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How Much More Extreme Can Markets Get?

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

These charts help us understand that a top is not just price, but a reversal in extremes of margin debt, valuation and sentiment.

In blow-off tops, extremes of valuation, complacency and margin debt can always shoot beyond previous extremes to new extremes. This is why guessing when the blow-off top implodes is so hazardous: extreme can always get more extreme.
 
Nonetheless, extremes eventually reverse, and generally in rough symmetry with their explosive rise. Exhibit 1 is margin debt: NYSE Margin Debt Hits a New Record High (Doug Short)
Note the explosive rise in margin debt in the past few months:
At tops, soaring margin debt no longer pushes stocks higher. I've marked up an excellent chart by Doug Short to highlight the diminishing returns of more margin debt at tops.
 
It's clear this same dynamic of diminishing returns is in play now, as margin debt has skyrocketed while the S&P 500 has remained range-bound, with each new high being increasingly marginal.
 
Exhibit 2 is China's Shenzhen stock exchange. The price-earnings ratio (PE) is a useful gauge of sentiment: when sentiment reaches extremes of euphoria, PEs go through the roof:
 
It appears that the Shenzhen bubble has burst. Latecomers to the bubble party will continue to buy the dips, but the ADX (a measure of trend strength) has been diverging for quite some time, and the MACD is rolling over into a sell signal.
 
 
 
These charts help us understand that a top is not just price, but a reversal in extremes of margin debt, valuation and sentiment. Many observers have an unyielding faith that central banks will never let markets decline ever again. There are four flaws in this blind faith:
 
1. Central banks did not want bubble markets in 2000 and 2008 to burst, either, but the bubbles popped despite central bank interventions.
 
2. Extremes can only get more extreme for a limited time. margin debt cannot rise from $507 billion to $5 trillion and then on to $50 trillion (three times the size of the U.S. GDP). The Shenzhen PE ratio cannot rise from 70 to 700.
 
3. Complex systems cannot be beaten into submission by two simple sticks (central bank liquidity and zero interest rates) forever. Extremes give rise to dislocations that cannot be beaten into submission by central banks for this reason: it is the nature of complex systems to break at the very points that cannot be strengthened or defended by simplistic manipulation.
 
4. When the speculative frenzy dissipates, central banks will be the only buyers left. Unless the Fed increases its balance sheet from $4.5 trillion to $14.5 trillion in a matter of months, even central bank manipulation will be swamped by sellers exiting bursting-bubble markets.
 

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Sun, 05/31/2015 - 16:55 | 6149973 CarpetShag
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So you believe his " sources" like "The Voice" and "London Paul" actually exist?

Sun, 05/31/2015 - 17:20 | 6150048 max2205
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Can and will 

Sun, 05/31/2015 - 17:27 | 6150078 kaiserhoff
kaiserhoff's picture

Amazon doesn't need profits.

  Why should anyone else;)

Mon, 06/01/2015 - 01:41 | 6151010 malek
malek's picture

Good article by Jim Willie.

Although I wouldn't go as far as he does in predictions, I agree with most of what he says.

Sun, 05/31/2015 - 16:42 | 6149939 Ajax_USB_Port_R...
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I'd like to see Zero Hedge start a contest. "Pick the Day the Dow closes down 500 points." Give the winner a cheap plastic trophy. Maybe make it a little tougher -750 points?

Sun, 05/31/2015 - 17:24 | 6150067 TungstenBars
TungstenBars's picture

Is that even possible in this "market" anymore?

Market will get shut down, and algos will panic buy when they re-open it. 

Sun, 05/31/2015 - 17:28 | 6150082 kaiserhoff
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Dibs on 9/11.

Sun, 05/31/2015 - 19:37 | 6150368 stocktivity
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Why not Tylers? That contest would bring new viewers to the site. I'll take 9/18/15.

Sun, 05/31/2015 - 23:10 | 6150812 yrad
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9/19/15

Mon, 06/01/2015 - 02:08 | 6151035 Sages wife
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6/15/15

Mon, 06/01/2015 - 05:52 | 6151216 Arnold
Arnold's picture

I'll buy the rest of the September grid,  and First week of October.

That trophy will sure look good next to my senior league participation trophy 2010.

Sun, 05/31/2015 - 16:43 | 6149942 Oh regional Indian
Oh regional Indian's picture

They can keep changing the rules and making more and more BIS countires give up capital controls and open up their financial markets. Kind of how Forex trading is a 24/7, global market where Indian rubes get culled just as easily as american ones.

If India was to be "deregulated" as an example and become fully convertible, that would give the ponzi directors another 7-10 years of debt slave creation. Easy. 

Likewise I imagine for malaysia, Indonesia....China is doing it well enough by themselves, but a free floating Yuan, fully convertible? Wham!

It can go many ways yet, but the immediate future seems full of not-good ness so to speak..

Goodness : https://www.youtube.com/watch?v=lk1TSBW_368

Sun, 05/31/2015 - 16:44 | 6149943 El Vaquero
El Vaquero's picture

"...Unless the Fed increases its balance sheet from $4.5 trillion to $14.5 trillion in a matter of months, even central bank manipulation will be swamped by sellers exiting bursting-bubble markets."

 

DAMN IT CHARLES! 

 

Don't give them any bright ideas.

Sun, 05/31/2015 - 16:53 | 6149969 Winston Churchill
Winston Churchill's picture

Didn't seem to trouble them back in 08.

we still have no idea how much,if any, was paid back.

I suspect they cashed out China's USTs around then ,along with the RMBS holdings

they admitted to.Easy to hide the canoli in that ammount.

Sun, 05/31/2015 - 16:52 | 6149967 CarpetShag
CarpetShag's picture

Okay Chuckie,, another doughty diatribe like Stockman or PC Roberts. So, why don't you tell us what will happen next?

Sun, 05/31/2015 - 16:57 | 6149976 wendigo
wendigo's picture

Well, the end may be nigh. Or the beginning. Whatever. 

When this reality is swept away, what replaces it? Did I stockpile the right items? Or will we progress to a point where no stockpile is going to help? Or maybe we get more of the same, just with pretty wrapping paper and a pink ribbon? Do I shoot myself now, or shoot them later, or trade my bullets for a bag of beans? 

Fuck if I know. 

Mon, 06/01/2015 - 05:58 | 6151218 Arnold
Arnold's picture

Ain't life grand!

You still have some freedom to choose.

Sun, 05/31/2015 - 17:32 | 6150103 CHC
CHC's picture

When this bitch blows - it will wrap itself around the globe a thousand times.

Mon, 06/01/2015 - 05:05 | 6151188 emorybored
emorybored's picture

It seems this picture is dated, that intsersection was a block back, we're at Faith and Hope, a little further south.

Mon, 06/01/2015 - 06:01 | 6151220 Arnold
Arnold's picture

A bit of Dali - esque melt would freshen it up a bit.

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