This page has been archived and commenting is disabled.

Bubble Exit Rule: "You Only Get Out If You Panic Before Everyone Else Does"

Tyler Durden's picture




 

Excerpted from John Hussman's Weekly Market Comment via The Burning Platform,

The stock market reached all-time highs last week based upon the machinations of central bankers and the perceptions of speculators that these bankers will always have their back. Yellen, Kuroda, and Draghi are growing increasingly desperate as everything they have done in the last five years has failed to revive their moribund economies. The average person in the U.S., Japan and Europe is far worse off today than they were in 2009 at the height of the worldwide recession. The .1% have vastly increased their riches through the ZIRP and QE policies of central bankers. The rise in stock markets is nothing but a confidence game built upon the false belief that there will always be a greater fool to buy overvalued assets acquired by borrowing from the central bankers at 0%. John Hussman understands the nature of markets:

We’re mindful that the financial markets move not based on what is true, but by what is perceived.

 

At present, the entire global financial system has been turned into a massive speculative carry trade. A carry trade involves buying some risky asset – regardless of price or valuation – so long as the current yield on that asset exceeds the short-term risk-free interest rate. Valuations don’t matter to carry-trade speculators, because the central feature of those trades is the expectation that the securities can be sold to some greater fool when the “spread” (the difference between the yield on the speculative asset and the risk-free interest rate) narrows.

He is also understands the move by the BOJ on Friday was made out of panic. It will set in motion tragic consequences for the Japanese people and world financial systems:

With regard to the recent move by the Bank of Japan, seeking to offset deflation by expanding the creation of base money, the move has the earmarks of a panic, which is counterproductive. The likely response of investors to panic is to seek safe, zero-interest money rather than being revolted by it. The result will be a plunge in monetary velocity and a tendency to strengthen rather than reduce deflationary pressures in Japan. In our view, the yen has already experienced a dramatic Dornbusch-type overshoot, and on the basis of joint purchasing power and interest parity relationships (see Valuing Foreign Currencies), we estimate that rather than the widely-discussed target of 120 yen/dollar, value is wholly in the other direction, and closer to 85 yen/dollar (the current exchange rate is just over 112). The Japanese people have demonstrated decades of tolerance for near-zero interest rates and the accumulation of domestic securities without any material inclination to spend them based on the form in which those securities are held. Rather than provoking strength in the Japanese economy, the move by the BOJ threatens to destroy confidence in the ability of monetary authorities to offset economic weakness – in some sense revealing a truth that should be largely self-evident already.

The carry trade is like picking up nickles in front of a steam roller. We’ve seen it all before. The result will be the same.

The narrative of overvalued carry trades ending in collapse is one that winds through all of financial history in countries around the globe. Yet the pattern repeats because the allure of “reaching for yield” is so strong. Again, to reach for yield, regardless of price or value, is a form of myopia that not only equates yield with total return, but eventually demands the sudden and magical appearance of a crowd of greater fools in order to exit successfully. The mortgage bubble was fundamentally one enormous carry trade focused on mortgage backed securities. Currency crises around the world generally have a similar origin. At present, the high-yield debt markets and equity markets around the world are no different.

Hussman can prove that QE and suppressed interest rates below the rate of inflation have completely failed to benefit the real economy and the real people. It has only benefited Wall Street profits, insiders, and rich speculators. They have set the stage for a financial collapse that will make 2008 seem like child’s play.

High real interest rates generally reflect strong demand for borrowing, driven by investment opportunities that are seen as productive enough to justify borrowing at those rates. They also encourage savings that can be directed to those productive investments. As a result, higher real rates are generally associated with more efficient investment and faster economic growth.

 

In contrast, depressed real interest rates are symptomatic of a dearth of productive investment opportunities. When central banks respond by attempting to drive those real interest rates even lower to “stimulate” interest-sensitive spending such as housing or debt-financed real investment, they really only lower the bar to invite unproductive investment and speculative carry trades.

 

We wouldn’t suggest that the Fed target above-equilibrium interest rates, but we are also entirely convinced that below-equilibrium interest rates are harmful to long-term economic and financial stability. Despite the ability of these policies to create short-term bursts of demand – enough to hold the global economy at growth rates that remain just at the border that has historically delineated expansions from recessions – the ultimate and rather predictable result of these policies will be another round of financial chaos.

Bernanke and  Yellen created $3.5 trillion out of thin air since 2008 and have done absolutely nothing for Main Street USA. None of that $3.5 trillion has ever reached average people in the real world. It has been funneled to the .1% and used to speculate in the markets, creating simultaneous stock, bond and real estate bubbles. Now central bankers around the world desperately attempt to keep the bubbles from bursting simultaneously. They will fail once again.

As the central bank creates more money and interest rates move lower, people don’t suddenly go out and consume goods and services, they simply reach for yield in more and more speculative assets such as mortgage debt, and junk debt, and equities. Consumers don’t consume just because their assets have taken a different form. Businesses don’t invest just because their assets have taken a different form. The only activities that are stimulated by zero interest rates are those where interest rates are the primary cost of doing business: financial transactions.

 

What central banks around the world seem to overlook is that by changing the mix of government liabilities that the public is forced to hold, away from bonds and toward currency and bank reserves, the only material outcome of QE is the distortion of financial markets, turning the global economy into one massive speculative carry trade. The monetary base, interest rates, and velocity are jointly determined, and absent some exogenous shock to velocity or interest rates, creating more base money simply results in that base money being turned over at a slower rate.

Those expecting hyperinflation from these money printing measures will have to wait awhile. It will happen after deflation engulfs the world and those in power panic. But, confidence in fiat currency and those controlling its issuance is waning rapidly.

Hyperinflation results when there is a complete loss in the confidence of currency to hold its value, leading to frantic attempts to spend it before that value is wiped out. I expect we’ll observe significant inflationary pressures late in this decade, but present conditions aren’t conducive to rapid inflation without some shock to global supply.

The fact is that all financial markets are extremely overvalued and will crash. The speculators have already forgotten the tremors of the coming earthquake which occurred two weeks ago. Treasury rates plunged, along with stock markets, as there were no buyers to be found. Confidence dissipated in an instant. Fear was palpable. Everyone has a choice. You can look like an idiot before the crash or after it.

Overvalued bull market peaks may still be drawn-out and frustrating. They can seem endless (see The Journeys of Sisyphus) and then suddenly unravel far more rapidly than it seems they should (see Chumps, Champs, and Bamboo) at which point the “lagging” features of a defensive stance are often reversed with striking speed. As the late MIT economist Rudiger Dornbusch once observed, “The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.” Recall that the 2000-2002 decline wiped out the entire total return of the S&P 500 – in excess of Treasury bill returns – all the way back to May 1996. The 2007-2009 decline wiped out the entire total return of the S&P 500 – in excess of Treasury bill returns – all the way back to June 1995.

As we’ve noted before, the problem with what we call the Exit Rule for Bubbles – “you only get out if you panic before everyone else does” – is that you also have to decide whether to look like an idiot before the crash or an idiot after it.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Mon, 11/03/2014 - 17:43 | 5408360 NotApplicable
NotApplicable's picture

As if all the exits aren't already sealed.

Mon, 11/03/2014 - 17:53 | 5408398 Pooper Popper
Pooper Popper's picture

Sealed,and the fire has been lit...

Mon, 11/03/2014 - 17:55 | 5408401 Deathrips
Deathrips's picture

I shit in the doorway on my way out.... its a slippery passage now...

 

Dont blame me...i just shit...they slip in it.

 

RIPS

Mon, 11/03/2014 - 18:14 | 5408447 ZerOhead
ZerOhead's picture

 ... you also have to decide whether to look like an idiot before the crash or an idiot after it.

 

I'm already a good 5 or 6 years past that that fork in the road...

Mon, 11/03/2014 - 18:25 | 5408478 CrazyCooter
CrazyCooter's picture

You know, now that he mentions hyper-inflation, I am not sure it will happen. Why?

Bail-ins.

See, all the money in circulation these days is electronic. Only a small portion is hard cash fiat. So, when things get to that point, they will just bail-in the banks. The banks will have all these assets that aren't worth shit. So, the (electronic) deposits will just cover the losses on the shitty assets and the money is extinguished. Everyone is suddenly broke. Banks are par. And maybe government can print a bit more again.

The aristorcats.

Regards,

Cooter

Mon, 11/03/2014 - 18:30 | 5408502 ZerOhead
ZerOhead's picture

Two more words... deposit insurance.

Everyone I know is either under the limit, have multiple accounts at different banks, or are in short term paper

Mon, 11/03/2014 - 18:49 | 5408541 booboo
booboo's picture

I am too but what's a phoney promise worth coming from any government. See, there is them and there is us. Kinda like a cop, there are three types of people to him, Cops, other cops and criminals.

With a government, any one, pick one, there is them and there are serfs.

Mon, 11/03/2014 - 19:01 | 5408587 logicalman
logicalman's picture

Good luck with that.

If TSHTF there's about 1% of what would be required to cover deposits in the supposed insurance accounts.

 

 

Mon, 11/03/2014 - 20:01 | 5408750 Uber Vandal
Uber Vandal's picture

@ ZerOhead:

This info is a over a year old, but, you should be able to get the picture.

http://www.zerohedge.com/news/2013-03-19/us-deposits-perspective-25-bill...

 

Also, Cyprus had similiar protection in place as well from the EU:

http://ellenbrown.com/2013/07/05/depositors-beware-bail-in-is-now-offici...

In Cyprus, the confiscation of depositor funds was not only approved but mandated by the EU, along with the European Central Bank (ECB) and the IMF. They told the Cypriots that deposits below €100,000 in two major bankrupt banks would be subject to a 6.75 percent levy or “haircut,” while those over €100,000 would be hit with a 9.99 percent “fine.” When the Cyprus national legislature overwhelming rejected the levy, the insured deposits under €100,000 were spared

 

 

 

Tue, 11/04/2014 - 00:39 | 5409529 malek
malek's picture

Unfortunately the rules were changed and deposit insurance limit is per owner, not per account anymore...

Mon, 11/03/2014 - 17:59 | 5408407 Eyeroller
Eyeroller's picture

And someone is going to yell "FIRE!"

Mon, 11/03/2014 - 18:03 | 5408418 Stackers
Stackers's picture

Hyperinflation results when there is a complete loss in the confidence of currency to hold its value

Keep that quote in mind kiddo's. Hyperinflation is not a monetary event. It is 100% a psychological event.

Mon, 11/03/2014 - 18:27 | 5408486 CrazyCooter
CrazyCooter's picture

Which begs the age old philosophical question; does a psychological event in the empty skull of a FSA'er make a sound?

Regards,

Cooter

Mon, 11/03/2014 - 18:47 | 5408538 ZH Snob
ZH Snob's picture

I see.  One is considered an idiot if he does not satisfy his greed to the last uptick.

 

noted.

Mon, 11/03/2014 - 17:43 | 5408362 wallstreetapost...
wallstreetaposteriori's picture

nothing wrong with taking a profit and waiting for everyone else to lose their ass.

Mon, 11/03/2014 - 19:12 | 5408615 hibou-Owl
hibou-Owl's picture

I pushed the sell button 7 months ago!,

Can someone yell fire a bit louder, I think their deaf.

Mon, 11/03/2014 - 17:44 | 5408364 Divided States ...
Divided States of America's picture

Well unfortunately I panicked out in mid 2009....and ever since, I have been in my own mental asylum trying to figure out what went wrong with me or the world.

Mon, 11/03/2014 - 17:46 | 5408376 gatorengineer
gatorengineer's picture

you gots lots and lots of company

Mon, 11/03/2014 - 18:01 | 5408413 seek
seek's picture

More than we'll ever know. I talked with a psychologist who said that her business noticably shifted in the 2009-2010 time frame to wealthier businessmen questioning their grasp of the world, and this hasn't changed.

Mon, 11/03/2014 - 18:10 | 5408437 847328_3527
847328_3527's picture

The psychologist down the block said he’s never before treated so many “motivational speakers” for depression. “It’s one big con-game out,” there he said.

Mon, 11/03/2014 - 18:46 | 5408536 seek
seek's picture

Man, working as a motivational speaker in this economy has to be a diagnostic criterion for being a sociopath!

Mon, 11/03/2014 - 19:01 | 5408588 NoDecaf
NoDecaf's picture

So "life coach" is not a good career choice in a post crash world?

Mon, 11/03/2014 - 21:30 | 5409028 seek
seek's picture

Note unless that's a euphemism for small unit tactics or an E&E instructor.

Mon, 11/03/2014 - 23:39 | 5409420 Kirk2NCC1701
Kirk2NCC1701's picture

I played it "smart" and put a large part of the portfolio into something really "safe" 2 years ago: PM.
Cause ZH had all the answers back then: "Avoid stocks, buy PM" was the mantra.

Mon, 11/03/2014 - 17:56 | 5408402 Seasmoke
Seasmoke's picture

its now so crowded in this room, how the fuck are we going to get out ???????

Mon, 11/03/2014 - 18:04 | 5408420 Amish Hacker
Amish Hacker's picture

"Getting out" is even harder than you think. You can't leave until you find someone willing to take your seat.

Mon, 11/03/2014 - 17:47 | 5408379 Bay of Pigs
Bay of Pigs's picture

Say goodnight Irene...

Mon, 11/03/2014 - 17:51 | 5408392 Pooper Popper
Pooper Popper's picture

goodnight Irene,,,

 

 

 

Mon, 11/03/2014 - 17:49 | 5408388 IronShield
IronShield's picture

Fear and Greed my Bruthas; will get you every time.

Mon, 11/03/2014 - 17:52 | 5408391 Bell's 2 hearted
Bell's 2 hearted's picture

yen @ 85 would, uhh, cause a bit of fireworks ...

Mon, 11/03/2014 - 18:04 | 5408422 seek
seek's picture

Oh, that $3.5T has done something for main street USA, alright. Those speculative real estate bubbles have eliminated most of main street's ability to buy a home, and have guaranteed the financial rape of those who can. Inflated real estate prices means inflated mortgages, inflated interest, inflated R.E. taxes, but mean zip as far as inflated incomes.

Mon, 11/03/2014 - 19:58 | 5408748 adr
adr's picture

It's so awesome to see a shithole that needs $200k worth of work listed at $375k like it is a bargain.

Equally awesome to see a home listed for $100k more than it sold for a year ago because the new owners made many "upgrades". Like a $100 light fixture and some purple paint. Cause we all know every new light fixture adds $25k in value.

Tue, 11/04/2014 - 02:04 | 5409647 Harry Balzak
Harry Balzak's picture

90% of these shitholes have been sitting vacant for multiple months.  Suggest reducing the price to the listing agent and they guffaw with feigned offense.  

Prices are at least what they were at the height of the bubble and a large portion of the properties are dilapidated.  If a correction doesn't happen driving down prices, it'll be cheaper to give these places away or tear them down to stop the bleeding.  The up-side for the govt is that the propaganda continues because house prices don't decline (on paper) and tax reciepts don't drop.  That's what govt is so concerned about.  

I suspect that'll be the govt solution in the end--a new "homesteading" program that, instead of giving new immigrants 40 acres and a mule, it'll give illegals amnesty and a dilapidated house.  

It'll almost as if the financial and political industries are intentionally snubbing those that have have been wise, saved their money, and hope to find a really good deal on a place to live.

 

Tue, 11/04/2014 - 02:19 | 5409659 Haus-Targaryen
Haus-Targaryen's picture

For this reason -- I say leave now. 

Expat yourself. 

Mon, 11/03/2014 - 18:10 | 5408434 DOGGONE
DOGGONE's picture

Take a good look at the long term past, thru today.
http://www.showrealhist.com/recDJIAtoRD.html
Take a GOOD look!

Mon, 11/03/2014 - 18:31 | 5408500 Trucker Glock
Trucker Glock's picture

Dear Santa,

I want a new all-time high on Dec 19 and a 50% correction by Dec 24.

P.S. Thanks for the lump of coal last year.

Mon, 11/03/2014 - 18:22 | 5408475 kchrisc
kchrisc's picture

"Bubble Exit Rule: "You Only Get Out If You Panic Before Everyone Else Does""

Unless you're panicking on a falling elevator. Better to get off quietly at the next floor, and take the stairs.

An American, not US subject.

 

"I once yelled "'fire!' on an elevator, and no one ran."

Mon, 11/03/2014 - 18:33 | 5408507 Oquities
Oquities's picture

i, in my own estimation, paniced before the housing bubble (way too early), before the 2008 meltdown (2 years), and now i'm doing it again.  fuck me!

Mon, 11/03/2014 - 18:33 | 5408508 WTFUD
WTFUD's picture

ONLY a stake through the heart and then some will break the resolve of those pesky blood sucking leach bankers.

Mon, 11/03/2014 - 18:53 | 5408555 limacon
limacon's picture

The time to panic is before the Titanic leaves the harbor .

See how to do it .

 

https://www.academia.edu/8942403/The_Hysterical_Focus_is_your_friend_

Mon, 11/03/2014 - 19:04 | 5408591 ramacers
ramacers's picture

plebs are lustin' for the financials gallows .... and then the real thing.

Mon, 11/03/2014 - 19:43 | 5408716 jubber
jubber's picture

Decent interview with Marc Faber today on Bloomberg for once he isn't constantly interupted like those cunts on CNBC pretty entertaining

 

http://www.bloomberg.com/video/marc-faber-on-japan-bonds-economy-gold-an...

Mon, 11/03/2014 - 19:53 | 5408732 adr
adr's picture

You don't have to get out of shark infested waters if you never jump in.

Mon, 11/03/2014 - 20:25 | 5408834 paint it red ca...
paint it red call it hell's picture

"Panic Before Everyone Else Does"

EEEk!

Tue, 11/04/2014 - 00:37 | 5409524 Restcase
Restcase's picture

I was late to the panic and all I got was this lousy T-shirt.

Mon, 11/03/2014 - 20:37 | 5408865 JenkinsLane
JenkinsLane's picture

The "Drinking In Dodgy Bars" rules:

1) If it kicks off, make sure you are holding a pool cue.

2) See rule 1.

Mon, 11/03/2014 - 21:06 | 5408954 alexcojones
alexcojones's picture

Like checking out of Hotel California.

Good Luck

Mon, 11/03/2014 - 23:21 | 5409371 antidisestablis...
antidisestablishmentarianismishness's picture

This nonsense about not being able to get out is and always has been a complete crock of shit invented by people who panicked and want you to do the same. 

Mon, 11/03/2014 - 23:54 | 5409447 AdvancingTime
AdvancingTime's picture

Sure all is stable, maybe it is and maybe it's not! Most investors think that even if things go downhill fast that they will be smart enough to get out of the markets. After the debacle in 2008 where they saw the market do nasty and violent swings they learned a few things, this time they figure they will make the right moves before it is to late. But what if it hits like the flash crash on steroids?

 For a long time I have been trying to develop a scenario for a market "super crash" and a reasonable map that would arrive at such a situation. Below you will find more on why this scenario could happen. We know that can't happen because circuit breakers have been put in place to arrest panic style moves, but imagine a market that falls, trade is halted, and the market simply does not reopen for days, or even weeks.

http://brucewilds.blogspot.com/2013/01/flash-crash-on-steroids.html

Tue, 11/04/2014 - 00:39 | 5409528 Restcase
Restcase's picture

We will not panic until CNBC tells us to.

Mon, 11/03/2014 - 23:53 | 5409444 AdvancingTime
AdvancingTime's picture

Many of us the are far from optimistic. While the future is hard to predict, as in politics the people who watch and study the economy are becoming more polarized as to the direction of the economy. Many of us are slipping into one of the two distinct camps, one that sees this as an economy slowly on the mend with the worse behind us and the other who clearly takes the position that things are not working.

Not only have things gotten worse but the distorted economy and manipulated markets only mask the fact that a day of reckoning is fast approaching and we are facing a bigger and meaner economic set back then any the world has witnessed in modern times. More on this subject in the article below.

http://brucewilds.blogspot.com/2013/08/after-big-crash.html

Tue, 11/04/2014 - 00:31 | 5409509 polo007
polo007's picture

According to Sprott Global Resource Investments Limited:

http://sprottglobal.com/thoughts/articles/what-greenspan-latest-talk-means-for-gold/

Friday, October 31, 2014

I traveled last week to the New Orleans Investment Conference, previously known as the ‘Gold Show.’ Jim Blanchard, a man known for promoting the right to own gold during the Nixon era, started the conference in 1974.

Early on, the conference was a gathering place for investors in precious metals. Speakers such as Rick Rule broke out into the investment scene through conferences like this one.

I’ll report later on the many speakers who attended the conference - and try to boil down some of the salient points from the highly valuable conference (attendees took nearly a week away from their regular lives to attend).

For now, I’ll confine myself to the headline speaker of the show – former Fed Chairman Alan Greenspan – and what his comments could mean for gold investors.

We did, though, learn a few important things about the Fed.

First off, Greenspan claims he has always remained true to Austrian economics and the principle of sound money. He fell into his role as Fed Chairman purely by accident, he claimed, and what he did there, he did it because he had to.

He explained that the capital needs of the Federal government were so massive that the only way to prevent disaster for the rest of the economy was to keep feeding the beast with cheap money. If the Fed hadn’t created and circulated new money, the Treasury’s insatiable demand for capital would certainly have ‘crowded out’ the rest of the economy, wrecking the entire private credit system.

Political realities, he explained, in the form of entitlement spending and off-balance sheet obligations of the US government, trump the need for sound money every time. It wasn’t his fault – that’s just how the system works. It’s set up to redistribute income from savers, who lose income because of low interest rates, to spenders.

In other words, Greenspan was a man who was forced by circumstance to go against his beliefs. Coming to the show, I had expected to disagree with Greenspan, but what I found was that the Fed Chairman was saying exactly what we have believed all along. Sound, stable currency is incompatible with the welfare state. Greenspan may have slipped away from the path, but he’s a great spokesperson for our message.

The Fed is unlike any other business in the world. It’s the only one that we know of that literally creates ‘something from nothing.’

The Fed wills new currency into existence, which it can then ‘sell’ by charging interest. Every dollar comes into existence as a debt due to the Fed; the more dollars are out there, the more money the Fed makes. The interest it receives is ‘pure profit.’ So it’s no surprise that as the government’s demand for capital has increased, the Fed has ‘accommodated’ that demand. Even if the Fed has to lend the government the money to pay its interest, that new money costs nothing to create, and it adds to the bottom line.

We did get one striking admission out of Greenspan. The Fed is not independent of the government, he said, calling suggestions to the contrary ‘naïve.’

Greenspan didn’t speak much to role of the Fed. He didn’t talk about inflation targets, or comment on how the Fed could help grow the economy, as he would have if it had been a New York Times interview I’m sure.

Hidden in his answers, however, was a big prediction for how the Fed will likely act in the future.

It’s not about juicing the economy or keeping the currency stable, although those are certainly justifications that are used.

The truth is, the Fed is merely adjusting supply to meet demand. That’s what he meant when he said that the Fed had to increase the supply of debt to avoid the private sector being ‘crowded out’ of the market.

Its mission isn’t to keep the currency stable, it’s to help fund the spending of the US government, and to defend the banking system.

This suggests that as long the US government resort to high levels of debt, the Fed isn’t likely to decrease the supply of money.

Greenspan might have an inkling of something he’s not telling.

Here’s what the former Fed Chairman had to say about the direction of gold and interest rates:

“Gold – measurably higher. Interest rates – measurably higher.”

Tue, 11/04/2014 - 07:31 | 5409828 buzzsaw99
buzzsaw99's picture

a stock market crash will not be allowed to happen

it should happen, but it won't

central banks have decreed that every bullshit stock on the planet is worth 1000X

 

Tue, 11/04/2014 - 09:25 | 5410035 Raoul_Luke
Raoul_Luke's picture

"In contrast, depressed real interest rates are symptomatic of a dearth of productive investment opportunities. When central banks respond by attempting to drive those real interest rates even lower to “stimulate” interest-sensitive spending such as housing or debt-financed real investment, they really only lower the bar to invite unproductive investment and speculative carry trades."

This is profound!  It explains in a nutshell the failure of monetary policy when faced with structural economic problems.  With the leftist "you didn't build that" agenda afoot, there is no demand for loans to fund productive endeavors.  And so the Fed ended up "pushing on a string."  All they have accomplished in the past six years is to obscure (to an extent) the deleterious effects of the Obama economic agenda.

 

Do NOT follow this link or you will be banned from the site!