"When Is The Crash Going To Happen?" - Mark Spitznagel Revisits "The Ticking Time Bomb"

Tyler Durden's picture

Submitted by Mark Spitznagel via Pensions & Investments,

Since the question “when is the crash going to happen?” is always asked, we thought it particularly timely to update the research we have done on the topic. Timing a crash can be a fool's errand, and fortunately such efforts are largely irrelevant if you are tail hedging (though they are quite relevant if you aren't). When tail hedging efficiently, the extreme asymmetries in payoffs, by definition, removes any need to time the top. But this doesn't mean that exercises in timing are without merit.

As we showed in previous research, without a doubt (or at least with over 99% confidence), bad things happen with increasing expectation when conditioning on higher Q ratios ex ante. That is, when Q is high, large stock market losses are no longer a tail event but become an expected event. Factoring time into the equation, and again based on history, the confidence interval around the median time would point to an expectation that the crash should commence right about now.

Monetary policy has proven to be very effective over the past seven years in elevating asset markets. However, its effect has been limited to the price of assets (the “title” to existing capital), but not the price of new capital. This differential is depicted in the Q ratio, where one can think of the numerator as representing the aggregate price of the stock market and the denominator as the aggregate book value. The higher the ratio, the further the stock market is priced relative to the reality of the underlying capital, and the greater the implied return on that aggregate capital above the average aggregate cost of capital. This ratio has always had its breaking point, much to the frustration of interventionist monetary policy, as the numerator ultimately crashes back to the denominator, rather than the denominator catching up to the numerator (a fact that Keynesians from Paul Krugman to James Tobin himself have considered a central puzzle of economics). Indeed, the continued deviation of this ratio from its long run historical average is something that both economic history and, best of all, economic logic dictate as unsustainable.

The question becomes how deviations and extremes in the Q ratio are ultimately corrected. The short answer is: they are corrected via the numerator, i.e., through corrections in the aggregate stock market value. The further the Q ratio has deviated from its long run historical average, simply put, the further the stock market has to fall to correct that deviation (this is what the market's homeostatic process does so predictably well).


There are regularities in the “stopping time” to the market's homeostatic correcting of extreme Q deviations, and as we saw recently in China, even massive interventions can't ultimately stop such corrections. An equity holder should be very aware of the current valuation environment, the magnitude of the drop that is to be expected, and the inherent cyclicality behind the amount of time between crashes. We are currently beyond the median amount of time, historically, before we would expect to see at least a 20% correction of the stock market (the numerator). Most importantly perhaps, the majority of the losses tend to happen in a concentrated plunge at the tail end of the path down to minus 20%. For instance, in just the last two months before the market passes through our 20% drawdown trigger, it typically (on average) has experienced a loss of nearly the entire 20%.



The very high probability of a crash currently implied by history flies in the face of a very low probability of a crash currently implied by the options market. The same beliefs that have pushed the market to extreme valuations have also returned option prices back to near record lows. If there is elevated risk in the equity market to the degree we have seen, counter-intuitively, it is not at all priced into options markets.


To use my favorite investing metaphor, the pot odds - the payoff, or the size of the pot relative to the price of calling - are very favorable compared to the hand odds - the likelihood of making the best hand; that is, we are getting the best of it.

In the recent August volatility (or in any other crashes we have seen), the tide turned both too surprisingly and too quickly for most to fully re-position until it was much too late. The future need not look like the past, but for an equity holder (or an opportunistic trader), the price of equity tail risk is not currently representative of that which has proven itself throughout history under similar (if not far less risky!) circumstances. How much further the rally stretches, whether another 10% or 100%, does not matter to an efficient tail hedger; it only adds to the expected magnitude and timing of a pending crash—which grows larger and sooner with each uptick in the stock market and tick of the clock—thus adding to the expected profitability and strategic advantage of the hedge.

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Truther's picture

Let it fucking burn already. I am tired of this shit charade.

MrNosey's picture
MrNosey (not verified) Truther Dec 22, 2015 5:40 PM

Europe is about to embark on a dash for the exit in the new year, as it is reported that German Chancellor Angela Merkel is allegedly ‘Hitler’s Daughter’ and the Fourth Reich is about to become a reality......


DontWorry's picture

I'm so sorry I clicked on that craziness

NoDebt's picture

I just ask that it happens on Obama's watch.  So I can say "Obama's fault" for the next 10 years after he's out of office.

BuddyEffed's picture

You are much more likely to be focusing on which way the wind is blowing and blaming it for being scented or blaming the tree squirrel for giving away your presence with warning calls rather than blaming Obama for anything.

JRobby's picture

Next Tuesday

Next Question

1223pm's picture

It's happening right now. Like a frog in the boiling water, 95% will not realize it until it's too late.

seek's picture

Yeah, I ranted about this exact topic and their insanity yesterday. Apparently we have a beforeitsnews blogspammer in our midst.

Hopefully Tyler is in a banning mood.

algol_dog's picture

I'm thinking your gonna get a lot tired'er ...

Truther's picture

BTW, when it goes, I hope it takes the FED and Hitlary with it.

 I think Putin, willl be the last man standing with a check mate.

DownWithYogaPants's picture

Von Firstenberg! Damnit...fourth

NoDebt's picture

What is with you and your obsession of having the top kick post?  It's not like they give you anything for being first.  Not even a cookie (although your browswer will get one no matter what).

commie's picture
commie (not verified) Dec 22, 2015 5:43 PM

I'll go with the goat entrails thank you. They have never let me down.  No crash on the horizon. 

Implied Violins's picture

You must live on a flat earth.

Gloomy's picture


The Global Recession of 2016

Forecaster David Levy sees a spreading global recession intensifying and ultimately engulfing the world’s economies.



Gambit's picture

I didnt even ready your article, but agree with your message.  Thanks to central banking/planning, the necessary or creative destruction never happened.  Which, unfortunetly, will amplify the next down turn. Sad realy, and we are all going to pay the price.  

two hoots's picture


No telling what a crazed congress and a president waiting to give away the store for equality would do if we had a significant crash.  Much less what Hillary and Bernie would promise?   If a crash is due, I hope Trump is there to manage it.


seek's picture

It's not in Trump/Hillary/Bernies hands. The Fed and banks control this, don't decieve yourself that a president has any significant financial power.

Bangin7GramRocks's picture

The crash will happen at exactly half past the monkeys ass, a quarter til his balls. Your welcome.

Consuelo's picture

Dat be the 'Taint...    Because after all, 'taint pussy and 'taint asshole...





Phillpots's picture
"When Is The Crash Going To Happen?"

All by design and when 'they' want it to.

gimme soma dat's picture

The real estate market has crashed. 

Baronneke's picture

It's just a matter of time before the markets implode.  Tic.. toc.. tic.. toc.. tic toc................aaaaaaand Poof, it's all gone.  

ZombieHuntclub's picture

Wait for it....Wait for it....still waiting ZH. Still waiting. 

FreeMoney's picture

and the ebola-shemitah-blood moon-aztec calendar-Nostrodamos market melt down that should be happening any minute now...

Seasmoke's picture

If everybody stopped paying the fraudulent mortgages. We could have a full recovery and growing by Valentine Day. That's my solution. And no blood either. Wake the fuck up people. 

truthalwayswinsout's picture

The markets have already crashed. You just don't know it.  Commodities have cratered and are not coming back.

What is really going on is the fraud in accounting at the banks where they have already suffered enormous losses (much larger than 2008 perhaps as much as 10x larger) but they are so adept at hiding those losses they have not shown up for 2 years or so. Of course, free money from the FED makes it possible to hide the losses along with Mark to Fantasy accounting rules.

Eventually they will have to report their losses the same way Enron and Bernie had to stop. Right now you are seeing the beginnings of the end as high yield funds are being knocked off 2-3 at a time.

If you are smart, you would literally get all your money out of the banks and stuff it in a mattress under your direct control.

ChargingHandle's picture

Those asking if and not when.....we cannot help you. Best to you.

savagegoose's picture

what can i say, but it would seem  an election is a great time to have a market crash, those fuckers will hand over billions to bail out a market crash at such a time,. so there is my prediction  at the change of gov.


BuddyEffed's picture

You have a valid point about market crashing during the election cycle. Remember when bush was still in office?  They called both candidates McCain and Obama into a meeting about the need for a bailout and they both came out saying "Yep, we agree there needs to be a bailout".  TPTB probably gave them both a taste of the real medicine and shared confidential data on real debt loads and real GDP and real resource constraints and then got them both on board to do some real Gods work.  That's my educated guess.  But the credit goes to George W for the bailout on his watch.

83_vf_1100_c's picture

 I am betting they can stall it off til Trump wins the Prez. Then he can declare the US bankrupt, reorganize and start it over. Give the orange man credit, he can swim to the top post bankruptcy. If it goes badly the Dems can point and say 'See, we told ya the Pubs would screw it all up!'. I'll be out back tending the corn and skinning a possum for dinner.

gmak's picture

"the confidence interval around the median time would point to an expectation that the crash should commence right about now."


Funny how beautiful elegant math gets f**ked up by messy reality.