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If You Think That Was A Crash...

Tyler Durden's picture




 

Submitted by Jim Quinn via The Burning Platform blog,

Last week’s volatility to the downside was entirely predictable, as the first leg down during this ongoing market crash reached the correction stage of 11%. The technical bounce was a given, as the 30 year old HFT MBAs on Wall Street have been trained like rats to BTFD. In their lemming like minds, it has worked for the last six years of this Federal Reserve created “bull market”, so why wouldn’t it work now. Last week was their first lesson in why it doesn’t work during bear markets, and we’ve entered a bear market. John Hussman seems amused at the shallowness of the arguments by Wall Street shills and CNBC cheerleaders about the future of the stock market in his weekly letter. After this modest pullback from all-time highs, the S&P 500 is still overvalued by 92%:

Following the market decline of recent weeks, the most reliable valuation measures we identify now project average annual nominal returns for the S&P 500 of about 0.5% in the next 10 years. On a broad range of historically reliable valuation measures (see Ockham’s Razor and the Market Cycle) the May peak in the S&P 500 reached valuations averaging about 114% above run-of-the-mill historical norms – more than double the valuation levels that have historically been associated with the 10% average expected market returns that investors have enjoyed over the long-term. At present, those measures have retreated to about 92% above historical norms.

Keep in mind that low interest rates don’t raise the estimated 10-year expected return on stocks from the current 0.5% level. Low interest rates only make the low expected return on stocks somewhat more “acceptable” because the alternatives are similarly dismal. The Federal Reserve’s policies of zero interest rates and quantitative easing have done nothing but to encourage yield-seeking speculation, bringing valuations to extreme levels, and leaving prospective future investment returns equally depressed.

Those who assert that high equity valuations are “justified” by low interest rates are actually (and probably unknowingly) saying that 0.5% expected returns on equities over the coming decade are a-okay with them. But it’s critically important to understand that while low interest may help to explain why current market valuations have been driven to obscene levels, low rates do not change the relationship – the correspondence – between elevated valuation levels and dismal subsequent long-term market returns.

It is time to assume crash positions because we have not experienced anything approaching a crash thus far. We’ve hit nothing but an air pocket.  As Dr. Hussman points out so succinctly, market crashes do not happen at the peak. There is usually an initial 10% to 14% decline as the smart money exits stage left, then the lemming dip buyers pile in and drive the market back up, but fail in bringing it above the initial high. It’s only then that sentiment deteriorates, support levels are broken, and all hell breaks loose. That time is coming.

 

The market decline of recent weeks was not a crash. It was merely an air-pocket. It was probably just a start. Such air pockets are typical when overvalued, overbought, overbullish conditions are joined by deterioration in market internals, as we’ve observed in recent months. They are the downside of the “unpleasant skew” that typically results from that combination – a series of small but persistent marginal new highs, followed by an abrupt vertical decline that erases weeks or months of gains within a handful of sessions (see Air Pockets, Free-Falls, and Crashes).

Actual market crashes involve a much larger and concerted shift toward investor risk-aversion, which doesn’t really happen right off of a market peak. Historically, market crashes don’t even start until the market has first retreated by 10-14%, and then recovers about half of that loss, offering investors hope that things have stabilized (look for example at the 1929 and 1987 instances). The extensive vertical losses that characterize a crash follow only after the market breaks that apparent “support,” leading to a relentless free-fall that inflicts several times the loss that we’ve seen in recent weeks.

It’s hysterical watching the paid Wall Street hucksters paraded on CNBC and the other corporate media propaganda outlets trying to calm the muppets so they can continue to fleece them. The highly paid talking heads, bubble headed bimbo spokesmodels, and captured shill “experts” like Cramer, blather about the 10% decline as if it has been an extreme over-reaction to a meaningless possible .25% increase in an obscure Fed lever and the complete collapse of the China bubble economy. They knowingly ignore the extreme valuations of our stock market to levels only seen in 1929 and 2000. Their goal is to keep the muppets in the market so their advertising revenue stream from Wall Street continues unabated.

The reason why the word “crash” has been bandied about to describe the recent selloff, I think, is partly because investors have lost all perspective of the losses that have historically been associated with that word, but mostly because it gives market cheerleaders the needed “cover” to encourage investors to continue speculating near record market valuations. After all, everyone “knows” that investors shouldn’t sell after a crash, thus the endless flurry of articles advising “selling in a crash is a textbook mistake,” “selling off stocks during a crash is a terrible idea”, “whatever you do, don’t sell”, “market crash: don’t rush to press the panic button,” “the worst investing move during a market crash,” … you get the idea.

Hand-in-hand with the exaggeration of the recent decline as a “crash” and “panic” is the exaggeration of investor sentiment as being wildly bearish. The actual shift has been from outright bulls to the “correction” camp, but that’s a rather meaningless shift since anyone but the most ardent bull would characterize current conditions as being at least a market correction. Historically, durable intermediate and cyclical lows are characterized by a significant increase in the number of outright bears. That’s not yet apparent here. Indeed, Investors Intelligence still reports the percentage of bearish investment advisors at just 26.8%.

The reason people lose so much money during market crashes is because of their cognitive dissonance and normalcy bias. They don’t want to think about the possibility of losing 50% of their money, even though history, facts, and common sense all point towards a dramatic crash. They will be convinced to stay in the market by the dramatic rallies that occur during bear market crashes. Six of the largest one day gains in history occurred during the 2008/2009 crash. Did that result in people not losing 55% of their money over a few month period? Selling now would not be a panic move, it would be a rational move.

It’s generally true that one doesn’t want to sell stocks into a crash (as I’ve often observed, once an extremely overvalued market begins to deteriorate internally, the best time to panic is before everyone else does). Still, the recent decline doesn’t nearly qualify as a crash. For the record, those familiar with market history also know that even “don’t sell stocks into a crash ” isn’t universally true. Recall, as an extreme example, that from September 3 to November 13, 1929, the Dow Industrials plunged by -47.9%. The market briefly recovered about half of that loss by early 1930. Even so, it turned out that investors would ultimately wish they had sold at the low of the 1929 crash. By July 8, 1932, the Dow had dropped an additional -79.3% from the November 1929 trough. In any event, the recent market retreat, at its lowest closing point, took the S&P 500 only -12.2% from its high, and at present, the index is down just -9.7% from its highest closing level in history. To call the recent market retreat a “crash” is an offense to informed discussion of the financial markets.

The biggest fallacy bought into by the ignorant masses and the intellectual academic elites is that the Federal Reserve’s purposeful blowing of this enormous bubble has increased the wealth of the nation. It has done nothing of the sort. It has increased the debt of the nation, while starving the productive wealth creating segments of the nation. They have created paper wealth by encouraging reckless gambling by Wall Street and the corporations using shareholder funds to buy back their stock at all-time highs. As we saw in 2000 and 2007, paper wealth can vaporize overnight.

Keep in mind that when paper wealth is “lost,” nobody gets it. Quantitative easing has not made the nation “wealthier”, nor will the massive paper loss we expect over the completion of the market cycle make the nation “poorer.” As I detailed in June (see When Paper Wealth Vanishes):

“As in equal or lesser speculative bubbles across history, there’s a common delusion that elevated stock prices represent wealth to their holders. That is a fallacy, and we can hardly believe that given the collapses that followed the 2000 and 2007 extremes, investors (and even Fed policymakers) would again fall for that fallacy so readily. The actual wealth is in the cash flows that are ultimately delivered into the hands of shareholders over time. Individuals can realize their paper wealth by selling now to some other investor and receiving cash in return, but only a small proportion of investors can actually convert current paper wealth into cash by selling to other investors without disrupting the bubble. The new buyer then receives whatever cash flows the stock delivers into the hands of existing holders, and can eventually sell the claim to the remaining stream of future cash flows to yet another investor. Ultimately, a share of stock is nothing but a claim on the long-term stream of cash flows that will be delivered into the hands of its holders over time. The current price and the future cash flows are linked together by a rate of return: the higher the price you pay today for a given stream of future cash flows, the lower the rate of return you can expect achieve by holding that investment over the long-term.”

The Federal Reserve has been successful in redistributing the wealth of the nation to the .1% who control the levers of our economic, financial, and political systems, from the working middle class who do the heavy lifting in this country. Redistributing wealth through speculation, rigging markets, printing money and throwing savers and senior citizens under the bus is not creating wealth. The biggest debt bubble in world history will lead to the greatest financial collapse in world history. Act rationally and get your money out of the stock market now.

Emphatically, the wealth of a nation is not measured by the price that the most reckless speculator will pay for the last few shares that change hands at the most exuberant moment of a bull market, multiplied by the entire number of shares outstanding. No, the wealth of a nation is its accumulated stock of productive real investment, human capital, and resources. Everything else cancels out because every security owned by some holder is also the liability of some issuer (see Stock Flow Accounting and the Coming $10 Trillion Paper Loss).

Put simply, many investors, and even some policy makers at the Federal Reserve, are under the delusion that paper market capitalization represents real wealth to the economy as a whole. The truth is that the wealth is in the productive assets of the economy and the long-term stream of cash flows they generate. Price fluctuations can certainly affect the distribution of wealth. Those who repeatedly buy stocks from others at depressed prices, and sell them to others at elevated prices, will accumulate the purchasing power of others. Those who repeatedly do the opposite will surrender their purchasing power to others. But the aggregate wealth of the economy as a whole is unaffected by those price fluctuations.

Read Hussman’s Weekly Letter

 

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Mon, 09/07/2015 - 11:15 | 6518380 Occident Mortal
Occident Mortal's picture

Inside the bubble... Nothing but a big wet Fed fart.

Mon, 09/07/2015 - 11:16 | 6518384 Chuck Knoblauch
Chuck Knoblauch's picture

S&P 500 valued 27 years on borrowing, not production.

I expect a 70% correction.

Or, it will close permanently.

Mon, 09/07/2015 - 11:20 | 6518396 Xibalba
Xibalba's picture

Trump will save you....HAHAHHAHAHAHHAHAHAHA! 

Mon, 09/07/2015 - 11:24 | 6518408 Chuck Knoblauch
Chuck Knoblauch's picture

Jesus saved me.

Mon, 09/07/2015 - 11:34 | 6518434 J S Bach
J S Bach's picture

One more big QE will send the markets soaring 25% higher before the crash.  Kinda like a red giant star that bloats outward before imploding in on itself.  Just a thought to allay the sighs of angst that will surely arise from readers of this site before the inevitable occurs.

Mon, 09/07/2015 - 11:51 | 6518446 Chuck Knoblauch
Chuck Knoblauch's picture

I apply that to the USD$.

Supernova.

tick tock

Mon, 09/07/2015 - 12:47 | 6518689 PlayMoney
PlayMoney's picture

I've been pondering how to play the QEinfinity that be coming. One would think they wouldn't be buying into that as much seeing it didn't work. But i am probably underestimating how many foolish big boy money managaers there are that will plow right into it.

Mon, 09/07/2015 - 13:50 | 6518956 worbsid
worbsid's picture

Remember the Fed is here for the club, and we ain't in it.

Mon, 09/07/2015 - 13:16 | 6518799 cpnscarlet
cpnscarlet's picture

ONLY if the QE is in the form of helicopter money to Mom and Pop (tax rebates). Another bond purchase will fail finacially and in perception since doing it so far hasn't worked to stim the general economy. EVERYONE is admitting that now.

Mon, 09/07/2015 - 16:41 | 6519636 tictawk
tictawk's picture

Everyone long the market is looking for one more pump so that they can dump their holdings.  Yeah do you think the market will accomodate that?  do you feel lucky?

Mon, 09/07/2015 - 11:35 | 6518443 RafterManFMJ
RafterManFMJ's picture

Jesus saves; the rest of you take full damage.

Mon, 09/07/2015 - 14:18 | 6519048 MSimon
MSimon's picture

Jesus saved you? Have you been deposited in a bank? Or turned into gold?

Mon, 09/07/2015 - 11:27 | 6518418 Kolchak
Kolchak's picture

"Or, it will close permanently."

 

Yep that ^^^

Mon, 09/07/2015 - 11:34 | 6518427 Chuck Knoblauch
Chuck Knoblauch's picture

There isn't enough cash to cover the shorts.

Buy physical that you hold.

Possession is king.

US is $200+ trillion in debt.

Mon, 09/07/2015 - 11:34 | 6518438 Herodotus
Herodotus's picture

What effect will the announcement of the beginning of QE4 have on the stock market?  Won't it go up to even higher highs?

Mon, 09/07/2015 - 11:49 | 6518472 Chuck Knoblauch
Chuck Knoblauch's picture

The infinite belongs to God.

Man's towers to heaven always fall.

Human arrogance is built in to the fall.

Mon, 09/07/2015 - 12:45 | 6518678 DanDaley
DanDaley's picture

You write like Jorge Luis Borges -Two Kings and Two Labrynths...and we are the King of Babylonia.

Mon, 09/07/2015 - 13:46 | 6518935 RaceToTheBottom
RaceToTheBottom's picture

And the hiding grounds for child molesters is just the dues to be paid to be saved in the afterlife......

 

Mon, 09/07/2015 - 16:38 | 6519623 tictawk
tictawk's picture

If QE 1, 2 and 3 did not jump start the economy in any meaningful way, why would QE4 do it?  Consider that other CBs were also pumping hard.  Now that is reversed as the BRIC nations specifically China are liquidating US debt to maintain currency pegs.  QE4 will not have the same effect as the other QEs and market reaction might be for only a few days at best.  China is dumping bonds and someone (read FED) has to pickup the excess.  Clearly the effect on the markets will be small.  Also keep in mind, the higher the valuations of the S&P, the larger the QE needed to keep it there and propel it higher.  A larger QE is not going to happen.  Also the dollar is losing its world currency status.  The only reason Fed could pump with impunity was that we were the world Reserve Currency and that is changing fast.  

Mon, 09/07/2015 - 11:19 | 6518393 I Write Code
I Write Code's picture

The stock market: you can live on it but it tastes like shit.

Mon, 09/07/2015 - 11:19 | 6518395 Chuck Knoblauch
Chuck Knoblauch's picture

Market volatility collapse and margin debt rising.

If the market doesn't collapse, it will be closed.

First time ever (since Lehman).

Mon, 09/07/2015 - 11:29 | 6518417 Ausonius
Ausonius's picture

 

 

Truly, would the average American notice anything immediate from a few more crashes or even a closed market?  Long-term, who knows: "You will be made to care" is the philosophy of the current regime.

Mon, 09/07/2015 - 11:30 | 6518425 KnuckleDragger-X
KnuckleDragger-X's picture

The magic smoke is escaping. The sheep are going to wake up one morning soon to find the circus has left town and there is no bread. The thing about 1929 was the people still knew how to survive on less, but now we have the free shit army and I just can't picture them standing in bread lines......

Mon, 09/07/2015 - 22:00 | 6520901 StychoKiller
StychoKiller's picture

How about skittles and Purple Drank lines?

Mon, 09/07/2015 - 11:22 | 6518403 max2205
max2205's picture

Where was the bull trap?  I know. Didn't happen yet.

Mon, 09/07/2015 - 11:28 | 6518420 3rdWorldTrillionaire
3rdWorldTrillionaire's picture

Random thought -- was the bull trap Oct 15 through July? Shit was really starting to hit the fan that lovely morning until Bullard -- perhaps the trap has been CB squawk / Fed "put"? Although many of us have been expecting a massive sell-off, this August drop came quite suddenly, and a few weeks earlier than expected... smells like a trap to me?

I know it may not "technically" be a bull trap per normal definitions... but, really, what has been following normal in the past few years?

Mon, 09/07/2015 - 11:23 | 6518407 i_call_you_my_base
i_call_you_my_base's picture

Right, I laughed at all of the "Black Monday" talk when it was a decline in the US indices of 3.5%. The Fed's removal of risk through QE, intervention, and jawboning has warped investors' perspectives.

Mon, 09/07/2015 - 11:25 | 6518409 khnum
khnum's picture

O the Fed is concerned with real wealth alright when the Fed housing bubble burst it picked up 12 percent of US mortgage backed securities and when this bubble bursts God only knows what percentage of blue chip equities the Fed and its cronies will have picked up.Stop polywaffling and cut to the chase its a private criminal enterprise that redistibutes wealth reverse Robin Hood style

Mon, 09/07/2015 - 14:34 | 6519115 MSimon
MSimon's picture

Twas alway thus. And when Robin Hood reversed things? He took his cut."My men (and women) need to eat."

Mon, 09/07/2015 - 11:26 | 6518413 Kolchak
Kolchak's picture

Said it before and I'll say it again,

Feds dead (cabal dead), just having trouble falling over quickly is all. The system is dead and rotting in front of our very eyes. Debt jubilee coming your way once the deadwood is handled properly and a new system with proper checks and balances will be put into place soon. There will be no war beyond the proxy wars we see now, all this and I can juggle also.

 

My point, relax and enjoy the show and tell the ass wholes to stick their fear up their collective assets, we dont want anymore.

Mon, 09/07/2015 - 12:33 | 6518641 Fish Gone Bad
Fish Gone Bad's picture

Debt jubilee coming your way

This will never happen in anyone's lifetime.  Remember Geithner's homeowner bailout?  A lot of talk and a lot of homes lost, but no bailout.

Mon, 09/07/2015 - 13:49 | 6518947 RaceToTheBottom
RaceToTheBottom's picture

"and a new system with proper checks and balances will be put into place soon."

Because the ones who put in the old system were just playing around last time????  This time they will do it better???  They are the same people....  Why would they do something different??

Mon, 09/07/2015 - 14:35 | 6519120 sapioplex
sapioplex's picture

I'm not necessarily disagreeing with you, but there are major differences today from the times when previous systems were devised. For example, the communication and computing capability available to the masses is radically different.  This has and does radically affect what those in power are capable of.  If you don't think that will affect the type of behavior during the downside of this crash, I suggest you haven't thought it through enough.  The masses are a much larger problem for those in power, this is a relatively new phenomenon and that isn't going to go away very easily.

Mon, 09/07/2015 - 15:56 | 6519455 RaceToTheBottom
RaceToTheBottom's picture

Good point. Thanks for replying.

I was more concerned about no one seeing the real causes of the situation now. Fake Keynesianism, Cronyism, Banksterism.

Computing power does not in itself help against those...

Mon, 09/07/2015 - 11:35 | 6518441 thunderchief
thunderchief's picture

Bend over and take it like a man investor/trader sheeple.  Its coming sooner or later...

Mon, 09/07/2015 - 11:41 | 6518455 Regression Economics
Regression Economics's picture

" Act rationally and get your money out of the stock market now."- Jimbo Quinn

So Jimmy Boy, you liquidated your 401K and now are 100% in Possessible Gold?

RE

Mon, 09/07/2015 - 11:42 | 6518459 TaborKnight
TaborKnight's picture

'The technical bounce was a given, as the 30 year old HFT MBAs on Wall Street have been trained like rats to BTFD.'

 and what about PTSD bloggers?

Mon, 09/07/2015 - 11:43 | 6518460 TaborKnight
TaborKnight's picture

'The technical bounce was a given, as the 30 year old HFT MBAs on Wall Street have been trained like rats to BTFD.'

 and what about PTSD bloggers?

Mon, 09/07/2015 - 11:46 | 6518468 shovelhead
shovelhead's picture

There's always a bigger fool...

Until you find out it's you. Then you're gonna hate what happens next.

But it will make a great story to tell the grandkids someday.

 

Mon, 09/07/2015 - 11:46 | 6518471 Ms No
Ms No's picture

Arguably the biggest opportunities (I have no problem looking at it that way because I didn't cause the problems) in the history of this country could be just around the corner if/when things collapse but the only problem is... they are going to propose a solution. 

Doesn't it just piss you off a tad that after saving, being frugal, buckling down when others had fun and making good decisions that you are likely to have complete financial independence and security stolen from you by a bunch of fucking jackals who are part of global dominator pathology?  Sure pisses me off. 

Mon, 09/07/2015 - 12:50 | 6518699 delete entry
delete entry's picture

yes, but looting a w-mart as it all collapses should more than make up for it.

Mon, 09/07/2015 - 11:54 | 6518493 Chuck Knoblauch
Chuck Knoblauch's picture
The S&P 500 will collapse before Betelgeuse.
Mon, 09/07/2015 - 12:49 | 6518695 Ban KKiller
Ban KKiller's picture

When "boy-wonder" hedge fund cunts start jumping ship you know something is up. When insiders are selling you know something is not up! Stocks are going down so sell, sell, sell. 

Or buy the dip. Or bet it all on Swiss Franc. Or bet it all on mortgage servicing companies. Or companies that have no profit. Or, well, you get the idea. Boy-wonder, my ass! 

Fuck you, hedge boys. Your blow will help ease the pain when you jump! 

Mon, 09/07/2015 - 12:55 | 6518716 delete entry
delete entry's picture

"the S&P 500 is still overvalued by 92%"

1930 x .92 = 1775 point drop? did i math that correctly?

Mon, 09/07/2015 - 14:29 | 6519093 MSimon
MSimon's picture

No. 100% too high means a 50% drop. I think.

Mon, 09/07/2015 - 15:44 | 6519400 delete entry
delete entry's picture

+1 makes sense, thank you

Mon, 09/07/2015 - 14:38 | 6519133 3rdWorldTrillionaire
3rdWorldTrillionaire's picture

No.

Mon, 09/07/2015 - 12:56 | 6518717 moneybots
moneybots's picture

" As Dr. Hussman points out so succinctly, market crashes do not happen at the peak. There is usually an initial 10% to 14% decline as the smart money exits stage left, then the lemming dip buyers pile in and drive the market back up, but fail in bringing it above the initial high."

 

In other words, it is not the short sellers that are the problem.  The smart money is first out the door.

Mon, 09/07/2015 - 13:05 | 6518751 Meremortal
Meremortal's picture

This all seems odd. Brokers don't care what direction the market heads, they just want you to buy or sell as they make money either way.

Metal sellers are the same. They make their money off trade action, the direction of prices is incidental.

That's why they tell you that metals are going to explode upward yet they will sell metals to you at today's price. When have they ever told you metals were going to sink in price (as they have for quite some time)? Traders in all things understand the eternal hopes of investors.

I used to get a kick out of Realtors (when I was one) who would tell their client bases,"It's a great time to buy or sell real estate!" Really? How can both be true at the same time? 

Everybody knows to buy low and sell high but few know when things are high or low. 

Mon, 09/07/2015 - 13:30 | 6518876 q99x2
q99x2's picture

FED has a choice either print or head for the bunkers. BTFD until you see those mushroom clouds.

Mon, 09/07/2015 - 14:27 | 6519083 Professorlocknload
Professorlocknload's picture

"Those who repeatedly buy stocks from others at depressed prices, and sell them to others at elevated prices, will accumulate the purchasing power of others."

So, BTFD?

Mon, 09/07/2015 - 16:01 | 6519476 Jungle Jim
Jungle Jim's picture

But, I thought the magical, mystical month of September was going to come in blasting like Cisco Kid at the ford and save us -- that the reddish-looking eclipse was going to splash in the ocean and turn the seas to blood and force the Bankster Cartel to release their death grip on gold and silver prices! You mean that's not going to happen? The movie lied?

Mon, 09/07/2015 - 16:21 | 6519542 besnook
besnook's picture

it would be hard to believe they would allow a crash this close to election time with nothing at stake except party selection.

the real problem is liquidity. there are no buyers for what anyone is selling, including the dollar. if they can manage to walk the dollar down to <90 over the next month all will be right in the world and unicorns will return if if is at 85 by the end of the year.

buythebigfuckingdip bbfd. it is setting up for a good 20-30% porno chart crash.

Mon, 09/07/2015 - 16:26 | 6519572 PositivelySkewed
PositivelySkewed's picture

"... HFT MBAs ..."

Huh? Although both highly manipulative, those are two distinct breeds.

Mon, 09/07/2015 - 17:42 | 6519925 Herdee
Herdee's picture

It certainly doesn't help matters any when WalMart and other big American Corporations are allowed on a daily basis to transfer their earnings out of the country to tax free havens.

Do NOT follow this link or you will be banned from the site!