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The US Stock Market – An Accident Waiting To Happen
Submitted by Pater Tenebrarum via Acting-Man.com,
Monetary Inflation Becomes Less Supportive of Asset Prices
We have recently discussed the sorry state of the junk bond market, as well as the noteworthy decline in the annual growth rate of US money supply aggregates. The latter has finally manifested itself not only in terms of narrow monetary aggregates like M1 (see chart) and AMS (“Austrian money supply”, a.k.a. TMS-1, the narrow true money supply), but also in the broader true money supply aggregate TMS-2.

As a reminder, here is the most recent chart of the year-on-year growth rate of TMS-2 :
Year-on-year growth in money TMS-2 has declined to its slowest pace since November of 2008, shortly after Ben Bernanke’s money printing orgy had been unleashed – click to enlarge.
Below is a chart of the annual growth rate of narrow money AMS from the transcript of the October advisory board meeting of the Incrementum Fund. US money AMS is calculated by Dr. Frank Shostak. The chart shown below originally appeared in his AAS Economics Weekly Report of October 5, 2015.
As you can see, the growth rate of the narrow true money supply has fallen off the proverbial cliff recently. It is fair to assume that it will continue to be a leading indicator for the growth rate of TMS-2. Steven Saville of the Speculative Investor has recently mentioned that the sharp growth in euro area money supply (a chart of the growth differential between US and euro area AMS can be seen here) could well help to keep asset prices up longer, by offsetting the slowdown in US money supply growth to some extent.
This idea certainly has merit, as there exists empirical evidence to this effect. However, the US stock market will likely continue to be the leading international stock market. Should leveraged positions in the US market run into trouble, it will affect “risk asset” prices nearly everywhere. The danger that this could soon happen is clearly growing:
Narrow US money AMS, annual growth rate – falling off the proverbial cliff – click to enlarge.
A Look at Leverage in the Market
Given the less supportive backdrop from money supply growth and corporate debt markets, it is probably a good time to take a closer look at leverage and positioning data that relate directly to the stock market. We have discussed all these data points before, so this is essentially an update that shows where things currently stand.
The most obvious data point worth considering in this context is margin debt. There is pretty convincing empirical evidence that the level of margin debt tends to peak a few months prior to the stock market topping out (this divergence is less noticeable near lows, as stock market peaks tend to be more drawn-out affairs, whereas lows are often made in the form of spikes). Given the deteriorating monetary backdrop, we would expect to see something like this to happen at the present time as well. This is indeed the case. Below is a chart of nominal margin debt since 1982 illustrating the situation.
A long term chart of nominal NYSE margin debt via sentimentrader. We have highlighted the major peaks in margin debt expansion observed since 1999/2000. Since margin debt is currently off 11% from its all time high recorded in April 2015, we can by now state that a major trend change warning is in place. Only if margin debt were to quickly rise again and exceed its previous peak would the warning signal be invalidated – click to enlarge.
Next we show two additional charts of margin debt from Doug Short/ Advisor Perspectives. On these charts, the growth in margin debt and the SPX are “inflation adjusted”, i.e., adjusted by CPI. The message remains however the same: every consecutive market top involves higher levels of margin debt, and the recent peak in margin debt and the subsequent decline are highly reminiscent of what could be observed at previous turning points.
Also included is a chart showing the net worth of investors. At the recent peak in margin debt, investor credit balances reached a record low in spite of the fact that asset prices have concurrently reached a record high. In other words, near what has been the market’s price peak to date, investors were prepared to take on an unprecedented level of leverage – not only in absolute, but also in relative terms. This leaves them woefully unprepared and exposed should the market actually suffer something worse than just a run-of-the-mill correction.
Growth in margin debt and the SPX, adjusted by inflation. The decline since the April peak in margin debt is very similar to what has occurred in the years 2000 and 2007. Will this time be different? We wouldn’t bet on it – click to enlarge.
NYSE investor credit balances have turned negative to an unprecedented degree. It takes quite a bit of bullish unanimity for investors to take on such outsized risk in one of the most overvalued markets ever. Evidently the idea that central banks will have their backs if anything untoward should happen is by now deeply ingrained. Many will be surprised when it turns out that central banks have actually no real control over asset prices (this doesn’t mean that their actions don’t influence asset prices, but “influence” and “control” are not the same thing) – click to enlarge.
Other Long Term Positioning Data
Similar to margin debt, other long term positioning data also tend to make peaks or troughs ahead of the major market indexes. An important detail are the extreme readings reached ahead of and in the vicinity of the turning point, as well as the persistence of these extremes. The bigger they are and the longer they persist, the more severe the next bear market is likely to be.
Two of these long term indicators are the mutual fund cash-to-assets ratio and the ratio of retail money funds to the market capitalization of the S&P 500 Index shown below:
The level of mutual fund cash relative to total assets since the early 1970s. This illustrates that mutual fund managers were far more cautious ahead of and during the secular bull market of the 1980s and 1990s than they are today. These extremes have partly to do with the fact that interest rates are now so low that cash holdings no longer provide a decent return. However, this is just another way of saying that extremely low mutual fund cash reserves are indicative of bubble conditions – click to enlarge.
This indicator shows that retail investors are by no means any more cautious than professional investors. Their cash holdings are likewise extremely low relative to the market’s capitalization – click to enlarge.
Lastly, here is an update of the positioning of Rydex traders. While these funds are primarily designed for short term speculation, the signals given by Rydex ratios historically appear to have long term rather than short term significance – this is to say, similar to the indicators shown above, they are probably not really useful for short term timing purposes, but should be seen as long term risk metrics.
This Rydex combo chart shows Rydex money market fund levels, the pure bull/bear fund ratio and the total assets held by bearish Rydex funds. In recent years never before seen extremes have been reached in all of them – these readings are lately beginning to falter, but remain at historically quite elevated, resp. suppressed levels – click to enlarge.
The leveraged Rydex bull/bear asset ratio, which isolates the assets held by leveraged strategies, shows similar extremes, which have lately begun to falter as well. What is interesting here is that the willingness to take on extreme risk was at its highest after the market had already advanced by more than 200% from its lows, i.e., at a time when market risk in terms of valuations was actually far higher than previously.
The leveraged Rydex bull/bear asset ratio over the long term – click to enlarge.
Conclusion
From a seasonal perspective it is unlikely that the market will make any big downside moves near year-end. In fact, it is usually more likely that there will be some additional strength, although the upcoming December FOMC decision represents something of a wild card this year.
However, the data above – especially the data on margin debt – suggest that we could see a big increase in market volatility next year. The decline that occurred seemingly out of the blue in late August is best seen as a warning shot in this context.
Long term risk has increased quite a bit, no matter which data points one happens to consider. Whether one looks at valuations, market internals, leverage or positioning, there are now more warning signs than ever. With the support provided by strong money supply growth declining as well, it becomes ever more likely that these potential dangers will actually materialize. It is an accident waiting to happen.
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Best way to avoid an accident is to avoid entering the casino...
"Best way to avoid an accident is to avoid entering the casino..."
Just remember who owns the Casino, makes its chips, its rules and provides the entertainment and distractions for those who do enter, i.e. the 90%.
Your non-participation (as part of the 10%) is commendable and is the right thing to do from a purist point of view, but it won't make any real difference until a bunch of other things line up for a Perfect Storm. In the meantime, let's not delude ourselves that they control the Horizontal, they control the Vertical -- and just like in any empire, they can prolong this Ponzi longer than you can stay solvent.
Especially if you bought Libertarian types of assets at their highs/peak (PM, Resources, Energy), because ZH writers (Simon Black, Jim Rogers et al) kept telling you that "The only way is up, in a growing global populace".
Digression...
How do you make a small fortune in PM and Commodities? Same as in the stock market: Start with a big fortune.
Which made me realize: Bears are not that different from Bulls. Bears are just Bulls with a different set of assets to promote and on which to collect commissions, or which they shill for their Pump & Dump games. Whereas stocks and bonds appeal to one set of demographics (Dems & Repubs), Commodities and PM seem to have a greater attraction to the Libertarian and agrarian/rural demographics. The fee-seeking salesmen (Brokers, CFPs, shills) have figured this out a long time ago, and regardless whether their niche is to be a Bull or Bear, they are making a living at it by targeting their Prospects with customized socio-political rhetoric, that draw them like flies to shit.
Kirk's Aphorism to investment: NO single asset on earth hold its value (remain a "Store of Value"). NONE. The only thing you can hope for, is for it to hold its value for two timelines: (a) the longer timeline for which you hope/plan to hold it, and (b) the shorter timeline when Murphys' Laws strike and you need to liquidate sooner. If you cannot be certain with a >95% confidence that this is the case, then you must hedge with multiple assets. But it's best, simpler and more sleep-conducive, if you allocate fairly evenly into Primary, Secondary and Tertiary assets. Where Primary = Land/RE, Resources, Commodities, PM; Secondary = shares in a business or company, and Tertiary = Paper assets (cash/FX, bonds, derivatives). Note that ZH has a clear dislike for Secondary and Tertiary assets, and keeps glorifying Primary assets. Having been burned by ZH's narrow and biased views (loaded up on PM during QE1 and QE2), I've learned to stick to the aforemention basics in Asset Allocation. Every CFP worth their salt will tell you the same thing.
Algos are making bears into an endangered species.
If they kill all the bears off then the market can never drop right?
You forget it has "fat finger" and "outage" stops.
Passing full retard on the way to hyper-retard........
Wow, the margin debt graph looks truly tsunami like.
This is going to hurt a lot of people.
As long as we do not go Plaid...everything should be OK.
You have institutions and ultra high net worth liquidating at these levels currently. SPY 210 nice resistance past week. Got short today at 209.95 with stop at 210.05. Risk 10 cents to make a dollar? All day.
AAAAAAAND you got stopped out. Not making fun of you. Just fucking sick of the chicanery, the bullshit. at least, as you say, you didn't lose much. always tomorrow.
You're making a strong assumption that the ongoing collapse is an accident Peter. As far as the "market" goes, it is a policy tool and it will collapse when TPTB decide it's time to pull the rug.
Meh....
Just BTFATH!
NEWS FLASH: STOCK MARKET SLIPS ON BANANA PEEL, LOSES ALL THE MUPPETS MONEY.
THANKFULLY TBTF BANK'S MONEY OK.
A bit OT but...
Was reading an essay on Sputnik in which The Saker is interviewed. He was outlining the ability of US Intel agencies to track money movements, one of their strong suits, he says.
I like The Saker a lot, just ordered his book. But more and more, I find myself wondering just _who_ this Saker guy might really be. From out of complete obscurity, now, he has risen seemingly to a cult-like fame. PC Roberts quotes him, Sputnik too, and many others. But why? What has he ever built/accomplished/done that anyone can verify?
Has anyone else here ever wondered how this anonymous individual went from being a total unknown to now, "a high-level expert of US intelligence capabilities."
Doesn't scan, somehow...
How do you verify? Easy, if they are allowed on main stream media, they have been vetted by the FBI, CIA or Mossad.
Furthermore, 90% of all websites were established or are subsidized by the same; three ways to identify them is a) their identical format and b) advertisers and c) their refusal to allow any discussion regarding historically-proven methods of redress.
"Market"?!?!? LOL!!!
Haha... as a ZHer once pointed out - the "market" is nothing more than a place/thing where some numbers are updated at random for a few hours each day.
One edit; publically traded markets for true price discovery died when the fiat that they are priced in was detached from reality.
Black markets and government manipulated markets are booming. In many ways they represent the ying/yang of life's never ending struggle. the harder these arrogant oligarchs push on those strings, the sooner the supply chains break and the sooner we start thining the fucking herd in earnest.
Same as it ever was....
Money laundering scheme for those with blue tickets
the premise of the titla is that there is "chance" or normal price discovery . There is not. None since at least 2008.. If you needed anymore evidence. Not only is there NOT a market but the fed runs a hedge fund. Starting at 9 am central on 10-02.. 2 years in a row actively luring in shorts via their luciferian criminal clowns on CNBS. Yes Santelli YOU are part of the fraud crowd to !!! Anyone who drags out charts right as of now doesnt get it and is complete idiot. "Markets" were shut down in 08. They have long ceased to exist.
I'd argue that "publically traded markets" have ceased to exist, yes. The entire planet is going the way of Weimar in that regard.
However, black markets and the underground economy is booming!
You know its like Sabermetrics - sometimes the slavish devotion to establishing correlations and neat charts gets you into trouble.
Theo Epstein made awful decisions, lots, but he had the money and gift for bullshit that papered it over.
So yes, with less printing you have less 'economy' - but its a sham anyway.
Printing billions to give to the very banks who keep jamming their fucking hands in the cookie jar is no way to run a real economy - only one that exists on paper, Pater.
Dear Pater, How short are you? It's nice to have stats on meaningless indicators (from a trading perspective of course, as there is zero correlation for profits) to drive you nuts. SP500 IS LESS THAN 2% from all time highs and that can't be right but it is. Maybe you should "seasonally adjust" everything?
www.traderzoo.mobi
I think so too! Have a look at this interesting video about the Journal of Commerce Index and the bond market! https://www.youtube.com/watch?v=d8kLV-H1Yqk
Here are some more signs of a coming recession.
1. Factory orders continue to drop
http://www.zerohedge.com/news/2015-10-02/us-factory-orders-flash-recession-warning-drop-yoy-10th-month-row
2. Default risk spikes
http://www.zerohedge.com/news/2015-10-02/us-financials-default-risk-spikes-2-year-high
3. M&A set record
http://michaelekelley.com/2015/05/29/mergers-and-acquisitions-set-record/
4. Fed sees 2 bubbles
http://michaelekelley.com/2015/02/20/fed-warns-of-two-bubbles/
o Commercial Property higher than pre-2007 level.
http://nreionline.com/finance-investment/cre-prices-are-now-officially-above-pre-recession-peak
o Global Corporate Debt Market hits $5 trillion.
http://fn.dealogic.com/fn/DCMRank.htm
5. Iron ore prices tumble
http://www.marketwatch.com/story/iron-ore-prices-keep-crashing-adding-to-global-growth-fears-2015-11-30
6. Baltic dry shipping index tumbles
http://www.marketwatch.com/story/shipping-index-falls-to-all-time-low-stoking-fears-about-global-growth-2015-11-19
Here is how to prepare.
http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/
Here is how to get your mind off this stuff.
http://michaelekelley.com/category/humor/
Good luck!
SPX to 500, we are fucked in two years.
“An Accident waiting to happen.”
The general opinion, at least among this site’s staff and most of its commenters, it that any financial shock – such as a rate hike – will trigger an immediate economic slaughter; some think it will be on a world-wide basis.
I hate to spoil the party, of sorts. Oh, a slaughter will happen – but not immediately. What we are witnessing is a slow destruction of nothing less than so-called Western Civilization. And by “Western Civilization” I mean one where rights, liberties and private property are absolutely protected – a society that has never existed.
It will be slow because something like 95% of Americans live in a world of make-believe: they survive by a million different sets of pleasing falsehoods to quiet their fears; to feed hope for a better – but entirely fictitious – life (we are dealing with lies, remember); to assuage guilt of a thousand little, or great, crimes; to promise forgiveness without meaningful restitution; among other weaknesses and moral corruptions.
With this policy to guide their lives, these people, obviously, will believe no one be he who lies to them.
They will, in other words, be led, or ruled, only by liars. On the other side of this coin, they will learn to hate with a passion those who tell truth or possess a passion for justice.
This rejection of truth has remarkable consequences. The faculty of reason is the primary, perhaps the only, attribute that distinguishes man from beast. Thus, the demand for a steady diet of lies is effectively a rejection of the capacity for reason. As such, these people literally reject their humanity; and place themselves at the level of a wild beast; which, by the way, is an insult to wild beasts; for, they do not act against their nature.
This is the mental and ethical condition of a very large fraction of men thru-out the world.
And they will die or kill rather than allow truth – or allow accountability for crime; or, they will do this rather than accept the humanity that reason would give them. They are so desperate to maintain their insanity, they will even destroy their own children.
So, when the Federal Reserve raises rates, yes, there will be an economic shock, and cause economic destruction; and the average man will dutifully ignore such facts; he will, instead, patiently believe falsehoods propagated by media babblers, professors and bureaucrats – while his world crumbles around him. This, while he maniacally supports the murderous policy of tyranny made possible by the Federal Reserve.
Why? Because he follows a policy of not believing facts provided by HIS senses when such facts contradict what he wants to believe; instead he believes anyone who tells him what he wants to believe – anyone who will lie to him.
Lies, in other words – the babbling of another human being – are his reality.
Thus, while a very small percentage of men will know the frailty of the economic situation, their relative power will be very minimal and hardly cause a ripple in the on-going plunder or destruction of American society.
To overthrow this world-wide system of economic destruction requires a few private men who a) take matters into their hands; b) direct the power of a large fraction of other men; and, in so doing, c) alter or abolish this system of destruction.
But this three-step program is not possible when weak members of society, those with self-imposed blindness, will labor fanatically, to allow the plunder to continue; believe all lies offered to them; wait patiently for the “promised land, or recovery”; and hate maniacally all those who speak truth or justice.
With their obedience and demands for a steady diet of lies, the Federal Reserve can continue this slow plunder of the earth until there are literally no more goods and services coming to market.
In other words, as long as store shelves are relatively full, the system of lies and plunder will continue. It could last another 5 years, maybe ten.
In the meantime, all that we can do is take measures to protect ourselves from the proscription that occurs with every social breakdown – a time when street gangs, criminal and useless classes and the insolent in general take the opportunity to settle long-simmering arguments, eliminate dissidents or murder creditors, elderly (to stubborn to die) or competitors (in business, professions or the sexual hunt).
If we are to survive the coming nightmare, we have to combine with others of like minds to form alliances for mutual protection. And, according to my research, the only historically-proven method to accomplish this is a network of First-Amendment assemblies – the engine that powered the American Revolution.
It is only when store shelves go empty that system-wide destruction will take on that snowball effect, and be accompanied by an ocean of blood – as demonstrated so many times thru-out the story of folly and crime, commonly called history.
Its NEVER going to go down. ZH needs to rethink its reason detre relative to time. DOW 20,000 before DOW 16,000. No matter what argument(s) you want to put forward about economic chaos - won't matter. print more. end of story.
Your IGNORANCE and SHEEPLENESS precede you. Fool. Before the DOW can go to 20,000 a LOT of liquidation must necessarily happen. Ain't enough momentum to get there from here. I'll guess a 20% correction maybe more, to fleece out the sheep (Pareto et. al.) before the 20,000 ship sails. Mind you, the next 'leg up' will be the last and it will be a desparate attempt by the CIC (Criminals In Charge) to save their booties before the masses of people start calling for and arranging their demise...
Seriously LL - if I had a dollar for every time I fuck heard that.
Fuck the market. Still stackin' here....
hairball
All those graphs are really nifty. But the fact remains that as a retired person I have the following choices for income:
1. Savings acct./money market = 0%
2. CD = 2%
3. Bonds = 2%
4. Selective portfolio of dividend stocks = 7%
Which do you think I (and other retirees) will chose?
Bottom Line : I can't tell my electric company I can't pay them this month because margin debt is falling. I HAVE to be in stocks regardless of what happens to the principal. In fact, I will look at any significant downturn in stocks as a buying opportunity because their yields will be even higher. Does my situation make rational sense? No, of course not. But it is where all of us have been put by Ben and Janet. We live with the market we have, not the one we would like to have.