Market Roulette: Dimes On Black, Dynamite On Red

Tyler Durden's picture

Submitted by John Hussman via his Weekly Market Comment,

The stock market is presently a roulette wheel with dimes on black and dynamite on red. We continue to have extreme concerns about the extent of potential market losses over the completion of the present market cycle. At the same time, we have very little view with regard to short-term market action. If one reviews market action surrounding major pre-crash peaks such as 1929, 1972, 1987, 2000 and 2007, you’ll observe a sort of “resilience” in the major indices on a day-to-day and week-to-week basis even after market internals had already corroded. In 1987, for example, the break following the August bull market peak was largely recovered over the course of several weeks before failing rapidly in October. In 2000, the market actually experienced a series of 10-12% corrections and recoveries before a final high in September that was followed by a loss of half the market’s value. In 2007, the initial break in mid-summer was fully recovered, with the market registering a fresh nominal high in early October that marked the end of the bull market and the start of a 55% market collapse.

As economic historian J.K. Galbraith wrote about the advance leading up to the 1929 crash, the market’s gains

“had an aspect of great reliability… Indeed the temporary breaks in the market which preceded the crash were a serious trial for those who had declined fantasy. Early in 1928, in June, in December, and in February and March of 1929 it seemed that the end had come. On various of these occasions the Times happily reported the return to reality. And then the market took flight again. Only a durable sense of doom could survive such discouragement. The time was coming when the optimists would reap a rich harvest of discredit. But it has long since been forgotten that for many months those who resisted reassurance were similarly, if less permanently, discredited.”

None of this implies that the market will or must collapse in short order. Stocks remain strenuously overvalued, overbought, and overbullish, but those conditions have persisted uncorrected much longer in the present instance than they have historically. That doesn’t encourage us to abandon our concerns, but it does make us less aggressive about investment stances that rely on any immediate unwinding of what we continue to view, along with 1929 and 2000, as one of the three most reckless equity bubbles in the historical record.

Our perspective is straightforward: on the basis of measures that have been reliably correlated with actual subsequent market returns in market cycles across a century of data, we estimate that the S&P 500 Index will be no higher a decade from now than it is today. On the basis of nominal total returns (including dividends), we estimate zero or negative returns for the S&P 500 on every horizon shorter than about 8 years. See Ockham's Razor and the Market Cycle for a review of the total return arithmetic behind these estimates, and Yes, This is An Equity Bubble for additional background on our present concerns.

At the same time, we don’t have strong views about immediate market prospects. Still, even a run-of-the-mill completion to the present market cycle would wipe out more than half of the market’s gains since the 2009 low, so whatever gains the market experiences in the interim are likely to be transitory, and few investors will retain them by exiting anywhere near the top. Frankly, we doubt that the present cycle will be completed with the S&P 500 even above 1000 (a level that we would associate with historically normal subsequent total returns of roughly 10% annually). We readily accept that 3-4 more years of zero interest rate policy would justify market valuations 12-16% above what would otherwise be “fair value,” but we also recognize that the vast majority of bear markets have overshot to the downside. In short, an informed view of market history easily admits the likelihood that the S&P 500 will lose half of its value over the completion of the present cycle.

We could certainly observe very constructive or even aggressive opportunities without that outcome. Those opportunities are most likely to coincide with a material, if less extreme, retreat in valuations, coupled with an early improvement in market internals. But here and now, we don’t observe any investment merit in equities, and with market internals deteriorating, any remaining speculative merit has also receded quickly.

As I emphasized last week,

“While we’re already observing cracks in market internals in the form of breakdowns in small cap stocks, high yield bond prices, market breadth, and other areas, it’s not clear yet whether the risk preferences of investors have shifted durably. As we saw in multiple early selloffs and recoveries near the 2007, 2000, and 1929 bull market peaks (the only peaks that rival the present one), the ‘buy the dip’ mentality can introduce periodic recovery attempts even in markets that are quite precarious from a full cycle perspective. Still, it's helpful to be aware of how compressed risk premiums unwind. They rarely do so in one fell swoop, but they also rarely do so gradually and diagonally. Compressed risk premiums normalize in spikes.”

Those spikes will make it quite difficult to exit in the nice, orderly manner that speculators seem to imagine will be possible. Nor are readily observable warnings (beyond those we already observe) likely to provide a clear exit signal. Galbraith reminds us that the 1929 market crash did not have observable catalysts. Rather, his description is very much in line with the view that the market crashed first, and the underlying economic strains emerged later:

the crash did not come – as some have suggested – because the market suddenly became aware that a serious depression was in the offing. A depression, serious or otherwise, could not be foreseen when the market fell."

There is still the possibility that the downturn in the indexes frightened the speculators, led them to unload their stocks, and so punctured a bubble that had in any case to be punctured one day. This is more plausible...

Some people who were watching the indexes may have been persuaded by this intelligence to sell, and others may have been encouraged to follow. This is not very important, for it is in the nature of a speculative boom that almost anything can collapse it.


Any serious shock to confidence can cause sales by those speculators who have always hoped to get out before the final collapse, but after all possible gains from rising prices have been reaped. Their pessimism will infect those simpler souls who had thought the market might go up forever but who now will change their minds and sell. Soon there will be margin calls, and still others will be forced to sell. So the bubble breaks.

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THX 1178's picture

It is the nature of a speculative boom that almost anything can collapse it.

A worldwide viral pandemic?

In particular, the announcement of several cases in NYC, LA, Chicago, Houston, Miami, ATL, etc.

MalteseFalcon's picture

Give it up.  You're wrong.  The market is just going to continue higher.  Pension plans depend on it.

Precious metals are over.

On a long enough timeline the DOW goes to 30,000.


drinkin koolaid's picture

Right and Wrong MF. The bear in gold from the Sept 11, 2011 high is over, We're in a new bull market which WILL have some big selloffs, but those should now be bought. You're fighting the last war.     On US stocks I totally agree. We're in the minority on that one certainly. Dow much higher than 30K IMO.

mvsjcl's picture

Amazing that they create economists in order to give cover to their malfeasance and theft. All market crashes are the coordinated withdrawal of liquidity via collusion by those that mean to profit from the results of il-liquidity. That's it.

nink's picture

The market is up today because..... ummmm.... I got nothing

MalteseFalcon's picture

It went up, because the FED printed money and bought it.  Same as yesterday.  Same as tomorrow.

Stormtrooper's picture

Precious metals are over.

I am always amazed at how duped the American population has become regarding "money" vs. fiat.

A $10 drop in gold vs. the fiat dollar causes the speculators to yell "fire" in the theater and run.

"Money" is a commodity that does numerous things, it acts as a medium of exchange, a store of value, portable, divisible,......etc.  Anything that requires human effort to extract can be used as money.  Chickens or cows can be money but they are not a very good store of value because they tend to die (and shit all over the place).  Over the course of 5000 years, humans have recognized that precious metals meet the definition of "money" well.

"Money" is just an exchange of something considered to be of value for something else considered to be of value.  "Money" is something that makes "barter, which is really all there is to an economy" a whole lot more simple by providing a commodity that is univerally recognized as having value.

Comparing the "value" of precious metals to "funny money" that can be created in unlimited quantities at no cost is a meaningless excercise.  The human population has to resume comparing the quantity of precious metals, a commodity, to the "value" of other commodities relative to PMs.

After a bit of a search, I came across a downloadable file from a research project called the "Cole Report".  It is an Excel spreadsheet listing the prices of numerous common commodities in various cities from the 1700's until 1861.

Because many prices in the 1700's were listed in pounds sterling or other, I chose to start in the year 1800 and take an average price of several commodities until 1861.  There was inflation (due to wars) and there was deflation (can't happen today with Central Banking).

At the time gold was $20.75/ounce (until the U.S. default in 1933).  Using these numbers, I took a quick average of several common commodities to try to understand whether the price of gold today has been a good "store of value".  Here are some results for the average prices during this period.  I converted the average price to pounds (or loaves for bread) and then used some current pricing to determine how much I could buy today with gold at $1300/ounce.

Beef: Average price-12.25 cents/pound; 1 ounce gold buys 169 pounds; today one ounce gold buys 163 pounds at $8/pound.

Bacon/pork: Average price- 9.5 cents/pound; 1 ounce buys 218 pounds; today one ounce gold buys 260 pounds at $5/pound.

Bread: Average price 4.07 cents/loaf.  One ounce gold buys 510 loaves; today one ounce gold buys 650 loaves at $2/loaf.

Butter: Average price 16.79 cents/lb.  One ounce gold buys 124 lbs; today one ounce gold buys 433 pounds at $3/pound.

Coffee: Average price 16.47 cents/pound buys 126 pounds; today one ounce gold buys 217 pounds at $6/pound.

This is a rough evaluation that needs to be adjusted for population growth, productivity, amount of gold available to be used as money, yada, yada, yada.  You can argue the commodity prices but it is clear that gold has maintained its "store of value" property.

This is just a starting point as people would learn to value gold/silver against the availability of other commodities.  That leads to inflation/deflation.

The point is that Americans, and humans around the world need to be re-educated to understand the value of gold in terms of its exchange for other commodities.  It is necessary to be able to determine what quantities of other commodities an ounce of gold will buy, not how many dollars it takes to buy an ounce of gold.  This is the first step to eliminate the destructive effects of the Central Banks and restore some stability to the economy.  Without the Federal Reserve Bank, Americans could still be paying 9.5 cents/pound for bacon based on the value of real money (or $5/pound with gold at $1300/ounce.

Download the Cole Report and do your own analysis. 

Urban Redneck's picture

You do realize that the price of gold did actually FLUCTUATE in the year 1800 just like it always fluctuates. Using an OFFICIAL price of $20.75/oz is about as bullshit as using the official $42.22/oz in 2014.

MalteseFalcon's picture

It does matter what is or isn't "money".  The FED prints paper gold and overwhelms the "gold market".  That's it.  The market is fake.  You'll NEVER know and will NEVER receive the free market value of gold.  NEVER.  Because there will NEVER be a free market for gold.

It's over.

bescobar's picture

30,000 just by years end. I'm done listening to the fear mongering of ZH. Maybe Barack Hussein Obama is the Messiah. Maybe Eric Holder really does care about us. Its time to stop pissing against the wind. This administration really does want the best for us. Oh, and Michael Brown is innocent as well.

MalteseFalcon's picture

None of your statements have anything to do with the FED printing money and buying the market.

LooseLee's picture

Devotedly said by a card-carrying PINKO COMMIE FASCIST. Go to North Korea where your enthusiasm for being controlled is actually respected.

MalteseFalcon's picture

Have your controller in the boiler room edit your script.  It makes no sense and makes you look stupid.

BadKiTTy's picture

Yeah well - the market in Zimbabwe went to the moon to! 

So what?


Rainman's picture

the plague ?? Good thing I know how to survive in the deep woods. Mrs. Rainman not so much.

TabakLover's picture

Johnny baby...I'm root'n for ya, I really, really am.

debtor of last resort's picture

What if there are no buyers? Frozen 'market'? Forced buying through pension funds after a three week lockdown? When this crash comes, there are no buyers. Then what?

Devotional's picture

<-- this thing aint popping any time soon

<-- October 2014 pop?

drinkin koolaid's picture

John, you're wrong for the umpteenth time. I decided from now on I'll just copy and paste what I've been saying for 5 years with this SECULAR bull market.  

"Once again for the last 5 years I repeat. This bullshit market is in an uptrend. Deal with it folks!"

ebworthen's picture

"Put it all on double six's 30-1" (all with someone else's money).

A black tulip will always buy you a house...

oudinot's picture

A couple of weeks agao I thought , naively,inaccurately  that this was the start of the inevitable bear market.  But, as I think retrospectively, a bull market of this intensity will need a 'blow off top' to confirm the abyss.

My next guess is late October with S & P 2200 or so........


Dungholio's picture

There is no good reason we shouldn't see DOW 35K by Christmas.

q99x2's picture

What is so difficult to understand about computer software. This is not 1929.

Software allows bankers to siphon off all the wealth from a nation and kill the citizens of that nation through FRAUD  A financial crisis never needs to appear.

RaceToTheBottom's picture

Sounds like this time is different.....

notadouche's picture

Proof positive that the market can indeed stay irrational longer than you can stay solvent.  

oudinot's picture

"The  market can stay irrational longer tna you can stay solvent"

Kinda like a wife.



notadouche's picture

In my experience I have to agree and then destroy the message for fear the beatings will continue.

neidermeyer's picture

If you have a wife you don't need an irrational market to become insolvent ,, she just has to decide you're too stingy with x y or z...

NOTaREALmerican's picture

The market goes up until somebody big doesn't get paid.   

Tenshin Headache's picture

So, to summarize, it's going to crash and I don't know when.

peterpilot9's picture

What is it with another DOW gonna collapse article?  Why can't the Hedge work on articles that might increase its credibility?  This is pretty much the same article written for DOW 10K, 11K,12K, 13K etc......

Well, on the other hand the Hedge isn't writing about China going to war with Japan (funny how that didn't pan out); now it looks like China and India.  Funny stuff.  Maybe this place does mean to be the financial version of the Onion.

Tsar Pointless's picture

It may be a mix between The Onion and the Drudge Report.

Comte d&#039;herblay's picture

ZH  is coming to us from a Parallel Universe, outside the Milky Way. As such, what they have written was originally transmitted in 1929 and is just now reaching our ether. 

Keltner Channel Surf's picture

Market to John:

"John, I'm only dancing

She turns me on,

but I'm only dancing . . ."

disabledvet's picture

Well...1929 and 1999/2000 looked pretty much identical. We haven't had the actual moonshot this go around which was definitely observable on those two it was with Japan in 1987 when it hit 40,000.

Not to continue to poke holes here but lest anyone forget the Fed smashed the housing bubble and a lot of other things circa 2008. "Now they're tapering." (Rapering?) Detroit has gone bankrupt in our Great Recovery and some company I've forgotten the name of just said "you're getting 90 cents on the dollar for your 5 billion you lent us. Thanks and have a nice day!"

In short "this ain't Nirvana" either so there are some rationales even if the explanations are beyond far fetched.

Comte d&#039;herblay's picture

"Reality is for those with no Imagination".

EL SCRIPTO's picture

Noticed the other day that Geo. Sorass placed some bets on a crash and figured his buddy-in-chief will want to make it happen...

EL SCRIPTO's picture

Noticed the other day that Geo. Sorass placed some bets on a crash and figured his buddy-in-chief will want to make it happen...

Comte d&#039;herblay's picture

What you don't know is the Call side of his spread, or to "put" it another way, a little knowledge is a dangerous thing.  

HUGE_Gamma's picture

this aint parabolic.. we need one last hurrah.. maybe S&P hitting 2200 by December.. 12% in 4 months, not impossible but a strong breakout above 2000 could do it.

scubapro's picture


why insist the large cap index go parabolic?   qqq already has, RUT already has and on a log scale or otherwise (given its a fixed income piece) jnk has too.   

you know that the russell 2000 p/e number, when calc'd, discards companies with no earnigs, what is it if we include companies with 'negative earnings' (never losses!)  200x ?  

Dow and SPX never did the parabolic in the past it was the lesser indices.  the time is nigh, but it wont be straight down, play it smart.  or just by LEAPS on tsla, nflx at 50% off 1yr out, and you'll triple up.

Comte d&#039;herblay's picture

A Franciscan TOR, the former Islamic terrorist, Executioner, torturer, and a very articulate, funny raconteur, humorist and original screenplay writer, Budgie Twitters, says with all humility that,

"TheTrend is your Frend (couldn't spell worth a dam, though). Don't fight the tape. And as a side note, Katie Upton's are for real and they are spectacular".

Billy Shears's picture

Yeah, I once bought a couple of slabs of bacon like that; bacon never looked so good!

fibonacci&#039;s claus's picture

I have never seen such manipulation.  The whole thing is completely rigged.  Utter corruption.  Pretentious.  There is nothing free about free trade, the markets, democracy.  What a rigged game!  There is absolutely no incentive for millions and millions of people in this country.  None.  Government has militarized the internet, web, police, the court systems!  The courts have become militarized weapons of mass destruction against the constitution.  The government is openly targeting our rights of privacy, spying on our mail, phone conversations, texts.  The cops roam around with stingray equipment spying on everyone. 



The second bloodmoon cometh!  God have mercy on the devils

LooseLee's picture

Well said. Unfortunately, it is being aided and abetted by quite a few here on ZH---I mean the PINKO COMMIE FASCISTS, you know (who you are!)

Trahald's picture

The market died in 2007 and the facade is being kept up by the US govt in conjunction with other financial institutions.  They have been manipulating the market for decades as can be seen from the cases brought against some of the largest players, however they are now the entire market.

Its is upto them when they stop, nothing to do with fundamentals or the BTFD propaganda or WW3 - it will stop when they want it to and not before.

Then the National Guard will be deployed in your town

Billy Shears's picture

Yes, I couldn't agree more and this is VERY, VERY worrisome!

BenzRabbit's picture

ZH and many others have been bearish too early.

Markets need a blow off top before a significant move down !

Imo, we are now in the final leg up which should terminate around SPX 2,100-2,200. Thereafter, fasten your seatbelts !!

scubapro's picture



"everyone" or at least the 4 remaining bears are waiting for a blowoff top in lg cap....dont let the mkt guide your bets, simply limiting losses can be a good guide.   waiting for the i-deal, can leave you with no-meal.