The actions of central bankers around the globe which have been driving stock prices higher are not a sign of control. They are signs of desperation. They are losing control. Their academic theories have failed. Their bosses insist they turn it up to eleven. Something is going to blow. You can feel it. John Hussman knows what will happen. Do you?
There are things going on with the financial markets currently that seem just a bit "out of balance." For example, asset prices are rising against a backdrop of global weakness, deflationary pressures and rising valuations. More importantly, there is a rising divergence between sentiment and hard data. While weather can't be blamed yet, it will likely be the main "excuse" in the months ahead as early record snowfall is already impacting economic production. However, it isn't just the manufacturing data that seems "out of whack."
"The multiple expansion phase of the current bull market ended in 2013. The strong S&P 500 YTD price gain of 10% roughly matches the realized year/year EPS growth of the index. The index has climbed by 17% annually during the past three years as the consensus forward P/E multiple surged by nearly 60% from 10x to 16x. ... We forecast US stocks will deliver a modest total return of 5% in 2015, in line with profit growth. The US economy will expand at a brisk pace. Corporations will boost sales and keep margins elevated allowing managements to both invest for growth and return cash to shareholders via buybacks and dividends. Investors will cheer these positive fundamental developments."
While the argument that declines in energy and gasoline prices should lead to stronger consumption sounds logical, the data suggests that this is not actually the case.
The markets have been pushing new all-time highs this past week as earnings season begins to wind down. Starting next week, much of the focus will shift back to the economy and holiday retail sales. Expectations are for a robust season but the early arrival of winter could have a more negative effect on the economy than anticipated should current weather patterns persist.
A normalization effort is going to then basically expose that the stock market is roughly overvalued by 100%? "100%, yes. I actually think the case is a little bit harsher than that; in fact, quite a bit harsher than that."
The problem with what we call the Exit Rule for Bubbles - "you only get out if you panic before everyone else does" – is that you also have to decide whether to look like an idiot before the crash or an idiot after it.
As faces are filled with chocolate on All Hallow's Eve, we thought this evening's reading list should maintain the focus of "scary" ponderances now that the Federal Reserve has ended their latest monetary iterations.
“Keep in mind that even terribly hostile market environments do not resolve into uninterrupted declines. Even the 1929 and 1987 crashes began with initial losses of 10-12% that were then punctuated by hard advances that recovered about half of those losses before failing again... The 2007 top began with a plunge as market internals deteriorated materially, increasing day-to-day volatility, and a tendency for large moves to occur in sequence." Investors should interpret recent market strength in its full context: we’ve observed a fast, furious advance to clear an oversold “air-pocket” decline.
"...the underlying cause of a crash will be found in the preceding months or years, in the progressively increasing build-up of market cooperativity, or effective interactions between investors, often translating into accelerating ascent of the market price (the bubble). According to this ‘critical’ point of view, the specific manner by which prices collapsed is not the most important problem: a crash occurs because the market has entered an unstable phase and any small disturbance or process may have triggered the instability."
"Present conditions create an urgency to examine all risk exposures. Once overvalued, overbought, overbullish extremes are joined by deterioration in market internals and trend-uniformity, one finds a narrow set comprising less than 5% of history that contains little but abrupt air-pockets, free-falls, and crashes."
The central bankers have truly been the markets best friends and Draghi and Kuroda-san have been taking over where Ms Yellen has all but left off, but even they can do little in the face of protest and dissent by various members of the global populace and the continuing stupidity and arrogance of our “democratically” elected representatives.
"The Ingredients Of A Market Crash": John Hussman Explains "Why Take The Concerns Of A Permabear Seriously"Submitted by Tyler Durden on 09/28/2014 19:39 -0500
"I should be clear that market peaks often go through several months of top formation, so the near-term remains uncertain. Still, it has become urgent for investors to carefully examine all risk exposures. When extreme valuations on historically reliable measures, lopsided bullishness, and compressed risk premiums are joined by deteriorating market internals, widening credit spreads, and a breakdown in trend uniformity, it’s advisable to make certain that the long position you have is the long position you want over the remainder of the market cycle. As conditions stand, we currently observe the ingredients of a market crash." - John Hussman
“Money amplifies our tendency to overreact, to swing from exuberance when things are going well to deep depression when they go wrong.”
When the most persistent, most aggressive, and most sizeable actions of policymakers are those that discourage saving, promote debt-financed consumption, and encourage the diversion of scarce savings to yield-seeking financial speculation rather than productive investment, the backbone that supports a rising standard of living is broken.