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Is the Stock Market Top In?
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
The pool of greater fools willing and able to buy assets at higher prices with leveraged free money has been drained by six years of credit/risk expansion.
Is the top in U.S. stocks in? The consensus is "no"--corporate profits are rising, the U.S. economy is recovering and has reached "escape velocity," i.e. it can continue expanding even as the Federal Reserve ends its monetary stimulus (QE) and plans the first increase in interest rates since the zero-interest rate policy (ZIRP) was launched in response to the Global Financial Meltdown.
Many observers have noted that global capital flows (from the risky periphery to the less-risky core) favor U.S. stocks and bonds--another reason to see the 5.5-year rally continue to new highs.
The case for the top being in rests on three pillars: extremes in monetary manipulation (oops, I mean policy), sentiment, leverage and liquidity, the rise of the U.S. dollar and the diminishing returns on monetary stimulus and the repression of interest rates.
A number of chart-oriented sites have made the technical case that extremes in sentiment, valuation and leverage will unwind as gravity reasserts itself. Various cyclical analyses also suggest that the current Bull rally is getting long in tooth and due for a reversal.
For an abundance of charts that call into question the consensus narrative of "onward and upward forever," please click through the excellent websites of John Hampson and Lance Roberts.
While conventional pundits are falling over themselves in their haste to issue soothing claims that a stronger dollar is good for corporate profits and the stock market, these feel-good analyses ignore the one key dynamic of a stronger dollar: profits earned in other currencies will convert to fewer dollars as the dollar strengthens. I have covered this dynamic for many years.
This means corporate profits earned overseas will decline as soon as the effects of the stronger dollar filter through to profit statements--that is, by next quarter. Given that up to 50% of global corporate profits are earned overseas, this is not a trivial dynamic.
The fact that the global economy is stumbling into recession is also ignored by those who see corporate profits rising forever. With roughly half of profits of global companies coming from overseas markets, how can a global recession not impact U.S. corporate profits?
If the stock market is indeed a discounting mechanism that prices in developments six months' out, then the hit to profits from the stronger dollar and flagging overseas sales should impact stock prices today, not in three months.
The most interesting case for the top being in is diminishing returns:
Total credit and GDP: rapidly increasing credit has a diminishing return as measured by GDP growth.
The Fed's balance sheet and the S&P 500:
Money velocity: diminishing returns:
Small biz: fading at the margins:
Federal student loans: soaring costs, diminishing returns on the degrees being bought:
The return on a college degree? Diminishing faster than you can say "default":
Labor participation and real median income: diminishing returns on all the outlandish money pumping and Federal deficit spending:
The "easy fixes"--unleashing a tsunami of cheap credit, dropping interest rates to near-zero--only work when creditworthy borrowers have productive uses for the new credit. If the cheap credit is used by marginal borrowers for speculation, the returns on those fixes are highly vulnerable to collapse once asset bubbles and risk-on carry trades pop.
Extending credit to marginal borrowers does not magically transform the borrowers' creditworthiness. All monetary easing and other stimulus does is expand the risk of a credit collapse by expanding the debt extended to risky borrowers. Marginal borrowers will still default as soon as making debt payments becomes painful/impossible; if you want evidence for this, consider how many subprime borrowers defaulted after getting lower rates on their mortgages.
Lowering interest rates does not magically make marginal borrowers creditworthy, or magically make speculative bets productive. In these two important ways, the "fixes" cannot fix what's broken. What they have done is enable more of what has failed spectacularly: extend credit and leverage to speculators who have ramped risk-on assets to the moon because cheap credit and low interest rates have enabled lucrative leveraged betting.
The fantasy was that all this cheap credit would magically flow into productive expansion of the real economy; instead, it fueled carry trades and an expansion of incredibly risky credit to subprime borrowers buying vehicles, homes with 3% down payment, etc.
The "recovery" constructed on this expansion of risk has built-in limits: once speculative trades reverse or blow up, the process reverses, and assets must be liquidated to escape the tightening noose of leverage. Once all the marginal borrowers have purchased vehicles, taken on student loans and bought houses and stocks on speculation, the pool of greater fools dries up and the deleveraging of assets purchased on margin/credit unleashes a feedback loop: selling begets more selling.
Those who believe the stock market can continue rising despite the end of the Fed's "free money for financiers" programs are implicitly claiming that the pool of greater fools is still filled to the brim. Simply put, speculating with leveraged free money and extending credit to marginal borrowers is not sustainable or productive, and the stock market seems poised to reflect three dynamics:
1. reversion to the mean and the unwinding of extremes
2. the decline in corporate profits resulting from a stronger U.S. dollar
3. the pool of greater fools willing and able to buy assets at higher prices with leveraged free money has been drained by six years of credit/risk expansion.
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No Top, yet. Must get past USSA mid term elections.
Doesn't it depend on which team color they want to win?
The ZH narrative is that the PTB always want team Donkey to win.
WHAT A STUPID FUCKING QUESTION!
FUCK YEAH THE TOP IS IN!
DUUUUHHHHH!!!
You're a bunch of idiots still believing the Red or Blue Team or the Feral Reserve has any control left over anything
It's all over an they know it!
Insert Willy Wonka talking about the rowers keep on rowing.
Conventional wisdom is that donkeys are friendlier to Keynesian policies (which in reality make the rich richer, but the sheeple believe the donkeys care about the poor).
So a Congress run by elephants in both Senate and House will, in theory, be less friendlier to the Fed.
The Fed knows the game is up, so if they pump the house of cards up and let it fall after a Republican takeover of Congress, then there will be someone to blame.
Food for thought: I find it quite ironic that the far left Lie-awatha Warren has been the only one to give the Ponzi Munchkin a hard time under questioning in the Senate. What does Lie-awatha know? If, in fact, there is a crash soon, then what a fantastic commercial those clips of her grilling Yellen will make for her presidential campaign in 2016.
Whichever top or team, please, please, please, Dear God (might as well ask him because the voters sure screw it up good) don't let the idiots like Al Franken get reelected.
Pretty please with cream, sugar and a Hail Mary or two on top? Banging on chest, mumbling about my fault, my own fault, etc
PS Spastica..... Weeeeell, the mag Foreign Affairs is after all one of the official organs of the NWO and this month, they've a series of articles about how "Liberal Democracy" (aka Progressive) needs to co-opt all of the movements both on the right and left that question the failure of Big (aka World) Government....
Important Article
http://www.propagandamatrix.com/articles/september2014/290914_co_opt.htm
There are two teams, team wolf and team sheep and right now the wolves are inviting the sheep to dinner and the sheep thinks it's wonderful that they are getting a free lunch...
Why no thread on Secret Service hearings? I cannot believe how stupid these people are, just say you fucked up and resign.
i'll bet you one thing ... Secret Service got a "hearing" from Michelle ...
Michael(the Wookie)Obama.
Careful my friend...
The last person who called Moochelle a tranny died during a routine operation.
Keep markets frothy and assume warhawk positioning = Dem strategy
Alan Colmes turns tables on Al Franken: why are you now running as a warhawk? http://tinyurl.com/llcnafk
HOD is in.
Short ES_F as it is sawtoothing downwards over time in preps for end of QE 3.
Thanks for waring us Feds.
I like your thinking. Target for downside?
The US cannot allow its stock market to falter. US military power and over $1 trillion a year spending on the military derives from an ever rising stock market.
Cheaper silver means more missiles can be wasted on civilians and wheat silos in Syria
US-led jets bomb grain silos in Syria, 'civilians killed'http://rt.com/usa/191576-syria-coalition-silos-civilians/
Is the stock market top in? No.
was it "heads" or "tails"?
seriously, i gave up years ago calling THIS market ... what will happen ... will happen
There's an easy algorithm - when somebody asks if the top is in, ask yourself if TPTB are tired of fleecing the general public, and that's your answer.
Well it seems to be in for silver...Wish I would have waited to make my last big buy.
I'm afraid they're going to kick this can down the road for 20 years. Long Zombie economy.
i remember 2008 clearly ... prevailing wisdom NFW they let markets drop before election ...
No top, but this post might put in a floor for the day.
ZH and its allies call top #2684.
Maybe they should programme a-Greater-Fool-HTF-bot.
If its risk offf...its sure not showing up in PMs....
The top would be in for normal market dynamics and yield seeking as QE/ZIRP ends, BUT that ignores the Fed directly supporting equity prices.
So, prices will decline just exactly as much as Janet's spreadsheet says they shall.
QE 4 coming in first or second quarter 2015. This time $170 billion/month.
Larger and larger QEs until the currency free-falls.
Agreed. But only after some 'event' happens in Q1 2015.
Use imagination for said event.
Love ya' Charles - but it doesn't matter.
As long as the FED, backed by the Police State, can print and talk - it will continue.
You can call peak leverage I think.
As Einstein postulated "there is a stop sign in quantitative theory." In short the money changers have their c squared down pretty good here...but your mass is expanding thus meaning "peak output."
When overlaid with the biggest Government in the form of outlays in US history its hard not to see how bailout tycoonitis doesn't lead to the "political elimination" of say...Rhode Island.
Not that the Governor cares....
"Peak Leverage" indeed....there is a "Stop Sign".....
Mathematically and Politically.....
I've always believed that the end would start with a major intra-day reversal ... Is this it? The odds are about 50-1 against.
The top will be in when the most-shorted stocks stop going up, i.e. when the shorts finally throw in the towel. Then, look out below.
lets put it this way.
1) Student loans dont matter this debt will be wiped away for the most part, there are like 101 ways to cancel out student debt now.
2) Labor participation is falling because of automation.
3) Corporate profits are up because of lay offs and wage reduction (part time instead of full time).
What matters is consumer spending, if consumer spending falls too much . . . it will be game over.
But stocks will continue to rise forever, the Fed is printing money and buying stocks everyone knows it... so . . . well actually they will rise forever till . . . they dont.
I think a good analogy would be a terminal cancer patient.
You can take said cancer patient to the ICU and pump them full of intravenous vitamins and BOOM they LOOK HEALTHY their cheeks are rosy and they feel better.
But the cancer is still there and growing, and the patient will still die.
The Fed's self-appointed task is to keep stocks going ever higher and keep that perception of wealth going.
Keeping speculators and reckless debtors afloat while punishing fiscally responsible people.
An effort to keep those with paper market profits spending just as the paper home equity profits fueled by artificially low interest rates and underwriting / borrowing requirements kept spending moving from 2002 through 2007.
Next BUBBLE:
QE to infinity until there is a currency crisis.
The US will enter Abe-Land before this is over? As long as the dollar keeps going up, why would there be a reason to stop printing, after all all the world need our money.
Kick the can down the road ECON/FED Speak:
Is the top in U.S. stocks in? The consensus is "no"--corporate profits are rising, the U.S. economy is recovering and has reached "escape velocity," i.e. it can continue expanding even as the Federal Reserve ends its monetary stimulus (QE) and plans the first increase in interest rates since the zero-interest rate policy (ZIRP) was launched in response to the Global Financial Meltdown.
In other words: BULLSHIT
So is "bad news" actually "bad news" now that any rate hikes are largely priced into the parabolic rise in the usd? If macro continues to be bad that may put off the rate hikes that *caugh*caugh weren't going to happen anyways, but should also put some pressure on the usd and lower bond yields.
It looks to me, a lot like the Feds. morphine drip is running dry. Then we have the whole credibility issue if the Fed. keeps waffling back and forth on their policy stance.
No, of course not, it's all good.
Signed,
Your friendly stock broker; we'll even open early for you, just as the commercial says.
What part of "The FED has unlimited power to print money" do ZHers fail to understand?
The market will continue up, because if nobody else buys, the CBs will buy - aka "The 3:30 Ramp."
And that is also why thinking that China can crash the T market is pure foolishness - no matter how many T-bills they sell, the FED will print the money, run it through Belgium, and buy every last one of them.
The World of Finance you grew up in no longer exists - that is why, after years and years of predicting an implosion, it never comes.
And as long as people will take FED notes, it never will.
-30-
It will until it won't. We are nearing the end of this ramp.
But, you're correct, from 3pm on is when the pros come out to play. Unless of course they panic. And if they do, they will panic first. We shall see. ;-)
And as long as people will take FED notes, it never will.
This is the crux of it. Federal Reserve Notes, such as the ones in my pocket right now, are still psychologically considered to be of value, and people think of what they can obtain in terms of these notes. There is a line out there when that psychology will change. And if they cross that line, it may happen suddenly.
Printing money is a dangerous game. The Romans got away with it for decades (centuries?) with debasement, but the world moved much more slowly then, and the foundations of survival were much more concrete. In our current virtual (i.e. reality-suspended) world, the speed at which this switch may flip is likely to be far faster. Access to food may disappear very quickly indeed if supply systems fail. Hundreds of years to evolve such a complex network can be undone much more quickly than that.
The "top" hasn't been in since the summer of '32.
Can it go a lot higher from here? No. But that's all your charts say. It can also churn here indefinitely, a little up this week, down the next. Until they raise rates (or start selling the bonds they bought), this juggling act ain't over.
I wanted to call it several days ago, when ZH was mentioned on CNN, but this is close enough.
I'm happy to call a top in US equity mkts....The FED are done with QE....bond mkt far more important than equities and at this point the FED are well aware of the negative marginal returns of asset purchases which is why they are ending them. Think we go risk off shortly and bond yields plummet...secretly that will be welcomed by the FED in some ways.
Any reintroduction of QE by the FED going forward and it will be over for the $. They will just keep rates at zero for as long as they can.
Well I do feel much more bearish that I did in 2008, about 1300 SP500 points more bearish.
Writing about the top = it's probably not the top
the market topped out for me a year ago., i don't have any hft's in charge of my money, i may of missed out on 20% or so, but when it blows up, the hft's are the only ones that will be able to trade for 24-36 hrs., i figure 25% loss before any normal investor will get any response to e-mails, or phones answered, to sell, or transfer funds.
2017 people.
Buffets derivative bets expire!!
Watch it go to shit after that!