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If Anyone Doubts We Are In A Stock Market Bubble, Show Them This
Submitted by Michael Snyder via The Economic Collapse blog,
The higher financial markets rise, the harder they fall. By any objective measurement, the stock market is currently well into bubble territory. Anyone should be able to see this – all you have to do is look at the charts. Sadly, most of us never seem to learn from history. Most of us want to believe that somehow “things are different this time”. Well, about the only thing that is different this time is that our economy is in far worse shape than it was just prior to the last major financial crisis. That means that we are more vulnerable and will almost certainly endure even more damage this time around.
It would be one thing if stocks were soaring because the U.S. economy as a whole was doing extremely well. But we all know that isn’t true. Instead, what we have been experiencing is clearly artificial market behavior that has nothing to do with economic reality. In other words, we are dealing with an irrational financial bubble, and all irrational financial bubbles eventually burst. And as I wrote about yesterday, the way that stocks have moved so far this year is eerily reminiscent of the way that stocks moved in early 2008. The warning signs are there – if you are willing to look at them.
The first chart that I want to share with you today comes from Doug Short. It is a chart that shows that the ratio of corporate equities (stocks) to GDP is the second highest that it has been since 1950. The only other time it has been higher was just before the dotcom bubble burst…
Does that look like a bubble to you?
It sure looks like a bubble to me.
In order for the corporate equities to GDP ratio to get back to the mean (average) level, stock prices would have to fall nearly 50 percent.
If that happens, people will be calling it a crash, but in truth it would just be a return to normalcy.
This next chart comes from Phoenix Capital Research. The CAPE ratio (cyclically adjusted price-to-earnings ratio) is considered to be an extremely accurate measure of the true value of stocks…
As I’ve noted before, the single best predictor of stock market performance is the cyclically adjusted price-to-earnings ratio or CAPE ratio.
Corporate earnings are heavily influenced by the business cycle. Typically the US experiences a boom and bust once every ten years or so. As such, companies will naturally have higher P/E’s at some points and lower P/E’s at other. This is based solely on the business cycle and nothing else.
CAPE adjusts for this by measuring the price of stocks against the average of ten years’ worth of earnings, adjusted for inflation. By doing this, it presents you with a clearer, more objective picture of a company’s ability to produce cash in any economic environment.
Based on a study completed Vanguard, CAPE was the single best metric for measuring future stock returns.
When the CAPE ratio is too high, that means that stocks are overpriced and are not a good value. And right now the CAPE ratio is the 3rd highest that it has been since 1890. That only times it has been higher than this were in 1929 (we all remember what happened then) and just before the dotcom bubble burst…
The funny thing is that stocks have continued to rise even as corporate revenues have begun to fall.
According to Wolf Richter, in the first quarter of 2015 corporate revenues are projected to decline at the fastest pace that we have seen since the depths of the last recession…
Week after week, corporations and analysts have been whittling down their estimates. By now, revenues of the S&P 500 companies are expected to decline 2.8% in Q1 from a year ago – the worst year-over-year decline since Q3 of crisis year 2009.
This next chart I want to share with you shows how the Nasdaq has performed over the past decade. Looking at this chart alone, you would think that the U.S. economy must have been absolutely roaring since the end of the last recession. But what is really going on is rampant speculation. Some of the tech companies that make up the Nasdaq are not making any profits at all and yet they are supposedly worth billions of dollars. If you cannot see a bubble in this chart, you need to get your vision checked…
And this kind of irrational euphoria is not just happening in the United States.
For example, Chinese stocks are up nearly 80 percent over the past nine months.
Meanwhile, the overall Chinese economy is growing at the slowest pace that we have seen in about 20 years.
Right now, we are in the calm before the storm. We are right at the door of the next great financial crisis, and most of the people that work in the industry know this.
And once in a while they let the cat out of the bag.
For example, consider what Hans-Jörg Vetter, the CEO of Landesbank Baden-Württemberg in Germany, had to say during one recent press conference…
“Risk is no longer priced in,” he said. And these investors aren’t paid for the risks they’re taking. This applies to all asset classes, he said. The stock and the bond markets, he said, are now both seeing “the mother of all bubbles.”
This can’t go on forever. Or for very long. But he couldn’t see the future either and pin down a date, which is what everyone wants to know so that they can all get out in time. “I cannot tell you when it will rumble,” he said, “but eventually it will rumble again.”
By “again” he meant the sort of thing that had taken the bank down last time, the Financial Crisis. It had been triggered by horrendous risk-taking, where risks hadn’t been priced into all kinds of securities. When those securities – mortgage-backed securities, for example, that were hiding the inherent risks under a triple-A rating – blew up, banks toppled.
What Vetter is telling us is what I have been warning about for a long time.
Another great stock market crash is coming.
It is just a matter of time.
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Yay, though I walk through the valley of the shadow of death I shall fear no evil, for thou art with me.
You know... Those charts kinda make me want to BUY the market (and I'm normally always a shorter).
But there are some multi-generational long term trends there in those charts. Despite the peaks and troughs, the long term trend is very clear: UP.
Bubble? More like a Ponzi.
yeah, yeah..But this next gig will be really big, you'll see
mhmm
Whats to say we cant see the "Buffet Indicator" at 200% and the CAPE over 50?
Nothing thats what; we aren't even within spitting distance of old highs on these so called indicators.
This sounds very simple, but for some reason it's hard for folks to understand. If prices crash in the market, it means your cash money is worth more than it was before it crashed. You either have to believe your currency is crashing or assets are crashing, you can't have it both ways. If you search the German DAX vs S&P 500 you can see the relationship to currency value.
ZH has become - has been for years actually - a pimp rag for anyone with a named blog who says, "Another great stock market crash is coming." Well, tell us more exactly when and we will all be pleased. Otherwise, ZH besides some own content, is a total joke.
If you knew "exactly when", what would you do differently than you are right now?
"If you knew "exactly when", what would you do differently than you are right now?"
Well I would know exactly when to go all in and short the market. Gee, I thought that was a simple concept.
Uh huh, and when you make a killing in paper, where would you put it? Precious metals? Who do you think would sell you theirs for paper?
No, I plan to buy real estate.
Sucker!
The Tylers, like the Starks, are always right eventually. Winter is coming. When you BTFATH, make it SDOW.
Real Estate , PM's (yes people will sell) , some luxury goods like a yacht and a Porsche (just enough to scratch that itch but not enough to cut into investible funds)... and then when the market becomes rational stocks.. People became very wealthy buying stocks in the 1930's ... My great uncle became wealthy buying real estate during WW2 with nothing but his paycheck at a printing company... he bought the best lakefront properties within easy driving distance of Boston he could find.. paid pennies for them.
As always, the secret is 'buy low, sell high.'
Right now, equities and real estate look high; precious metals look low.
Hedge accordingly...
If you don't like ZH's content...then why are you here for over 4 years?
"Those who fail to learn from ZH...........
Trolls and Bots do what they do.
KATO: Otherwise, ZH besides some own content, is a total joke.
And yet you come here and not just read but comment as well. Fuck off!
People come here for real stories and YES there are some doom porners but so the fuck what. Go somewhere else and find a better site that you approve of.
don't come on here then if u think it is a total joke
i wouldn't.
If the FED hadn't thrown some $11 Trilllion free dollars Wall Street's way, benefiting 5% of the population, with only 1% having the means to offshore the profits, you might have a point.
I don't think it's right to call it a bubble when one infinitely rich investor (the Fed) throws ship loads of money at something. A stock market "bubble" usually implies that there are lots of people clamoring to buy stocks in a manic fashion. It also implies that the mania will cease at some point and everyone is going to realize that what they own is worth a lot less than they paid. I don't really see that in this market.
Dr_Snooz - I agree with you that everything has changed in terms of how things are valued since 2008. I absolutely agree with the thesis of the article that today is a ginormous bubble compared to what is the historical norm. I just think that we will never return to the norm, not anymore. The next stock market collapse could be the big one marking the end of times as we know it. What plutocrat would want that to happen? It is in their best interest to keep the gravy train rolling with them raking in the billions over and over. Central banks are on their side and will provide whatever newly created digital fiat is necessary to buy whatever is necessary to keep this monster alive. Why let this collapse if the central banksters can just buy up 100% of whatever they want and carefully control the prices, while keeping interest rates at zero or negative and also controlling the price of gold. Easy peasy. Life as a sociopathic plutocrat has never been easier.
Yes. Past ratios are irrelevant today as there is no longer a real market. There has been no crash as so many have reasonably predicted, because they won't let it crash and it is obvious they will do anything to support it. They have proven they can do nothing for the real economy (at least anything that does not reduce their power or control) so the "market" is all they have. I'm sure it will end at some point and its not being a doomer to suggest it will, but there is no way to say when because we have no idea to what extents they are willing to go to to support it. Like a doctor who knows his patient is terminal yet continues even more drastic treatments, all while doing what they can to give hope in its success. Even to the point of claiming the next breath of air as a success. The whole world is caught in this trap. The consequences are so dire that to allow it to fail without their manipulation (and it would fail), would be a world wide disaster. People hoping for such shit have no idea of what they wish, simply ideological tantrums. We will all eventually die, but to accept that eventuality with suicide is nuts. If they had allowed the economy to crash and reset fifty years ago, we would have had a chance, but now it will end in the streets.
Agreed, Oldwood. The kinds of interventions we have now on the scales we have now are unprecedented. No one knows how long they will or can work. However, they will all fail in the end because of the very fact they are artificial interventions.
I would also like to point out that whether they are working or not even now depends on where you stand. If you are retired and wanted fixed interest investments you have seen them go to zero. So, if grandma only had a $100k cash and just needed a reliable $5k to add to her Social Security she has seen it go to zero. Each year she has reduced the principle another $5k or has taken on lots more risk to try and generate a return. Either way she is almost certain to lose.
I suggest that the only way we can claim we have gained by intervention is to be very specific on what we count, do not count or even look at.
Does anyone in his best mind or on the most optimistic day believe that unemployment is really 5.5%? That would signal rapid wage growth which is the last non-faked indicator left.
Yes, ZH predicts 8 out of 5 crashes but part of that is timing and part is not knowing what the next centrally planned intervention will do. Most all of us know it is bad economics which eventually does turn out badly.
I do think if P/E's, CAPE's, etc. looked good someone would point it out.
Keep in mind that the equity markets are just a small fraction of the bond markets. All amounts of QE, as enourmous as it might have been, is peanuts compared to the bond market.
I believe, even more since everyone is only focused on equities and believes in the put insurance of CBs on the equity markets, that the problem will come - as always!- from a direction nobody is aware of.
I believe it could be the bond market. Once bond prices start to fall and rates rise, and illiquidity would become obvious, it could easily turn into a Dollar crisis (get out of Dollar denominated debt AND out of the dollar -> dollar tsunami). Which will make interest rates go higher and the dollar lower while liquidity in the bond market will not come back. The Fed could no longer do anything, because printing dollars to buy the debt, would increase the dollar flood, while raising rates faster than the crisis would demand, would kill the economy.
And once in such a situation the markets would become aware, that the USA have only roughly 150 bn Forex reserves to support the Dollar, this could turn into a full blown panic out of the dollar.
Yes, but it seems to me that in a market crash, the bond market will get even more cash short term as people look to preserve capital. Only in a hot market will rates begin to rise, even the Fed induced rates.
I think bonds actually tell a better story and are a better indicator than stocks. All Fed and other government interventions have sort of cornered and coralled money into equities. That is not where the money actually would all like to be.
Yes, that's how it has always been.
But what happens, if the illiquidity in the bond market (= a small door) is met with the wish of many to exit it? The volatility we saw last year in the 10 year could also appear to the downside. Now if that would happen the volatility itself could create dramatic volumes of even more sellers - bond markets are not suited for high volatility movements. But in such a scenario, what would happen to the money markets, which essentially are bonds, too? It is possible that the safe haven status is put into question, once the volatility appears in the bond market to the downside. If you exit bonds because they are falling quickly, then you will enter them immediately by going into the money markets?
2008 was the other side around: liquidity crisis and the dollar as safe haven - ofcourse everyone jumped into the dollar, which was the prerequisite that the Fed could react by printing money.
But a move OUT of USD debt would be the opposite - and could only be answered by tightening. But since such a move would not occur when the economy is booming, but when it is weakening, then tightening would kill the stock market.
I don't know how realistic this scenario is, but right now everyone believes, that a liquidity problem in the US markets will always result in more demand in USD. The above example shows, that this must not be the case. And from a logical point of view, it seems the most likely outcome to me, because if CBs have closed all doors and the world is believing money printing and artificially low interest rates come at no cost, then the laws of nature will find a way to correct the artificial status - for example by cracking a wall.
When you mention what might happen should people/algos exit the dollar this might apply to dem dam ferners. Something like 90+% of our inflation is exported. What happens to all those dollars if people over there sell them and they come home?
When you discuss bonds versus stocks, where do you account for derivatives which are in the hundreds of trillion$?
If people/businesses/governments are treading water, at best, in this sea of debt then how can anything hold up if rates rise and entire nations, including businesses and individuals, have to default?
I believe that the point that ZH is trying to make, even when they post Phoenix stuff, is that the entire system and every facet is manipulated and corrupt to the core. Each time something little breaks it has the potential to bring about contagion and sink our battleship.
You have to go from the end of 2011 to make any comparison of stock market action to any future stock market action because that is when the FED connected the markets via software to an infinite supply of fiat.
BTFD
fart !
OK. In your general direction, or someplace else?
First off - Happy Easter all!
Secondly - I've been reading Zerohedge for what seems like - forever... and have seen countless articles just like this one. Every time I see an article like this one I just lick my lips because I know, as the world turns, I make money no matter what. How come you never seem to have the "glass half full guys" write an article here explaing the many ways they'll (we'll) leverage this "coming disaster, end of world, OMG, Chicken Little the world is ending" - GOOD news and make a wonderful furtune. As I (we) did last time, and the .com time before that.
Surely, all you here can't be so uneducated in playing the market that you actually don't think this next collapse - and the many, many after that, will be anything but as sensational an opportunity to fatten your pockets as are the opportunities from up cycles...
Are none of you Capitalists?
Well I plan to expand my land holdings (currently 500 acres) when the time is right. In the meantime I make very good money selling food and fibre , and accumulating the profits (about a half million /annum) in readiness.
The only question is where to store the cash ; at this stage I 'm still comfortable with Rabobank.
What land is paying you $1000/yr per acre in rent?
Maybe he's growing the mary jane
Farmers receive so many unjust entitlements, subsidies and tax abatements compared to anyone else attempting to make $$$ that you would have to be a moron not to make $$$. You will also stay comfy with Rabobank until you are not, which will become insolvent quickly when it does go pop.
I find it hilarious that farmers are whining about farmland prices falling this year ... FOR THE FIRST TIME SINCE 1986! ,, 28 years of UP isn't good enough? And the falloff is easily understandable with the demise of ethanol... The only farmers hurting are the morons that thought that crops grow to the sky forever and borrowed all they could at the top. If you didn't you can sell out and be a winner , you are just getting 2013 prices instead of 2014 prices for your land.
Many of us are capitalists, arbs, entrepreneurs. The Tylers, not so much.
As to why they are forever jealous, socialist, crying wolf, green with envy, and allergic to anyone, anywhere, making money from the market... damn fine question.
Whatever you must tell yourself to make it through the day. It is amazing to see what some people consider "capitalism". I guess anything short of a gun in the face is considered fair trade, right?
How is any trader different than Jamie Dimon? All just looking and hoping for that opportunity to buy low and sell to a muppet at a higher price, be it in a nanosecond, and hour or a day. No value added. Nothing. Simple wealth redistribution dependent upon fear and greed.
Anyone who has ever actually built a product or provided a real service that doesn't include the facilitation of deception or opportunism understands this.
Nice call out. You could've been a little harder when taking them to the old wood shed but Mondays seem to make people more polite for some reason.
I'm getting sick of these people talking about the existing system as if capitalism is involved. And calling the Tylers socialists... just examples of the war is peace brainwashing cult of state.
"hoping for that opportunity to buy low and sell to a Muppet at a higher price"
That's what makes the markets a ponzi and not a traditional bubble, The declining number of Muppets willing to invest in equities, while the Dimon's of the world continue to churn the market hoping for the elusive escape velocity that cannot come if the Muppet refuse , or are unable, to play along.
The vast majority are still trimming there cable bill down and deciding between coloring their hair or buying groceries for the week. The only Muppets still buying into the market are those who still have a job with a matching 401K and a greater proportion of those are just collecting the match and holding it in "safe" mode. The markets have become no different then Social Security, Most of us don't believe it will be there when we need it and thus resent the system forces us to participate. The base of this ponzi is quickly eroding and the top is becoming more unbalanced by the day.
If it were just another Bubble, when the next crash comes, we would see a correction to normalize values, but because it's a ponzi at it's peak with declining new investors the crash that's coming will be nothing like we've ever seen before and the entire financial industry will completely collapse from it's own weight when it finally bursts!
A world wide digital currency waits in the wings for this day.
And he causes all, the small and the great, and the rich and the poor, and the free men and the slaves, to be given a mark on their right hand or on their forehead, and he provides that no one will be able to buy or to sell, except the one who has the mark
totally agree , but also consider someone probably quoted you word for word at the steps of the senators building in Rome once, and look what happened there. just in Latin obviously.
oh really happy easter all ?
do u really think we are all xtians or something?
Perhaps not but Happy Easter is not an insult in any way if you understand what it means to believers.
As-salamu alaykum, inshallah.
Yes, it is always helpful to profit from the pain and suffering of others.....just like the big boys do.
pretty fucking sad.
If anyone is wondering exactly why we are in the fucked place we are now, just look at Mylegacy.
And this has NOTHING to do with capitalism, this is opportunism at best and direct manipulation to cause chaos for profit or just plain simple theft at worst. What next...grave robbing for profit...a little extra change in your pocket??
GO FUCK YOURSELF
My legacy has no legacy. Yet does not understand that.
Ah, that is better. Thank you.
One could write calls each month on divvy stocks and make Some comfortable, quiet money over time, but it's not the stuff of books, CNN interviews and cocktail parties.
How???
You are the sum total of what is wrong in our world today. Me,me,me and then of course ME. $$$$$$$$$$$$$$$$
Seen a lady having difficulties with a large object. I tried to help her but it was more than I could handle. There were six or seven abled bodies to help out but no assistance was forth comming and I was ragged by those bodies--but no help.
There was a time in this country that if you were in a jam usually someone would help out another.
Me,me,me and of course----.
And that was what AMERICA was about; not me, me etc. MIlestones
Where do you live? Not all parts of US are like that. NC is one of them.
Bubbles can last for decades. See the 30 year bond bubble.
And then one day they meet Mr. Pin Prick.
Pop.
Oh darn.
I haven't seen a stock bubble last for decades. Most last 3-5 years before the collapse. The question is how far along is this one?
That the stock market is overvalued is beyond doubt but I would hasten to add that in relation to the extremely cheap rates of interest it probably isn't.
While there is no real alternative for a return, the frustrated money and the FED manipulation will ensure an upward self-reinforcing rise.
Once rates rise the black hole of the universe will beckon all of us.
I'm in the "bubble" camp.
Timing? It's like snow avalanches here where I live.
There are some slopes that, if and when sufficient snow falls, and the other necessary conditions obtain, they WILL slide. The exact moment cannot be predicted by anynone, including the "experts", but there is zero doubt that the event, the avalanche, will occur.
Mises will be vindicated; the crackup boom is coming.
Clyde the Raven agrees https://www.youtube.com/watch?v=GlJA38A8HSc.
hairball :)
It's time to blow bubbles and chew gum, and I'm all out of gum.
it's different this time...right???
What's that old expression? ...
Markets can stay irrational longer than you can stay solvent.
The game could go on for a lot longer.
The game could end tomorrow.
It's a game of "confidence". Who's to say when confidence will evaporate?
The 2015/2016 Shemitah Jubilee And The End Of The Kali Yuga
The Millennium Report
March 7, 2015
http://themillenniumreport.com/2015/03/the-20152016-shemitah-jubilee-and...
What I dont like about history graphs, is that history is no longer a relative situation to the present. It took the bankers many centuries to get to this point. The only part of history that will repeat itself is war and salvery and tyranny. They can keep this thing going for a long time to come. Altho, they are seeing things are geting out of hand, thus, the police state being set up. They will start riots and civil war etc. Historic graphs on the economy are worthless. Get real.
Been in a bubble for 4 years, no worries, stocks go up foreva.
it may be a bubble but it is in no way irrational. i could list 19 reasons why stock prices being jammed higher is not irrational if you like.
bullish
Bubbles may come and bubbles may go but the bullshit on ZH goes on forever.
So you are saying there is no bubble?
No. I'm saying most of what you read on ZH is bullshit.
We're in a propaganda bubble......
This has been the greatest game of manipulation, thievery, insider trading, and general overall corruption ever! Look at some of the players that have been caught dead to rights; Geithner and Kaufmann. What is even more amazing is no one has looked closely at the corporate buy backs. Execs and directors get issued stock options, then authoirze buy backs so the options become in the money and they are grossly enriched. The corps. did not have to make a product, employ people, or make money. All they had to do was borrow money at "zero," then buy their stock. Hmmmm? The orders are done at the market, and the brokers they flow through front run the buying with their own option buying. Hmmmm?
The Fed has control of the stock markets through the emini futures, jamming them higher as an applause meter, or when they want asset prices higher. All they have to do is hit the electronic buy button, force the futures to a premium and the HFT take over from there.
Then we have the HFTs: Wow if this isn't painting the tape, wash buys and sells, or front running?
The people of the world can't even earn interest on their savings, nor is the job market improving anywhere, except in the fantasy dreams of the manipulated media orchestrated by the Central Banks / plannners.
I just keep humming "Everything Is Awesome..."
I'd like to see the BUffet Indicator chart replotted using the GDP compuation method from 10 years ago....before it was massaged upward.
That would sharpen the current peak nicely me thinks.
Squid
Actually, show them this instead...
http://www.globaldeflationnews.com/anatomy-of-a-bubble-how-the-federal-r...
Investment money needs to find a home. It's not like the stock market isn't a lousy choice. It's like all the rest are so much worse.
In order for the corporate equities to GDP ratio to get back to the mean (average) level, stock prices would have to fall nearly 50 percent.
What about -1/-2/-3SD?
It's not exactly irrational. Those responsible know exactly what they're about---a pump and dump courtesy of the Fed.
1. Use ZIRP to load companies up on debt to finance stock buybacks at several times fundamentals.
2. Get clear into something likely to maintain its value no matter what (viz. Russian equities).
3. Watch the fun as the crash knocks a good 20 per cent off private sector wages (before taxes) and wipes out what remains of the proles' net worth, life savings and pensions.