This page has been archived and commenting is disabled.

Guest Post: "So Much For The Market Being Cheap" Charting A 50-75% Downside Case In The S&P

Tyler Durden's picture


Submitted by Brandon Ferro, Managing Member of Hevea Partners

Some Market Thoughts worth Sharing

Historical market data that suggest our current situation resembles very scary periods in times past (i.e., the 1929 crash to be specific) is beginning to pile up.

Let's look at the set up from the perspective of charts.

Here are historical bear markets, indexed to 100% (100% = bull market peak). 

It's quite easy to see that the current bear market that began in late April has been more ferocious than the average bear market through history at this juncture of its development.

In fact, this bear market looks an awful lot like the way the 1929 crash shaped up.  While other individual bear markets have fallen faster and by a greater amount, they were all short-term crashes, such as the 1987 crash and the 1998 Asian Financial crisis crash. 

As such, they ended very quickly.  The current one, however, seems to be more drawn out, again looking very similar to the 1929 crash represented by the red line.

What is worth noting is that despite the fact that we witnessed a mini-crash in May and a $1T support package for Europe thereafter, the current tape action is still as weak as it is and is leading to the set up in these charts I'm discussing. 

Despite the latter events, one of which was supposed to be cathartic to an over-bought market and the other supportive to global economic stability, we're still hanging on the edge of a cliff it seems.

Now, let's specifically compare the 1929-1942 bear market, which began with the 1929 crash and largely ended with US engagement in WW2, to the 2000-2010 period, which has seen two massive bear markets with two major rallies of 100% and 85% in between. 

It is amazing how closely these charts resemble themselves in terms of price action and the timing of each cycle’s respective moves.  It seems to me that the only major difference is the order in which events seem to be playing out. 

For instance, they had their crash quickly while we have avoided ours for 10 years with profligate monetary policy and government spending. 

It seems to me that the market is now recognizing that the game is up; no amount of additional money, bailouts or otherwise can prevent the system from collapsing under the weight of all the debt that has been allowed to build.  That's why it seems as if the far end of the black line is on the cusp of doing what the red line did on the left side of this chart in 1929.

Again, the same events, just reversed - politicians unwittingly took austerity measures in 1929-1930 that caused a depression and they're doing the same thing now, just 10 years later than expected.

If you look at the dotted black line, it represents the absolute low of the 1929-1932 depression, a roughly 85% decline in all on a monthly basis.  For context, this correlates to roughly 230 on the S&P500.

Question is, their bear market ended when we entered WW2; is Iran and Israel the catalyst for a similar situation in 2012 when this analytical work suggests our bear market could end?  They could theoretically pull the world into their mess given the resources at stake and the emergence of a resource rich country in China.

Which brings me to the S&P500 / Gold ratio chart. 

Historically, the value of the S&P500 relative to the price of gold reaches a bottom at roughly 28% (all-time low = 19%).  The ratio is currently 94%. 

Assuming a gold price of $1,500 or $2,000 (reasonable given fundamental backdrop) suggests an S&P500 value of 375-500.

Isn't it crazy to see how the market cycles vs. the price of gold through history?  This is the third major secular bear market for stocks relative to gold over the past 110 years and it shows up decisively in the chart. 

If you believe that everything reverts back to its mean and even overshoots (i.e., when you stretch the rubber band too hard in one direction it has to snap back even harder in the other), then the unprecedented explosion in the market vs. the value of gold in 2000 (almost 6.0 on the chart) relative to other historical peaks at the top of secular bull markets (1929 and 1966) suggests greater upside than $1,500-$2,000 for gold and more downside than 375-500 for the S&P500.

Further, the SPX / Gold ratio chart is where we form our timing thesis of 2012 being a potential bottom for this secular bear. 

Notice how troughs in the S&P500 relative to the price of gold have typically taken 12-13 years to play out.  The S&P500 put its peak in relative to gold 10 long years ago in 2000.  We sure are close.

Let's also look at the valuation on the market (Price-to-Earnings ratio or P/E) when it has typically reached major, major bottoms which have led to new periods of prosperity and huge, secular bull markets.

Typically, the P/E on the S&P500 has reached b/t 6x-8x earnings per share (rolling Shiller 10 year average), well below the current ~19x. 

Notice how the “generational low” in February 2009 (dark black), which preceded the 85% rally over the past year, was probably not the generational low everybody thought it was - the P/E on the market never went below 14x.  Also note the P/E at the 2003 lows (white).

If we assume $70 in S&P500 earnings per share in 2011 (mild recession in 2H10 and 2011) and use a 6x multiple you get an S&P500 value of 420. 

To really nail the overall thesis for you here is a comparison of the P/E ratio on the market during major, long-lasting, secular bear markets.

I’ve indexed the P/E to 100%, the point at which it peaks during the end of a secular bull market.  As the lines move right and lower it represents the amount by which the S&P500’s 10 year P/E has contracted relative to its peak in the past secular bull move.

The black line represents the bear market we've been in since 2000.  The marker represents today's data point. 

As it stands, P/E ratios have contracted by roughly 50% from their level in 2000 (45x, vs. only 35x at the peak in 1929).

Notice how much further valuations have to contract to reach the level of contraction they have reached in other secular bear markets. 

The chart indicates valuations bottom when they have declined about 80%-90% from their high.  Using the 2000 P/E of 45x this yields ~5x-9x, in-line with my chart above which says market bottoms are reached at P/Es in that range.

Let’s play devil’s advocate and assume that S&P500 earnings estimate of $95 (LOL) in 2011 is correct…

Even if it happens, this chart suggests it could be more than offset by material P/E contraction that has yet to take place.  A 6x-8x P/E on that $95 number next year would yield 570-760 on the S&P500, well below the current 1,030.

Therefore, even if you want to make the bull case for earnings, the latter chart suggests you’ve only figured out half the story; you also have to make an entirely unlikely bet that the black line will diverge and we will start to witness massive P/E expansion unlike any we have ever seen before at this stage of a secular bear market.

I’m not saying it’s impossible, but it sure does seem implausible given the way history looks in the chart hah?

So much for the market being cheap.



- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Wed, 07/07/2010 - 00:21 | 456062 King_of_simpletons
Wed, 07/07/2010 - 00:25 | 456067 bull-market_3.0
bull-market_3.0's picture

Some very interesting points, especially about the 10 year P/Es

Not a big fan of the SPX/Gold Ratio however. If S&P represent the top 500 companies in the US, and Gold doesn't increase in value, it makes no sense that the ratio should be constant given that technological progress should improve the value of the numerator.

Nevertheless the 10 year P/E analysis is interesting and really pisses me off because it suggests to me that I will have to get out of this market again....ughhhh! 

Wed, 07/07/2010 - 06:21 | 456210 George the baby...
George the baby crusher's picture

Don't understand why your post was flagged as junk.  It's a valid comment and opinion.

Wed, 07/07/2010 - 08:19 | 456273 ratava
ratava's picture

because ZH is full of butthurt people after the latest gold plunge. you cant be a deflationist and a goldbug at the same time, sorry guys.

Wed, 07/07/2010 - 22:12 | 457739 Papasmurf
Papasmurf's picture

$40 drop on $1250 is a butthurt?  You must never have invested in the S&P.

Wed, 07/07/2010 - 07:41 | 456248 Chemba
Chemba's picture

regarding the SPY/Au ratio, if the SPY constituents are creating intrinsic value, that just means there would be a secular up-trend in the ratio, but you could (would) still have the cyclical swings about that trend.

regarding p/e analysis, we'll get to those bear market lows but it will take time.   The experiences of most investors today are anchored in the greatest bull and bubble market of all time.  to them, a 15x P/E seems "cheap", and they can't "see" how the credit bubble has fueled "E" to unsustainable levels.

We will get a bear market P/E of 6-8x and it will be on an "E" that nobody can anticipate.  A 7x P/E on $35 of "E" is ~ $250 on the SPY.

When this happens, and it will, the only silver lining is that voters will send the corrupt corporate-socialist (fascist) Obama back to Chicago for some "community organizing"

Wed, 07/07/2010 - 08:56 | 456306 pan-the-ist
pan-the-ist's picture

You're not Chemba Wumba.

Wed, 07/07/2010 - 00:28 | 456069 RobotTrader
RobotTrader's picture

If the SPY is going to lose another 50%....

Well, say hello to 5-yr. yields of .70%, 10-yr. yields of 1.8% and 30-yr. at 2.6%.

Wed, 07/07/2010 - 00:44 | 456089 Jasper M
Jasper M's picture

"Either gold is 3x underpriced, or stocks have 75% downside."

Probably a bit over both.

It pains me to say (hate to risk offending that avatar) I have one quibble with Robotrader's analysis - Treasuries, especially on the long end, will only continue to plummet proportionally Until Federal default is manifest. And, really, how much longer do you think that'll be? 

Not that I'd mind if the rates Do go that low - I am am currently holding a bit of IEI, in the (normally boring) 5 year zone, and any such windfall would be welcome. 

Wed, 07/07/2010 - 02:38 | 456158 Spitzer
Spitzer's picture

There you go, the biggest bubble of them all.

Its so obvious is sickening

Wed, 07/07/2010 - 03:12 | 456169 jeff montanye
jeff montanye's picture

we've already traded at 2.6% on the long bond (pre-christmas '08).  considering the prior post we may get to only 3.5% or so this run.  nothing like higher interest rates to collapse p/e ratios.

Wed, 07/07/2010 - 08:09 | 456266 Hungry For Knowledge
Hungry For Knowledge's picture

THAT is when I'll refinance my house!

Wed, 07/07/2010 - 00:30 | 456071 Tripps
Tripps's picture



sp500 at a 11-12 pe on 2010 and 2011 right NOW with HARD data. and was a 10 PE at the 2009 LOWS...when banks were going to zero


what do you freaking bears want? utter destruction. i hope you all get BLOWN out of your shorts for your LYING regarding PE, etc!

you got stocks like verizon paying 7% yields and you want them to trade at 20% yields while treasuries would pay .1%?


the bubbles are in currencies and bonds. wake up. not stocks


Wed, 07/07/2010 - 01:44 | 456140 Assetman
Assetman's picture

Stocks with zero yields are vulnerable-- and certainly good handful of the higher beta variety are very bubblelicious.  This is certainly true if earnings growth gets revised downward-- valuations be damned.

Gravitating to stocks like Verizon (assuming they can continue maintaining its dividend payout) can retain a greater portion of its stock value if things go wrong.  Investors will be naturally attracted to the yield if there is a huge premium to Treasuries.

I don't disagree that there is a bubble in bonds, or currencies, for that matter.  But process of seeing that bubble prick may take longer than most expect.

Wed, 07/07/2010 - 03:15 | 456170 jeff montanye
jeff montanye's picture

i'm impressed he's got HARD data for 2011.

Wed, 07/07/2010 - 08:59 | 456313 pan-the-ist
pan-the-ist's picture

Here's a newb question:

Why would anyone (in their right mind) bother owning a stock that didn't pay dividends?

Wed, 07/07/2010 - 11:31 | 456649 Reductio ad Absurdum
Reductio ad Absurdum's picture

Well... growth. Microsoft didn't pay dividends until recently. If you had bought it in 1986 and held for about 13 years you'd have done very very well, all without any dividends.

Also, there are a lot of trendy or opportunistic stocks out there that you might want to get into and out of very quickly, in which case dividends are irrelevant.

Wed, 07/07/2010 - 07:29 | 456240 obelisks
obelisks's picture

So do you think now is a good time to buy real estate in Vegas ?

Wed, 07/07/2010 - 08:08 | 456265 kc135guy
kc135guy's picture

Sorry Tripps, here is the correct information on PEs during that time and an improvement to Shiller data.  Not sure where you get the 11-12 pe - been downloading S&P data for years and haven't seen those yet either GAAP or Operating.

BTW, when asked about a company's future earnings, Carl Icahn replied "How the hell do they know what they will earn next year?"

Wed, 07/07/2010 - 08:29 | 456279 Thomas
Thomas's picture

That Icahn quote is spot on. Accounting is still in an atrocious state of affairs (actually the accounting is probably fine; it's the reporting part.) There is also that niggling little detail that percent drops from different p/e's is questionable. In our current case, I think it is the best case scenario. Of course, once stocks lose the p/e ratio, the p will be chasing the e to the bottom.



Wed, 07/07/2010 - 00:34 | 456076 DoctoRx
DoctoRx's picture

You say:

politicians unwittingly took austerity measures in 1929-1930 that caused a depression

There is a reason that the liberal economist Robert Shiller says he admires both Hoover and FDR.  Both were interventionists.  Did not candidate FDR rail against the Hoover deficits and campaign on a balanced budget platform?  Perhaps the Fed's sudden move to high interest rates contributed to the stock crash.  But to blame the Great Depression on 1929-30 "austerity" is questionable.  Whether Smoot-Hawley in 1930 can be called austerity is unclear, rather than unwise under a more modern view than existed in 1930.

It appears that Gentle Ben blames the Fed more than Hoover or the politicians, Smoot-Hawley aside, for the severity of the GD.

In any case, this is not the post's main point, with which I am very sympathetic. 


Wed, 07/07/2010 - 03:26 | 456172 jeff montanye
jeff montanye's picture

your critique is well founded, imo.  fiscal changes were largely expansionary '29 to '32 (fdr elected late '32) and the federal govt much, much smaller relative to gnp.  money supply growth also non-contractionary at 3% or so.  a lot of the contraction was debt run off from excessive consumer, business and foreign government borrowing '14 to '29 combined with the specter of no deposit insurance/bank runs. how this latter squares with the 3% money supply growth that the data show is an area i'd like greater clarity.  wads of money pressed on big banks/wall street while tough times/austerity on main street?

Wed, 07/07/2010 - 00:43 | 456088 pitz
pitz's picture

What's the difference between then, and today?  Back then, money was commodity backed, on some form of the gold standard.  Today, it is entirely floating.  Once you reference both those S&P500 charts with a common commodity, ie: gold, they look identical, and you should see that we are at what appears to be a very low point, perhaps even lower than experienced in the depths of the 1930s.

Wed, 07/07/2010 - 08:45 | 456294 dehdhed
dehdhed's picture

you can still exchange fiat currency for gold or commodities .. for now anyway

Wed, 07/07/2010 - 08:48 | 456298 dehdhed
dehdhed's picture

i meant the dollar is indirectly backed by gold

Wed, 07/07/2010 - 00:45 | 456090 qikbucks
qikbucks's picture

US Debt/GDP = 90% and climbing.. tic .. toc.. 

Wed, 07/07/2010 - 01:04 | 456101 FranSix
FranSix's picture

Expecting a crash? Well, we just had a huge stock market crash and bear market rally.  What happens next?  Ok, let's compare bear markets on an inflation adjusted basis:

Looks like a coming denoument that compares closely with the Nikkei.

Wed, 07/07/2010 - 00:53 | 456105 Johnlaw2012
Johnlaw2012's picture


Aaron Boesky of Marco Polo Pure Investments is calling a 3,500-4,000 point level for the Shanghai market at the end of 2010. If the index finishes this year lower than it is today, he pledges to AsianInvestor that he will run around Hong Kong in his underwear.

By Simon Osborne | 7 July 2010
Keywords: aaron boesky | marco polo | china
The Shanghai index has fallen more than 30% since its recent peak in August last year. Enough already, says Aaron Boesky, chief executive of Marco Polo Pure Investments in Hong Kong, who has made what he claims to be his most high-conviction call ever that this is a market bottom.

Lots of money managers, pundits and hedgemites make bullish calls. We hear them all the time and never punish anyone for getting it wrong. We must and will.

Will Boesky put his money -- or in this case, his trousers -- where his mouth is?

And if you're wrong? What if the market ends 2010 lower than today?
We hold, and continue to try and raise capital, while we await the Chinese investors' return to the market.

Come on, you've just made what you say is one of your biggest calls ever. That doesn't sound like a very big reaction should you get that call wrong...
We will continue doing what we do and investing for the long term in a market we truly believe in...

No, I am not satisfied.
Ok, ok. I will make a wager with you Simon. If we are right in saying the market finishes the year with an impressive rally to over 3,500 points, you tell your readers in a nice piece that we made the call of the year.

If we are wrong and it finishes the year below the July 5 close of 2,475 for the Shanghai A-share index, I promise to run the streets of Hong Kong dressed only in my under-shorts. Is that enough skin in the game for you?

Wed, 07/07/2010 - 07:03 | 456229 obelisks
obelisks's picture

Surely this will have a bearing on which direction The Shanghai index is going to go ?


Wed, 07/07/2010 - 00:53 | 456106 DoctoRx
DoctoRx's picture

pitz:  You might be interested in this analysis by Andrew Smithers, which values the stock market both on an earnings and an asset parameter.  Both show it about 40% overvalued, far different from the early 1920s and the early 1930s and at various other times:

Wed, 07/07/2010 - 00:55 | 456109 maddy10
maddy10's picture

SPY will be down only if honesty miraculously returns and Mark to market bares real bank balance sheets

NOT happening!

Move on! Muddle in the mud bath!

There will be constant disclosures of filth to keep SPY within range!

Follow where big money goes and prosper!

System is officially biased in favour of biggies!

Wed, 07/07/2010 - 01:10 | 456120 BobPaulson
BobPaulson's picture

I want to agree with this but my scientific mind says n=2, so I wouldn't get too excited about a trend line though that data set (R^2=1.000000000).

Wed, 07/07/2010 - 01:31 | 456134 ChevronSky
ChevronSky's picture

I posted this comment in another thread, but I believe it is relevant to this article as well. CS


For the first time since the start of the March '09 rally, the persistently rising quarterly values have reversed (as of 6/30/10) in the following: SPY, QQQQ, DIA, IWM, RSP as well as most of the individual Dow Industrial components; and GOOG and AAPL if that matters to anyone.  When quarterly values reverse, this indicates that the recent directional bias (in this case, down) is continuing with unusual trend tenacity.  In other words, it indicates a change of higher-timeframe trend, i.e. of Primary degree.  Quarterly values for most major index ETF's began increasing in Q3 2009. Prior to the end of Q2 2010, it was premature to call an end to the Primary bull run that started in March '09, especially for long-term investors.  Now it is not.

Wed, 07/07/2010 - 01:32 | 456135 Eric Cartman
Eric Cartman's picture

I've seen this on so many blogs recently that I'm starting to think it was just one whack jobs prediction and a bunch of bears are quickly jumping on board, varying the study slightly and publishing it anywhere they can. 

I star. 

Wed, 07/07/2010 - 01:38 | 456136 Oh Jesaulenko -...
Oh Jesaulenko - you beauty's picture

I posted this elsewhere and it's a bit off-topic, but why did the PPT ever let the SPY get down to 666 last year?  If they let it happen then, why won't they now?

Wed, 07/07/2010 - 01:47 | 456142 themosmitsos
themosmitsos's picture

there was no PPT then silly, PPT was created BEACUSE it fell to 6-6-6, the number of the beast :P

Wed, 07/07/2010 - 02:19 | 456153 Oh Jesaulenko -...
Wed, 07/07/2010 - 07:56 | 456251 Scooby Dooby Doo
Scooby Dooby Doo's picture

Inside the beltway it's referred to as 'The Reston 6'. Six organizations in the DC area that, in concert, use algorithmic trading to move the market in an agreed upon direction. They take their marching orders from the Fed, not Timmah. Only the Fed can pay for their margin calls and take or make delivery on the contractual agreements.

They have a packet sniffer that sits in front of the exchange boxes. It's disguised as a router and firewall but it uses the router’s ability to log ACL matches in its own buffer in order to catalog the traffic that crosses it.

They know what orders are inbound and have a threshold order size that they trade against.

It's all very elegant. Beautifully architected. It gives me goose bumps standing in the chilled room that houses those servers. Knowing what potential they have. Like being in the same room as a God.

Wed, 07/07/2010 - 09:04 | 456321 pan-the-ist
pan-the-ist's picture

That gave me a boner.

Wed, 07/07/2010 - 01:46 | 456138 themosmitsos
themosmitsos's picture

yet *MORE* go give your shotgun a blowjob it

meanwhile, check out Robert Prechter, ms smiley, calling for DOW<1000:

Wed, 07/07/2010 - 01:44 | 456139 Misean
Misean's picture

All very intersesting...outside of the insipid "austerity measures" comment...a claim without a warrant, but is common Keynsian/Moneterist mythology...but anyway...

My problem is that comparing the US today to the US of the Shitty Depression is an incorrect historical analogy.  The correct analogy is to look at Great Britain of 1920-1940 and US today-ish and US 1920-1940 and China today-ish.

My two cents.

Wed, 07/07/2010 - 01:58 | 456146 From Italy
From Italy's picture

Have you seen Marc Faber's "mirror mirror on the wall...." conference from about a month ago? He shows that when you have a situation in which they print money, the stock market stays up even though it will be volatile, and the currency collapses. Gold is going up for this last reason, I don't know if you can always compare graphs from 80 years ago to today. The population was young in the 30's. Today we have a rich world population made up of senior citizens especially in Europe, and of young people in Asia, so you should consider this when you project earnings on 30 year bonds, or before comparing today to the past. Of course Faber assumes they will keep printing, in fact this is the real question.

Wed, 07/07/2010 - 02:23 | 456154 Eric Cartman
Eric Cartman's picture

This confused the fuck out of me. 

Wed, 07/07/2010 - 02:46 | 456164 agrotera
agrotera's picture

You get the same idea when you look at the history of the DOW, and run a simple regression --you will find the DOW between 2000-3000 and if there is such a thing as reversion to the mean...just sayin...

Wed, 07/07/2010 - 03:54 | 456171 GoinFawr
GoinFawr's picture


The DXY looks all gulliver and pletchoes to me.

Hey Johnny Bravo, you're a self purported TA guy, watcha think? I mean every time you find some minor indicator on the USD/Au chart you can magnify to look even remotely bearish you're 'creeching "TOP" repeatedly in all caps while offering predictions of three-fingered bottoms, so how have you missed this crucial technical? It's not like this DXY H&S pattern is at all subtle; indeed it's as plain as the ass on your head.



Wed, 07/07/2010 - 16:00 | 457087 Johnny Bravo
Johnny Bravo's picture

The DXY looks all gulliver and pletchoes to me.

Well pip pip cheerio to you.

The dollar is currently in a triangle pattern, with support around 82 if it does a 50% fib retracement, and slightly under 80 if it does a 61.8% fib retracement.

I have no idea what you are talking about as far as a head and shoulders pattern goes.  I think we revisit the 61.8 fib in late 2011, to early 2012.  I think that the rally in the dollar has peaked until we see these levels.

Wed, 07/07/2010 - 04:45 | 456193 laosuwan
laosuwan's picture

Charts are great for predicting the past.

Charts are just visual representations of historical data points; they do not explain anything or predict the future. Besides, the market is now so corrupt and manipulated you cannot draw any conclusions about anything. The only sure way to measure earnings is dividends. That is what I have learned by comparing Asian companies to American companies. If you find a company with no dividends in my part of the world you can be sure their earnings are fake.


Anyway, like Warren Buffet said, "I stopped charting when I realized I got the same answer turning the chart upside down."

Wed, 07/07/2010 - 09:16 | 456339 Bam_Man
Bam_Man's picture

If you find a company with no dividends in my part of the world you can be sure their earnings are fake.

Or just a "flash in the pan", or a combination of both.

In either case, a very astute observation on your part. 

Wed, 07/07/2010 - 16:02 | 457093 Johnny Bravo
Johnny Bravo's picture

Computers trade on technicals and charts and that's all you need to know to say that your assertion there is total B.S.

Companies don't trade on earnings as much as they trade on technicals.  75% of the traders on earth are HFTs using technicals.

Wed, 07/07/2010 - 19:37 | 457534 laosuwan
laosuwan's picture

if 75% of the traders on earth are trading based on technical charts then there would be no uncertainty. This is not the case so charting does not work. It does not matter if traders trade on earnings or not, the fact is that companies with dividends have real earnings. The whole, "we use the earnings to invest in future growth so there are no dividends now" story is like a big screaming white pair of shoes on a timeshare salesman. It says, stay away from this company.

Wed, 07/07/2010 - 21:00 | 457654 Chip
Chip's picture


Thu, 07/08/2010 - 20:35 | 459673 laosuwan
laosuwan's picture

apple is different; it's not a business, it's a cult.

How many times has Apple gone bust only to be bailed out? It must be the whole jeans and black t-shirt mystique thing; it certainly cannot be the cutsie hardware for which there is almost no software of past years. anyway, if they are so profitable now why are there no payouts? No dividends means you have to sell your stock to get a return on investment. That's not right.

Wed, 07/07/2010 - 04:46 | 456194 ebworthen
ebworthen's picture

The similarities between the past two years and 1929-1931 are striking.

Go back and read some of the newspaper articles and stories; many of the same themes.  Debt, deflation, insolvent banks, government intervention, trade wars, unemployment, and talk of austerity versus government spending.

It doesn't really matter what they do now. 

Once they allowed the banks to gin the mortgage market with a wink and a nod from politicians on both sides, then gambled with CDS's, then backstopped their greed and failure with taxpayer cash - well - that was the end of the game - done - over.

The losers are the middle class, families, retired seniors, anyone not directly in on the game.

Deficit spend and stimulate, doesn't matter, it's a net zero or negative long term. 

Use "austerity" and cut spending and promises and you will have a lot of pissed off people going off the grid (cheating on taxes or moving out of the country - not investing it in U.S.A.). 

Austerity should have been to never ever bail out failed banks, insurers, and companies - that would have been a free market.

Spending would have been on bridges, sewers, roads, ports, railyards, electric grids - physical infrastructure not grants to study infrastructure and chase red herrings.

Instead they bail out the banks with taxpayer $$$ then suddenly "austere" with unemployment. 

It's all a cruel joke - and more than that - it is the madness of crowds.

Both arguing about bailing from the port or aft side being the right thing to do as the ship sinks with a gaping hole where the propellers used to be.

Wed, 07/07/2010 - 05:13 | 456199 agrotera
agrotera's picture

ebworthen--poetic and crystal clear and true on every level!!!!!

Wed, 07/07/2010 - 05:59 | 456206 zhandax
zhandax's picture

I think you mean "bailing from port or starboard" but otherwise spot on.

Wed, 07/07/2010 - 08:05 | 456262 Crab Cake
Crab Cake's picture

Great post. +100

My favorite sentence...

"Austerity should have been to never ever bail out failed banks, insurers, and companies - that would have been a free market."

Wed, 07/07/2010 - 09:07 | 456324 snowball777
snowball777's picture

Yes, the machinations of state capitalism are all too ugly when laid bare...bailouts for me...austerity for you...and please take another credit card with rate over 10% while I borrow near zero, if not below.

Those of us who saved, didn't take out an ARM, and aren't buried in debt definitely aren't interested in reflating anything for the sake of the profligate and short-sighted. We salivate at the thought of cheaper gold and housing.

At some point, those "in on the game" will be marked; Americans are not historically known for their patience or temperance in this regard.


Wed, 07/07/2010 - 04:48 | 456196 jippie
jippie's picture


Wed, 07/07/2010 - 05:43 | 456203 Mentaliusanything
Mentaliusanything's picture

I think (and Junk away) that you have missed the elephant that sits quietly aging in a chair. We the (Elephant) are the baby boomers, of which I am just one - Born in '54. 

The Population bulge cannot be dismissed by any one who invests. We are your wallet and like it or not we have finished our spending. Now we want total security with our wealth, smaller homes, cars and bills. We no longer require a fashionable wardrobe, we eat out less and travel more. we conserve and build walls around us because risk is a thing we cannot take on. We protect our wealth small or large. We hate change and need little extra in widgets. Our health will cost you but if push comes to shove we will pay for the extra days it provides.

If you think for one moment that we don't make a blip on your investment decisions then you are very foolish. If Austerity comes we can cut to the bone (because Austerity breeds Austerity) We are not tied down and we can move to warmer climates and we are withdrawing our 401's and investing in safe areas such as food, alcohol, energy, tobacco (even if we have given up),travel and retirement homes.

Its over - we sucked it all up and sold our 5000 sq ft home with pool to the bigger fool and left you a Turd - Ok you want to hear it -  well we are sorry(not) we pocketed half a mill on the deal and left you in debt forever with something that is going to be an easy target for the local's to rape over with increased charges and fees. We don't give a shit because we sleep in and get up at a fair time around nine for a healthy breakfast of fruit and fibreand Krug before getting on the golf course or simply going for a walk hand in hand with the woman of our dreams, much younger of course and with all her teeth and natural boobs.

The market is over valued - well - Duuuuuuurrrrrrrrr - we sucked that up as well - its not worth a night in Vegas- we started selling out in 2005 as we retired and we popped the Krug and we are still have 'em in grand supply.

Want to know something - We fear inflation and its not coming any time soon. This sucker been sucked dry and its going down. You will live with it. After all You have an I-phone and make shit all except paper movements across your desk. Want some investment advise, Get a real job that makes something you can sell. Bag chicken shit and sell it for a 300% mark up - I don't care. Chicken shit and Hope, Its all you really have. Hows that working out for you ???? 

Wed, 07/07/2010 - 06:24 | 456212 Young
Young's picture

I'm part of this younger generation you Keynesian cunts fucked for decades to come. Thanks.

Wed, 07/07/2010 - 06:40 | 456217 Monkey Craig
Monkey Craig's picture

I appreciate this post. It's nice to see people take responsibility for fouling up the planet.

It makes it easy for people in my generation (born in 1982) to blame others and not accept responsibility for:

- bowing down to the New World Order (think NSA and Google)

- taking on major debts with a small income (say $500k to buy a house with a $50k income) 

-studying subjects that don't make anything (say finance or art history instead of engineering)

- living on our devices, including cable TV and ipads

Wed, 07/07/2010 - 08:03 | 456261 Sean7k
Sean7k's picture


Further, to compare the 30's with now are an exercise in futility. This is the problem with mathematics- constantly in search of a relationship without any ability to form true predictions. It is the bane of keynsians(though they deserve it)

The dollar was gold backed. The FED was much more reserved. FDR hadn't signed away the country until 1933. We were a manufacturing and industrial power with tremendous natural resources and no laws to complicate production.

This depression is an exercise is patience. The FED can and will create as much money and credit as it deems necessary. Inflation is the likely result because it favors the banks. If we have deflation it will be short and devastating allowing the wealthy to ride it out while everyone else is short squeezed. Then the pick up of assets will be like picking up quarters on the street. 

There are only so many golden eggs left to grab- pensions, 401k's and default on SS and medicare. When this is completed? The move to a global currency and the assurance  that it will never happen again. Penalized? The holders of bonds and savings. Winners? The holders of massive debt secured by assets at a fraction of their previous value.

Wed, 07/07/2010 - 08:16 | 456271 Crab Cake
Crab Cake's picture

Well from one Gen X'er to one 'Boomer, all I can say is I've smelled your stink for quite some time.  Ever since my early teens I've know that something was very rotten in Denmark; the politics, the cops, the justice system, the hypocrisy and lies, all of it. 

Thank you for coming out and calling it like it is, your generation fucked this country royal by laying down for the monied and corporate interests. 

I hope you don't mind when me and the kids show up to live at your retirement residence.

Ozzy Osbourne - Mama I'm Coming Home

Wed, 07/07/2010 - 09:41 | 456392 Dingleberry Jones
Dingleberry Jones's picture

I second this. I'm tired of the selfish, lazy boomers who ruined the opportunity that their parents gave them. 



Wed, 07/07/2010 - 09:18 | 456340 snowball777
snowball777's picture

Awwww...your mad that the castle that you were gonna sell to go live in Boca is worth half what you thought it would and your condo-to-be now has a lovely view of the tarballs. Your 401(k) took it in the pooper and has you nervously watching the balance. You probably bought some shit you'll need someone else to move for you with your HELOC before skating on the fallout from your American Dream (tm).

We, the screwed younger generation, will likely put an end to SS and Medicare of fiscal necessity because you end of the bathtub curve types cost 5X what we do in those fun-filled years of aches, dementia, and shuffleboard. The best way to fix the sov debt crisis in the US would be to put people like you on trains.

Oh, and you'll be wanting to hire a private police force in your dotage because the state of the states is such that we can't afford to protect you from hungry gangbangers anymore (who would've though those gold chain-wearing, gun-toting thugs were so ahead of the curve on the commodity bubble?).

You fat little dumplings wouldn't know how to deal with've NEVER known it.


Wed, 07/07/2010 - 05:48 | 456205 MrTrader
MrTrader's picture

More doom and gloom - as usual. This site is losing credibility. Every single day.

Wed, 07/07/2010 - 08:27 | 456275 Scooby Dooby Doo
Scooby Dooby Doo's picture

Hello my rally monkey friend.

Wed, 07/07/2010 - 09:25 | 456358 snowball777
snowball777's picture

No, you can't have a pony.

Wed, 07/07/2010 - 11:56 | 456688 Reductio ad Absurdum
Reductio ad Absurdum's picture

You showed up at a blog with the tagline "the survival rate for everyone drops to zero" and then complained that it had too much "doom and gloom"?? You're not too bright, are you.

Wed, 07/07/2010 - 06:01 | 456207 godfader
godfader's picture

"Typically, the P/E on the S&P500 has reached b/t 6x-8x earnings per share (rolling Shiller 10 year average), well below the current ~19x."


I am shocked that people keep mentioning this without mentioning inflation rates or corporate bond interest rates. In 1980/81 bonds were yielding 15%. Therefore stocks' earnings yield had to be cheap "enough" to become attractive. That's how the Shiller PE reached the 6-8x multiples. It was partly a function of high inflation and the availability of high yields in fixed income.

Today corporate and government bonds yield between 3-6%. Compared to investment grade corporate bond yields, equity earning yields are nowhere close to being overvalued on any historical measure

Wed, 07/07/2010 - 06:36 | 456215 dan22
dan22's picture

Why the Euro Crisis Is Far From Over:

Some problems that the politicians there don’t address:

1. Greece has a giant union problem. Aside from the government and its agencies, the Greek public sector includes a variety of enterprises in various sectors of the economy. Some of these concerns enjoy monopoly status, such as the Public Power Corporation, the Greek Telecommunications, and Olympic Airways, which alone operates domestic air travel. Other public-sector enterprises, most notably national banks and manufacturing companies owned by them, coexist with private firms in their field of activity. They need to be dismantled, not negotiated with.( All you wanted to know about the Greek public sector and unions.)

2. It is politicly impossible to make the budget cuts that are need for an “internal devaluation”, which is a code for deflation. If Greece is to stay in Euro they need to cut wages by 30%, and that includes the government sector.

3. The bond market doesn’t agree with the politicians, and as the last two years have shown the bond market is usually right. With a 10 year note at over 10%(!) And falling domestic demand no economy can survive. Businesses can’t borrow money to expand or even stay in business. 

Why the Euro Crisis Is Far From Over:

Wed, 07/07/2010 - 06:46 | 456218 Mako
Mako's picture

These exchanges/markets/trading desks are going to be shutdown/closed/destroyed/ this time.   This ain't the 30s. 

All you people looking for Helicopter Ben or some rice farmer in China to save you are in for a rude awakening.  The fun hasn't even started yet.

Anyone still believing that decoupling myth better go look at the Asian charts.  All China can do is expand it's capacity to the max. then imploded into a mess.

Wed, 07/07/2010 - 09:08 | 456328 pan-the-ist
pan-the-ist's picture

MrTrader - please review Mako's comment for real doom and gloom.

I like to think doom and gloom is on a scale, with "the road" on the left, "Mako" in the middle, and being water boarding on the Right.

Doom Scale (linear representation)

The Road                   Mako                    Waterboarded


Wed, 07/07/2010 - 12:33 | 456734 Assetman
Assetman's picture

Uh... I'd put Mako a couple more notches to the right.

Wed, 07/07/2010 - 15:56 | 457070 pan-the-ist
pan-the-ist's picture

Have you ever read the road?  Makes being water boarded look like a love-in.

Wed, 07/07/2010 - 06:50 | 456220 Instant Karma
Instant Karma's picture

Historically, the value of the S&P500 relative to the price of gold reaches a bottom at roughly 28% (all-time low = 19%).  The ratio is currently 94%. 

Assuming a gold price of $1,500 or $2,000 (reasonable given fundamental backdrop) suggests an S&P500 value of 375-500.

Further, the SPX / Gold ratio chart is where we form our timing thesis of 2012 being a potential bottom for this secular bear. 

Notice how troughs in the S&P500 relative to the price of gold have typically taken 12-13 years to play out.  The S&P500 put its peak in relative to gold 10 long years ago in 2000.  We sure are close.

Typically, the P/E on the S&P500 has reached b/t 6x-8x earnings per share (rolling Shiller 10 year average), well below the current ~19x. 

Notice how the “generational low” in February 2009 (dark black), which preceded the 85% rally over the past year, was probably not the generational low everybody thought it was - the P/E on the market never went below 14x.  Also note the P/E at the 2003 lows (white).
If we assume $70 in S&P500 earnings per share in 2011 (mild recession in 2H10 and 2011) and use a 6x multiple you get an S&P500 value of 420.

So, some upside in gold, and some downside in stocks. Seems reasonable. But nothing goes straight up or straight down. I just wonder if this time is "different" given that in addition to ordinary economic cycles and forces, the US is a huge debtor as opposed to creditor nation, and manufacturing, for good or for ill, is a much smaller part of the economy. Seems like these factors could contribute to a currency and debt crisis, sending gold much higher than cycle analysis might predict.

Wed, 07/07/2010 - 06:55 | 456223 Mako
Mako's picture

"If we assume $70 in S&P500 earnings per share in 2011"

My computer banks show a 60-70% chance of sub-250 S&P 500 if 666 is taken out by 3%.

Wed, 07/07/2010 - 06:56 | 456225 End Game
End Game's picture

Valuations driven by sales growth and earnings.

Sales growth and earnings driven by US consumption ($9+ trillion per year).

US consumption driven by US demographics (ref -

US demographics get ugly from 2012 - 2025.

No help from Europe or Japan.  Bad demographics, too.

Can young China or young India pick up the slack?  Not in the short term.

Pop go the markets.

Wed, 07/07/2010 - 07:19 | 456237 papaswamp
papaswamp's picture

BDI is now below 1 yr lows and still free falling.

Wed, 07/07/2010 - 07:32 | 456241 spinone
spinone's picture
  • In 2005, Prechter warned readers of an imminent top in real estate.
  • In October 2007, Prechter warned that stocks and commodities were historically overvalued and due for an immediate crash.
  • In 2008, Prechter maintained that the U.S. dollar would rally throughout the most volatile market environment since the Great Depression.
  • In February 2009, Prechter told readers to end their short bets and prepare themselves for a "sharp and scary" bear market rally.
  • In April 2010, Prechter wrote, "we can project a top ... between April 16 and May 7, 2010."

  • The 7¼-year cycle has been quite regular since the first bottom in 1980. The next bottom was at the crash in October 1987. The next one was November 1994, which is when the economy went through four years with lots of layoffs; it was a recessionary period throughout until that cycle bottomed. The next one was between September 2001, which was the 9/11 attack, and the October 2002 bottom. And the latest one was at the low in March 2009. All those periods are 7¼ years apart, so we are in the uptrend portion of the 7¼-year cycle.

    However, notice for example that in 1987, the market went up until August of that year and then bottomed in October, just a couple of months later. So the decline occurred very, very late in the cycle. This time it occurred a little bit earlier in the cycle, topping in ‘07 and bottoming in ‘09. In the current cycle, prices should peak the earliest of all of them. It’s what we in the cycle prediction business call “left-hand translation.” The market’s already gone up for about a year, and I think that’s just about enough. I think we’re going to spend most of the cycle going down. But the important thing to note is that the next bottom is due in 2016. That means I think we’re going to have a repeat of what happened between 1930—which was the top of the rally following the 1929 crash—and the July 1932 low. Instead of taking two years, it’s going to take about six years.

    It’s going to be a very long decline. It’s going to be interrupted by many, many rallies, just as the decline from 1930 to 1932 was. And every time it bottoms and rallies, people are going to say “OK, that’s enough; it’s over.” But it won’t be over. It’s just going to be a long, long process. I think you and I will probably be talking a few times during this period. One of the interesting aspects of this process is that optimism should actually remain dominant through the first three years of the cycle. That will carry us into 2012. Even though prices will be edging lower, most people are going to think it’s a buy, and you shouldn’t get out of your stocks, and recovery is just around the corner, probably for the next three years. And then, for the final half of the cycle, the final three years, that’s when you’ll get the capitulation phase when everyone finally gives up.



  • Wed, 07/07/2010 - 07:40 | 456245 GFORCE
    GFORCE's picture

    The Chinese slowdown is only beginning. It will kick in around october 2010 and last for a few  years. This will be a reality check for the China bubble and also the Australian piggyback ride.

    This is not rocket science when the data shows stimulus is now stalling and world growth is slowing.

    The S&P will likely re-test the lows (flash crash 2.0) and from there, will begin another multi-year upswing. How long it takes to reach previous highs? Maybe decades. Depends on technology.

    Wed, 07/07/2010 - 08:21 | 456274 Nevermind
    Nevermind's picture

    How can employment get better? People CAN'T retire even if they've saved money, because they get no interest. So people will hang on to any job with benefits...right? Another hidden cost of ZIRP, workers UNABLE to leave the job market.

    Well, if you're really rich, you could have invested with Madoff or Stanford...

    Wed, 07/07/2010 - 09:31 | 456373 snowball777
    snowball777's picture

    I've heard people discuss lowering the retirement age limits to levels like those in Greece (around 55) to encourage people to leave the workforce earlier, but they obviously weren't thinking about the added cost to SS / Medicare / taxbase induced by replacing skilled, highly-compensated workers with less-skilled, less-compensated workers.


    Wed, 07/07/2010 - 08:33 | 456283 Oquities
    Oquities's picture

    another bonehead comment that government will cause the problem due to austerity.  the cause, of course, is excess debt, unserviceable.  austerity ends up being mandatory, now or later, with later causing more eventual damage than now.  common sense, really.

    Wed, 07/07/2010 - 08:38 | 456284 MarketFox
    MarketFox's picture


    The 2006/8 period represented 100/ terms of cumulative credit and asset valuation amounts....

    At current "make believe" mark to "legal" accounting market...

    The ratio has moved to 60/100....


    Valuation = Income + Debt


    All current and on the table government impositions further negate terms of higher taxes and other higher cost impositions such as health insurance and cap and trade....along with paying current bond holders and monetary dilution to support the older and nonjustifiable higher prices....

    So now the ratio looks like 25/100 vs 100/100....


    So what does this suggest ?


    Wed, 07/07/2010 - 09:08 | 456329 37FullHedge
    37FullHedge's picture

    100 year devaluation of the Dollar circa 98%

    1910 gold $20 X 50 = $1000 This very simple gold valuation is the Dollars 2% value today X 50 to make a 100% value from 100 years ago.

    Using this very simple valuation gold is expensive near 1200 and since gold isnt the same as 100 years ago in a 100% fiat money system for me gold has risk.

    The bullish case for gold is maybe the dollar has lost more than 98% and gold clearly offers the best insurance if the fiat system fails.

    The Dow gold ratio is a no starter for me.

    The Earnings is the key to the Direction of the Dow I havnt a clue where they will be in a few years but with so much offshoring, higher taxes and debt levels I would be inclined to the downside over the longterm, If the fed keeps printing clearly this will devalue the dollar further and improve earnings in devalued dollars etc.

    I think silver is trading very cheap and on any valuation it should be $50 plus and at under $18 is a good place to ride out the problems ahead,

    Wed, 07/07/2010 - 09:24 | 456354 Walt Whitman
    Walt Whitman's picture

    Absolutely chilling. A couple of those charts literally made me shiver.

    Wed, 07/07/2010 - 09:52 | 456416 gdgenius
    gdgenius's picture

    Shiller PE is a good measure, but you can also just look at the S&P 500 Dividend Yield.  Major market bottoms have always occured at a div yield of at least 6%, and sometimes much, much higher.  Right now we're at about 2% and only got as high as about 3% in March of 2009.  We've got a ways to go - This is definitely not over....

    Wed, 07/07/2010 - 11:42 | 456664 Diogenes
    Diogenes's picture

    Here we go again with the same old apcray about the war ending the depression, when the chart clearly shows the bear market of the 1929 crash ending at month 34 which would be October 1932, nine years before the US entry into WW2.

    Wed, 07/07/2010 - 12:37 | 456746 Reductio ad Absurdum
    Reductio ad Absurdum's picture

    It is a fact that America's main economic rivals were devastated by World War II. Germany and Japan lost millions of people and were physically and psychologically destroyed (and half of Germany was given to the Soviet Union). Italy was similarly affected. The English and French empires were shattered.

    It took decades for our former economic rivals to rebuild, and during those decades the US made a fortune. This fortune paid off the debts incurred by FDR's reckless and inefficient spending during the 1930's. It also paid for the wars in Korea and Vietnam and, initially, for the wasteful liberal social programs of the 1960's (the so-called "Great Society"). Up until recently, we've still been living off that inherited post-WWII financial boon. But that inherited money is long gone now, and nothing is going to replace it. Yet the government is spending more money in more inefficient ways than ever before while the morons and the sheeple keep claiming that "it worked for FDR!"

    Thu, 07/08/2010 - 15:03 | 458838 No More Bubbles
    No More Bubbles's picture

    Fuck that noise, this is going to ZERO!



    Fri, 08/20/2010 - 10:03 | 532644 herry
    herry's picture

    Really  this is a great post from an expert and thank you very much for sharing this valuable information with us..................... windows vps | cheap vps | cheap hosting | forex vps

    Do NOT follow this link or you will be banned from the site!