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Are Stocks & Bonds Due For A "Generational" 75% Crash?
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
From the point of view of history, a reversion to generational lows is inevitable, and a valuation level around 50% of GDP for stocks is a fair target.
If we look back to 1981 valuations of stocks and bonds as a guide to valuations at the next generational low, we find stocks and bonds are due for a 75% drop. The Great Bull market in bonds and equities took off after 1981, and has run higher for 34 years (notwithstanding a spot of bother in 2000-02 and 2008-09).
Before credit bubbles became the New Normal, the stock market was valued at less than 50% of GDP. Now stocks are valued at over 200% of GDP, as are bonds. Together, the total securities valuation is over 400% of GDP:
Data courtesy of Doug Noland
The GDP (gross domestic product) of the U.S. was around $17 trillion in 2014. If valuations returned to pre-bubble levels of 50% of GDP, stocks would have to drop from $36 trillion to around $8 trillion--a decline of 75%.
Bonds would have to experience a similar decline to reach pre-credit-bubble levels.
A drop back to the rich valuations of 100% of GDP would require a decline of 50% from current levels. In other words, the S&P 500 would be around 1,000, not 2,000.
To provide some context for the extreme valuations of present -day stocks and bonds, I have shown what the stock and bond markets would be worth in current dollars if they had simply tracked inflation since 1981. According to the Bureau of Labor Statistics Inflation Calculator, $1 in 1981 is now worth $2.60 in 2014 dollars.
If stocks had risen only with official inflation, the S&P 500 would be worth 10% of its current valuation: $3.6 trillion versus $36 trillion.
The bond market (Treasury, corporate and Municipal bonds and agency securities) would be worth 15% of the bond market's current valuations.
Measuring the valuations of bonds and equities in terms of GDP bypasses the debate over inflation.GDP has risen smartly in the past 34 years, and so the expansion of securities at the same rate is to be expected--never mind what official inflation registers.
Measured in GDP, stocks and bonds have reached extremes that make no sense except as the result of an unprecedented global credit bubble. Credit bubbles have a history of not being as permanent and durable as those living in the peak of the bubble expect.
By any reasonable measure, the current credit-bubble boom in stocks and bonds is getting long in tooth after 34 years of relentless expansion, and the rise of securities to 400% of GDP is reaching extremes that are increasingly difficult to support, much less push higher.
From the point of view of history, a reversion to generational lows is inevitable, and a valuation level around 50% of GDP for stocks is a fair target. This implies a 75% decline in both stocks and bonds within the next decade, if not sooner.
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Yes. Let's round up to 80%.
It's all Bullshit!!!
I don't even believe the 17T GDP number. A pretty large % of that number i smoke and mirrors, bullshit they use to make sure the number on paper keeps going up. If what the author suggests actually happens, it would more likely be 50% of around 12-14 T, which would mean a much larger drop. Oh well, Im sure the plunge protection team will save the day.
Without a certificate, the value of even the highly prized fractionalized digital stock always reverts to its intrinsic value...0.
Charles....you are soo optimistic.
RIPS
Exactly, if it falls 75% there is absolutely nothing keeping it from reaching present cash value of the assets because sales are over... It is asset fire sale time. Got a garden, canning equipment, some way to keep warm. If you don't your respiration may decrease 100%
The crash will most likley be masked by hyperinflation when it happens. I guess one could argue it's already being masked by the inflation so far .
yep, a range bound market and $20 for a loaf of bread. And every talking head will be babbling about how the markets are holding up well. Either that or a true 75% butt kicking.
yep, a range bound market and $20 for a loaf of bread. And every talking head will be babbling about how the markets are holding up well. Either that or a true 75% butt kicking.
that oughta clear out the floor.
That will clear out most pension funds and explode unfunded liabilities.
Yes but we all want to know. Will all the `lil Zero's finally buy some stocks after it happens? Do tell.
If the "markets" go down 80% in this environment, it will be back to the 1800's lifestyle soon enough. The entire economy relies on the "markets". It all crumbles if those numbers drop. That's why they will never let it happen again.
80% is not unreasonable. I don't think it would cause a complete breakdown in society. Markets have a way of traveling too far in either extreme, before correcting themselves. If we saw an 80% decline, it would be followed by a huge rally off the lows.
Let's do -90%! Main Street doesn't deserve it, but Wall Street sure does!
Main Street will have it all stolen by .gov sooner or later anyways.
Crush the casino! End the Ponziconomy! Hang the banksters!
Main Street had more than enough time to prepare and get out of debt.
Smart ones, yes, but many have been lulled into a false sense of security with the rally. The rest that don't own any investments are living paycheck to paycheck anyway.
Ultimately this is the best case scenario.
drop back, not going to happen if the FED has its way.
That's why I said ultimately.
Won't happen. They would rather destroy the currency and hyperinflate away than to let all the banks, governments, and retirement accounts get wiped out. At least with inflation, they can collect more taxes while blaming the "greedy" farmers and oilmen for high food and energy prices. Then they'll focus on how home prices are increasing at 10% YoY and the big 3% annual raises while real inflation is at 20%.
Exactly, and if Joe 6pack complains he will be told that he just isn't working hard enough.
Nobody cares what J6P does or says. There are no members at the Fed who fall under J6P category. J6P doesn't even have any representation in Congress or elsewhere in American politics. So why this fuss about J6P types? As long as J6P is working for fiat and gets distracted by tits and ass or entertainment, there is no issue.
But when the Fed sees a challenge, they will respond.
No. If Joe 6pack complains he will be labeled a "terrorist."
What is the Fed's mandate and which interests does the Fed really represent? The Fed was in charge in 1929 and the shit hit the fan regardless. Just before though, the sales of ultra expensive real estate and exotic cars went parabolic.
Do not underestimate the claw backs.
"......The Fed was in charge in 1929...."
"Nuff Said".
The fed can control the day-to-day operation of the markets because on average, only a small fraction of the total outstanding holdings are traded on a day-to-day basis. BUT, if some event unsettles 'the masses' and they start selling in numbers, the fed will have NO power to stabilize the markets.
The issue there is the vast majority of securities are owned by corporations, funds etc many of which are the shareholders of the FED and the FED itself along with other central banks.
They have no intention of ever selling.
The unwashed masses who own a small fraction of them personally do so primarily through forced buying programs with no option to exit or strong incentives not to exit their 401k, iras ect.
Retail traders trading from a platform following the day to day gyrations to new highs are almost entirely irrelevant to broad price action. They can effect stuff on a small scale in as much as the HFTs front run their orders and change the 'market' pennies in nanoseconds but that's about it.
I don't agree with the premise here because the stock market and the economy are antithetical. They have nothing to do with eachother.
The stock market is mostly related to money and credit. The Federal Reserve has a monopoly over money and credit (of the world's reserve currency). So stock "valuations" are more a reflection of what the Fed and other Central Banks are doing.
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Weird shit for a 6 weeker three dayer kind of guy.
Not if you have hyperinflation
Bingo. How much cash sloshing about now vs a decade ago?
Exactly. It's going to be a slow bleed through inflation. It's much easier for the oligarchs to hide. They'll be like
"What are you talking about unemployment is only 4 %"
Meanwhile there only be a 25 % participation rate.
or "What inflation?", "Just substitute your steak for hamburger meat or just substitute you hamburger meat for rat meat. "
A rigged market only falls once everyone is in and it's been transferred to the bag holders.
Hasn't happened yet.
Have you checked your bag?
If my aunt had balls....she'd be my uncle.
"If we look back to 1981 valuations of stocks and bonds as a guide to valuations at the next generational low, we find stocks and bonds are due for a 75% drop."
1981 is a rediculously low baseline to declare we're a DUE for a 75% drop. It's a plausible target to make a worst case senerio argument, that's all.
stfu, already.
disagreement here with many of you..... the PPT and the fed just aren't omnipotent in this regard.
they are running skirmish actions, heading off liquidity crunches and trying to re-establish confidence, but they don't run the whole market.
if a real panic ensues, confidence drops, the whole market goes no-bid, and all the retirement folks are calling their brokers at 1-800-RUN, then it will drop and it will drop hard. they have their speedbumps, but all that will do is stretch it out over days while they jawbone the hell out of the media to keep each succeeding day from caving in.
the difference between now and '87, '71, '29 is that so much of the volume is nintendo machines jerking each other off. i'm not sure it will matter that much, though, since most of the hedgies won't want to be buying if a strong loss of confidence takes hold....they will turn off their pong sets and liquidity will really dry up.
god only knows when, but gravity will overcome all this nonsense. it will be hard to exit once it starts. the real question is if counterparty risks will trash any neg bets.
"nintendo machines jerking each other off.." - an image I will never forget, sir. thank you. +1
I strive to implant visual imagery to blasphemize your nightmares.....
I lean more towards FED continuing to prop up the markets. They would have cratered long ago without QE, it's pretty much an implicit guarantee that it will continue. Everyone involved knows its a scam, the only confidence to keep up is that the scam is now business as usual. And what's left of the middle class might get restless if their retirements go in the shitter for the third time in 15 years. Why take that chance when you have unlimited funds?
There's no way to put a lid back on Pandora's box, just Print and Pray for one more Day.
I 100% agree. To your point on counter party, my guess is it will be a problem at or after the bottom. In the beginning, take advantage and then get the heck out of Dodge.
Clearly ZHers and libertarians don't get (pun intended) Stock Options.
It's what makes the Fortune 500 corporate gig go round.
Fibonacci defcon 5 level crash
"From the point of view of history, a reversion to generational lows is inevitable, and a valuation level around 50% of GDP for stocks is a fair target. This implies a 75% decline in both stocks and bonds within the next decade, if not sooner."
+++
What is this site? Affirmative Action for the severely intellectually challenged?
Sorry, I meant the article....
Has. That. Ever. Happened.... In the last 500 years of markets?
Just because you found someone else's stupidity and repostit doesn't mean it suddenly becomes true or even sounds smart.
I suggest you study the period from 1930 to 1933. yes it has happened and it will again.
"......the last 500 years of markets?"
Love the doom porn
Kinda long in the tooth now
no ZH?
A slow-moving trainwreck is still a trainwreck.
Or it means we will have a 75% increase in GDP.
Now I'm no math wiz but I believe the equation goes something like this.
(Current GDP [+ or -] YoY change in hookers and blow) x 1.75= moar printing.
Get to work Mr. Yellen.
I'd say he didn't go far enough as stocks tend to overshoot well beyond "targets" of this kind. This is why they are called "panics". We are going to 300-400 on the S&P. Probably over the next three years. Good luck Bitchez.
Listen, and understand. That Yellenator is out there. It can't be bargained with. It can't be reasoned with. It doesn't feel pity, or remorse, or fear. And it absolutely will not stop, ever, until the us dollar is dead.
You are correct. Whether stocks and bonds 'correct' from their abstract numerical levels is unlikely with Yellen and even more QE. If she goes down the QE path stocks may hold levels but the dollar is trash and you still lose half of your value. If she raises rates then stocks and bonds crash and you still lose half of your value.
But the worst possibility is for Yellen to raise rates and trigger a massive unwind or a massive derivative crash. This would bring in momentum players to the downside and further drive Lehman like liquidation.
Props to "automatic choke" ............."the difference between now and '87, '71, '29 is that so much of the volume is nintendo machines jerking each other off" ......... That phrase should be made into a T-shirt!!
Well duh.
Yes absolutely. The proper p/e of the S&P is about 5, which is what a 75% drop equates to.
Who writes this stuff?
nice... so where would govs get tax if we are all bankrupt?
And.just look at the inflation-adjusted DJIA ...!
http://showrealhist.com
I reckon it plays out this way........
We get the crash, all that scenario A OR we get a Republican President with a republican congress, call that scenario B.
A.
Crash, dow in free fall, 10 year yields spike, in comes the FED with QE, GO TO D:
B.
Repub gev repeals Obama car, there is a HUGE hiring wave, 1 million jobs per month. Every one is happy and WHAT do American's do when they are happy? They borrow money. And which banks are sitting on 2.5T of printed money reserves? A reserve ratio of 10 means a juicy 25T to spill into the economy, GO TO D:
Here is D:
With so much new USD sloshing around foriegn holders of 10years have had enough, the bonds get cashed and the FED has to print even more money to redeam. Inflation starts to roar but the FED can't raise rates as that would bankrupt the Fed, State and Muni govs so it leaves them as is. People start realizing that pepaer money is losing value so they buy everything in site....
And away we go. Pooof!
Loaf of bread, US$500.
Fill your car with gas, $5,000.
Oh sure, the seniors will still get ther $2,100 SS cheque every month....they can by 4 loafs of bread and a can of coke.
Or, I could be wrong.
Squid.
There hasn't been a 10% correction in almost 4 years. Everyone and their mother is a bull. I thought the market always punishes the most people? There is no contrarian trade anymore.
There are no markets.
GDP ratio's don't work anymore with global markets, now that 50% of revenue comes from overseas.
I think the Kondratiev long wave is a short way to the same conclusion. If the wave is still there, if it really fits the way things are... well, just wait until inflation begins speeding up. From that point many things will change for a couple of generations. The moment inflation begins, game over for free money printing... just think about the chain of events and consequences after that precise moment, the point of inflation accelerating. If and when it happens...