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Is It Really Different This Time?
Submitted by Lance Roberts via STA Wealth Management,
This morning, as I settled in to begin my morning research routine, I was greeted by an email containing a speech delivered at the University of California. The opening paragraph immediately grabbed my attention:
"The stock market has been advancing with only one significant setback throughout the decade...It has thus established a new record for the length of its rise, although it has not equaled the extent of the record advance of the 1920's: 450 percent from 1921-1929.
What does this phenomenal upward movement portend for investors and speculators in the future? There are various ways of approaching this question. To answer it, I shall divide the question into two parts. First, what indications are given us by past experience? Second, how relevant is past experience to the present situation and prospects?"
The issue of past experience, known as "recency or anchoring bias," is one of the primary factors that has the greatest effect on investor returns over time. As stated in the speech:
"However, in order to judge today's market level, it is desirable, perhaps essential, to have clear picture of its past behavior. Speculators often prosper through ignorance; it is a cliche that in a roaring bull market knowledge is superfluous and experience a handicap. But the typical experience of the speculator is one of temporary profit and ultimate loss."
The importance of that statement is that most individuals extrapolate past performance indefinitely into the future. This tendency is what leads investors to "buy high and sell low." This psychology is displayed in the following chart.
The two questions that must be answered are whether this is just a bull market or some sort of "new market" that will defy all previous experiences?
If this is just a bull market, then the term itself suggests that it is just the first half of a full-market cycle and that eventually a bear market will follow. The chart below shows the history of full market cycles going back to 1900.
Historically, full market cycles have finished when prices complete a "mean reverting" process by falling well below the long-term mean. Since the beginning of the secular bull market in the 1980's that full "mean reverting" process has not yet been completed due to the artificial interventions by Central Banks to prop up asset prices.
There is an argument to be made that this is could indeed be a "new market" given the continued interventions by global Central Banks in a direct effort to support asset prices. However, despite the coordinated efforts of Central Banks globally to keep asset prices inflated to support consumer confidence, there is plenty of historic evidence that suggest such attempts to manipulate markets are only temporary in nature.
Beijnath Ramraika and Prashant Trivedi recently discussed this topic showing a chart of the rate of change for the S&P 500 index over a 75-month period which is the length of time of the current market advance from the financial crisis lows. I have reproduced the chart below with some modifications. I have used a 72-month rolling rate of change of the real, inflation-adjusted, return of the S&P 500 index from 1900 to present. I have also overlaid that with the actual real S&P 500 index (log-2 basis). This more clearly shows that from current peaks of the long-term rate of change in the index, forward market returns have become less desirable.
Their conclusion is simple:
"Clearly, the current rate of change is in extreme territory and is exceeded only by three other market up-moves: the roaring bull market of twenties leading into the Great Depression, the bull market of the fifties and the technology boom. Further, the trajectory of the up-move is similar to that of the market leading into the highs of 1929 and the highs in 1983.
We have had a market on potent steroids."
Such extreme movements in prices over a relatively short period, regardless of underlying circumstances, have all had similar outcomes. Consequently, investors should expect a similar outcome in the future. However, in the short-term psychology tends to overtake more logical thought processes as the "need for greed" keeps investors at the table long after the "cards have turned cold."
Valuations also provide similar evidence that the current market is most likely no different than previous bull market cycles. Sam Ro at Business Insider recently posted the following bit of analysis:
"The forward price/earnings (PE) ratio — the price of the S&P 500 divided by the expected earnings of those S&P 500 companies — is probably the most popular way to measure value in the stock market.
In theory, it tells us if the market is cheap or expensive relative to some long-term average.
Unfortunately, it is horrible at signaling where the market will go in the near-term, like in the next year. This is not news."
Sam is correct. In the very short-term, valuations are a horrible market timing metric due to the psychological impact of investor behavior on the markets.
However, as shown in the series of charts below (compiled by my colleague Nan Lu), valuations can tell us much about what we should expect as investors over the longer term. The charts below are the total dividend reinvested returns of the inflation adjusted S&P 500 index.
Not surprisingly, the expected total inflation-adjusted returns from currently high levels of valuation have historically been disappointing relative to what investors had witnessed previously.
Importantly, the charts above DO NOT mean that EVERY year will be a low return. What history suggests is that forward returns will be much more volatile with periods of significant drawdowns that will comprise a total long-term return at lower levels. Unfortunately, most investors will not survive to see that outcome.
This was a point made within the speech:
"Now, what can past experience tell us about the validity and dependability of this rosy view as to the future of business and common stocks? Its verdict cannot be conclusive, because NO prediction, whether of a repetition of past patterns or of a complete break with past patterns, can be proved in advance to be right.
Nevertheless, past experience does have some things to say that are at least relevant to our problem. The first is that optimism and confidence have always accompanied bull markets; they have grown as the bull market advanced, and they had to grow, otherwise the bull market could not have continued to their dizzy levels; and [secondly] they have been replaced by distrust and pessimism when the bull markets of the past collapsed."
So, who was this mysterious speech giver? It was delivered by Benjamin Graham at the University of California, Los Angeles on December 7th, 1959. (The speech can be found here.)
As the evidence suggests, the current bull market is likely not a "new market" but just the first half of a full market cycle. Eventually, the cycle will complete itself as price goes through a mean reverting event. This is not a BEARISH prognostication but a simple reality. Nothing more. Nothing less.
In there near term, over the next several months or even couple of years, markets could very likely continue their bullish trend as long as nothing upsets the balance of investor confidence and market liquidity. However, of that there is no guarantee.
As Ben Graham concluded:
"'The more it changes, the more it's the same thing.' I have always thought this motto applied to the stock market better than anywhere else. Now the really important part of the proverb is the phrase, 'the more it changes.'
The economic world has changed radically and will change even more. Most people think now that the essential nature of the stock market has been undergoing a corresponding change. But if my cliche is sound, then the stock market will continue to be essentially what it always was in the past, a place where a big bull market is inevitably followed by a big bear market.
In other words, a place where today's free lunches are paid for doubly tomorrow. In the light of recent experience, I think the present level of the stock market is an extremely dangerous one."
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I don't know what all that means, but I think it means there's plenty of room left to go.
The bull market is just now starting. So load up and keep some powder ready to buy the dips. It's the new market.
So at 1207 we had a huge spike in the S&P right after a retest of the day’s low, which allowed the stock market to recover half the losses on what was a dismal day. From that minute on the market did not look back and is closing well into the green. On that same day we have precious metals getting crushed, all this associated with no news barring blood in the streets in the Chinese markets and no changes in the Greek debacle. Counterintuitive, but it is the exact think you would want to see if you were a central bank or the government. If this doesn’t scream PPT I don’t know what does, conspiracy theory or not, but they were not created for nothing.
A VERY good indicator of where a stock price is headed is the dividend actually.
If a company SLASHERS its dividend ala GENERALELECTRIC...well, let's just say I sold at 26 and am DAMN HAPPY I DID!
If on the other hand a company INCREASERS it's dividend (Boeing comes to mind)...ASSUMING SALES ALSO INCREASE (again, Boeing comes to mind) then yes...we might have a buy here.
The SUCKER is the one falling for "Mr High Yield."
At some (REITS have been crushed this year) you will be SLASHERED as "the Enterprise" can no longer afford the interest expense.
A good example is...well, Greece actually.
Yes, this time there really is no spoon...
Things must be busy at "central command" today... ..one hell of stick save.
"Okay fellow CNBS'ers! Today's meme is HEALTHY CORRECTION!
Repeat after me...HEALTHY CORRECTION...
Healthy correction.... healthy correction.
Hey, you know you're right. I don't feel scared any more and an inexplicable desire to buy moar stocks! Thanks, DV.
I think the present level of the stock market is an extremely dangerous one.
But the Fed thinks that the stock market is a buy today. Or all those Kevin Henrys would not be buying today.
Still some suckers out there to loot, but we know TPTB are into symbolic dates.
We just don't know which ones.
"We just don't know which ones."
Lets start with Elul 29.
manipulation is a constant
it's the effects that are temporary
Wait - so it could go up or down? That's not what they said on CNBC.
BTFD...BTFD..BTFD......the fed does.
The Fed is saying BTDF to us..... Buy The Dips, Fuck.
Hey, who's buying all that ISIS oil?
Shouldn't they have all sorts of extra cash laying around from all that savings?
http://www.counterpunch.org/2014/06/20/its-all-for-israel/
dudes?
Of course its different this time. The massive use of computers and insider trading has enabled us to jump directly into hyper-stupid. No worries though there's a giant brick wall ahead to help slow us down.....
ok. got it. when the PE's are high, the returns are low.
Quick, everyone buy long term bonds at less than inflation!
Too late, already bought shiny....
If the Federal Reserve ITSELF is the one front running your trade then the answer is YES.
Obviously Governor Cuomo might want to "call up the Prez and ask for HIS bailout" here...that would be for the ENTIRE STATE OF NEW YORK...I might add...
It must be a new bull market, cuz it's negative over the last 6 months.
yes – it is different this time. “this time” will be way worse. You’ve had 7 years of everyone piling-into dividend paying stocks. once the yield on the U.S. 10-year intersects the yield on the S&P500, be somewhere else. only 2 ways that ever happens:
1. fed admits inflation has been upon us. college tuition, rent, food, toll roads, ballgames, entertainment (movies, theme parks ie. DIS), autos, furniture, retirement (ie. stocks, bonds) all at all-time highs. While gasoline has retraced some 50% off the high, we are still paying 3x what I had been the average at the pump just 10-15 years ago (ie. we are lulled into thinking $2.50 a galloon is a “deal”) only way this happen is thru an act of congress or change in president who gets 2-terms to get the hawks in to do what Volcker did since Obama has loaded up the fed with doves.
2. bond market wakes up to default risk. People think principle in the bond market is “safe & guaranteed”. once the haircuts hit & people open their statements & see that principal getting smashed, the selling will be relentless & yields will pop. Just check the high-yield market; HYG is south of 90.00 (key level). Its SCREAMING something is wrong. Can’t have a commodity as big as (since it’s the biggest) oil down 55% off the high and not have bodies floating in the water. governments may be forced to step in, but once the tax payer wakes-up & realizes they are on the hook for sovereigns being bought by central banks, that’s when they take to the streets & demand a reversal. Lets just watch and see what happens in germany should a “deal” be pushed thru, greeks continue to retire at 53, and the germans continue to pay for it.
you have 1 of the majors (ie. japan, china, u.s., germany) slip into technical recession (we all know here
the planet is not growing & that “they” are barely holding onto they’re own lies which are on the cusp of folding), followed by another & another – and people will care about paying for other countries early retirement, welfare, etc.
What he said. (sorry for the pronoun if you identify as a trans/multi/reverse something or other identity perversion)
Yes it is different this time, because it is not a free market anymore.
Is it really different this time? No but its funny as fuck.
This is what happens when you have paid right fucking arse licking psychopaths, to agree with your every word and tell you just how amazing you are, all of the time, while you repeat the same mistakes, time and fucking time again which got you stupid fuckers into the hole you now find yourselves in. The same hole which you landed us cunts in, and which we will no fucking doubt, hang you for.
History might repeat, but the interwebs gives you a laugh reading it, doesnt it NSA, GCHQ?
Tick fucking tock you idiot cunts.
;-)
The twats have the markets back with software set up to reverse down days. Casino Federal...
Dont worry Winston mate, they know that we know its all a pile of bollocks.
They are shitting themselves blue.
Odious Debt mate, and that which cant be repaid, fucking wont.
Tick, Fucking, Tock.
Funny as fuck. Like a fat lass dancing at the disco, sweating the tits off.
Cunts, and they know they are...
;-)
Step right up folks. Every player's a winner. BFTD , BTATH,,, hell just buy, buy, buy, buy, buy!
Buy that new $40,000 truck, $250,000 McMansion. $20,000 Harley. You only live once! Can't pay? Nooooo prob. Just bankrupt and start all over.
Don't be a deadbeat and live within your means, or worse an unpatriotic low life saver. To hell with saving for retirement. Obama-Care has got you covered,,,,, S p e n d!
And if your jobless,,, go to school. Take those freebie school loans and parteeee, parteeee, parteeee!
Or better, join the military and see the world,,, at least the ME. and if you come home in a Obama Bag your relatives are winners! Bunches of insurance money and best,,, your a hero!
Land of opportunity,,, that it is.
I should have known the S&P would recover when I noticed there wasn't any sweat on Steve LIESman's head this morning
Mr. Market has woken up, and he's going to be giving haircuts at the neckline.
The number one question is: when will the time be that the bankers of the NWO are fully prepared to use the military, DHS, FEMA and various other agencies to protect them from the citizens of the nations that they have taken over.
They would do it today if they thought they could get away with it, but they aren't. In the meantime they are having their software manipulate everything possible until the optimal time. BTFD until you see those mushroom clouds. BTFD until the banks take the pension funds. BTFD until reality forces the banksters to act. Its us against them. Its Putin and Xi and Greece and the entire world against them. It is God almighty and all of Existence that is against them and what they stand for. Notice how many of them are now warning against the singularity. Even the F'n singularity is expected to be against them. Everybody hates the NWO.
It is different this time, it seems, if only because CBs have never been so determined and have never had as many confederates and avenues to manipulate the stock market. They are all in, and will stay all in, until the bitter end because any sign of weakness will cause the same collapse they are so despartely trying to avoid, the one that would never have occurred in the first place if only they wouldn't meddle in the markets. But, ultimately, I think all this is by design of the very same CBs as they want to engineer the collapse of the markets (world-wide) for an entirely different (and social) agenda. We are trully beyond all redemption, this is the road to perdition.
Excellent review of the trend! It reiterates the common knowledge of the secular bear market which began in 2000. Expected end is about 2022 where we should be in a secular bull market if and only if the debt issues on a world wide basis is resolved. 4 times since the early 1800's have we been in this same predicament, 4 times there was means to reduce the public and private debt to 175% of GDP. Those means were in 1849 gold, 1870's austerity by increased savings, 1920's the intervention of WWII which again forced savings to occur by rationing commodities, and we are at the fourth round. Savings have diminished since the 1950's, debt has increased with the slogan "buy now, pay later". At some point, the pipper will have to be paid and it will be very painful. The lesson to be learned is to avoid debt that is not productive in producing income. This chapter in the book of "Economics" has been written and read by many, and as Einstein has stated in his definition of insanity is, repeating the same process and expecting a different outcome. The first time of the use of non productive debt can be forgiven, the second time, proof of what non productive debt can lead to, third time, insanity, fourth time, time to be committed to an institution.