To all those investors expecting the Fed to step in to backstop the recent weakness seen in the stock market, Wolf Richter warns: The cavalry isn’t coming.
After years of force-feeding too much liquidity into world markets, the central banking cartel is now aware of the Franken-markets it has created. And now with a new head at the US Federal Reserve, and soon at the ECB, central bankers have shifted their priority from supporting asset prices to now actively engineering lower prices.
They just don’t want prices to drop too far too fast.
Of course, the big question is: how much control do they really have? The situation may very quickly get out of their hands.
But the big takeaway is to expect lower prices across the board for nearly every “risk on” asset: stocks (including and especially the FANGS), corporate bonds and real estate. The Fed is working to reduce investor exuberance — and as many bloodied contrarian investors will warn you — Don’t fight the Fed:
Now we’re in an environment where we have an Everything Bubble, and even though there’s still a few central bankers out there that say that they can’t see the bubble, others have now acknowledged it. Of course they don’t call it a “bubble”; they say that prices are “elevated”. So they’re seeing this. In my opinion, a lot of the responses from the Fed are not really about inflation; they’re really about trying to avoid the asset bubble from getting any bigger. They’re trying to avoid a deflation of that asset bubble that could be very messy for the financial system.
Which is why they’re now tightening. Even though inflation by their measure is still relatively low and below target. And so they’re really not targeting inflation; I think they’re targeting asset prices. They’re trying to put a stop to the Everything Bubble out of fear that it might bring the financial system down again if this goes any further.
There’s debt behind this asset bubble, and this leverage is what’s risky. So I think the Fed is clearly, this time, on the side of targeting assets bubbles. Investors are asking if the stock market drops, if the Dow drops a thousand or two thousand or five thousand points, is the Fed going to step in and put a stop to it? And my gut feeling is, no, they won’t. They will let this run unless credit freezes up. They’re trying to bring these asset prices down somewhat. I think that’s the environment we’re in. We have bubbles everywhere, and now we have Central Banks trying to somehow save the system with minimum damage.
Of course we only have the central banks to blame for this situation. They wanted every investor to go way out on the risk branch, and pension funds have done that. And now, the price to be paid for that will be tremendous. Most of these insolvent pension funds are state and municipal funds, so taxpayers may be at least partially responsible for picking that up.
This same will probably be true with corporate pension funds. We are seing companies that are going bankrupt, such as Remington, you know, they’re guaranteed to some extent by the Federal government and that, too, in the end, is probably going to require that the taxpayer will have to step in.
And as for the pain that rising interest rates will create, this is just the beginning. This has just started. After almost a decade of 0% interest rate policy we don’t know anymore what it’s like to look at many years of rising interest rates. Money will get a lot more expensive for a lot of companies. And those that have to roll over their debt, even if they’re not on LIBOR, if they have fixed rate debt they’ll have to roll that over eventually. And when they roll that over, they go from, you know, from a 4% percent coupon to maybe a 6% percent, 7% percent or 8% percent coupon.
As for housing, I think what we’ll see is not a dramatic selloff of double digit percentages that we had last time. I think we’ll see a long, drawn-out, much more difficult process. At first, it won’t even look like a sellout. I think on housing on a national basis, housing will continue to look strong even though the selloff will start in particular cities. You will have some cities that are turning around, but overall, nationwide the numbers are still stable. And so the Fed won’t even be worried about it because they’re looking at the nationwide numbers, and they’re saying, “Oh, it’s still okay, it’s just declining a little bit” or it’s “plateauing” whereas house pricing may be coming down pretty sharply in some of the most bubbly cities.
After rallying on Friday, stocks tanked on Monday, dropping over 450 points. In fact, it was the worst first day of the second quarter since the Great Depression.
Stocks dove Wednesday as well on the heels of China’s announcement that they will intensify the trade war with more tariffs, according to most analysts. But Peter Schiff, the financial guru who accurately predicted the 2008 recession has a different take.
According to Schiff’s blog, Schiff Gold, most analysts blamed the plunge on the escalating trade war, but Peter Schiff sees it quite a bit differently. He said it was just another bad day in a bear market. In fact, he said the market could have rallied because the Chinese response wasn’t as bad as it could have been. But when you’re in a bear market, all news is bad news.
Schiff says that the media’s talking heads are simply using the tariffs as an excuse. The real truth is that most people are in a selling mood. “Stocks are expensive. The bull market is over. It’s now a bear market. People want to get out. People are allocating out. Growth is slowing whether people want to acknowledge it or not,” said Schiff.
The media pundits are optimistic too; just like they were before the 2008 recession, said Schiff. “That’s what’s going on now. Nobody thinks there’s a problem. Everybody is optimistic. Everybody is bullish. So, when you see these classic signs that something is going wrong, you just ignore it.”
The bottom line is Schiff thinks the economy is going to tank (although he isn’t sure how soon that will occur) and the stock market is going to continue its bear run. But the Fed is not going to be able to come to the rescue this time around because of inflation. If it does try to launch more QE to bail out the stock market, it will completely tank the dollar.
When we do all that, the dollar is going to implode because everybody is going to know that the experiment failed. Everybody is going to know there is no way out of this box. There is no normalization of rates that is ever going to happen. Their balance sheet is never going to shrink. The balance sheet is going to grow permanently, which means this banana republic debt monetization. They can no longer pretend that they’re not doing the same things as South American banana republics. It’s a pure ‘we just print money to finance government spending,’ which is going to explode.
Gregory Mannarino, the founder of TradersChoice.net joined USA Watchdog’s Greg Hunter for an interview. While speaking with Hunter, Mannarino said that the Federal Reserve isn’t losing control of the market, it has already lost control and we are in some very serious financial trouble.
Mannarino said the markets are out of control and it’s the Fed’s fault. Not that we didn’t know that, but the whole economy is unraveling and not many seem to have noticed. Mannarino, who is a professional trader says the new Fed Head, Jerome Powell, caused the market to sell off last week, not president Donald Trump’s tariff talk. Powell blurted out in Congressional testimony that the “U.S. is not on a sustainable fiscal path.”
“They have already lost control. If they were in control, would they still be buying bonds like they are? Would they still be trying to ‘get it right’? They cannot unwind this in a normal way. They have created a system of bubbles, and they are well aware of this. These things tend to collapse very violently when they do. If the Federal Reserve or any of these central banks were in control, do you think we would be in the situation we are in right now? Absolutely not. All they have done is liquefy the world with debt and buy everything they can to keep this propped up. This is not control. This is some kind of a Frankenstein they have created by trying to prop everything up.”
“The stock market is in a bubble that is being suspended on the back of the debt bubble. So when the debt bubble pops, every other subsequent bubble connected to it is gonna burst along with it…forget the stock market…it’s the bond market that tells the story,” Mannarino warns.
Mannarino says that the whole system is fake, and he and Hunter say it’s definitely possible that central banks are giving each other money to buy their own bonds. If that’s happening, and many market analysts firmly believe that it is then the Fed is in desperation mode.
“This [the markets] is a corpse here, that’s on life support. And that’s all it is. So, there’s going to be a terrible moment or reckoning. Inflation? Forget about it. Of course, there’s going to be massive inflation. They can’t stop it…we’re in a lot of trouble here…let’s say we start getting surreal inflation, and they’re going to start hiking super fast. Well, what’s that going to do? BAM! There goes your debt bubble and then we’re done. Back to the stone age. Stock market down 6,000 will probably seem like a dream come true because it might even go lower than that.”
“People are going to lose everything; worse than last time if they’re not ready for what’s coming. That means watching the bond market….there’s gonna be an unbelievable price to pay for this at some point.”
Peter Schiff, a market analyst who had accurately predicted the 2008 recession and the recent stock market plunge says more is coming. Wait until you hear what he says is on the horizon for America and the global economy in the Trump era.
In an interview with Infowars‘ Alex Jones, Schiff details what we can all expect from the economy. And even though Trump has fought to save the economy, the federal reserve is working against the president. “Unfortunately, he is the fall guy. There’s no way to stop this,” Shiff begins.
“The problem is so big that the minute the Fed has to try to solve it, it’s gonna unleash a much bigger one [problem],” Shiff says. Jones begins his intro by not sugar coating the problem the economy is in thanks to government interference. The economy is a giant bubble and it will pop at some point, not just deflate.
“The Fed were dragging their feet in raising rates while Obama was president. They talked about raising rates but at the end of the day, they barely moved them up. The pace of hikes has increased since Trump was elected, but part of the reason for that…I mean, the media is not talking down the economy; if anything they’re overhyping the economy. Everybody’s talking about how strong the economy is, how everything is great. Everybody is taking credit for this great economy. The Fed wants to take credit for it, Trump wants to take credit for it, so if everybody wants to talk about how great the economy is, the Fed doesn’t have any excuse if it doesn’t raise rates…in order to keep up the pretense that the economy is as strong as everybody thinks, the Fed is in this box where it has to raise rates.
But they [the Fed] can’t tell the truth that it’s really a bubble, and if we raise rates, we’re gonna prick it, so they’re kinda in this bind. And they are still telegraphing that they’re gonna raise rates three or four times this year. And that is the problem.“
Schiff then goes on to explain some of the problems Trump inherited from Obama that will be difficult, if not impossible to solve without a crisis.
“One of the things the happened under Obama, is he inherited a massive deficit from Bush. The deficit skyrocketed in 2008/2009 and so, after a couple of years, the deficits were slowly falling while Obama was president. Now, they were falling from a very high level, but at least they were going down. All of a sudden, deficits are skyrocketing and they’re about to explode out of control. Yet, we have no way to finance them. So interest rates have no place to go but way up. Not just a little up.”
Jones then wanted to know if Shiff thought there was a way for Trump to help America get out of this mess. Schiff says Trump should come clean on how the economy is really looking.
“The sooner he tells the truth, the better…I don’t think this market is going to roar back and make new highs.”
The other problem is Americans have the lowest savings rate in ten years. There is no money for the public to buy undesirable bonds that not even the Chinese will buy. Schiff also says that the social justice warriors need to take a break and focus on the bigger picture.
“Social issues need to take a backseat. If the economy crashes, if the market crashes, if we have a worse economy than the one that Bush left Obama, then none of the other stuff matters. Because we’re paving the way for somebody worse than Hillary Clinton.”
Trump is going to get blamed when the economy tanks because the media has already decided that they are on the side of socialism. When all of this happens, prepare for the free market (which we don’t have) to be blamed and prepare for the tax cuts to be blamed. This will pave the way for Communism. “I don’t think Trump can get out of dodge in time,” Schiff said.
I have been saying it for years and I will say it again here — stocks are the worst possible “predictive” signal for the health of the general economy because they are an extreme trailing indicator. That is to say, when stock markets do finally crash, it is usually after years of negative signs in other more important fundamentals.
Of course, whether we alternative analysts like it or not, the fact of the matter is that the rest of the world is psychologically dependent on the behavior of stock markets. The masses determine their economic optimism (if they are employed) according to the Dow and the S&P and, to some extent, by official and fraudulent unemployment statistics. When equities start to dive, society takes notice and suddenly becomes concerned about fiscal dangers they should have been worried about all along.
Well, it may have taken a couple months longer than I originally predicted, but it would seem so far that a moment of revelation (that slap in the face I discussed a couple weeks ago) is upon us. In less than a few days, most of the gains in global stocks for 2018 have been erased. The question is, will this end up as a “hiccup” in an otherwise spectacular bull market bubble? Or is this the inevitable death knell and the beginning of the implosion of that bubble?
After I predicted the election of Donald Trump, I also predicted that central banks would begin pulling the plug on life support for equities markets. This did in fact take place with the Fed’s continued program of interest rate increases and the reduction of their balance sheet, which effectively strangles the flow of cheap credit to banking and corporate institutions that fueled stock buybacks for years. Without this constant and ever expansionary easy fiat, there is nothing left to act as a crutch for stocks except perhaps blind faith. And blind faith in the economy always ends up being smacked down by the ugly realities of mathematics.
I believe the latest extraordinary dive in stocks is NOT a “hiccup,” but a sign that “contagion” is still a thing, and also a trailing sign of instability inherent in our fiscal system. Here are some reasons why this trend is likely to continue.
Historic Corporate Debt Levels
As mentioned above, artificially low interest rates have allowed corporations incredible leeway to manipulate stock markets at will using stock buybacks and other methods. However, there are still consequences for this strategy. For example, corporate debt levels are now at historic annual highs; far higher even than debt levels just before the crash of 2008.
If this doesn’t illustrate the falseness of the so called “economic recovery”, I don’t know what does. Beyond that, what happens as the Fed continues to raise interest rates and all that debt held by the “too big to fails” becomes vastly more expensive? Well, I think we are seeing what happens. Over time, faith in the corporate ability to prop up equities will erode, and a considerable decline is built directly into the farce.
Price To Earnings Ratio
In some of her final statements upon stepping down as the head of the Federal Reserve, Janet Yellen had some choice comments about the state of equities markets. These included statements that stock market valuations were high and that the price-to-earnings ratio of the S&P 500 (the ratio of stock values versus actual corporate earnings per share) were at a historical peak. This fits exactly with the policy shift I warned about in 2017, and my assertion that Jerome Powell will be the Fed chairman to oversee the final crash of the post-bailout market bubble.
The spike in P/E ratios is not only taking place in U.S. markets. For example, the same trend can be observed in countries like India. Meaning, there are equities valuation problems around the world.
The issue here is that corporate earnings do not justify such high stock prices. Therefore, something else must be inflating those prices. That something was, of course, central bank stimulus, and now that party is almost over, whether the “buy the f’ing dippers” want to admit it yet or not.
10-Year Treasury Yield Spike
Have spiking Treasury bond yields actually been a signal for an “accelerating economy” as mainstream economists often suggest? Not really. In the era of central bank monetary manipulation, it is more likely that yields were spiking because markets are anticipating the arrival of Jerome Powell as Fed chair and accelerating interest rate hikes rather than an accelerating economy.
The notion that the economy itself might be “overheating” in 2018 is a rather new and nefarious propaganda meme being used by central bankers to set a particular narrative. I believe that narrative will be the claim that “inflation” is a key concern rather than deflation and that central banks must act to temper inflation with more aggressive rate increases. In reality, what we are seeing is not “inflation” in a traditional sense, but stagflation. That is to say, we are seeing elements of price inflation in necessary goods and services and well as property markets, but continued deflation in the rest of the economy.
The Fed in particular will continue to ignore negative fundamentals because they are seeking to deliberately pop the market bubble they have created.
The spike in 10-year bond yields seems to be correlating closely to the recent volatility in stocks. This volatility increased exponentially as yields neared the 3% mark, which appears to be the magical trigger point for equities failure. Though yields suffered a modest decline as stocks tumbled this week, I still recommend keeping an eye on this indicator.
Dollar Weakness
As I have mentioned in recent articles, there has been a strange disconnect between interest rates and the U.S. dollar. As the Fed continues its policy of hiking interest rates, generally the dollar index should rise in response. Instead, the dollar has been swiftly falling, only stalling in the past couple of trading sessions. If the dollar index continues to fall even as stocks decline and rates increase, this may suggest a systemic risk to the dollar itself.
Such risk could include a dollar dump by foreign central banks in favor of a wider basket of currencies, or the SDR trading basket created by the IMF.
Balance Sheet Reductions Accelerating
The Fed’s most recent release of data on its balance sheet reduction program shows a drop in holdings of $18 billion; this is far higher that the originally planned $12 billion slated by the Fed. Meaning, the Fed is dumping its balance sheet holdings much faster than it told the public initially.
Why is this important? Well, if you have been tracking the behavior of stocks over the past few years as well as the increases in the Fed’s balance sheet, you know that stock markets have risen in direct correlation with that balance sheet. In other words, the more purchases the Fed made, the higher stocks climbed.
If this correlation is directly linked, then as the Fed reduces its balance sheet, stocks should fall.
So, the fed announces its latest round of balance sheet reductions on January 31st, the reduction is much higher than anticipated, and within a week we witness the largest two day market drop in years. You would think this observation might just be important, but if you look at the mainstream economic media, almost NO ONE is mentioning it. Instead, they are searching for all sorts of random explanations for what just happened, none of which are very logically satisfying.
I believe that the Fed will not only continue its program of interest rate increases even if stocks begin to flounder, but that they will also unload their balance sheet as quickly as possible.
Corporate Investor Comments
Major corporate investment firms are beginning to raise their voices about the potential not only for stock devaluations, but also the amount that they might fall. Sydney-based AMP capital suggested a rather moderate 10% pullback in equities, which I think will become the talking point for most of the mainstream media over the next couple weeks. At least, until the whole thing comes crashing down much further than that.
The head of Blackstone COO expects stocks to fall at least 20% this year, a much more aggressive number but not high enough in my view.
I still believe these kinds of estimates are only applicable in the very short term. By the end of 2018, it is possible that markets will double the worst estimated declines predicted by the mainstream investment world given the fundamentals.
Central Banker Comments
Comments by agents of the Federal Reserve reinforce the notion that the central bank is about to crush the bull market bubble. San Francisco branch head Robert Kaplan has been quoted as saying the Fed may be required to hike interest rates MORE than the three times expected by mainstream economists in 2018.
As noted above, Janet Yellen’s exit statements were decidedly “hawkish,” suggesting that property markets and stocks are overpriced. On top of this, Jerome Powell, the new Fed chair, has been quoted in Fed documents from 2012 (finally released this past month) discussing the market bubble the Fed had created and the need to temper than bubble. In other words, Powell is the perfect man for the job of imploding stocks. Powell even predicted in 2012 that when the Fed raises rates the reaction by stock markets might be severe. Interesting that markets would plunge the very first day Powell assumes the Fed chair position.
I suppose finally a Fed agent and I have something in common. We’ve both been predicting the same exact market outcome caused by the same trigger event for around the same number of years.
I outlined in great detail the plan for the “global economic reset” and Powell’s role in overseeing the next stock crash in my article Party While You Can – Central Bank Ready To Pop The Everything Bubble. In that article, I predicted exactly the results which seem to be developing today in equities.
In essence, Powell is being portrayed by the mainstream media as “Trump’s guy,” and the change in Fed leadership is now being referred to as “Trump’s Fed.” This is not random rhetoric. I can’t think of ANY other president in the past that was given credit by the mainstream media for the activities of the Federal Reserve. Trump’s control over the Federal Reserve is zero. But, the actions of the Fed over the course of this year will undoubtedly crash the very equities markets that Trump has been foolishly taking credit for since his election.
The real issue here now is, how fast will this ugly festering sore explode? That’s hard to say. I would not be surprised if markets fall about 20% below recent highs in the course of the next couple of months and then stall. We may even see a couple spectacular bounces in the near term, all set to trumpets and fanfare by the mainstream economic media who will proclaim that the latest shock-drop was nothing more than an “anomaly.” Then, the crash will continue into the end of 2018 and panic will ensue.
That said, if there is some kind of major geopolitical crisis (such as a war with North Korea), then all bets are off. Stocks could crash exponentially over the course of a few weeks rather than a year. As the past few days have proven, stocks are not invincible, not in the slightest. And all the gains accumulated in the span of years can be wiped away in an instant.
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Today saw Jerome Powell sworn into office as the new Chairman of the Federal Reserve, replacing Janet Yellen. Looking at the sea of red across Monday’s financial markets, Mr. Powell is very likely *not* having the sort of first day on the job he was hoping for…
Also having a rough start to the week is anyone with a long stock position or a cryptocurrency portfolio.
The Dow Jones closed down over 1,200 points today, building off of Friday’s plunge of 666 points. The relentless ascension of stock prices has suddenly jolted into reverse, delivering the biggest 2-day drop stocks have seen in years.
But that’s nothing compared to the bloodletting we’re seeing in the cryptocurrency space. The price of Bitcoin just broke below $7,000 moments ago, now nearly two-thirds lower from its $19,500 high reached in mid-December. Other coins, like Ripple, are seeing losses of closer to 80% over the same time period. That’s a tremendous amount of carnage in such a short window of time.
And while stocks and cryptos are very different asset classes, the underlying force driving their price corrections is the same — a change in sentiment.
Both markets had entered bubble territory (stocks much longer ago than the cryptos), and once they did, their continued price action became dependent on sentiment much more so than any underlying fundaments.
The Anatomy Of A Price Bubble
History is quite clear on how bubble markets behave.
On the way up, a virtuous cycle is created where quick, outsized gains become the rationale that attracts more capital into the market, driving prices up further and even faster. A mania ensues where everyone who missed out on the earlier gains jumps in to buy regardless of the price, desperate not to be left behind (this is called fear of missing out, or “FOMO”).
This mania produces a last, magnificent spike in price — called a “blow-off” top — which is then immediately followed by an equally sharp reversal. The reversal occurs because there are simply no remaining new desperate investors left to sell to. The marginal buyer has suddenly switched from the “greater fool” to the increasingly cautious investor.
Those sitting on early gains and looking to cash out near the top start selling. They don’t mind dropping the price a bit to get out. So the price continues downwards, spooking more and more folks to start selling what they have. Suddenly, the virtuous cycle that drove prices to their zenith has now metastasized into a vicious cycle of selling, driving prices lower and lower as panicking investors give up on their dreams of easy riches and increasingly scramble to limit their mounting losses.
In the end, the market price retraces nearly all of the gains made, leaving a small cadre of now-rich early investors who managed to get out near the top, and a large despondent pool of ‘everyone else’.
We’ve seen this same compressed bell-curve shape in every major asset bubble in financial history:
And we’re seeing it play out in real-time now in both stocks and cryptos.
The Bursting Crypto Bubble
It’s amazing how fast asset price bubbles can pop.
Just a month ago, the Internet was replete with articles proclaiming the new age of cryptocurrencies. Every day, fresh stories were circulated of individuals and companies making overnight fortunes on their crypto bets, shaking their heads at all the rubes who simply “didn’t get” why It’s different this time.
Here at PeakProsperity.com the demand for educational content on cryptocurrencies from our audience rose to a loud crescendo.
We did our best to provide answers as factually as we could through articles and webinars, though we tried very hard not to be seen as encouraging folks to pile in wantonly. A big reason for this is we’re more experienced than most in identifying what asset bubbles look like.
To us, the run-up in the cryptocurrencies seen over 2017 had all the classic hallmarks of an asset price bubble — irrespective of the blockchain’s potential to unlock tremendous long-term economic value. Prices had simply risen way too far way too fast. Which is why we issued a cautionary warning in early December that concluded:
So, if you’ve been feeling like the loser who missed the Bitcoin party bus, you’ve likely done yourself a favor by not buying in over the past few weeks. It is highly, highly likely for the reasons mentioned above that a painful downwards price correction is imminent. One that will end in tears for all the recent FOMO-driven panic buyers.
And now that time has shown this warning to have been prescient in both its accuracy and timeliness, we can clearly see that Bitcoin is following the classic price trajectory of the asset price bubble curve. The chart below compares Bitcoin’s current price to that of several of history’s most notorious bubbles:
This chart (which is from Feb 2, so it doesn’t capture Bitcoin’s further decline below $7k) shows that Bitcoin is now about 2/3 of its way through the bubble life-cycle, and about half-way through its fall from its apex.
Projecting from the paths of previous bubbles, we shouldn’t be surprised if Bitcoin’s price ends up somewhere in the vicinity of $2,500-$3,000 by the time the dust settles.
Did The Stock Market Bubble Just “Pop”?
Despite the extreme drop in the stock market over the past two days, any sort of material bubble retracement has yet to begin — which should give you an appreciation of how overstretched its current valuation is.
Look at this chart of the S&P 500 index. Today’s height dwarfs those of the previous two bubbles the index has experienced this century.
The period from 2017 on sure looks like the acceleration seen during a blow-off top. If indeed so, does the 6% drop we’ve just seen over the past two trading days signify the turning point has now arrived?
Crazily, the carnage we’ve seen in the stock market over the past two days is just barely visible in this chart. If indeed the top is in and we begin retracing the classic bubble curve, the absolute value of the losses that will ensue will be gargantuan.
If the S&P only retraces down to the HIGHS of its previous two bubbles (around 1,500), it would need to fall over 43% from where it just closed today. And history suggests a full retracement would put the index closer to 750-1,000 — at least two-thirds lower than its current valuation.
How Spooked Is The Herd?
As a reminder, bubbles are psychological phenomena. They are created when perception clouds judgment to the point where it concludes “Fundamentals don’t matter”.
And they don’t. At least, not while the mania phase is playing out.
But once the last manic buyer (the “greatest” fool) has joined the party, there’s no one left to dupe. And as the meteoric price increase stops and then reverses, the herd becomes increasingly skittish until a full-blown stampede occurs.
We’ve been watching that stampede happen in the crypto space over the past 4 weeks. We may have just seen it start in the stock markets.
How much farther may prices fall from here? And how quickly?
History gives us a good guide for estimating, as we’ve done above. But the actual trajectory will be determined by how spooked the herd is.
For a market that has known no fear for nearly eight years now, a little panic can quickly escalate to an out-of-control selling frenzy.
Want proof? We saw it late today in the complete collapse in XIV, the inverse-VIX (i.e. short volatility) ETN that has been one of Wall Street’s most crowded trades of late. It lost over 90% of its value at the market close:
The repercussions of this are going to send seismic shockwaves through the markets as a tsunami of margin calls erupts. A cascading wave of sell-orders that pushes the market further into the red at an accelerating pace from here is a real possibility that can not be dismissed at this point.
Those concerned about what may happen next should read our premium report Is This It? issued over the past weekend.
In it, we examine the congregating perfect storm of crash triggers — rising interest rates, a fast-weakening dollar, a sudden return of volatility to the markets after a decade of absence, rising oil prices — and calculate whether the S&P’s sudden 6% rout is the start of a 2008-style market melt-down (or worse).
Make no mistake: these are sick, distorted, deformed and liquidity-addicted bubble markets. They’ve gotten entirely too dependent on continued largess from the central banks.
That is now ending.
After so many years of such extreme market manipulation finally gives way, the coming losses will be staggeringly enormous.
The chief concern of any prudent investor right now should be: How do I avoid being collateral damage in the coming reckoning?
The impending economic collapse is hidden from most. People only see a rising stock market, not the negative underlying factors that will cause the whole system to crash.
The weakening of the U.S. dollar is just getting started, warned veteran market forecaster Peter Schiff, CEO of Euro Pacific Capital. “We have just begun a major, long-term bear market in the dollar,” he said, which should cause a spike in oil prices. He thinks oil will reach $80-$100 a barrel in 2018. The commodity currently trades at roughly $63 a barrel. Shiff focuses on oil as just one example of the inflation that will help collapse the dollar.
When the price of oil rises, it reverberates through the economy. Peter called it a gigantic tax hike for consumers. But the Fed is still worried prices aren’t going up fast enough and that they won’t hit the mystical 2% goal.
“They’re going to hit that out of the park. They’re going to be looking at 2% in the rearview mirror – in the distant rearview mirror. That is going to be the big story. They’re going to way overshoot and they’re not going to be able to do anything about it.” –Peter Schiff
“High inflation is not good for the dollar. By definition, high inflation means the dollar is losing purchasing power. If the dollar is losing purchasing power, that is bad for the dollar,” Shiff explains.
“If they [the public and investors] don’t think there’s going to be inflation, they’re wrong. Those expectations are totally wrong. People are ignoring what is going on in the currency market, what’s going on in the commodities markets, what’s going on in the bond markets. All of this stuff is flashing inflation – at least the way you measure it – consumer prices.” –Peter Schiff
Shiff continues with even more dire news. “We are very close to a major breakdown in the bond market. Now, I know the bond market has dodged a lot of bullets…so you could say ‘cryin’ wolf. Look how long the bond market has held in there. But you know what? It’s gonna hold up until it doesn’t. And when it breaks…this bond market is gonna unravel. The whole thing could unravel very, very quickly. This is what is so dangerous here. You have the bond market potentially about to break down, a major 30-year bull market about to unravel, you have the dollar getting ready to go over the edge of a cliff. “
Shiff also warns to not put your trust in the government or their bonds.
“Everybody belives the fed is going to shrink it’s balance sheet. Now, I don’t believe that but the markets believe it. Now, I checked the balance sheet on Thursday again. So far, it hasn’t shrunk at all. So there’s been no tapering.
The risk of a big drop in the bond market has never been this high. And what happens if the bond market tanks? That’s it. The stock market is gonna crash…there’s a massive crash coming. And if the fed is gonna panic, they’re gonna try to stop it.”
The feds will try to fix a stock market crash by not raising rates, which will lead to the imploding of the dollar. Everything that can go wrong, will.
“I don’t know if this is going to unravel very quickly. But it is close,” Shiff warns.
Many people do not realize that America is not only entering a new year, but within the next month we will also be entering a new economic era. In early February, Janet Yellen is set to leave the Federal Reserve and be replaced by the new Fed chair nominee, Jerome Powell. Now, to be clear, the Fed chair along with the bank governors do not set central bank policy. Policy for most central banks around the world is dictated in Switzerland by the Bank for International Settlements. Fed chairmen like Janet Yellen are mere mascots implementing policy initiatives as ordered. This is why we are now seeing supposedly separate central banking institutions around the world acting in unison, first with stimulus, then with fiscal tightening.
However, it is important to note that each new Fed chair does tend to signal a new shift in action for the central bank. For example, Alan Greenspan oversaw the low interest rate easy money phase of the Fed, which created the conditions for the derivatives and credit bubble and subsequent crash in 2008. Ben Bernanke oversaw the stimulus and bailout phase, flooding the markets with massive amounts of fiat and engineering an even larger bubble in stocks, bonds and just about every other asset except perhaps some select commodities. Janet Yellen managed the tapering phase, in which stimulus has been carefully and systematically diminished while still maintaining delusional stock market euphoria.
Now comes the era of Jerome Powell, who will oversee the last stages of fiscal tightening, the reduction of the Fed balance sheet, faster rate increases and the final implosion of the ‘everything’ bubble.
As I warned before Trump won the election in 2016, a Trump presidency would inevitably be followed by economic crisis, and this would be facilitated by the Federal Reserve pulling the plug on fiat life support measures which kept the illusion of recovery going for the past several years. It is important to note that the mainstream media is consistently referring to Jerome Powell as “Trump’s candidate” for the Fed, or “Trump’s pick” (as if the president really has much of a choice in the roster of candidates for the Fed chair). The public is being subtly conditioned to view Powell as if he is an extension of the Trump administration.
This could not be further from the truth. Powell and the Fed are autonomous from government. As Alan Greenspan openly admitted years ago, the Fed does not answer to the government and can act independently without oversight. So, why is the media insisting on misrepresenting Powell as some kind of Trump agent? Because Trump, and by extension all the conservatives that support him, are meant to take the blame when the ‘everything’ bubble vaporizes our financial structure. Jerome Powell is “Trump’s guy” at the Fed; so any actions Powell takes to crush the recovery narrative will also be blamed on the Trump administration.
But, is it a certainty that Powell will put the final nail in the coffin of “economic recovery?” Yes. Last Friday the Fed finally released the transcripts of its monetary policy meetings in 2012, and in those transcripts are some interesting admissions from Powell himself. After reading these transcripts I am fully convinced that Powell is the man who will stand as the figurehead of the central bank during the final phase of U.S. decline.
Here are some of the most astonishing quotes by Powell from those transcripts along with my commentary. These quotes are yet another piece of evidence that vindicates my position on the Fed as an economic saboteur and my position on the historic market bubble the bank has created:
Powell:“I have concerns about more purchases. As others have pointed out, the dealer community is now assuming close to a $4 trillion balance sheet and purchases through the first quarter of 2014. I admit that is a much stronger reaction than I anticipated, and I am uncomfortable with it for a couple of reasons.
First, the question, why stop at $4 trillion? The market in most cases will cheer us for doing more. It will never be enough for the market. Our models will always tell us that we are helping the economy, and I will probably always feel that those benefits are overestimated. And we will be able to tell ourselves that market function is not impaired and that inflation expectations are under control. What is to stop us, other than much faster economic growth, which it is probably not in our power to produce?”
Assessment: By all indications the Fed did do more,MUCH more. Including QE3, various stimulus packages and incessantly low interest rates for years, the Fed has essentially stepped in every time stock markets in particular were about to crash back to their natural state of decline. Powell is being rather honest in his estimation here that these stopgaps are in fact temporary and that the Fed cannot produce true economic growth to support the market optimism they have created through their interventions. He is stating openly that markets will only remain optimistic so long as they are assured that the Fed will continue to intervene.
This is probably why it took almost six years before these transcripts were released.
Powell: “When it is time for us to sell, or even to stop buying, the response could be quite strong; there is every reason to expect a strong response. So there are a couple of ways to look at it. It is about $1.2 trillion in sales; you take 60 months, you get about $20 billion a month. That is a very doable thing, it sounds like, in a market where the norm by the middle of next year is $80 billion a month. Another way to look at it, though, is that it’s not so much the sale, the duration; it’s also unloading our short volatility position.”
Assessment: And here we have Powell’s shocking admission, clarifying his previous point — the “strong response” that Powell is referring to is a market reversal, or bubble implosion. He even admits the existence of the Fed’s “short position on volatility.” This explains the strange behavior of the VIX index, which has plunged to record lows as “someone” continually shorts VIX stocks in order to interfere with any decline in markets.
This interference in the VIX has conjured an aberration, a market calm and investor confidence that is artificial. Such overconfidence, when optimism turns into mania, has happened before. In fact, the end of the Greenspan era was awash in such exuberance. And this delusion always ends the same way — with crisis.
I would also like to mention here that I have seen some disinformation being planted on Powell’s statements in 2012, asserting that he was “not talking about stock markets” specifically. Obviously he is, as you will see in other parts of his statement, but to reinforce the point, here is a quote from another Fed member who spilled the beans, Richard Fisher:
“What the Fed did — and I was part of that group — is we front-loaded a tremendous market rally, starting in 2009.
It’s sort of what I call the “reverse Whimpy factor” — give me two hamburgers today for one tomorrow.”
Fisher went on to hint at his very reserved view of the impending danger:
“I was warning my colleagues, Don’t go wobbly if we have a 10 to 20 percent correction at some point… Everybody you talk to… has been warning that these markets are heavily priced.” [In reference to interest rate hikes]
So, what happens when the Fed stops shorting volatility and ends the easy money being pumped into markets? Well, again, I think Powell and Fisher have just told you what will happen, but let’s continue.
Powell:“My third concern — and others have touched on it as well — is the problems of exiting from a near $4 trillion balance sheet. We’ve got a set of principles from June 2011 and have done some work since then, but it just seems to me that we seem to be way too confident that exit can be managed smoothly. Markets can be much more dynamic than we appear to think.
When you turn and say to the market, “I’ve got $1.2 trillion of these things,” it’s not just $20 billion a month — it’s the sight of the whole thing coming. And I think there is a pretty good chance that you could have quite a dynamic response in the market.”
Assessment: The Fed balance sheet is being reduced NOW, and Powell as chairman will only continue the process if not expedite it. Some people may argue that Powell is displaying an attitude that would suggest he is not on board with tightening policies. I disagree. I believe Powell will make the argument that the band-aid must be ripped off and that stock markets need some “tough love”.
In fact, Fed members including Yellen and former member Alan Greenspan (is there such a thing as a “former” member of the Fed?) have already been fielding the notion that stock markets are suffering from “irrational exuberance” and that something must be done to “temper inflation.”
Powell is also acknowledging the mass-psychological aspect of investors, now trained like Pavlovian dogs to salivate over stock tickers instead of thinking critically on the implications of equities that “can’t lose”. When they finally begin to realize that equities can indeed lose, and that the Fed is going to let them lose, what will the result be, I wonder?
Powell: “I think we are actually at a point of encouraging risk-taking, and that should give us pause. Investors really do understand now that we will be there to prevent serious losses. It is not that it is easy for them to make money but that they have every incentive to take more risk, and they are doing so. Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy.”
Assessment: Wow! And there you have it. The new Fed chair’s own prognostications. He even used the dreaded “B” word — bubble. Yes, as I have been arguing for quite some time, the Fed will continue to raise rates and cut off the low cost money supply to banks and corporations that has helped boost stock markets as well as numerous other asset classes. And now we discover after six years a Fed official, soon to be the Fed chairman, telling you EXACTLY what is about to happen within American markets, reinforcing my long held position.
Powell even mentions that “this is their strategy.” Now, that could be interpreted a few ways, but I continue to hold that the Fed plans to deliberately crash markets and that this will be a controlled demolition of the U.S. economy.
Trump may actually clash with Powell over these measures in the near future, considering Trump has thoroughly taken credit for the insane stock market rally that has dominated since his election. But, this will only add to the fake drama. Imagine, the very man Trump “picked” as the new head of the Federal Reserve undermining the market bubble which Trump boasts about on his Twitter account. The Kabuki theater will be phenomenal.
All the while, the true culprits behind the bubble and the crash, the international financiers and banks, will escape almost all scrutiny as the public mindlessly follows the political soap opera played out in the mainstream media.
***
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The only other times in our history when stock prices have been this high relative to earnings, a horrifying stock market crash has always followed. Will things be different for us this time? We shall see, but without a doubt this is what a pre-crash market looks like. This current bubble has been based on irrational euphoria that has been fueled by relentless central bank intervention, but now global central banks are removing the artificial life support in unison. Meanwhile, the real economy continues to stumble along very unevenly. This is the longest that the U.S. has ever gone without a year in which the economy grew by at least 3 percent, and many believe that the next recession is very close. Stock prices cannot stay completely disconnected from economic reality forever, and once the bubble bursts the pain is going to be unlike anything that we have ever seen before.
If you think that these ridiculously absurd stock prices are sustainable, there is something that I would like for you to consider. The only times in our history when the cyclically-adjusted return on stocks has been lower, a nightmarish stock market crash happened soon thereafter…
The Nobel-Laureate, Robert Shiller, developed the cyclically-adjusted price/earnings ratio, the so-called CAPE, to assess whether stocks are likely to be over- or under-valued. It is possible to invert this measure to obtain a cyclically-adjusted earnings yield which allows one to measure prospective real returns. If one does this, the answer for the US is that the cyclically-adjusted return is now down to 3.4 percent. The only times it has been still lower were in 1929 and between 1997 and 2001, the two biggest stock market bubbles since 1880. We know now what happened then. Is it going to be different this time?
Since the market bottomed out in early 2009, the S&P 500 has been on a historic run. If this rally had been based on a booming economy that would be one thing, but the truth is that the U.S. economy has not seen 3 percent yearly growth since the middle of the Bush administration. Instead, this insane bubble has been almost entirely fueled by central bank manipulation, and now that manipulation is being dramatically scaled back.
And the guys on Wall Street know what is coming. For example, Joe Zidle says that this bull market is now in “the ninth inning”…
Joe Zidle, of Richard Bernstein Advisors, is arguing that the bull market has entered the bottom of the ninth inning.
“This is a late-cycle environment,” Zidle said on CNBC’s “Futures Now” recently.
“In innings terms, they’re not time dependent. An inning could be shorter or they could be longer. It just really depends,” the strategist said.
This bubble has lasted for much longer than it ever should have, and everyone understands that a day of reckoning is coming.
In fact, earlier today I came across an article on Zero Hedge that contained an absolutely remarkable quote from Eric Peters…
“We are investing as if 1987 will happen tomorrow, because it will,” said the CIO. “But we need to be long, or we’ll be out of business,” he explained, under pressure to perform. “So we construct option trades that are binary bets.” Which pay X profit if stocks rally, and cost Y if markets fall. No more and no less.
“What you do not want is a portfolio whose losses multiply depending on the severity of a decline.” That’s what most people have today. “At the last stage of the cycle, you want lots of binary bets. Many small wins. Before the big loss.”
“Are we at the start or the end of the ‘Don’t know what I’m buying’ cycle?” asked the same CIO. “No one knows.” But we’re definitely within it.
“When their complex swaps drop 40%, and prime brokers demand more margin, investors will cry ‘It’s not possible!’ But anything is possible.” The prime brokers will hang up and stop them out.
In case you don’t remember, in 1987 we witnessed the largest one day percentage decline in U.S. stock market history.
When it finally happens, millions upon millions of ordinary Americans will be completely shocked, but most insiders know that the other shoe is going to drop at some point.
In particular, watch financial stock prices very closely. Last month, Richard Bove issued a chilling warning about bank stocks…
One of Wall Street’s most vocal bank analysts is troubled by the rally in financials.
The Vertical Group’s Richard Bove warns that the overall market is just as dangerous as the late 1990s, and he cites momentum — not fundamentals — as what’s driving bank stocks to all-time highs.
“If we don’t get some event in the economy or in politics or in somewhere that is going to create more loan volume and better margins for the banks, then yes, they would come crashing down,” Bove said Monday on CNBC’s “Trading Nation.” “I think that the risk in these stocks is very high at the present time.”
It isn’t going to take much to set off an unstoppable chain of events. Our financial markets are even more vulnerable than they were in 2008, and the right trigger could unleash a crisis unlike anything we have ever seen in modern American history.
Unfortunately, most Americans keep getting fooled by the artificial boom and bust cycles that the central banks create. Right now most people seem to have been lulled into a false sense of security, and they truly believe that everything is going to be okay.
But every time before when the market has looked like this a crash has always followed, and this time will be no exception.
Michael T. Snyder is a graduate of the University of Florida law school and he worked as an attorney in the heart of Washington D.C. for a number of years.Today, Michael is best known for his work as the publisher of The Economic Collapse Blog and The American Dream.
The US stock market is officially in a massive bubble based on the one valuation metric that cannot be faked.
Corporations can engage any number of accounting gimmicks to juice their earnings, cash flow, and dividends… for this reason P/E, P/CF and P/DY ratios are all suspect when it comes time to value a corporations.
Sales cannot be gimmicked. Either money comes in the door, or it doesn’t. And if a company is caught messing around with its sales numbers, someone is going to jail.
For this reason, Price to Sales is perhaps the single most objective and clear means of measuring stock valuations.
This metric, above all others, you can point to and say, “this is definitively accurate and has not been messed with.”
On that note, as Bill King recently noted, today the S&P 500 is sporting a P/S ratio that is massively higher than it was in 2007 and is only marginally lower than it was during the Tech Bubble (the single largest stock bubble of all time for most measures).
(Source: The King Report)
There is simply no way to look at this and not call it a bubble. It is well above the 2007 bubble and only slightly smaller than the Tech Bubble (which everyone now looks
This bubble, like all bubbles, will burst. And when it does, the market will crash, just as it did in 2000 and 2008.
To pick up a FREE investment report outlining three investments that you could make you a ton of money when the bubble bursts…
(ANTIMEDIA) After nearly a decade of being able to borrow money for next to nothing, interest rates are finally beginning to creep higher. Even the relatively small increases seen so far have caused problems in the previously booming automobile industry. The size of the auto loan market has ballooned to a historic 1.1 trillion dollars, and subprime lending has once again become the norm. Teaser offers that allow people to get cars with zero money down and 84-month financing have fueled a wave of irresponsible spending. Americans’ tendency to associate success with having nice things has driven many people who can’t afford to buy a house to get the next best thing — a brand new car.
The data released so far in 2017, however, has started to raise questions about how much longer these spending habits can last. There has been a significant drop in new car sales and a sharp increase in the delinquency rates of subprime borrowers. Inventories across the country have started to build up, and if things don’t turn around soon, the excess cars sitting on lots will eventually force prices lower. According to analysts at Morgan Stanley, price declines will also impact the used car market, and some predictions are calling for up to a 50% decline by 2021.
Millions of borrowers who bought cars on credit could see the value of their vehicles plummet yet still have to pay off their full loan amount. It’s similar to 2008 when the mortgage market collapsed and plunged home prices across the country dramatically lower. Property values fell so much that people suddenly owed more on their homes than they were worth. Those homeowners then had to make the decision of whether to wait it out and keep paying their inflated mortgage rates or cut their losses and sell. Cars, on the other hand, have never been an investment, and this kind of situation in the auto industry would likely trigger an avalanche of private sales as people try to get out from under their debts.
Fitch Ratings Inc. talked about these recent developments in their latest report:
“Fitch expects that deteriorating credit performance will be more acute in the subprime segment, driven to some extent by the expansion of less-tenured independent auto finance companies that have demonstrated higher-risk appetites and less underwriting discipline…NADA’s Used Vehicle Price Index, which measures wholesale prices of used vehicles up to eight years old, declined over 6% in 2016 and was down 8% year over year through February 2017, marking the eighth consecutive monthly decline. Used vehicle prices were down 1.6% sequentially in February, reflecting the sharpest monthly decline for the index since November 2008 and a seasonal anomaly for February.”
Wells Fargo is one of the largest holders of subprime auto debt and recently took steps to limit their exposure when investors started to recognize the possible downside. It has even been reported that many of these loans were given out to buyers who had no credit score at all.
The risks aren’t limited to just lenders and borrowers but also extend to institutional investors. Thousands of these high-risk car loans have been bundled together into products similar to the mortgage-backed securities that undermined financial stability in 2008. Investment fund managers have bought billions of dollars worth of this securitized debt while trying to maximize returns in this low-interest rate environment. Even though this bubble, on its own, isn’t enough to destabilize the economy, the additional problems with student loans and record high rental costs have had a devastating impact on the net worth of most working Americans.
The real reason these loose lending standards have reemerged in the auto sector is to prop up the system through consumerism. The trade-off has been a lack of any substantial savings by the average person. Instead of planning for their futures, people have financed overpriced cars for six or seven years while still having to make monthly payments on a student loan. This next generation isn’t going to have the extra money needed to afford a home, build an investment portfolio, or start a business. Instead, they’re setting themselves up to work for years trying to get out from under the stress that comes from accepting debt enslavement.
As time goes on, more and more weaknesses in the economy will reveal themselves. Whether it’s the collapse of the retail market, uncertainty in the Eurozone, or the automation of low-skilled workers, something will eventually cause public confidence to break. The auto loan market is a microcosm of the systemic imbalances that have become normal since the Federal Reserve and U.S. government bailed out the system in 2008. Despite this clear manipulation, individuals who accumulated massive debts are still responsible for their actions, but the rampant lack of economic knowledge has led millions of people into a life in quicksand.
For months we’ve been talking about the massive lending bubble propping up the U.S. auto market. Now, noting many of the same concerns that we’ve highlighted repeatedly, Morgan Stanley’s auto team, led by Adam Jonas, has just issued a report detailing why they think used car prices could crash by up to 50% over the next 4-5 years.
Here’s the summary (flood of supply, poor lending standards and desperate OEMs who need to keep new car sales elevated at all costs):
Off-lease supply: This has already more than doubled since 2012 and is set to rise another 25% over the next 2 years.
Extended credit terms: Auto loans are at record lengths and lease assumptions (residuals, money factor) are at record levels of accommodation.
Rising rates: Starting from record low levels in auto loans.
Overdependency on auto ABS: The outstanding balance of auto securitizations has surpassed last cycle’s peak.
Record high deep subprime participation:32% of subprime auto ABS deals were deep subprime (weighted average FICO < 550) in 2016 vs. 5% in 2010.
Record high units of new car inventory:2016YE unit inventory levels were near 10% higher than 2015YE, and are continuing to trend higher in 2017.
OEM price competition: Car manufacturers have capacitized to a 19mm or 20mm SAAR. At this point in the cycle we start seeing more money ‘on the hood’ to move the metal. As new car prices fall, used prices look relatively more expensive, which necessitates a decline in used prices to equilibrate the supply/demand imbalance.
Increased ADAS penetration: We expect auto firms to achieve nearly 100% active safety penetration by 2020, creating an unprecedented safety gap between new and used vehicles, accelerating obsolescence of the used stock. Rising insurance premiums on older cars could accelerate this shift
Trouble in the car rental market: Due to a number of secular shifts, including how consumers access transportation options (e.g. ride sharing), car rental firms are facing stagnant growth, weak pricing and over-fleeted conditions. As these cars hit the auction, the impact on prices could be significant.
All of which Morgan Stanley thinks could spark a 50% decline in used car prices over the next couple of years. So, for all of you pension funds out there scooping up all of the AAA-rated slugs of the latest auto ABS deals for the ‘juicy yield’, now might be a good time to review what happened to the investment grade tranches of MBS structures back in 2009 when home prices crashed by similar amounts.
And here are the stats…
Off-lease volumes have already doubled since 2012 and are only expected to get worse…meanwhile, lending standards have gradually gotten worse and worse…
…as further revealed by the growing share of ‘deep subprime’ loans in auto ABS deals.
Of course, so far negative equity hasn’t been a problem for car buyers because lenders have been all too willing to roll those debt balances into new loans. And, courtesy of low rates and stretched out terms, consumers haven’t really cared that their debt balances are ballooning so long as their monthly payments remain low.
Meanwhile, none of the warnings about a flood of used car volumes about to hit the market has impacted new car volumes being pushed on to dealer lots.
All of which results in this fairly brutal outlook for used car prices:
Dear OEMs, the first step is admitting you have a problem.
It"s impossible to predict with certainty how much more insane our financial markets will get before an inevitable correction. But my personal bet is: A lot!
For my reasons why, take a few minutes to watch the chapter on bubbles below from The Crash Course. For those who haven"t seen it before, the takeaway is this: bubbles pop only when greed in the market has been exhausted:
Bubbles make no sense economically. Or rationally. But they happen all the time as a part of the human condition.
Even while financial bubbles are enabled by dumb monetary and banking decisions, their actual genesis is rooted in primal human emotions. Greed on the way up, and fear on the way down.
The hardest part about these bubbles is not being swept up in them. As the above video shows, history is chock full of asset bubbles. We humans just never seem to learn. Like Charlie Brown"s endless attempts to kick Lucy"s football, we get suckered in by the promise of easy riches, only to end up flat on our back when the market suddenly yanks that promise away.
Wash, rinse, repeat.
Most of you reading this might be thinking “Hey, I’m a reasonable intelligent person. I won"t fall victim to the next bubble.” Perhaps, but maybe not. The numbers say that the majority of you will. Unfortunately, being smart -- even a genius -- is no protection against being ruined by a bubble.
Remember from the video that even Sir Isaac Newton, easily one of the most brilliant humans ever to live, got his clock cleaned by the South Sea Bubble:
Bubbles are much easier to enter than to exit. As they build, all your friends and neighbors are diving into the pool and enjoying easy riches. You deserve some of that good fortune, right? And there will be plenty of eager parties willing to help you get on the bandwagon.
But when the bubble pops, though, action becomes much harder to take. At first, everyone assumes that the sudden drop is a temporary aberration and that the party will shortly resume. As prices fall further -- and they typically fall at a faster rate than when they were rising -- folks become paralyzed by fear on the way down, slowly realizing that their paper profits may indeed be gone for good. At first they"re unwilling to give up the dream of the "sure thing" they so recently had, and then, once the losses start mounting, they find themselves resistant to locking in those losses by selling. Instead, they hold on to the increasingly threadbare hope that prices will at least recover to where they can ‘get their money back.’
Of course, that never happens. For all those who bought in during the mania, their money was hopelessly betrayed the moment they placed their bet. And that’s what bubbles are – merely bets. And that bet is: I bet I can get out before everyone else.
That’s mathematically impossible for the majority. It’s really only possible for a very tiny few who have the vision and the discipline (and more often than not, the luck) to pull it off. Very rare are the people who get out at the top.
Don"t Be A Victim
So, to avoid becoming victim in the future, the first thing you need is the clarity to know when you have a bubble on your hands.
Well, it really doesn’t get any clearer than this:
Why Toronto (and Other Cities) Inflate Housing Bubbles to the Bitter End
Feb 20, 2017
“Let’s drop the pretense. The Toronto housing market and the many cities surrounding it are in a housing bubble,” Bank of Montreal (BMO) Chief Economist Doug Porter told clients in a note last week.
Many have called it “housing bubble” for a while, but now it’s official, according to BMO.
In January, the benchmark price and the average price were both up 22% year-over-year, with the average price of detached homes up 26%, of semi-detached homes 28%, of townhouses 27%, and of condos 15%. Double-digit price increases have become the rule in recent years.
But this jump was “the fastest increase since the late 1980s – a period pretty much everyone can agree was a true bubble – and a cool 21 percentage points faster than inflation and/or wage growth,” Porter explained in his note, cited by BNN.
Holy smokes! Or rather, what are people smoking up there? Bubble weed, or something. A 22% yr/yr gain? On top of a string of recent years of double-digit gains?
Here are two more features about bubbles we need to keep in mind:
Bubble exist when prices rise beyond what incomes can sustain
Bubbles always have a blow-off top
First, house prices rising a ‘cool’ 21 percentage points above wage growth over a single year is the very definition of bubble behavior. Simple math tells us that anyone who borrows to buy property eventually has to pay that loan back.
The money to pay back that property loan comes from wages. Ergo, property prices and wages cannot depart from each other forever, or even for very long, without a lot of repayment defaults resulting.
As for ending in a "blow-off top", that"s just how history tells us bubbles finally exhaust themselves. They draw in every last sucker and lazy-thinking ‘investor’ until there"s no "greater fool" left willing to pay a higher price. This doesn"t require 100% participation from the local population; only 100% participation from everyone who can be drawn in. When that finally happens, that’s when the bubble bursts all of its own accord.
There"s another way for a bubble to end, but it practically never happens. Responsible bankers and lenders could prevent the bubble"s formation by simply not lending ridiculous amounts. It almost never happens for the same reasons that people buy overpriced houses: greed and our social programming to follow the herd. If all your banker buddies are making big bucks writing loans to anyone who can fog a mirror, then you"ll be rewarded for doing the same. Nobody wants to be the lone, unpopular voice urging restraint when the crowds are going wild.
The quotes below from the 1850’s show how this dynamic is nothing new to society:
“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one.”
“In reading The History of Nations, we find that, like individuals, they have their whims and their peculiarities, their seasons of excitement and recklessness, when they care not what they do. We find that whole communities suddenly fix their minds upon one object and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first.”
Well, the good people of Toronto -- as well as Vancouver, Palo Alto, Melbourne, and a large number of other real estate markets -- have fixed their minds on the delusion that the recent skyrocketing price appreciation means that home prices will continue to always rise from here. So get in now! You can"t lose! Don"t risk getting priced out of the market!
What particularly crazy about this is that we just saw 10 short years ago how this movie ends. But those caught up in the current mania simply aren"t thinking logically right now. They"re fully captured by the bubble mania.
And, as before, it’s lonely out here for those of us trying to be the voice of sanity and reason. Nobody want’s to hear that now.
And later, once the painful correction has wrought its destruction, those of us who dared to sound an alert may be blamed as responsible for the losses - as if by pointing out the delusion we caused the burst to happen.
Conclusion
I could go on and on, risking being the boy who cried wolf, and point out all the other obvious bubbles infecting our financial landscape that all but assure a very difficult future of financial and economic pain.
The delusion much of society wants to believe in is that we can get something for nothing. That is, to become rich, all we have to do is buy an asset like a house or Apple stock and simply wait.
The wealth will just magically arrive. No work performed, nothing new created, nothing done. Just buy, and wait.
Of course, even a cursory examination of all of life in nature (or before humans invented thin-air money printing) quickly reveals that actual wealth comes from hard work, usually coupled with taking risks.
But somehow we’ve slipped back into the common and very human delusion of that our current culture has somehow figured out how to escape the old bonds of wealth creation. This time is different!
The Romans re-minted coins in smaller and less pure weights and it worked! For a while. Then its empire collapsed on itself.
Zimbabwe (and now Venezuela) printed and it worked! For a while. Then its citizens were left impoverished.
Society"s dangerous conceit is in thinking that somehow we’ve managed to, this time, escape the hard rules of wealth creation and have discovered a new principle by which we can all get wealthy without doing anything at all. All you have to do is play the game. Put your money to work! Buy stocks and houses and you can"t go wrong!
And it’s working! For now.
But when we back up a bit, it’s pretty easy to see how this cannot be true. Not for the majority. Why? Because real wealth isn"t a paper gain on a house. Nor is it even money in the bank. Or a large stock portfolio.
Real wealth consists the final things you consume: food, appliances, transportation, entertainment, clothes, energy, etc.
Those are real things. They have to come from somewhere. Which means they have to be produced, stored, transported, and sold. By themselves, your cash and your stock portfolio have no value. Those are merely claims on true wealth.
So how can it be possible for everyone to be exponentially increasing their claims on real wealth, without the underlying pie of real wealth itself, increasing at an equivalent rate?
It’s not.
And that’s the painful lesson that gets learned and re-learned as each new generation gets duped and then dumped by an asset bubble.
Sadly, bubbles used to happen only once in a generation. Once those burned by the last bubble have died off, the younger generation has no living memory to prevent them from getting suckered by the next one. But for some reason, our current generation has something of an addiction to bubbles. We"ve lived through the tech stock bubble, the real estate bubble, and now we"re living inside the "everything" bubble.
What"s wrong with us?
My advice is to sell your house if you live in Toronto, or a similarly bubblicious real estate market. Similarly, reduce your exposure to stocks and bonds at these record highs, and develop a wealth protection strategy with a financial adviser who understands the risks in today"s markets.
Know what the bubble signs are and be smarter than Newton by standing aside, nodding knowingly, and tolerating your "smart" friends and neighbors.
It’s one of the very hardest things to do, but it’s also one of the most important.
Odds are high you"ll be proven the smart one once the current bubble bursts.
And if you haven"t read it yet, read our report How Bad Will It Get? in which we detail the tremendous scale of the losses that will result when this Mother Of All Financial Bubbles collapses. It will be a traumatizing time for society, and many, many people will see their wealth vaporize.
The key objective at this time is to position yourself for physical and financial safety. For those who do will be in a position to prosper greatly, as well as offer much-needed support to others, when the coming reset arrives.
