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Guest Post: Is A Major Correction Coming?
Submitted by Lance Roberts of STA Wealth Management,
I recently posted an article posing the question of whether, or not, the markets had entered into the "3rd Stage Of A Bull Market?" In the article I stated:
"Are we in the third phase of a bull market? Most who read this article will immediately say "no." However, those were the utterances made at the peak of every previous bull market cycle. The reality is that, as investors, we should consider the possibility, evaluate the risk and manage accordingly."
During the radio program last night I was discussing the long term trends of the market and discussing the deviations from the long term moving averages. Moving averages are like "gravity" to stock prices. The farther away (deviation) from the moving averages that prices get; the greater the probability becomes for a reversion back to the mean. The chart(s) of the day is a monthly analysis of the S&P 500 Index and the very broad Wilshire 5000 Index from 1970 to present.
It is worth noting that currently both markets are pushing deviation extremes only seen four times previously. The difference has much to do with the "secular market" within which these deviations occurred. The deviation extremes were much shorter lived during the secular "bear" market of the 70's which effectively ended in 1982. With interest rates and inflation falling the secular "bull" market of the 90's, combined with the "irrational exuberance" of the "tech bubble", the markets were able to sustain extreme deviations from the long term average for an extended period. Ultimately, however, those extremes have always been reversed.
The current deviation from the long term average, fueled by Federal Reserve interventions, is approaching extremes in both deviation and duration. As I stated above - as investors we should always remain mindful of the risk.
My friend Cullen Roche, Pragmatic Capitalist blog, picked up on an additional concern that had also caught my attention:
"I have to admit that I start to feel a bit uneasy about things when I see all news reported as good news because it either means the economy is getting better or more QE is coming. That wouldn't bother me so much if corporate earnings were still booming and the economy was growing strongly, but neither one is occurring. In fact, the market is just driving higher on what looks like sheer optimism of continued QE; and little else.
You can see this optimism in two indicators you'll recognize. The first is Warren Buffett's favorite valuation metric – total market cap to GNP. The latest reading of 110% has only been surpassed by the Nasdaq bubble.
I'll be honest – I've never really understood the obsession with equities and being a macro guy I probably never will because I have so much love for so many asset classes and approaches. But if I were 100% allocated in equities at this point in the cycle I would feel rather uneasy about my positioning."
I have to admit that I start to feel a bit uneasy about things when I see all news reported as good news because it either means the economy is getting better or more QE is coming. That wouldn’t bother me so much if corporate earnings were still booming and the economy was growing strongly, but neither one is occurring. In fact, the market is just driving higher on what looks like sheer optimism of continued QE and little else.
You can see this optimism in two indicators you’ll recognize. The first is Warren Buffett’s favorite valuation metric – total market cap to GNP. The latest reading of 110% has only been surpassed by the Nasdaq bubble.
Read more at http://pragcap.com/2-charts-that-make-me-feel-uneasy-about-the-stock-market#YzptZUSxhcPmXPUA.99
I have to admit that I start to feel a bit uneasy about things when I see all news reported as good news because it either means the economy is getting better or more QE is coming. That wouldn’t bother me so much if corporate earnings were still booming and the economy was growing strongly, but neither one is occurring. In fact, the market is just driving higher on what looks like sheer optimism of continued QE and little else.
You can see this optimism in two indicators you’ll recognize. The first is Warren Buffett’s favorite valuation metric – total market cap to GNP. The latest reading of 110% has only been surpassed by the Nasdaq bubble.
Read more at http://pragcap.com/2-charts-that-make-me-feel-uneasy-about-the-stock-market#YzptZUSxhcPmXPUA.99
I agree with his concerns, and this is something I addressed previously in "There Is No Asset Bubble?"
"While it is certainly conceivable that the markets could attain all-time highs. The speculative appetite, combined with the Fed’s liquidity, is a powerful combination in the short term. However, the increase in speculative risks combined with excess leverage leave the markets vulnerable to a sizable correction at some point in the future.
The only missing ingredient for such a correction currently is simply a catalyst to put "fear" into an overly complacent marketplace.
In the long term, it will ultimately be the fundamentals that drive the markets. Currently, the deterioration in the growth rate of earnings and economic strength are not supportive of the speculative rise in asset prices or leverage. The idea of whether, or not, the Federal Reserve, along with virtually every other central bank in the world, are inflating the next asset bubble is of significant importance to investors who can ill afford to lose a large chunk of their net worth.
It is all reminiscent of the market peak of 1929 when Dr. Irving Fisher uttered his now famous words: "Stocks have now reached a permanently high plateau."
Does an asset bubble currently exist? Ask anyone and they will adamantly say 'NO.' However, maybe it is precisely that tacit denial which might be an indication of its existence."
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Is the FED about to taper?
I was about to post the same thing.
At least we aren't currency manipulators like those evil chi.coms.
Intervention=good
Manipulation=bad
See the difference?
The day will come when even the mighty Fed will lose control. It will be a great and cataclysimic day at the same time.
Janet Yellen is a major correction to lack-luster stimulus under mis-named "helicopter Ben". Wake me up when Yellen is pumping one trillion digital dollars per week.
The correction will look like Caracas stock market... the correction will be to the UP side.... just like in Weimar Germany.
Ding-Ding!
QE is no longer considered intervention.
It is POLICY. And can only be increased in magnitude.
I've said for a long time that stocks are only fairly priced assuming over10-15% annual DEVALUATION of the currency.
Major devaluation is not coming, its ongoing.
By the time the fed untapers we will be down 10% in 1 hour...then you will be told by msm when we are down 20%...no buy dips
We should be over 20,000 on the dow by then....fed wants higher lows...they fucked the chart up last time
Next low on the 20 year weekly should be over 9000..for a nice reverse h&s to get bullish on
Gs in control...over and out
I actually think Yellen was put in to be the one to pilot the implosion.
I believe it's because she has an inny for genitalia and that's that. The implosion already happened -- S&P is not an indicator or any state just a store for USD haters. The MSM, to their discredit, are controlling the narrative that all is well under Herr Obama.
Friggin hopeless. Better historical timing is looking at Presidential tenures. Last 6 months of a 2 term president is usually brutal. So this garbage can last another 2.5 years or so.
TheFed has already lost control - they have no alternative but to QE for infinity. Printed into a corner, with no way out.
"TheFed has already lost control - they have no alternative but to QE for infinity. Printed into a corner, with no way out."
If they have lost control, it is pointless to QE to infinity.
QE infinity is widely suggested by many commentators. I ain't the first - and it has less downside risk than tapering.
So, Lance, during the past "corrections" Was the FED as actively engaged in relentless debt monetizations as they are now??
It may have something to do with why this "market" will not "correct" correctly...
Is the Pope Catholic ?
Does a bear shit in the woods ?
Is Elton John gayer than two boys fucking ?
Are the Chinese cornering the physical gold market ?
Are Snooki and Kim Kardashian suiting up for Dancing With The Stars ?
Are the sheeple gonna be caught in the headlights of The Greater Depression ?
Fucking right they are. Bend over America, bankster sausage is aimed right at your asshole - you are about to get fucked. Real good.
Fake markets don't have real corrections or crashes - Only ones that are planned and are for the greater good of the .001%
no taper, no crash. no question. think this through. the levels of projected debt were published four years ago. we are headed to 25 trillion as planned. but think about what the printfest really means. i for one don't believe we ever have to pay the fed back. so that number is not as scary as it could be. i also believe as more of the world economy comes on line, the amount of dollars needed becomes much larger, so we can expand the currency supply (print) quite a bit without hyper inflation. what i don't like is giving select institutions access to unlimited free money through the fed, which they then use to buy up the shares of all our productive industries. quite an advantage to get your (gigantic) piece of the pie without breaking a sweat.
Is A Major Correction Coming?
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For Christ's sake, if we all had a dollar for each time this question has been asked, we would all be very rich right now, and it wouldn't matter anyway.
Well where did they think all this QE was going?
Bull markets are like boy bands and investors are like teenage girls.
Teenage girls eventually grow up and their idols dissapear.
That barechested Bernanke poster will fall off the wall eventually.
but there's always a new crop of fans and a new record-company showpiece.
The market will rally until the the Bernank's bosses decide it's time to collapse it. All other analysis of the centrally planned policy tool is irrelevant.
The market will rally until the the Bernank's bosses decide it's time to collapse it
Exactly. That is the part that scares this shit out of me.
When all the bad loans are bought by the FED.
Yep, and no one will get any advance warning for when they do it either. It will be just like in 2008 no one saw that coming either, but later we found certain insiders had placed their bets heavily on it right before it happened.
If the upside of the market is not real...Why would anyone consider the downside to be??
The roof is on fire
no
No, not until taper. Then yes, big yes.
It does not HAVE to revert to the mean. Just look at the Zimbabwe chart posted here on ZH earlier.
Here's another way to look at it:
Once the market exceeds 30% deviation over the long term average, it NEVER goes below that level again. BTFATH!!!
(Just don't price it in silver/gold/oil, etc.)
Guest Post: Is this a market or the systematic rapping of america by the international banking cartel?
Lets consider some charts... /sarc
Yes.......and this may be the catylist...
http://www.huffingtonpost.com/2013/10/25/wall-street-landlords_n_4151345.html
The new scam.......hedge funds losing control of all thos e properties for rent
Correction? Noooo, told ya yesterday that stock prices have reached what looks like a permanently high plateau. :-)
Taper? That's just a PR spin - gov bonds topped mid of 2012 while junk bonds topped few months ago. Is that selfexplanatory?
I hereby proclaim this plateau as Altucher-land. 15,500 is the new base camp. Allow your lungs to adjust to the altitude then it's on to beyond infinity.
Next step actually is evolving into a species which does not require oxygen to breathe.
Good luck with all that.
I think if Lance drew a trend line from 1971 through today he'd find the "market" is currently slightly "undervalued".
The world changed in 1971.
According to Macquarie Research:
https://app.box.com/s/pzbyrvapbxjs27ql0lnw
Banking on Unconventional Monetary Policy
Event
- We analyse the implications of maintaining current unconventional monetary policy (UMP) mechanisms in the major developed economies for some time into 2014.
Impact
- Financial markets are now expecting the US Federal Reserve to maintain its current program of QE bond purchases until at least March 2014. At the same time, several other major central banks have recently signalled an intention to maintain highly accommodative monetary policy settings for the foreseeable future. Consequently, the medium-term outlook for global liquidity has shifted and should be seen as supporting the strengthening cyclical upturn in the developed economies.
Outlook
- Recent actions and comments from the major central banks indicate that unconventional monetary policy (UMP) can be expected to remain a key feature of the global landscape well into 2014. This reflects a combination of factors, many of which have both domestic and global economic dimensions.
- Notwithstanding concerns in some quarters of financial markets that UMP is an unsustainable policy approach, central banks appear to assess the near-term risks of macroeconomic instability as being better managed through the protracted use of extraordinary policy measures.
- Moreover, the complicated nature of exit strategies for the major central banks, including the likelihood of further unsettling capital outflows from some emerging market economies, is leading to an acceptance that UMP will be sustained for longer than originally anticipated.
- We noted previously that the market consensus in respect to the US Fed’s commencement of a wind back in its quantitative easing (QE) asset purchase program has shifted into 2014. Indeed, market expectations have now aligned with our base case of Fed QE tapering commencing at the 18-19 March 2014 FOMC meeting – although the risks are still skewed to an even later date.
- Given the ‘general equilibrium’ spill-over effects of any shift in the stance of US monetary policy, it is not surprising that most of the other major central banks have acquiesced with the financial markets expectation for a protracted deployment of UMP.
- In our view, there are three key macro implications for global investment markets in the extended use of UMP, namely:
- ongoing elevation of investor risk appetite and a focus on ‘capital growth’ driven assets;
- near-term abatement of ‘capital account’ pressures in several key emerging market economies; and
- persistent concerns about competitive exchange rate devaluations and asset price bubbles.
Oh shit, not another market collapse predicition. These guys must have run out of things to report. I tell you what, the market will more likely "collapse" when everyone has grown competely sick and tired of hearing these dire predictions, and when the most insignificant event off the radar screen serves as the trigger. Not a black swan, but a duck dropping.
Aesop's "The Boy Cried Wolf" revisited: "The boy cried collapse."
Would be nice to have a ocntent filter on ZH for these types of articles.
Unless the FED dumps their temporary holdings and sets their software to take the markets lower there will be no correction.
BTFD
yaawnn. wake me up when it does.
"Guest Post: Is A Major Correction Coming?"
omg i thought it read "erection".
my bad.
:)