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Inconceivable
Submitted by Lance Roberts of STA Wealth Management,
Just recently one of the greatest fairytale movies ever made, “The Princess Bride” had its 27th anniversary of its release. If you have never seen the movie, you are missing one of the greatest classic adventure tales ever made and something that you will enjoy watching with your children.
What does this have to do with the financial markets? Just hold on a second and watch this clip first so you will have the right context for where I am headed.
This is the “frame of belief” that pervades in the financial markets currently. A correction of magnitude is currently “inconceivable” as the U.S. is now “clearly” on a trajectory towards stronger economic growth. As Russ Koesterich from Blackrock stated recently:
“But good news on the U.S. economic front should help temper worsening geopolitical tensions and slowing growth in Europe.
Of course, a strengthening U.S. economy may have a downside. If the Federal Reserve (Fed) increases interest rates too soon or by too much, markets could be rattled. Another trend to watch: diverging growth. Europe and Japan are still struggling while the U.S. continues to evidence signs of strength.
At the same time, stocks are on pace to finish the year with returns in the mid to upper single digits, and I still expect rates to rise, if only modestly, for the remainder of the year.”
First, the U.S. is hardly showing evidence of real economic strength outside of a “bounce” from the Q1 drawdown and the push from the Fed’s liquidity interventions. This is the same continuing pattern of the “start and stumble” recovery that we have witnessed since the end of the financial crisis as shown in the chart below.
Notice, that absent Central Bank interventions, the economic composite index has failed to show organic, self-sustaining, economic recovery. Furthermore, even the recent “surge” in economic growth has failed to push the index neither to levels higher than the initial recovery bounce nor to levels more consistent with previous economic expansions since 1974. With the Fed’s latest iteration of liquidity injections ending this month, the true test of whether the economy is “recovering” is yet to be seen.
Secondly, the recent decline in inflation expectations, commodity prices, and the rising dollar (which will impact exports and corporate profits), all suggest the economy is too weak to stand on its own.
Those issues are already showing up in rapidly declining earnings momentum and expectations, as shown in the chart below from Societe Generale, does not “jive” with the near vertical ramp in recent manufacturing surveys. Very likely there will be a rapid deterioration in the “outlooks” by companies using “global weakness” as a reason to swiftly guide down future expectations. While it is currently believed to be “inconceivable” that the U.S. will be dragged down by global weakness, the markets face a potential re-pricing of “risk” as expectation collide with reality.
As I wrote in this past weekend’s newsletter, the markets are likely already recognizing these issues.
"Over the last several weeks there has been a very pervasive and steady deterioration in the technical underpinnings of the broader markets with small and mid-capitalization stocks, along with international and emerging markets breaking important supports.
For most investors, that damage, up to this point, has been masked by the rotation of money from "high-risk" momentum plays into the safety of large capitalization stocks found in the S&P 500. However, this past Friday, a critical level of support was violated, along with some other more worrisome signs, which need some attention.
The chart below shows the S&P 500 index from since 2007.
I have shown the relative buy/sell signals that have occurred since then. Only the sell signal in 2010 resulted in a "bad" trade due to the quick onset of the second round of quantitative easing in September of that year.
Importantly, the most severe corrections in the market since the end of the financial crisis have occurred ONLY when the Federal Reserve's "liquidity injections" were extracted from the financial markets."
I also outlined the "10-Risks" to the markets currently that will likely continue to weigh on the markets. (Subscribe for "free" email delivery)
1) Eurozone
2) Earnings
3) Deflation
4) Commodities
5) US Dollar
6) Interest Rates
7) Economic growth
8) Technical underpinnings
9) Volatility
10) Complacency
Technically Important
These “risks” should not be underestimated. Never before in history has the amount of market participation been so heavily driven by computerized trading. Importantly, most of these computerized programs use some form of technical analysis for executing the buys and sells of entire baskets of securities instantly. The major risk to the markets is the break of widely watched support levels that triggers simultaneous selling across the markets driven by computerized algorithms.
Such an occurrence, as we got a taste of in the May, 2010 “flash crash,” creates a “vacuum” of buyers which causes extremely rapid declines in prices. Such a drop would break further supports potentially triggering “serial selling” as programs continue to generate sell-orders with no readily available buyers. The real danger of a swift sell-off is the potential escalation of margin calls as leverage is currently near all-time highs. The additional forced liquidations would create a negative spiral leading to a dramatic destruction of capital as “panic selling” eventually ensues.
That is what history suggests will happen. While this time is different due to the vast amount of computerized inputs into the markets, the result will likely be the same as it has always been.
The chart below shows the key support levels for the markets that are widely watched with the percentage decline from the recent market peak. While it is “inconceivable” that such a decline could occur, it certainly could not hurt to be aware of the levels that being closely watched.
Many of these levels are key psychological support levels such as 1800, 1750, 1700, etc. As I stated above, like dominoes, once a key support level fails prices could quickly escalate tripping one support after the next.
As shown, a decline of 18.2% would wipe out all of the 2014 gains and 50% of those from 2013 without technically triggering a “bear market” in the S&P 500. The real problem is that no one knows where the “trigger” point is that escalates a market correction into a full-fledged bear market. Furthermore, with the economy already growing so weakly, a decline of 18% could cause a contraction in economic growth further panicking the “bulls.”
The point is that there are many risks investors should not ignore. Making up losses is much harder than reinvesting stored capital once a clearer picture emerges. While the current belief that a correction of magnitude in the markets is "inconceivable," I am not sure that word means what they think it means.
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Survivalist villanelle
You who balk at the smell of salt on every meal.
You who will not have that third glass of wine.
You who never ate anything that did not come from a shelf.
You who read the mainstream media to justify your gutless days.
You who sell your grandchildren's future for a dime and another day.
You who know precious little yet jeer at those who know different.
You whose notions of safety and freedom would make a neanderthal drop dead with multiple stomach ulcers from laughing so hard.
You who deny the broader meaning of life, yet claim that I do not live.
You who hide in plain view accusing others of hiding under a bed.
You fucks, how can you mistake preparation for fear?
only the paraniod will survive!
seriously,
if nothing happens...they win..
if SHTF...they win!
gold bugs arent stupid..
All jawboning aside, the ONE THING that has mattered since 2007 is the free money from the Fed. And that's coming to an end.
And it's going to be a very cold Winter:
Again.
http://www.bloomberg.com/news/2014-10-14/new-york-gets-frigid-winter-war...
Think there's nothing to that??
http://wattsupwiththat.com/2014/10/14/water-temperature-of-the-great-lak...
Inconceivable only means that it can't be conceived by the mind of the person uttering the word. By no means should it be taken to mean impossible!
It only characterizes the poor cognitive skills of the person uttering the words.
And remember X Infantry Capt. some wise words to live by:
JUST BECAUSE YOU'RE PARANOID, DOESN'T MEAN THEY'RE NOT OUT TO GET YOU!
yep...
thats why I left...
DISCRETION IS THE BETTER PART OF VALOR!!!
Also: Even paranoids have real enemies.
The Titanic sink???
Inconceivable...
Oops!
Sorry, the free money from the FED is not the only thing. You need to put that together with the empty mega cities created by China through money printing of their own, plus their own version of shadow banking. Add to that Japan, the EU CB rescue of all sovereigns on the shoulders of Germany. The seemingly unlimited money printing in Japan to stratospheric levels in terms of debt over GDP, etc. etc.
Yes, but all that was only possible because the Fed propped up the ponzi. No other countries would have done the things they did unless the Fed kept the system from failing. Hell most of the things you cite, Japan, ECB, was Fed money.
Nope, ebola, cold winters, ISIS, it's all just window dressing.
Why would 'all that free money coming from the Fed ' come to an end?
It costs almost nothing to produce. It is applauded when it appears. It's menace is undetected by all but 1 in 1 million men. It appears at first to be nearly medicinal. It is created with a thousand good and legal means. Those who receive it first benefit the most but even those who receive it later are pleased. It reduces the effort to repay odious debt. It allows the nominal economy to enlarge. It cause those up for election to be given tenure.
No, I think we will not see an end to this free money. There would be riots on Facebook if that were to happen and deflation would cast a shadow across the land. Those charged with printing have always made the choice to print in spite of the fact that printing is fatal to the very thing being printed...it is just that no one really cares. New currencies are easily made and old ones easily discarded.
I'm not sure how it will be done but unless there has been a tidal shift in the thinking of central bankers we will see it again.
The Fed says it's gonna end.
Are you saying the Fed a lies?
Luckily, I have developed a resistance to Iocane Powder so I will be just fine. And also I avoid land wars in Asia.
Bad poem? Three downvotes is way too much.
They will never see it coming.
"They'll see it coming from a mile away...and do nothing."
Shelter in Place...learn it, live it, love it.
heard the president signed executive orders to...
be able to send the N.G. to africa..
and one to stop all interstate travel at his command..
BS or not?
Opportunity.
Without thePresident's authorization nothing happens.
He's not saying anything so...
Shorted the Dow two days ago. Thanks! My balls feel warm and fuzzy.
Just be sure they're YOUR balls though!
But do they feel slobbered on? No point in half measures.
Ebola will bring an epic market crash, trust me.
The sheep I speak to are waking up.
It may be too late, but the spell is breaking.
Damn, I hope so. I am became so tired of prostletizing that I gave up. I just figured the zombie apocolypse was here to stay.
*EBOLA ALERT!*. Student at San Diego college with Ebola symptoms (could just be a cold) but anyway resume media frenzy and scary hazmat tape everywhere!
Not all markets are created equal. No doubt there will be crashes, but where and when?
What kind of question is that? NO ONE EXPECTS THE SPANISH INQUISITION!
Ebola will bring an epic market crash, trust me.
Why?
Edify me please.
You cannot be edified until you assume the position.
Ebola market crash? Inconceivable! Unpossible!
'Inconceivable!'
You keep using that word.....I do not think it means what you think it means.
x + 27 years. No way I'm that old. It's inconceivable!
Then again I haven't even been to a movie theater in 16 years.
LOLZ
Market Going Green
Oil Up
PM's Down
Price discovery over guys, back to BTFD!
Was fun while it lasted!
Ok Red Arrow Guys - Do you see a lot of volatility ahead or do you just not like me?
Oil up so much today and mainstream articles saying how "bad" low oil prices (?!?!?!!?!?) are tell me the Fed is getting this mini-correction back under control where they want it.
Show your work LOLZ!
HURRAAAY!
You're right about one thing Lance.... The Princess Bride was a great movie.
If that movie was 27 years ago, I'm getting old.
Student in quarentine at Southwestern community college in San Diego over ebola scare, yellow tape and media frenzy!
...because this time it's different.
Screw QE4...QE MOAR!!!
QE(whatever), just hand us more free money QUICK!
Is that the logic here? Amazing.
Its a Trap!
No, it's Life in Hell - starring Akbar 'n' Jeff...
Look at it with the other eye, just to be sure.
Is that Andre the Giant, or the bass player from Twisted Sister...?
Andre.
R. I. P.
rip - his drinking was legendary
Quick! Assemble the down voters!
Huh?
What a joke the markets are magically headed into the green territory. Of course they highlighted the strong economy and last but not least the Fed wants to continue to print. Well I am not the sharpest tool in the shed but didn't the markets do the same darn thing the last couple of times when the Fed stated QE was over? The big difference this time is Yellen is slower to respond to the markets needs.
What a scam at the taxpayers expense. The sad part is most will never see it. They will worship our saviors the financiers, the fed and the media. Our economy is sucking for the most part, but as long as I git my welfare and SNAP everything is great!!!!!
Again ...shelter in place. "We'll be with you momentarily."
Need new hinges on the bunker. Worn them out already with all this back and forth.
LOL
Oh Mighty Genie!
Deflation "risk". How will people survive if their purchasing power increases? Thank GOD we have economic wizards to keep devaluing our money in order to prevent this from happening!
Light that pipe. Inhale deep.
'Inconceivable!?!? WHAT DOES IT MATTER ANYWAY.....the PPT is on the case'
Hillary'ous!
ROUS - rodents of unusual size
hhmm, Lance didn't mention Treasuries ... or his 10yr @4% in 2015 call
Just look at that S&P chart; ramptacular, rampalicious, rampamongous, rampnomarketus!
C'mon Janet, end QE and put the prime rate at 4%, I dare ya'!
The Fed is in attack mode; a situation in which the owners of the central bank think they’ve got to grab it all. The only reason Bullard called for QE4 today was for his master, Stanley Fischer. The main reason is that the Fed has to have at this moment political calm.
Supposing the Dow went down 400 today; 500 tomorrow and another 500 next week; everybody would be clamoring for a new monetary system. And the politicians, every one of them, would be saying, Well it’s the Fed, in order to save themselves.
The Fed is trying to hold off this economic train wreck by a continual drive into debt financed by the Federal Reserve's printing press.
Jawboning is cheap ... anyways, Bullard does not have a vote this year ... or in 2015
let me hear the "voters" speak
I don't know that it's cheap, Bell. Jawboning it seems is a favorite ploy of the dictators of economics in the manipulation of the stock market. Unfortunately, the FOMC “voters” have no more power than Bullard. All the Fed owners need are jawboners. The money trust has always been in control.
All Fed open market operations and decisions are carried out by the New York Federal Reserve Bank. The open market is merely a different funnel for creating money out of nothing and pouring it into the economy.. The end result is expansion of bank credit; trillions for the bankers, debt and lost purchasing power for the people in exchange for their savings, labor, and remaining positive net worth.
The BUTTON has been pushed. Everything has been set in motion. Ebola, market crash, War and a defaltionary collapse.
The Great leveling is about to commence. This should take two years.
Next the Great RESET.
As I understand it, 'Inconceivable' things are those that carry the best cost-benefit for investors, while moving with the herd heralds total sheering, and reliance of the benevolence of governments and otherwise 'authorities' is the lowest risk way to profit for approximately 40 year stretches punctuated with short sharp periods of total loss.
Long Iocaine powder!
To call it "inconceivable" says nothing about markets, but a lot about the poverty of our imagination.
...and the de-construction of our language.
It does not matter what the Fed does or what politicians do, if the sheeple stop buying stuff (which by all indications is what is happening due to NO MONEY) the system will fail. Bring on the debt inflated bubble burst.
Inconceivable? Unconscionable is more like it.
Incomprethinkable!!
It may not be "conceivable" but it certainly is remarkable. It certainly is!
Meet the new leadership, same as the old leadership: https://www.youtube.com/watch?v=o9PeXUsdFys
as far as i can tell this is QE 1 finally coming to it's natural, and ugly end.
tarp, bail-outs, stimulus was the natural lead-up to QE 1, which accomplished a great fete, it nullified americas national budget.
the budget was never talked about, or voted on after fed. introduced QE 1,.
with no budget, govt. could spend thier extra trillion a year for facism, controling communications, and people.
all the while bis, (the fed.), with 0% intrest suceeded into to turning 80% of americas capitalism into inevitable federalism.
QE 2-3-4 were propaganda pure and simple, they changed nothing, ( except for more cover to the thieves, and confidence to the sheep), QE1 had already turned americas financial system over to the bis, and thier CB band of thieves.
the bis is failing, so anything could happen, as we've already seen, trying to provoke putin into a war, bis put all their marbles into 3 bags, japan, eu, and america, now none of the three can help the other further, their all three on life support.
they became very powerful using human nature against humans, but when the population stops fighting for you, and turns against you lose big,and fast.
It's got to come to an end. I hope it's now. The suspense is killing me.......and the middle class.
These linear levels, across time & price, mean nothing.
The chart is curved, volume matters (time-series prediction), margin in use/available matters, and that's how proper technical analysis works.
The programmers aren't investors. They'll do what they're told to do. If those who give specs to programmers are idiots then no wonder idiotic results will happen when the code runs.
At the very least curved support equations would be required, not flat lines, and even then that may disagree with time-series analysis of volume of filled orders vs volume of cancelled quotes vs time vs available margin, all of which must be simultaneously considered at bare minimum or the analysis is incomplete and invalid.