The Worst Time In History To Be Invested In Stocks

Tyler Durden's picture

Submitted by Jim Quinn via The Burning Platform blog,

Today will go down in history as one of the worst times in history to be invested in the stock market. Virtually no one believes this statement. That is why it will prove to be true. Every valuation method known to mankind is flashing red. A crash is baked in the cake. Will the trigger be Greek default, a Chinese market crash, a Fed rate increase, a derivative bet going boom, a Middle East event, someone doing something stupid in the South China Sea, a Ukrainian eruption, or a butterfly flapping its wings? When greed turns to fear, for whatever reason, the house of cards will collapse for the 3rd time in 15 years. Thank the “brilliant” bankers at the Federal Reserve.

I’ve picked out the most important passages from Hussman’s weekly letter for your enjoyment.

The financial markets are establishing an extreme that we expect investors will remember for the remainder of history, joining other memorable peers that include 1906, 1929, 1937, 1966, 1972, 2000 and 2007. The failure to recognize this moment as historic is largely because investors have been urged to believe things that aren’t true, have never been true, and can be demonstrated to be untrue across a century of history. The broad market has been in an extended distribution process for nearly a year (during which the NYSE Composite has gone nowhere) yet every marginal high or brief market burst seems infinitely important from a short-sighted perspective. Like other major peaks throughout history, we expect that these minor details will be forgotten within the sheer scope of what follows. And like other historical extremes, the beliefs that enable them are widely embraced as common knowledge, though there is always, always, some wrinkle that makes “this time” seem different. That is why history only rhymes. But in its broad refrain, this time is not different.

More enlightened leaders at the Federal Reserve would never have allowed, much less intentionally encouraged, yet the third speculative episode in 15 years. Unfortunately, the idea that repeated cycles of malinvestment and yield-seeking speculation have actually been the cause of the nation’s economic malaise doesn’t seem to cross their minds.

Moreover, consumers spend based on their concept of “permanent income,” not off the value of volatile assets such as stocks. Economists have understood this since the 1950’s. While the Fed has been successful at intentionally promoting yield-seeking speculation since 2009, a century of evidence demonstrates that current valuation extremes also imply a market collapse that is now baked in the cake, and that Federal Reserve policy has much less ability to prevent than investors seem to believe.

 

We’ve seen various criticisms based on the misconception that the concerns of value investors such as Jeremy Grantham and I rest simplistically on the Shiller P/E. Those criticisms are coupled with ad hominem criticisms that I’ve repeatedly addressed ad nauseum. All of this might carry more weight if better valuation measures than the Shiller P/E did not also have even worse implications for future market returns. Numerous historically reliable measures, based on earnings, revenues, assets, gross value added, and other fundamentals all line up with a similar message. The following chart from Doug Short provides a very nice long-term perspective based on Tobin’s Q (market capitalization / corporate net worth) going back to 1900.

If one draws any lesson from the above chart, it should be a full understanding of exactly how poor market returns were, and for how long, following similar historical extremes.

January 1906: Following an initial plunge into July of 1906, the market would recover, and then collapse in what was known as the “panic of 1907,” losing half of its value by the end of that decline. More importantly, however, the Dow Jones Industrial Average would not durably move beyond its 1906 peak until April 1938, more than three decades later.

September 1929: Following the initial 1929 crash, the market would briefly rebound by about 50% into early 1930, collapsing again as the Great Depression took hold. From its September 1929 peak of 381.17, the Dow Jones Industrial Average would collapse to 41.22 at its 1932 low, losing 89% of its value. The Dow would not durably move beyond its 1929 high until November 1954.

August 1937: One of the repeated fallacies of historical perspective currently making its way among analysts is the notion that the Federal Reserve raised interest rates prematurely in 1937, cutting short the recovery from the Great Depression and causing stocks to crash. There are several problems with this narrative. The first is that the Fed did not raise interest rates at all. Indeed, the Fed discount rate was progressively lowered until it reached 1.0% in September 1937, and the first rate hike would not occur until 1948. The Fed did raise reserve requirements in 1936, but at a time when actual reserves were already more than 200% of required reserves. What actually happened in 1937 was that an already fragile financial bubble crashed. Market internals, on our measures, turned negative in May 1937, before the market actually peaked. Following the August high, the stock market went on to lose half of its value by early 1938. In short, a market collapse was already baked in the cake on the basis of extreme valuations, and the subsequent collapse was clearly preceded by a shift toward investor risk aversion.

We have no argument with the idea that the increase in reserve requirements and a modest decline in the monetary base, regardless of actual economic impact, might have contributed to that shift toward risk aversion and the timing of the crash. But again, a crash was already baked in the cake. It was the coupling of extreme valuations with increased risk-aversion – regardless of its origin – that explains the 1937 crash in a context that is fully consistent with more than a century of market history. The Dow Industrials would not durably exceed the August 1937 market peak until November 1949.

February 1966: Following an initial bear market that year, the stock market would enter a series bull-bear market cycles, each ending at progressively lower levels of valuation for the next 18 years. That sequence is what defines a “secular” bear market. The S&P 500 would set its August 1982 low within 10% of that February 1966 peak.

January 1973: This point is included not because it was the most extreme valuation, but because it was the highest point in terms of price during the early years of the 1966-1982 secular bear market. At the 1973 peak, the S&P 500 Index was only 16% above its Feburary 1966 level. The market would go on to lose half of its value by late-1974. The S&P 500 would not durably clear its January 1973 peak until September 1982.

March 2000: We already know that the first collapse from the 2000 peak would take the S&P 500 down by half, and the Nasdaq 100 down by 83%. It also wiped out the entire total return of the S&P 500 – in excess of Treasury bill returns – all the way back to May 1996. Notably, the Federal Reserve was aggressively and persistently lowering interest rates throughout the collapse. It is only the return to obscene historical overvaluation that has even allowed the S&P 500 to post a 4% annual total return over the past 15 years. I expect that every bit of that total return will prove to be transitory by the completion of the current market cycle.

October 2007: We already know that the collapse from the 2007 would take the S&P 500 down by 55%. It also wiped out the entire total return of the S&P 500 – in excess of Treasury bills – all the way back to June 1995.  Notably, the Federal Reserve began cutting interest rates a month before the 2007 market peak, and continued to cut interest rates persistently throughout the collapse.

As a reminder of how “following the Fed” treated investors during the collapse of the most recent market extremes, the chart below shows the Federal Funds rate alongside the S&P 500 during those declines.

I know. Investors don’t want to believe this. They want to believe that the Federal Reserve has their backs; that as long as the Fed doesn’t explicitly hike interest rates, the market will move higher indefinitely.

Put simply, investors whose strategy is to follow the Fed – in the belief that stocks will advance as long as the Fed does not raise interest rates – are free to place all their eggs in Janet’s basket. On the other hand, for investors whose strategy is historically informed by factors that have reliably distinguished market advances from collapses over a century of history, our suggestion is to consider a stronger defense. Our greatest successes have been when our investment outlook was aligned with valuations and market internals, and our greatest disappointments have been when it was not. Both factors are unfavorable at present, and our outlook is aligned accordingly.

Read Hussman’s Weekly Letter

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dimwitted economist's picture

a Government "spook" told me: IT WON'T BE ALLOWED TO GO DOWN... so much for FREE markets Huh?

Troy Ounce's picture

 

And a British financial wizz kid told me: "Do not worry. It is only debt!"

 

greenskeeper carl's picture

"today will be the worst time in history to be invested in the stock market. no one believes this, which is why it will turn out to be true"

 

or, maybe that should be "today will turn out to be the BEST time in history to be invested in the stock market. None of US on here believe that, which is why it will be true"

 

(I don't actually believe that, but thats what its felt like...)

 

SoilMyselfRotten's picture

 are free to place all their eggs in Janet’s basket. 

 

I'm not putting anything near Janet's basket

Divine Wind's picture

 

 

 

Martin Armstrong is predicting, minor temporary corrections aside, that the market will continue to rise as more foreign money fleeing the Eurozone continues to pour in.

The U.S. has massive problems, but others, including the Euro, are failing faster.

Smart / institutional money is looking for a place to park.

At the present, that is in the U.S..

daveO's picture

That's now. From where will the future scared money come? We're closer to the peak, imo. Chinese are buying houses, too.

"It's not just a fad cause it's been goin' on so long...They saw it wouldn't last too long..They'll be eatin' their words with a fork and spoon"... 

http://www.youtube.com/watch?v=yLgWbH-qhVo

Logiclee03's picture

TD has been wrong for the last 800 points up...hope no one pays for this advise.

greenskeeper carl's picture

I wouldn't say tyler has been 'wrong'. He hs maintained that the rising markets are built on a mountain of debt that can only end in one way: default. I also don't think he has ever said 'the markets can't go up', just that you are essentially betting your money on the whims of janet yelen ad mario drahgi having your back, and that if you think you can keep your money on the table and pull it out before the algos do once this farce is revealed and the markets begin their inevitable free fall,you are deluding yourself. But hey, its an (allegedly) free country, place your bets.

fromthinair's picture
fromthinair (not verified) wildbad Jun 22, 2015 7:23 AM

another case of sale of causality packed in a story/analysis. The analyst is immune to the outcome. Such analysis has no place in "The Plan B". 

The only question whose answer I want to know is "who is working on the tenth person problem?". If no one is then how will ever be solved? 

http://just-a-thought-from-thinair.blogspot.com/

Bobbo's picture

This tenth person problem: resolved quite a long time ago with the invention of fractions.  You know, like 9/10  *  10 people =  9 resource.

Get a life.  Your air is getting too thin.
Or, just ask a third-grader to help you with it.

ZH Snob's picture

the main proboem with stocks, bonds, and futures is how they are valued.  the message in all these run-ups is that there is money to be made.  increasingly worthless dollars.  they keep people mesmerized with paper (abstract) gains while distracting them from converting the debt into assets.  it is very much like how keeping your money in chips keeps you in the casino.  the flashing lights and colors, the excitement are all a diversion to keep you from cashing in those chips and walking out the door.

LawsofPhysics's picture

The worst time in history to be invested in paper bullshit...  -   fixed it for you.

This is it's picture

I can't think of a better time.

BULLISH.

VinceFostersGhost's picture

 

 

There's always that one guy.

 

Have I got a tulip for you!

Shawnee's picture

shemitah......we can't fight the fed and the fed can't fight the Lord! this elevators goin down

Comte d'herblay's picture

Say it three X and it might come true.  Or not.

Shawnee's picture

shemitah......we can't fight the fed and the fed can't fight the Lord! this elevators goin down

Condor96's picture
Condor96 (not verified) Jun 22, 2015 7:18 AM
VinceFostersGhost's picture

 

 

Do you know why those guys always look like drugged out programmed MKultra freaks?

 

That's because they are.

Condor96's picture

Father ? Mother ? 

JoeySandwiches's picture

A coworker of mine invested a lot of money in some stock portfolio a few months ago. I showed him all the risks of a crash and told him he was too late to the party... His response was basically 'it didn't matter because the stock market always goes up in the long term'.

That's when I knew he was beyond my help. Some people just have to learn the hard way.

This is it's picture

If it's any consolation to him, he's been right till now at least.

VinceFostersGhost's picture

 

 

That Common Core education is serving him well.

Herodotus's picture

Look at the Weimar inflation.  I think you will see that the stock market went up about 500,000% or so.

The problem was that inflation went up about 1,000,000%.

So in the end people who were invested in stocks lost 1/2 of their money.

The DJIA which is at about 18,000 could very well go up to 100,000 or 300,000 or 5,000,000.  It's all relative.

You are right though, he would be most likely to protect more his purchasing power by putting it all into gold and silver.

JustObserving's picture
The Worst Time In History To Be Invested In Stocks

And bonds are even worse investment:

Fed says inflation in USA was 0.8% in 2014.  Chapwood Index says it was 9.7%.  So what are the consequences?

Let's use a Zero Coupon Bond Calculator to see the effect of fake inflation on a $1000 bond  for 30 years:

A zero coupon bond is a bond bought at a price lower than its face value, with the face value repaid at the time of maturity

With Fed's 0.8% fake inflation, Zero Coupon Bond Value = $787.38

With Chapwood inflation of 9.7%, Zero Coupon Bond Value = $62.20

So with Fed's inflation assumption, you can borrow $787.38 for 30 years and pay $212.62 as interest

With Chapwood inflation, you borrow $62.20 for 30 years and pay $937.80 as interest

With Chapwood Index, if you borrow $787.38 for 30 years, you pay $11,871 as interest.  Or 55.83 times  that with the Fed's inflation  adjustment.

http://www.chapwoodindex.com/

Bangin7GramRocks's picture

This was all before the Fed began actively buying stocks and fully supporting the "markets". There is no historical comparison for this bubble.

razorthin's picture

If the Fed can buy stocks with a limitless off-the-books balance sheet to support its parasitic cronies, it can wire me $5,000 a week and support the real economy.  I'll buy shit with that.

See to it!

/sarc

Bangin7GramRocks's picture

I remember when President Cheney sent me $1500 and had his assistant George tell me to buy a TV. I was quite confused where the money came from, but spent it nonetheless.

VinceFostersGhost's picture

 

 

when President Cheney sent me $1500

 

Probably didn't even notice you had to pay it back in taxes the next year.

 

Thanks a lot for doing that however.

TrustbutVerify's picture

Bangin...That $1500  definitely helped the Chinese (or other foreign) manufacturing market.

 

Make efforts to buy American.  It builds pressure to build US employment. 

markar's picture

If they do that, that $5000 a week will barely feed you.

BoPeople's picture
BoPeople (not verified) Jun 22, 2015 7:23 AM

"A crash is baked in the cake."

I have believed that the stock market stopped being even the tiniest resemblance of a market long ago. It became and insiders mechanism for embezzlement and theft. But theft of what, exactly? Theft of money/mammon, certainly. Theft of ethics and morality, yes. Theft of soul ... most likely. Those who profit by it have lost something and try to drag others in with them.

I no longer believe that a crash is baked into the cake. Why? because there are so many pundits and propagandists now saying that there is.

The forces controlling the markets and insider money now seem to want people to believe that a crash will happen within the next few months.

Why is that?

Bobbo's picture

There is another side.  Catherine Austin Fitts (solari.com) suggests quite strongly that there will be a "Crash-Up" in values reflecting a leveraged buyout of the western equity market(s).  This would follow what as already occurred: a leveraged buyout of western governments, and the institution of a "black" or hidden economic system that accounts for the $Trillions that have "gone missing" from numerous government books and gold hideaways.  See also gizadeathstar.com re. Babylon's Banskters, and richarddolanpress.com re. breakaway civilization.

buzzsaw99's picture

there is no market

planet shmanet janet [frank n furter]

dontgoforit's picture

Any of you guys still in to stawks?  Very close friend of mine took a hit week before last, but he's a true player - picks, run-ups and sells.  And he's pretty good at it, having doubled his stake in the last 10 years.  So, now I belive he's mulling over a cash out.  We're all getting too old for this dice thing anyway.  Better to take the chips and go home.  And that, my friends, is how the mouse ate the cat.

Mr Pink's picture

That's 10% per year. Gee, how can I learn how to be a stock market picker guy?

Trucker Glock's picture
"The Worst Time In History To Be Invested In Stocks"

 

Someone should tell the DAX
nathan1234's picture

The Old Saying and History repeats

A Fool and his money are soon parted

This realisation will dawn only when the event ( collapse) happens. No amount of advice will help. We are dealing with human nature.

The Vultures of Wall Street together with the Banksters will be hiding in their crags trying to escape their lynching by the public

 

PermaBug's picture

Well that used to be true but these days the feds bail out the fools using the wise people's money.

Which does make you wonder who the real fools are I suppose.

ramgold2206's picture

I was so fed up with all this shit I wanted to own gold to try remove myself from this matrix best I could, but like nearly everybody I had F..K all extra cash to convert into bullion. However If your willing to try your hand at network marketing, you could use the commissions earned to acquire gold bullion from Karatbars. May not be for everybody and I aint pushing it on anyone but its another option and its working for me.

6 months ago I had no cash and no gold.. Now I have a wee bit of both..

Genuine opportunity www.teamramgold.com for info if your interested - email me for full traning

greenskeeper carl's picture

hahaha I don't think anyone on here is dumb enough to buy into a pyramid scheme just because its got the word 'gold' in it, nice try though. Maybe you can get glenn beck to peddle it like he does for those other shysters.

ramgold2206's picture

Carl, 8 months ago I would have agreed with you...until I researched the programe. And whether you like it or not, its not a pyramid scheme. The gold is the same price for everyone hence its not pyramid, the marketing system is just that a marketing system not to be confused with a ponzi scheme (affilate and referal based). The programe pays exactly what your owed on time eveytime. the Gold is superb and legitmate. All i can say is that after 8 months, I have gold I have some money again all for a bit of marketing .. not the most difficult thing in the world to do.

Able Ape's picture

Yes, No, Maybe....

q99x2's picture

BTFD It's FED software stupid.

CHC's picture
CHC (not verified) Jun 22, 2015 8:06 AM

The Fed believes it's God.  God on the other hand knows He's NOT the Fed.

Zimscooter's picture

what if the FED copies the BOj and buys on the dips, eventually to become the largest holder of the "all in as last resort" ETFs? the the markets will truly continue to go up for ever moar

Comte d'herblay's picture

This has far more credibility than this: " Today will go down in history as one of the worst times in history to be invested in the stock marketVirtually no one believes this statement. That is why it will prove to be true".

So if nearly everyone believes that the earth is round, it is in reality flat and if you walk too far in one direction straight ahead, they will fall off.

I see.