteriorating…
#1 Total business sales have been declining for nearly two years, and they are now about 15 percent lower than they were in late 2014.
#2 The inventory to sales ratio is now back to near where it was during the depths of the last recession. This means that there is lots and lots of unsold stuff just sitting around out there, and that is a sign of a very unhealthy economy.
#4 Profits for companies listed on the S&P 500 were down 7.1 percent during the first quarter of 2016 when compared to the same time period a year ago.
#5 In April, commercial bankruptcies were up 32 percent on a year over year basis, and Chapter 11 filings were up 67 percent on a year over year basis. This is exactly the kind of spike that we witnessed during the initial stages of the last major financial crisis as well.
#7 The U.S. economy has lost an astounding 191,000 mining jobs since September 2014. For areas of the country that are heavily dependent on mining, this has been absolutely devastating.
#8 According to Challenger, Gray & Christmas, U.S. firms announced 35 percent more job cuts during April than they did in March. This indicates that our employment problems are accelerating.
#9 So far this year, job cut announcements are running 24 percent above the exact same period in 2015.
#10 U.S. GDP grew at just a 0.5 percent annual rate during the first quarter of 2016. This was the third time in a row that the GDP number has declined compared to the previous quarter, and let us not forget that the formula for calculating GDP was changed last year specifically to make the first quarter of each year look better. Without that “adjustment”, it is quite possible that we would have had a negative number for the first quarter.
But you never hear Obama talk about that statistic, do you?
And the mainstream media loves to point the blame at just about anyone else. In fact, the Washington Post just came out with an article that is claiming that the big problem with the economy is the fact that U.S. consumers are saving too much money…
The surge in saving is the real drag on the economy. It has many causes. “People got a cruel lesson about [the dangers] of debt,” says economist Matthew Shapiro of the University of Michigan. Households also save more to replace the losses suffered on homes and stocks. But much saving is precautionary: Having once assumed that a financial crisis of the 2008-2009 variety could never happen, people now save to protect themselves against the unknown. Research by economist Mark Zandi of Moody’s Analytics finds higher saving at all income levels.
So even though half the country is flat broke, I guess we are all supposed to do our patriotic duty by going out and running up huge balances on our credit cards.
What a joke.
Of course the U.S. economy is actually doing significantly better at the moment than almost everywhere else on the planet. Many areas of South America have already plunged into an economic depression, major banks all over Europe are in the process of completely melting down, Japanese GDP has gone negative again despite all of their emergency measures, and Chinese stocks are down more than 40 percent since the peak of the market.
This is a global economic slowdown, and just like in 2008 it is only a matter of time before the financial markets catch up with reality. I really like how Andrew Lapthorne put it recently…
On the more bearish slant is Andrew Lapthorne, head of quantitative strategy at Societe Generale. To him this profit downturn is a sign that stocks are far too overvalued and the economy is weaker than you think.
“MSCI World EPS is now declining at the fastest pace since 2009, losing 4% in the last couple of months alone (this despite stronger oil prices),” wrote Lapthorne in a note. For the S&P 500 specifically, the year on year drop in profit drop was the most since third quarter of 2009.
“Global earnings are now 14% off the peak set in August 2014 and back to where they stood five years ago. Equity prices on the other hand are 25% higher. Gravity beckons!”
I couldn’t have said it better myself.
Look, this is not a game.
So far in 2016, three members of my own extended family have lost their jobs. Businesses are going under at a pace that we haven’t seen since 2008, and this means that more mass layoffs are on the way.
We can certainly be happy that U.S. stocks are doing okay for the moment. May it stay that way for as long as possible. But anyone that believes that this state of affairs can last indefinitely is just being delusional.
Gravity beckons, and the crash that is to come is going to be a great sight to behold.
The Dow closed above 18,000 on Monday for the first time since July. Isn’t that great news? I truly wish that it was. If the Dow actually reflected economic reality, I could stop writing about “economic collapse” and start blogging about cats or football. Unfortunately, the stock market and the economy are moving in two completely different directions right now. Even as stock prices soar, big corporations are defaulting on their debts at a level that we have not seen since the last financial crisis. In fact, this wave of debt defaults have become so dramatic that even USA Today is reporting on it…
Get ready to step over some landmines, investors. The number of companies defaulting on their debt is hitting levels not seen since the financial crisis, and it’s not just a problem for bondholders.
So far this year, 46 companies have defaulted on their debt, the highest level since 2009, according to S&P Ratings Services. Five companies defaulted this week, based on the latest data available from S&P Ratings Services. That includes New Jersey-based specialty chemical company Vertellus Specialties and Ohio-based iron ore producer Cliffs Natural. Of the world’s defaults this year, 37 are of companies based in the U.S.
Meanwhile, coal producer Peabody Energy (BTU) and surfwear seller Pacific Sunwear (PSUN) this week filed plans for bankruptcy protection. Shares of Peabody have dropped 97% over the past year to $2 a share and Pacific Sunwear stock is off 98% to 4 cents a share.
A lot of big companies in this country have fallen on hard times, and it looks like bankruptcy attorneys are going to be absolutely swamped with work for the foreseeable future.
So why are stock prices soaring right now? After all, it doesn’t seem to make any sense whatsoever.
And it isn’t just a few bad apples that we are talking about. All across the spectrum, corporate revenues and corporate earnings are down. At this point, earnings for companies on the S&P 500 have plunged a total of 18.5 percent from their peak in late 2014, and it is being projected that corporate earnings overall will be down 8.5 percent for the first quarter of 2016 compared to one year ago.
As earnings decline, a lot of big companies are getting into trouble with debt, and we have already seen a very large number of corporate debt downgrades. In recent interviews, I have been bringing up the fact that the average rating on U.S. corporate debt has now fallen to “BB”, which is already lower than it was at any point during the last financial crisis.
A lot of people don’t seem to believe me when I share that fact, but it is absolutely true.
One of the big reasons why corporate debt is being downgraded is because a lot of these big companies have been going into enormous amounts of debt in order to buy back their own stock. The following comes from Wolf Richter…
Downgrades ascribed to “shareholder compensation,” as Moody’s calls share buybacks and dividends, have been soaring, according to John Lonski, Chief Economist at Moody’s Capital Markets Research. The moving 12-month sum of Moody’s credit rating downgrades of US companies, jumped from 32 in March 2015, to 48 in December 2015, and to 61 in March 2016, nearly doubling within a year.
The last time the number of downgrades attributed to financial engineering reached 61 was in early 2007. It would hit its peak of 79 in mid- 2007, a few months before the beginning of the Great Recession in Q4 2007. At the time, stocks were on the verge of commencing their epic crash.
When corporations go into the market and buy back their own stock, they are slowly cannibalizing themselves. But we have seen these stock buybacks soar to record levels for a couple of reasons. Number one, big investors want to see stock prices go up, and so big investors tend to really like these stock buybacks and will generally support corporate executives that wish to engage in doing this. Number two, if you are a greedy corporate executive that is heavily compensated by stock options, you very much want to see the stock price go up as well.
So the name of the game is greed, and stock buybacks have been fueling much of the rise in U.S. stock prices that we have been seeing recently.
However, the truth is that nothing in the financial world lasts forever, and this irrational bubble will ultimately come to an end as well.
Back then, as could be the case today, a bull market & a US-led economic recovery was rudely interrupted by a crisis in Emerging Markets. The crisis threatened to hurt Main Street via Wall Street (the Nasdaq fell 33% between Jul-Oct 1998, when [Long-Term Capital Management] went under). Policy makers panicked and monetary policy was eased (with hindsight unnecessarily). Fresh liquidity combined with apocalyptic investor sentiment very quickly morphed into a violent but narrow equity bull market/bubble in 1998/99, one which ultimately took valuations & interest rates sharply higher to levels that eventually caused a “pop”.
Like Hartnett, I definitely believe that a major “pop” is on the way, although I would like for it to be delayed for as long as possible.
Someday we will look back on these times with utter amazement. It has been absolutely incredible how the financial markets have been able to defy economic reality for so long.
In a new CNNMoney/E*Trade survey of Americans who have at least $10,000 in an online trading account, over half (52%) gave the U.S. economy as a “C” grade. Another 15% rated the economy a “D” or “F.”
This gloom persists despite the fact that the stock market is on the upswing again. The Dow topped 18,000 Monday for the first time since July 2015.
If some Americans think that the U.S. economy deserves a “D” or an “F” grade right now, just wait until they see what is in our immediate future.
Personally, I give our economy an “A” for being able to maintain our unsustainable debt-fueled standard of living for as long as it has. Somehow we have managed to consume far more than we produce for decades, and the largest debt bubble in the history of the planet just keeps getting bigger and bigger and bigger.
Of course we are very much living on borrowed time at this point, but I truly hope that the bubble economy can keep going for at least a little while longer, because nobody should want to see what is coming afterwards.
*About the author: Michael Snyder is the founder and publisher of The Economic Collapse Blog. Michael’s controversial new book about Bible prophecy entitled “The Rapture Verdict” is available in paperback and for the Kindle on Amazon.com.*