Ayer la Reserva Federal subió tipos en un 0,25%. Puede que sea la última del año, da igual. Ahora lo que les toca es decidir el proceso de reventa de toda esa burrada de millones de dólares que tienen en su balance, el malvado TAPERING que nos viene…
Ya lo sabes, pero te lo recuerdo. El TAPERING es el proceso por el que los bancos centrales tienen que dejar las cosas como estaban antes de los paquetes de estímulos financieros QE (Quantitative Easing), tan numerosos que han practicado. Se han tirado años comprando bonos públicos y privados, tratando de estimular las economías maltrechas tras la gran crisis de 2008.
Como ves el que se lleva la palma es el banco suizo (SNB), el Banco de Japón y el BCE. La Reserva Federal y el Banco de Inglaterra pararon hace unos años y serán los primeros (la FED) en meter tijera, en vender todo lo comprado, ya que el loco de Dragui sigue dale que te pego…
Ya tenemos en la Eurozona el 39% de nuestro PIB en manos del Banco Central Europeo, y sigue subiendo hasta que decida que se acabó… Entonces las rentabilidades negativas se terminarán, y los precios de los bonos no estarán donde los tenemos…
En la reunión de ayer han propuesto la salida de bonos de su balance a este ritmo:
La Fed detalla que el límite para reinvertir los bonos del Tesoro de EE.UU. que lleguen a vencimiento será inicialmente de 6.000 millones de dólares por mes, y que se incrementarán en otros 6.000 millones cada tres meses durante un periodo de doce meses, hasta que alcancen los 30.000 millones al mes.
El límite para la deuda de agencia y los MBS será inicialmente de 4.000 millones y se incrementará en 4.000 millones adicionales al mismo ritmo (cada trimestre durante 12 meses), hasta que alcance un ritmo de 20.000 millones al mes.
Y sí, va a afectar a las bolsas este maldito TAPERING. Se pensaron que se podía comprar y comprar bonos a su antojo, llenar de liquidez el sistema, para darle una patada adelante a la crisis, pero esto no era para siempre, habrá que darle marcha atrás y apechugar con sus efectos nocivos…
With first the Fed, and then the ECB and BOJ, all expected to start reducing their balance sheets over the next two years, a bevy of central bankers has been busy on the jawboning circuit, explaining why this would not have a major impact on either bond yields or stocks.|
They may be quite wrong, however, according to the latest analysis released overnight by Bank of America's rates strategist Shyam Rajan, who calls the upcoming "trillion dollar mismatch" between Treasury supply and demand over the next five years a "smoking gun" which will trigger an "equity-rate disconnect" due to the gradual phasing out of "price insensitive buyers" and calculates that "either rates need to be 120bp higher or stocks need to be 30% lower to trigger enough demand to match forward UST supply estimates." Needless to say, both outcomes are negative for current record low volatility, and will have a substantial impact on risk-asset prices over the coming years, a vastly different forecast than the one the Fed has been scrambling to convey.
Here is the gist of Rajan's argument:
The bond/equity disconnect vs. UST supply/demand
The trillion dollar mismatch in Treasury supply/demand dynamics over the next five years will likely trigger an equity-rate disconnect correction, in our view. Our analysis suggests either rates need to be 120bp higher or stocks need to be 30% lower to trigger enough demand to match forward UST supply estimates. In this report, we quantify the projected increase in supply, the decline in price insensitive demand and the triggers required for the two main price sensitive sources – pensions (higher rates), mutual funds (lower equities) to step up, to clear the supply-demand mismatch in USTs.
Supply is coming, irrespective of stimulus
There are few things more certain right now than increased Treasury supply, in our view. Whether one believes that tax reform gets done or not, Treasury supply is likely to go up substantially over the next five years. In essence, the US Treasury is underfinanced by anywhere between $2 - $4.5 trillion over the next five years, requiring substantial increase in auction sizes and/or new products. Of this, even conservatively speaking, there is likely to be a $1 trillion shortfall in demand using current trends.
Putting these divergent trends together, Rajan notes that the "smoking gun" shortfall is emerging in a time when price insensitive buyers are gone, "so prices have to move"
Unlike prior cycles, price insensitive sources of demand (reserves, domestic banks and Fed) are no longer present to absorb the substantial increase in UST supply needs. This leaves the duty of absorbing supply to the three main price sensitive channels:
1) Foreign private investors who need a stronger dollar and have bridged the gap in the last two years. However, with both the ECB and the BoJ set to taper, crossover demand from this community is set to decline.
2) Domestic pensions who would need higher rates - Our analysis suggests that rates need to be nearly 120bp higher for this community to account for the entire $1 trillion.
3) Fixed income mutual funds - In our estimate, equities need to be 30% lower for mutual fund to see sufficient inflows into bonds to bridge the gap.
Either way, we believe the peak of the equity-rate disconnect is behind us.
Below we lay out some more details from his critical analysis, first why "supply is going up no matter what":
There are few things more certain right now than the upcoming increase in Treasury supply. As we have written previously (May refunding: eyeing the ultra 27 April 2017), few realize that the Treasury’s supply needs are likely to go up substantially irrespective of the stimulus outlook. The four components that drive future Treasury supply all point towards higher issuance needs:
+Baseline deficit projections from the CBO were projected to trough in 2016 and increase even absent additional stimulus.
+Maturing debt: Given the substantial issuance we had until 2015, the profile of maturing debt increases every year until 2020. This drives gross refinancing needs higher.
+Fed: As the Fed allows Treasury securities to run-off, there is at least one class of maturing debt investors that won’t renew themselves – the SOMA portfolio. Fed run-offs will increase public issuance needs by about $200bn-$250bn a year.
+Tax reform/cuts: depending on the details adds anywhere from $200-$400bn in additional annual issuance needs.
+Recession: If one were to take a pessimistic view of the economy where Fed runoffs or stimulus don’t happen, a recession starting next year would drop federal receipts by nearly $250-$400bn (without accounting for likely increased spending) resulting in an effect almost similar or higher than that of the Fed run/offs.
The easiest way to illustrate this shortfall is Chart 4. Current coupon auction sizes raise the blue horizon line – which is just about enough to cover baseline maturing debt and deficit projections for 2018 but falls substantially short starting from 2019. On top of this, if the Fed were to start portfolio run-offs and/or we get a tax reform package in Congress; the shortfall totals nearly $800bn-$1 trillion a year starting as early as next year1. In a nutshell, we estimate the US Treasury is underfinanced by cumulatively around $3 trillion - $4.5 trillion over the next five years.
BofA notes that the shift in Treasury market dynamics is coming at a time when the "old players - including foreign private - are now weak"
The problem with increasing supply this time around, is that the Treasury market can no longer rely on the kindness of the old players. In Savings glut 2.0 – unwinding the bond market conundrum after peak QE, we detailed how despite the savings glut continuing, there is clear evidence that it is not supporting fixed income assets. More generally,
-Reserve manager demand has declined dramatically. Given that this concept has been well socialized over the last two years, it suffices to say that Chinese demand for USTs has gone from accounting for 40% of net UST supply from 2004-2014 to being negative over the last two years (Chart 5).
-Domestic banks that have purchased nearly ~300bn of USTs in the last five years have net sold duration since the election. The potential for lower regulation has likely stopped the dramatic chase for liquid assets that dominated bank behavior in the last five years. This has led to domestic banks turning into a net seller of nearly $26bn USTS year-to-date.
-Foreign private investors are home bound: While the above two factors have been in place for some time now their effect has been somewhat masked by one factor. The dollar and rate differentials moved far enough to encourage foreign private investors to be the price sensitive buyer that stepped up to cover the gap. In fact, since the end of QE in the US in 2014, crossover demand from Europe or Japan can itself account for nearly $560bn of US demand – nearly matching the peak annual demand from the Fed during QE (Chart 6). Now given that, both ECB and BoJ QE are likely to end next year, the peak of foreign private buying is likely behind us. A cheaper periphery post ECB taper and a steeper JGB curve post BoJ changes next year, will likely result in a greater home bias for these investors
Rajan's calculation boils down to one number: a $1 trillion shortfall over the next 5 years.
The combination of increasing supply and decreasing traditional demand leaves the UST market in search of new price sensitive buyers. While we are not usually alarmists about supply/demand mismatches, even taking a conservative estimate this time around worries us. Using a baseline of our Fed portfolio runoff schedule and assuming no stimulus, the Treasury faces a shortfall of ~$2 trillion over the next five years (primarily starting in 2019). We assume that the Treasury will finance nearly 50% of this in sectors with heavy demand – bills through 5s. On top of this we will also assume that the current auction sizes have more than sufficient demand. This leaves the Treasury to net increase 5y-30y auction sizes by approximately $4bn each. We only assume that this additional increase in auction sizes will need a new sustained buyer, leaving a demand shortfall of ~$1 trillion over five years.
But with conventional buyers phasing out, who will buy? The answer: mutual and pension funds. And this is where the existing equilibrium math gets tricky.
Currently, the projected pension obligations of the top 100 corporate defined benefit plans stand at $1.71 trillion with a funded ratio close to 85% (~$250bn deficit). More importantly, the rate sensitivity of pension liabilities more than dwarfs the equity sensitivity of pension assets. The empirical sensitivity of the combined funded ratio to rates stands at roughly at $2.1bn improvement for every 1bp increase in 30y rates. On the other hand, it exhibits negligible sensitivity to a move in equities – for example in 2012 and 2016, despite equities being up >10% and rates unchanged, funded ratios barely budged.
So simplistically speaking, a 120bp increase in 30y rates will see the top 100 corporate pension plans return to 100% funded ratios.
What would it need for pensions to account for $1trillion demand? Currently, asset allocations for these pensions stand at ~ 35% equities, 45% fixed income (with 20% in other assets). Ignoring costs and funded status volatility considerations, it is reasonable to assume that as pensions reach a 100% funded ratio, they will likely move out of equities to a fully fixed income portfolio (as companies don’t benefit from overfunding). So in the most simplistic case, a 120bp increase in rates, will lead to a $600bn outflow from equities into bonds (35% of $1.7 trillion) from the top 100 plans. Scaling this up to the entire universe of DB plans ($2.9 trillion) would suggest that a 120bp increase in rates, will lead to a total of ~$1 trillion in demand from this community for fixed income assets.
In other words, one possible solution to the "smoking gun", i.e., the $1 trillion supply/demand gap to be completely met by pensions, would require the clearing level in markets would have to see interest rates nearly 120bp higher. Such a move would have dramatic consequences for the entire treasury curve, as it would imply much higher longer-date inflation expectations, not to mention vastly steeper funding costs.
What about mutual funds?
The second source of price sensitive demand is the domestic mutual fund community. Here, while some of the inflows are steady given an aging demographic, a substantial increase in demand from this community would need a risk-asset shock that motivates outflows from equity funds into bond funds. To isolate the potential demand in a riskoff shock from this community:
*First, we believe the entire mutual fund and household sector holdings of corporate equities are susceptible to reallocation during risk-off shocks. There is roughly $11 trillion of equities held by mutual funds and about $15.8 trillion by the household sector according to flow of funds (total $27tn).
*Second, in order to quantify the potential outflow from this community we use EPFR flow data during risk-off shocks. Specifically, we isolate recent 5% correction episodes in the SP 500 and see net outflows experienced by equity funds. We then scale up this number given that total net assets represented by EPFR is about $8 trillion or a third of the universe that is susceptible to reallocation.
Can mutual funds account for $1 trillion demand? According to BofA, the average outflow in the two most recent prominent 5% risk-off corrections (Q1 2016, Q3 2015 China deval) has been ~$47bn. Scaled up to the entire universe this would suggest ~$160bn in equity outflows for a 5% correction in the equity market.
This means one would need roughly a ~30% correction in equity markets to result in a shift of nearly $1 trillion from equity funds into bond funds.
* * *
This brings us to BofA's concering conclusion, according to which "the trifecta of increasing UST supply, declining traditional sources of demand and the need for either pensions or mutual funds to step-up will trigger an equity-rate convergence trade in our view."
Why now?: The combination of increasing Treasury supply and decreasing traditional demand has left the onus of absorbing UST supply to price sensitive buyers. While this was met over the last two years by the foreign private community, the end of ECB/BoJ QE will likely require the $1trillion supply/demand gap to be met by domestic pensions and mutual funds.
+For pension funds to fill in this gap completely, the clearing level for rates needs to be nearly 120bp higher.
+For mutual funds to have enough inflows to justify this demand, equities would have to be nearly 30% lower.
Rajan leaves off with this caveat: "This is clearly a simplistic framework given its assumptions around linearity. For example, pensions could use nonlinear glide paths – adopting a very risky strategy if underfunded and substantially lower risk allocations as funded ratios move past 90%. Similarly, investor outflows from mutual funds during risk-off shocks of 10% will likely more than simply double a 5% correction episode. Nevertheless this provides a first order framework to evaluate what “price sensitivity” these particular investor bases would require to account for a trillion dollars of additional bond demand."
While the analysis may be simplistic, it is accurate, and brings up numerous questions about the current dyseqilibrium between bonds and stocks. It also provides a fascinating discussion topic for the next Yellen press conference, when we hope at least one journalist will ask just how the Fed hopes to cross this particular $1 trillion "supply demand imbalance chasm" without major market disruptions, something the Fed has not even once acknowledged yet is a possibility.
Abrazos,
PD1: Es que además, se han pasado…
If I can show you that economists, central bankers and stock analysts are blind in the area of their expertise to the most obvioussetup for disaster ever, then you’ll realize we are perfectly poised for potentially the greatest stock market crash in history. Many times in the past few months, I’ve heard these people say that the present bull market cannot crash spectacularly yet because we have not seen the kind of irrational exuberance that is required to set things up for such a crash. I shake my head in amazed disbelief as I listen to the most irrational nonsense about a stock market rally that was by far the most exuberant we have ever seen!
When the end of the financial world comes, it comes quickly. Because of the irrationality that allows such events to build up, it also comes unexpectedly to the majority of people in the financial world (and to others). The one essential ingredient for a truly massivefinancial crash is that almost no one sees it coming.
Simply put, the higher and steeper the rise, the more spectacular the fall; but the market and the economy it is operating in have to be rickety in order for things to go down like a house of cards. For that kind of situation to develop, market analysts have to be blind to the flaws around them (which looks completely irruption to those who can see). Otherwise, they’d be counseling everyone to get out of the market, not to keep bidding it up into the stratosphere, and so the market would never rise to such absurd heights in such a perilous situation.
Trump Rally displayed irrational exuberance with the worst possible timing
We are now exiting the longest period of central bank stimulus in the history of mankind. As that time dragged on, central banksters began to see nothing but diminishing returns for all their extravagant money printing, known as quantitative easing coupled to the lowest interest in the history of the modern world. So, the Trump Rally happened just as we are exiting a time when even central bankers know their ability to save a falling market or a failing economy is more limited than ever before. Their old tricks for recovery are ceasing to work because they are played out, and the banksters know it.
The knowledge that their usual tricks have lost potency is pressuring the governors of the Federal Reserve to get out of stimulus mode quickly now so that they have something they can throw at the next downturn that is not already in play and completely exhausted. The economy needs a rest from stimulus if the next round of stimulus is to have any shock value. It doesn’t do any good to just hold the shock paddles of the defibrillator on the patient’s chest and administer a continual shock. The defibrillator needs to recharge and then hit suddenly in order to have any shock value to a dying heart.
The law of diminishing returns, like entropy, trumps everything — even Donald Trump — and the Trump Rally has exhausted itself just as the Federal Reserve has determined that it has to remove the shock paddles and give the defibrillator time to recharge. So, stimulus is coming off just as the stock market fades out.
Not only has the rally ended, but the Federal Reserve’s recovery is going into cardiac arrest just as the board of governors are putting the defibrillator away. Figuring out whether the currently now unfolding collapse of the Federal Reserve’s “recovery” is due to the stupidity of central bankers (to have ever thought money printing would work in a world rife with examples of its catastrophic failure)) or is due to a bankster conspiracy that is plotting to force a new monetary paradigm on the world, doesn’t matter for our understanding of what is about to happen. The only difference that conspiracy adds is that it means people need to go to jail at the end of all of this. I’ll leave that for others to decide when the dust settles.
What matters right now is that I convince my readers how extraordinarily exuberant and remarkably irrational the present bull run in the stock market became during the Trump Rally. Because, if you can see that, you’ll recognize the end is here, and you might be able to exit before the rush when the exits become so jammed that no one else can get out.
Those who understand basic economics (such as diminishing returns) and who can learn from stock market history will be able to see that the Trump Rally ends in disaster and that it’s not Trump’s fault. (Though the globalists will certainly capitalize on the opportunity to say that this completely foreseeable disaster was due to Trump and his supporters.)
The truth is that the disaster was baked in long ago; that’s why I can tell you it is coming and have been saying for many months that it would show up in June or July. Whether by the sheer stupidity of banksters who have ascribed to fantasy economics or by nefarious design, the Fed’s phantom recovery is fading right as the Fed ends the life support that created the appearance of recovery. That is characteristic form for the Fed.
My position for the past decade has been that this patient (the economy) was only kept alive after the official part of the Great Recession by artificial life support and that it would die when support was removed. Clearly, the doctors of disaster are now stripping that life support away, even as the patient goes into his final paroxysms.
The Trump Rally displayed the most exuberant irrational exuberance ever seen in the stock market
That’s the amazing part that leaves me standing in utter bewilderment as the economic gurus of our time say the stock market cannot crash because we have not seen the kind of irrational exuberance that precedes such an end. The rise in the stock market that happened during the Trump Rally was far greater and far faster than any seen in history! And it is so easy to see and to prove on an historic graph.
Of course, the rise in cash (liquidity) that the Federal Reserve is determined to remove was also far greater and far faster than at any time, which is why the market has been so irrationally exuberant. The market has never been this juiced for this long, and it was all built on the Fed’s free money, now quickly fading away. Look at the worst market crashes and the bull runs that preceded them, and you’ll never see a sharper, more exuberant upturn at the end of those runs than the Trump Rally. NEVER! I’ll prove it below.
Please show me a time on any graph of the stock market where we have EVER seen an exponential rise as steep and prolonged as the Trump rally. I repeat myself because it amazes me that people can be so blind in the area of their overrated expertise. How much more euphoria can you possibly expect than what we just had, given that it exceeds ANYTHING in the history of the stock market?
Now the market is flatlining, the euphoria has ended, but that, too, is typical of all major tops before major crashes. None of them instantly blew off and crashed. The fall of the cliff has ALWAYS come after a short term of a few months during with the top flattened out, usually followed by a choppy downward turn, and FINALLY the market suddenly leaped off the cliff a few months later later. We’ve had three months now of such a top. So, the end is fully poised to happen.
Let’s prove it now. Look at the last last thirty years of the Dow in the graph below and particularly at the run-ups to the two greatest crashes during that time — the dot-com crash that unfolded slowly at the change of the millennium and the Great Recession that began at the start of 2007. They both show “exuberance,” which means the steepness of the bull market suddenly increases in a sustained manner, and they both flatten out at the top for a time after that exuberance and then tilt downward before the big crash comes. Here are the three periods of greatest irrational exuberance in history:
Note that the sharpest increase in the pitch of any bull market happened during the last half year (the Trump Rally)and has just topped out. It is is more euphoric than any other rise on the graph. That is to say the Dow rose much more steeply during that rally than during ANY other period in history. It is the steepest rise in the entire history of the stock market, and it continued that rise for as long or longer (not in months but in height attained) than any other sharp rise in the history of the Dow. (I use the Dow because it has the longest history of any index, and you know that the history beyond the left border of the graph is minuscule in its ups and downs compared to recent history. Even the Great Depression happened within a much shorter range of highs and lows.)
Clearly, before each major crash, the pitch of the market steepened for a heroic last hurrah. The last hurrah is now in! It’s fully there. You can see it. It’s gained as much altitude as any hurrah that ever preceded it. The fact that it did so in half the time of all previous euphoric bouts only makes it ALL THE MORE EUPHORIC!
And look at all the tops after those periods of exuberance. Never did the stock market just immediately plunge over the cliff. Instead, we see it rounding off or flattening out, just as it has in the past few months. Then it trends downward for several months or even a year before it finally takes the big plunge.
Again, I repeat myself because so many experts are failing to see this, and it SO OBVIOUS! There is nothing more irrational than experts coming out of a period of the most extreme exuberance in history and not even being able to see it at all.
Since the Trump Rally was clearly the largest burst of irrational exuberance in history, there is certainly no need for another burst before the big crash and it would be unlike any previous crash if the market did put in another large burst of euphoria. It could happen, of course, but there is no need for it to happen before the next big crash because what has already happened exceeds anything we’ve ever seen. Even the ramp up to the dot-com crash, where Greenspan coined the term “irrational exuberance,” was not as steep or as protracted as the Trump Rally.
The Trump Rally displayed the most irrational irrational exuberance ever seen in the stock market
The graph above proves the exuberant part, but now let’s examine this irrational aspect. The Trump Rally — sprint to the stratosphere that it was — was clearly built on nothing but hot air. It was based entirely on the mere hope that President Trump’s big fiscal stimulus plans will come into effect, and it continued to rise even as every one of his major plans (his big campaign promises) either failed in congress or in the courts … just as I said was likely many months ago … and as continues to be the case.
If a market’s period of exuberance (any market, housing, stocks, bonds, whatever) is all based on campaign promises, we ALL KNOW such promises rarely turn out as promised. No group of people is more notorious at failing to deliver their promises than politicians. So, it is irrational to invest based on a politician’s promise, especially when you already see that politician flip-flopping on nearly everything he has said, AND you see his own party members fighting him in congress and the other party unanimously lined up against him. This rally was entirely based on the promises, not on anything that was actually happening. There was no REAL change to merit a surge in the market, and very little likelihood that the hopes would materialize.
Moreover, those promises would have to materialize in nation that is more sharply divided politically (on the streets and in congress) than it has been since the Great Society changes of LBJ. So, those promises face huge political battles, which they must overcome before they ever become reality. Nothing defines irrationality like the resolute belief in a reality that does not exist and has more than half the nation united against its ever happening! (I.e., not just Democrats, but a good number of NeverTrumper Republicans who for the first time in history voted against their own party member and voted FOR a president from the opposition party.)
That the market would rally during such unlikelihood speaks of a phenomenal level of irrationality driving its exuberant climb. This market has risen more quickly than ever into thinner atmosphere than ever based entirely on hot air. All it needs in order to crash is for the hot air (Trump’s plans) to fail, which they have every likelihood of doing and, so far, is the only thing they have done!
Add to that scenario the fact that many experts who are looking at this picture are saying, “We still need to see some sign of irrational exuberance before this bull market crashes,” and you have the most spectacular irrational blindness in the history of the stock market.
As the graph proves, exuberance has never risen higher, more quickly on such faint and unlikely hopes than it has now. Add to that the fact that fundamental economic indicators were turning downward during that rise in a way that would cause a rational market, in the very least, to hesitate, if not drop; yet it soared. (See my “List of Seven Troubles Assailing the US Economy as We Head into Summer.”) Add to that the fact that stimulus is being shut off and the Fed has just begun talking about winding down its balance sheet. Add to that the fact that even the world’s leading market analysts see no sign of irrational exuberance in that kind of scenario; then, clearly, irrationality has reached its zenith.
Folks, irrational exuberance is all in, so the stock market is poised to crash!
This market has lost any grasp or concern whatsoever about fundamentals. Thus, I was not suggesting in the article just referenced that the market would fall because of how it responds to fundamentals that are now going down, but exactly the opposite. It will crash severely because it has no grasp of fundamentals whatsoever, and is flying like a hot-air balloon into a cold storm. But fundamentals still fundamentally matter because they arereality. Those who are out of touch with reality, get slammed by it because it happens whether they believe in it or not. It doesn’t wait for their acknowledgment of its existence.
So, as auto sales tank, home sales start to slide, the promise of wage growth fails to materialize, commodity prices drop (particularly oil and copper and iron) because China cannot sustain its outlandish construction spree (see referenced article for all of that) society becomes more discordant politically, and the Fed starts subtracting cash from the market, then reality will eventually crush the exuberance out of the market by taking American corporations deep into the red. We’re seeing it now with automakers, and may be about to see it in housing (too early to know for sure if April was a change in trend or a one-off).
It is when reality becomes so crushing that it forces knowledge upon us that markets suddenly leap off a cliff as denial finally breaks. They don’t fall. They leap as panicked investors jump for their lives.
Economic fundamentals are falling apart right when I thought they would. The fact that they are collapsing immediately after the most stunning rise of irrational exuberance in market history is why I’ve predicted the economy and the stock market will crash this summer. Exactly when that breaks through market denial into the big leap, I don’t know; but I’ve predicted that happens sometime between June and January of 2018.
The economy will continue to force companies out of profit and into trouble until irrationality (economic denial) can no longer hold up to the crushing reality. In the present case, the level of denial is so much greater than we’ve ever seen that reality is going to have to crush hard in order to break through the denial.
Stock market crashes do not ever play out all at once. So, don’t expect just because I’ve predicted the crash will begin in June or July that the stock market is just going to go BOOM! off a cliff. Historically, the stock market has never fallen that way. Look again at the chart above, and you will see that the tops after the period of irrational exuberance can run horizontal for a long time or take a bumpy ride that rounds ever more steeply downward. They decline from a peak for awhile before reality overcomes investor denial and all the investors finally leap off a cliff like lemmings in what becomes that 20%-or-greater plunge that crashes become famous for (the Black Monday, Black Tuesday or October Surprise kind of event), which technically turns a bull market into a bear market.
So I don’t know exactly how and when the stock market will fall apart, but my point is that the chemistry for a crash of epoch scale is finally all in … right at the start of summer, which is when I predicted the chemistry for a crash would all be in play — peak irrationality during the market’s sharpest rate of rise in history at the market’s highest peak in history, ending against a falling economy in a time of extreme political disparity and social turbulence while the Fed is reversing stimulus and removing liquidity. It’s about the worst mojo you could ask for.
History repeats itself because we’re irrational
Fitting another historic norm, the Fed doesn’t see that its interest rate increases will help trigger the disaster that is already unfolding. It will once again unwind its stimulus into a falling economy. (That, or it wants to push things over the edge as a conspiracy to force monetary change upon the world and start a whole new tier of robbing from the middle class to stuff the bellies of the rich under a new paradigm — the old having gone as far as it can).
Even if the Trump stimulus plan happens, it’ll come far too late.. And, with or without the Fed’s help, the crash is going to play out between now and the start of next year. It’s just a question of how big and close together the chunks are by which it goes down. As you can also see in the chart above, epoch crashes take a couple years or more to play out completely.
Double steep climb combined with double irrationality for as long of a run of that kind as we’ve ever seen at the same time that the market is priced about as rich in view of actual earnings as we’ve ever seen and richer in terms of total market value than we’ve ever seen makes this the highest risk for a historic crash we’ve ever seen.
And, yet, the professional market bulls (the investment analysts) say, “Where’s the irrational exuberance? We haven’t seen any of that yet! We can’t have a huge crash without that!” So, I think, Oh my gosh, Dude’s, can you really be that dumb? You’re standing up to your eyeballs in a manure pile, and you’re so irrational you can’t smell the stuff that’s already covering your nose or see it while it laps around your eyelids. Surely, this is set to be the biggest wipeout in history when irrationality is that severe.
I think of Ben Bernanke in 2008, standing in the middle of the second greatest recession in US history telling congress, “So far, there is not a recession anywhere in sight!” Then, after the first quarter GDP numbers for 2008 were revised and the second quarter numbers came in, we all found out that he (and we) were in the middle of a recession that had begun half a year earlier! It was something I had no doubt we were in, but the nation’s top expert couldn’t see it to save his soul, and real estate experts at the time argued with me that I was nuts!
In November or December of 2007, I was absolutely certain the housing market was entering its worst imaginable crash, yet Ben Break-the-banky was still convinced in June or July of 2008 that housing would keep rising as would the overall economy. It was all rosy in his view.
I was so certain in 2007 of an imminent housing market collapse that I told my wife to push her family to sell the small estate they had been holding on to immediately, even if it made them really angry with her — to do all she could to force their hand because they’d be REALLY THANKFUL they did within just a matter of months. (They had been holding on to it because the housing market was rising so exuberantly that just sitting on it, rather than selling it and dividing it up, was the best investment they all could hope for.)
I told her that housing was on a breaker that was going to destroy the banking industry on a global scale within months! I convinced her that it would be the worst thing WE had ever seen (having not lived through the Great Depression). Half a year later, Bear Sterns went down. Three months or so after that Lehman Bros. died, and the rest is history; but ol’ Ben Bernanke was singing of eternal glory days for housing all the way up to a month before Bear Sterns died. Fortunately, her family sold the estate before all of that went down.
We are poised now on the brink of a collapse even worse than that. Whether the big part of the crash happens this summer or doesn’t become real evident until the end of the year, I cannot say any more certainly than I did back then. I only knew then that it would be a matter of months, not years, as I do now. The situation is already perfectly poised. The irrational exuberance has taken place, and the cracks in the overall economy are already becoming evident. It is just a matter of how long it takes before everything falls.
We are sailing in a hot-air balloon into a dark storm, the likes of which we’ve never seen, and the Fed is shutting off the fuel to the burner that is the only thing that has kept us afloat in our passage over the Great Recession. They are largely out of fuel anyway; so, even if they turn it back on, we won’t get much more than a sputtering flame and couple more minor bounces on our journey down.
And, in case you just cannot bring yourself to take my word for it, here are the parting words of an old-world market analyst and economist retiring after 47 years who parts with “a scathing critique of capital markets, modern economists, central bankers, and everything else that is broken in today’s society.” It is a must read for all market participants, as well as economists, politicians and central bankers: “After 47 Years, Stephen Lewis Calls It Quits In A Scathing Critique Of Modern Markets.”
Yes, folks, it really is that bad, and the ignorance (or irrationality) of economists that let us fall into the Great Recession, as Stephen Lewis rants about, remains as dim-witted now as it was then. Due to economic denial, arrogant economists learned absolutely nothing from their embarrassing and colossal failure to see the worst economic event in their lives as it was unfolding, and now they are joyfully cheering the nation into the next storm once again. Enjoy the remaining ride while you can because it will be short and downward for a long, long way.
The greater the height, the greater the fall. The greater the irrationality, the more likely the fall.
PD2: Ayer el Papa Francisco lo bordó de nuevo:
“En la catequesis de hoy consideramos cómo la certeza de la esperanza se funda en que somos hijos amados de Dios. Nadie puede vivir sin amor. En cierto modo, detrás de muchas reacciones de odio y violencia se esconde un gran vacío interior, un corazón que no ha sido amado verdaderamente. Lo único que puede hacer feliz a una persona es la experiencia de amar y de ser amado.
El primer paso que da Dios hacia nosotros es su amor anticipado e incondicionado. Dios nos ama antes de que nosotros hayamos hecho algo para merecerlo. Él es amor, y el amor tiende por naturaleza a difundirse, a donarse. Como una madre, que no deja nunca de amar a su hijo, aunque haya cometido un error y deba cumplir con la justicia, así Dios nunca deja de amarnos, porque somos sus hijos queridos.
El amor llama al amor. Para cambiar el corazón de una persona, en primer lugar hay que abrazarla, que sienta que es importante para nosotros y que es querida. Así comenzará a despuntar también en ella el don de la esperanza.”
