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Guest Post: The Case For A Crash

Tyler Durden's picture


Submitted by Charles Hugh-Smith via Peak Prosperity,

We’ve recently been treated to two mutually exclusive forecasts: that the Great Bull Market will run until 2016 or 2018, so no worries; and that markets are exhibiting bubble-like characteristics that presage another crash.

So which forecast is more likely the correct one?

Analysts of every stripe—fundamental, quantitative and technical—pump out reams of data and charts to support one forecast or another, and economists (behavioral, macro, etc.) weigh in with their prognostications as well.  All sorts of complexities are spun as a by-product of producing research that’s worth paying for, and it all becomes as clear as…mud. 

As an experiment, let’s strip away as much of the complexity as possible and look at a few charts of what many observers see as the key components of the U.S. economy and stock market.

Let’s start with a basic chart of the S&P 500 (SPX), a broad measure of U.S. stocks:

Without getting fancy, we can discern three basic phases: what we might term “the old normal,” from the late 1950s to 1982; an amazing Bull Market from 1982 to 1994 that saw the SPX more than double; and a third phase that some consider “the new normal,” a leap to the stratosphere in the 1990s, followed by sharp declines and equally sharp rises to new highs.

This third phase of extreme volatility does not look like the previous phases; that much is clear.  Is this a new form of volatile stability; i.e., are extreme bubbles and crashes now “normal”?  Or are these extremes evidence of systemic instability? About the only things we can say with confidence is that this phase is noticeably different from the previous decades and that it is characterized by repeating bubbles and crashes.

Let’s zoom in on this “new normal” from 1994 to the present. Does any pattern pop out at us?

Once again, without getting too fancy, we can’t help but notice that this phase is characterized by steeply ascending Bull markets that last around five years. These then collapse and retrace much of the previous rise within a few years.

The reasons why these Bull phases only last about five years are of course open to debate, but what is clear is that some causal factors arise at about the five-year mark that cause the market to reverse sharply.

The ensuing Bear markets have lasted between 2.5 and 1.5 years. We only have three advances and two declines to date, but the regularity of these advances and declines is noteworthy.

Next, let’s consider other potential influences on this “new normal” of wild swings up and down. Some have observed a correlation between the cycles of the sun’s activity and the stock market, and indeed, there does seem to be a close correlation—not so much with the amplitude of the market’s recent moves but with the economic tidal forces of recession and Bull/Bear sentiment.

But there is nothing here to explain why the highs and lows in the stock market have become so exaggerated in the “new normal.”

Many have attempted to correlate key dynamics in the U.S. and global economy to the stock market’s gyrations.  Let’s look at a handful that are often offered up as important to the U.S. markets: the bond market (TLT, the 20-year bond index), the Japanese yen, gold, and the U.S. dollar.

If there is some correlation between the SPX and the TLT, it isn’t very visible.

How about the Japanese yen? Once again, there is no correlation to the SPX that is obvious enough to be useful.

Some analysts see the yen and gold as tightly correlated; here is GLD, a proxy for gold:

There is a clear correlation here, but as we all know, correlation is not causation, which means that some underlying forces could be causing the yen and gold to act in a similar fashion. Alternatively, the yen is acting on gold in a causal role.

In either case, the problem with correlations is that they can end without warning.  Since neither the yen nor gold correlate with the S&P 500, neither one helps us forecast a continuing Bull or a crash.

Lastly, let’s look at the U.S. dollar (DXY).

As I have noted elsewhere, the dollar doesn’t share any meaningful correlation with the S&P 500, yen, gold, or bonds in terms of trends, highs, or lows.  Here is a longer-term view of the Dollar Index, and once again we see no useful correlation to the SPX:


Proponents of cycles (17.6 years, for example) claim a high degree of correlation with actual highs and lows, but these cycles do not exhibit the fine-grained accuracy we might hope for in terms of deciding to buy, short, or sell stocks.

Analyst Sean Corrigan has described a remarkable 33-year cycle of highs and lows in the SPX:  lows in 1949, 1982, and (forecast) 2015, and highs in 1967 and 2000, (forecast of next high, 2033). While interesting on multiple levels, these cyclical data points are rather sparse foundations for decisions on whether to sell or hold major positions in the stock market, and they do not provide a forecast of the amplitude of any high or low.  Given the extremes of the “new normal,” we would prefer a forecast, not just of time, but also of amplitude.

Though it is unsatisfyingly imprecise, the “new normal” phase strongly implies that future declines will be as dramatic as the advances and that the five-year clock is ticking on the current Bull market. Forecasting an advance that lasts years beyond this five-year pattern is equivalent to forecasting that the “new normal” phase is now ending and a new phase of much longer Bull advances is beginning.

That is a bold claim, and there is little historical data to give it much weight.  Stripped of complexity, the charts suggest that the current run will top out within the next few months and retrace most of the advance from 2009; i.e., a crash of significant amplitude.

In Part II: The Case for Cash, we analyze the indicators that help us determine the likelihood of a coming crash similar in magnitude to 2000-02 and 2008-09, and why a strategy of selling risk assets now, and holding the cash until income-producing assets “go on sale” at the trough of the next market decline, seems especially prudent at this time.

Click here to access Part II of this report (free executive summary; enrollment required for full access).



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Wed, 12/11/2013 - 15:44 | Link to Comment Grande Tetons
Grande Tetons's picture

The Fed is like a horny guy with AIDS. He knows his days are numbered....however, he still can not stop fucking.  

Rubbber! Pffft...those are for Austrians. 

Point being...these assholes know this is the last piece of ass they will ever such they are going to go out in style. 

Wed, 12/11/2013 - 16:14 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

DCRB CA$H recommendation (USA): the NEW $100 FRNs.  To balance holding money in the bank.  It is always smart to have CA$H around...


Gold too...

Wed, 12/11/2013 - 16:14 | Link to Comment negative rates
negative rates's picture

Crash bitches!

Wed, 12/11/2013 - 17:31 | Link to Comment OutLookingIn
OutLookingIn's picture


NOT smart to have too many eggs (cash) around.

Case in point;

Actual physical cash currency printing. Not so long ago. the vast majority of notes printed were $1.00 dollar bills.

Not so any more. Almost all the expanded majority of notes printed are $100.00 dollar bills.

What does that tell you? Soon a new $500.00 dollar note. Then a $1,000.00 dollar note. Then...  

Thu, 12/12/2013 - 06:58 | Link to Comment Headbanger
Headbanger's picture


As shown on Wilshire 5000 chart from Daneric's blog:

Wed, 12/11/2013 - 15:42 | Link to Comment ultraticum
ultraticum's picture

The S&P and the M2 trend make Bitcoin's volatility look pretty tame.  Shhhhh . . . don't tell that to the MSM.

Wed, 12/11/2013 - 15:45 | Link to Comment M9L
M9L's picture

How can one derive and estimate the length of current economical cycle using backward looking data? Just because we had 5 year old cycles in the past does not mean will have them in the future, it can 10 or 20 year cycle. GDP growth and economic prosperity dictate the length of the bull market not past cycles.

Wed, 12/11/2013 - 15:54 | Link to Comment fonzannoon
fonzannoon's picture

You had a tech bubble followed by a housing bubble followed by a sovereign debt bubble. The last bubble requires the reserve currency to pop. So it could take a bit longer than the last two.

Wed, 12/11/2013 - 18:49 | Link to Comment tarsubil
tarsubil's picture

I have a sinking feeling that this is right. Treasury yields are not flat like they were with the last two stock implosions.

Wed, 12/11/2013 - 15:54 | Link to Comment ebworthen
ebworthen's picture

Backwards induction.

And with no GDP growth or prosperity, QE equity propping, and mark-to-model accounting - the five year run is looking toppy.

But yeah, Yellen and $6 Trillion more of QE and back door free money to the TBTF banks might keep it going.


Wed, 12/11/2013 - 16:21 | Link to Comment negative rates
negative rates's picture

He almost got the last part right, it was a credit bubble, it was about to burst, (or croak as we say in the frog business), The 1/2 way roller coaster was about crash, but the santa clause rally put us over the top so what else could it be? Not me?? At $85 billion a month, it's was gravy  from here on out, and so I will shout until my spout is worn out.   

Wed, 12/11/2013 - 15:58 | Link to Comment zaphod
zaphod's picture

Throwing in that sunspot cycle chart says it all.

Sunspots - Repeat regularly

Dow - Does not repeat regularly

Showing the two charts side by side - Meaningless

Wed, 12/11/2013 - 17:11 | Link to Comment JoBob
JoBob's picture

The Dow doesn't repeat, but the chart plots the recessions against the sunspot cycle. Correlation is not causation, but is interesting nonetheless.

The current sunspot cycle is a bizarre one with minimum or no sunspots and both solar poles have the same polarity. If we're approaching another Maunder minimum, the attendent "recession" could be an absolute, multi-decade doozie!


Wed, 12/11/2013 - 17:33 | Link to Comment DebtSlaveZombie
DebtSlaveZombie's picture

Agreed.  I can go search for animal migration changes, ocean current and jet stream changes, global warming cycles and all kinds of supposed "evidence" that shows a trend to somehow support my stance for an outcome.  My neighbor died in his sleep a few weeks ago, 43 years old.  Great shape, didnt smoke or drink, did everything right.  Just died anyway.  Ive known people live to 90 years old and they abused themselves way beyond what someone should to live that long.  There's no predicting when your life ends or when a crazy bull market will end, no matter what evidence you have to the contrary.  One day you wake up...and its over or its not.  My guess is this thing has a lot of legs left.  Maybe it pulls back to 1600 early next year.  But we will see S&P 2500 in 2015 and maybe higher.  This peak will be a monster before its done.

Wed, 12/11/2013 - 20:00 | Link to Comment BKbroiler
BKbroiler's picture

There's no predicting when your life ends or when a crazy bull market will end

Then what the hell do we need all these economists for?  


I'm an atheist, but the Bible says 7 lean years and 7 fat ones, and at least for me 2000-2006 was shit, 2007 to 2013 was tits, so I'm kinda bracing for the worst for 2014-2020, as long as we all get to follow our own meaningless indicators.

Wed, 12/11/2013 - 19:12 | Link to Comment A. Magnus
A. Magnus's picture

"GDP growth and economic prosperity dictate the length of the bull market not past cycles."

By THAT logic there shouldn't be a bull market at all - this can rightly be called a BULLSHIT market: The only GDP growth is through monetary inflation; manufacturing is decimated, and 1 out of 3 working age Americans is OUT of a job. There IS no economic prosperity except for the banking asshole minions who get to spend their POMO/TARP money before it dilutes the value of all the dollars already in circulation.

Fuck your deluded 'cycle' daydreams. This market is as artificial as Obama's Free Shit Army Twitter Brigades...

Wed, 12/11/2013 - 15:48 | Link to Comment ebworthen
ebworthen's picture

I'm cheering on the Sun, and for S&P 666 and dead bankers.

Jamie Dimon buried up to his neck, honey, and ants.

Am I being too macabre?

Wed, 12/11/2013 - 15:51 | Link to Comment Tim Knight from...
Tim Knight from Slope of Hope's picture

Not in the least. You're being too gentle about the whole thing.

Wed, 12/11/2013 - 15:55 | Link to Comment Grande Tetons
Grande Tetons's picture

I just wonder what it would be like to be reincarnated in an animal whose species had been so reduced in numbers than it was in danger of extinction. What would be its feelings toward the human species whose population explosion had denied it somewhere to exist... I must confess that I am tempted to ask for reincarnation as a particularly deadly virus.

Prince Phiilip


No, EB....I think your idea is not Macabre enough.  


Wed, 12/11/2013 - 19:41 | Link to Comment Pure Evil
Pure Evil's picture

Maybe good ole Prince Phillip' wish will come true and he'll come back as the HIV virus and get passed around out in the Castro district of San FranSicko.

Amazing this guy has lots of time to navel gaze while living off the ill gotten gains of his royal family.

Wed, 12/11/2013 - 15:52 | Link to Comment icanhasbailout
icanhasbailout's picture

"Buy the crash" already has its trademark BTC

Wed, 12/11/2013 - 16:43 | Link to Comment disabledvet
disabledvet's picture

that to me is absolutely a triggering event...a 99% decline in bitcoins value next week. I don't think that would have a daisy chain effect but certainly any dramatic move lower in the energy space could cause a lot of of high beta names to get hammered (again. we've already had one sell off.) craziness in Greece, craziness in the Ukraine, craziness in the South China Sea...and of course Egypt and the Middle East in general. We have hit peak unreality right now.

Wed, 12/11/2013 - 15:57 | Link to Comment Professorlocknload
Professorlocknload's picture

Crash? Have you told the Fed about this?

Wed, 12/11/2013 - 16:16 | Link to Comment NEOSERF
NEOSERF's picture

Great, just great, now Yellen has all the data she needs to increase the moon!

Wed, 12/11/2013 - 16:29 | Link to Comment TheRideNeverEnds
TheRideNeverEnds's picture

pffft that chart is a clear tripple top breakout.  why are you not buying the dip today?  we are clearly going signifigantly higher tomorrow, just shaking out the weak hands before our push past 1850 next week on the FED announcing an increase in QE.  

Wed, 12/11/2013 - 16:32 | Link to Comment frankTHE COIN
frankTHE COIN's picture

Ra.......The Sun God is mightier than that Man Behind The Curtain.

Wed, 12/11/2013 - 16:57 | Link to Comment dcj98gst
dcj98gst's picture

So the spx will hit 666 soon?

Wed, 12/11/2013 - 17:03 | Link to Comment Lagging Indicator
Lagging Indicator's picture

Yes, but where are the charts comparing tea leaves and goat entrails?

Wed, 12/11/2013 - 17:20 | Link to Comment DebtSlaveZombie
DebtSlaveZombie's picture

Here's an observation... we seem committed to looking at the last 2 peaks then corrections and thinking we are over due for the next one since the past should tell us about the future. Well... which past are you looking for?  We are being somewhat  selective at what tea leaves we are reading.  The triple top was supposed to confirm a decline...but guess what.... it broke through.  That old top around the 1500/1550 level may be the new support.  In 1987 and 1990 we had a double top with declines after each, 1987 we had a 40% decline then in 1991 we had a 25% pullback which would lead some to say "back to where we came from".  But it broke through and look what happened.  S&P 320 in 1991 to S&P 1520 in 2000... a 9 year run and almost a 500% return!!! But we can select any part of the charts we want to tell the story we need to make a point, or sell a newsletter, or get people to buy gold or to buy ammo and build "bug-out" shelters.  We can make the data do whatever we want especially when we have an interest in the masses agreeing with us.  This pattern is just the beginning starting with the early 1970's when we came off the gold std.  That was the base of a peak that will end much further down the road.  When we have a pullback (in 2015) it may only be 20-25% before it resumes it upward trend to wherever it ends.  Just remember, this market can stay irrational way longer than u can stay liquid.  How many bears got crushed in 1997 when the market looked "topped out" and it ran for another 2 1/2 years?  Be careful what you are looking for in the charts.

FYI: The "prepper" market is huge now.  Now thats the business to get into.  Selling prepper supplies and allow them to pay in gold and silver.  Big business.

Wed, 12/11/2013 - 18:40 | Link to Comment nightshiftsucks
nightshiftsucks's picture

Not sure how you can compare the past with today without comparing the growth in debt and the out sourcing of good paying jobs.

Wed, 12/11/2013 - 18:45 | Link to Comment icanhasbailout
icanhasbailout's picture

The only indicator that is meaningful to the stock prices is how much Benny is printing, and expected to print in the future. It really is that simple.

Wed, 12/11/2013 - 18:50 | Link to Comment Spankrupt
Spankrupt's picture

A by product of stock investment income is stock price appreciation. A stock should be bought for its dividends or cashflow. Anybody remember that concept? Everything else is white noise and conjecture.

Wed, 12/11/2013 - 19:47 | Link to Comment Sufiy
Sufiy's picture

Axel Merk of Merk Investments: Buy Gold for Protection as the Risk is Something is Going to Blow Up

 Gold is taking the pause after its recent advance to $1260, but US Dollar is testing the new lows after breaking below 80.00 yesterday. Equity markets are under presser today and the most notable rotation is JPMorgan going Net Long Gold according to the reports.

Wed, 12/11/2013 - 22:00 | Link to Comment The Econ Ideal
The Econ Ideal's picture

Sunspots and stock market declines...

Suggestion: look for a periodicity to Ponzi schemes - humans apparently are unable to resist them over time, so there appears to be a "natural" cycle.

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