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The Herd Is Heading For A Cliff

Tyler Durden's picture




 

Submitted by Jim Quinn via The Burning Platform blog,

You would think investors (muppets) would be grateful for the extended topping process of the stock market, as it has given them the opportunity to exit before the inevitable crash. As CNBC and the rest of the mainstream media spin bullish stories to keep the few remaining mom and pop investors sedated and the millions of passive working Americans invested in their 401ks, the Wall Street rigging machine siphons off billions in ill-gotten gains, while absconding with fees for worthless advice.

Does the average schmuck know the S&P 500 stood at 2,063 on November 21, 2014 and currently sits at 2,056, thirteen months later? Based on the media narrative, we are still in the midst of a raging bull market. John Hussman provides the counterpoint to this narrative with unequivocal factual evidence based upon a hundred years of stock market data and valuations. Anyone investing in today’s market should expect ZERO returns over the next ten years and a 40% to 55% plunge in the near future. And as a cherry on top, a recession has arrived.

The summary of this outlook is straightforward. I view the equity market as being in the late-stage top formation of the third financial bubble in 15 years. Based on a century of evidence relating the most historically reliable valuation measures to actual subsequent market returns, neither a market plunge of 40-55% over the completion of the current cycle, nor the expectation of zero 10-12 year S&P 500 nominal total returns, nor the likelihood of substantially negative 10-12 year real returns should be viewed as worst-case scenarios – they are all actually run-of-the-mill expectations from current extremes. Based on the joint behavior of the most reliable leading economic measures (particularly new orders plus order backlogs, minus inventories), widening credit spreads, and clearly deteriorating market internals, our economic outlook has also moved to a guarded expectation of a U.S. recession.

The Federal Reserve has encouraged the rampant speculation over the last few years with their trillions in QE gift to Wall Street banks and ZIRP, which allowed the “brilliant” 30 year old Ivy League educated high frequency traders to take the free Fed money and front run their client’s trades and generate guaranteed profits. Of course, ZIRP also forced grandmas throughout the country to acquire a taste for cat food in order to survive. But Ben and Janet are “heroes”, I’m told. What a coincidence that shortly after the QE spigot was turned off on October 29, 2014, the market has gone nowhere. The speculative juices appear to be drying up.

Because speculation tends to be indiscriminate, the most reliable measure of a robust willingness to speculate is the uniformity of market action across a broad range of individual stocks and security types. An overvalued market populated with speculators who still have the bit in their teeth will tend to hold up or advance further despite valuation extremes. Because of the Federal Reserve’s relentless and intentional encouragement of speculation in the half-cycle since 2009, even measures of overvalued, overbought, overbullish extremes – which had historically been followed almost invariably by market collapses in prior market cycles – were followed instead by further market advances.

John Hussman, inconveniently for those of a bullish ilk, notes that market internals have deteriorated rapidly, with only a few beloved, overvalued, overhyped tech stocks holding up the market. Most stocks are already in a bear market. Corporate profits are falling. PE ratios are high. Consumer spending is anemic. The jobs growth narrative is false. Real household income is at 1989 levels. Based on history, current conditions have only been seen at major tops. I’m sure this time will be different and Cramer, along with all the highly paid Wall Street shills, will be right.

Now that market internals have clearly deteriorated following overvalued, overbought, overbullish extremes, with reliable valuation measures at obscene levels and emerging economic weakness, a century of history suggests that the stock market is vulnerable to the risk of severe losses. Investors should not assume that the “support” that keeps losses relatively shallow during a drawn-out topping process will persist. There’s some truth in the old saying “the bigger the top, the steeper the drop.” Only a few points in history have seen the S&P 500 within 3% of a record high, with both overvaluation and unfavorable market internals during at least 80% of the prior 26-week period. Aside from points in recent months, the other points were major tops in 2007, 2000, 1972, 1969, and 1961.

When you talk to your relatives, neighbors and coworkers they all act like they are buy and hold long term investors. They are either lying or oblivious. Someone who is 60 years old and has accumulated a significant 401k nest egg invested in stocks can not afford a 50% haircut in their retirement portfolio. Anyone with a significant amount in the stock market will have to have balls of steel to not panic as their life savings is cut in half – AGAIN. Three times in fifteen years is pretty hard to swallow. The debt markets (junk bonds) are a flashing red warning light. To not heed the warnings of the market would be foolish. Hussman couldn’t be any clearer, just as he was in 2000 and 2007.

I really do implore investors who could not comfortably ride out a market collapse similar to 2000-2002 or 2007-2009, or who rely on their assets to finance near-term spending plans, to shift their risk exposure down to a level that could tolerate that outcome. Understand that while valuations have been hostile for years, and while overvalued, overbought, overbullish conditions have repeatedly emerged in the recent half-cycle without effect, the hinge that supported continued gains was a persistent willingness to speculate, as conveyed by uniformly favorable market internals. That support has dropped away. Ignore that key distinction at enormous risk. The market behavior we’ve observed in recent quarters is fully consistent with an extended top formation. With credit spreads predictably widening in successively larger spikes, that formation appears increasingly vulnerable to a steep vertical break of prior support.

Robert Prechter perceptively notes that investors act in a herd like manner thinking that because the herd is still invested in the market and has not sensed danger yet, it must be safe. Investors are lazing around the waterhole like unsuspecting gazelles. This herd will be running for their lives in the near future, as danger is lurking.

Still, we doubt that most speculators think about the decision to accept market exposure in such a systematic way. On that point, Robert Prechter of EWI offered a brilliant perspective last week to describe the typical behavior of speculators. He observed, “In neither case – buying or selling – is there any thought about taking on risk, rationally or otherwise. In both cases, they are unconsciously acting to reduce risk, thanks to the emotionally satisfying impulse to herd. Herds act to gain sustenance or avoid danger. Gazelles may lope together toward the water hole or dash in a herd from predators. The goal, albeit unconscious, of both types of actions is to reduce risk. Likewise, in market advances speculators herd as if trying to gain sustenance; and in market declines they herd as if trying to avoid getting killed… Subjectively, i.e. in their own minds, speculators perceive greater risk as less risk and less risk as greater risk. That is why they buy in uptrends and sell in downtrends. In the former case, they behave as if the herd is leading them to sustenance, and in the latter case they behave as if the herd is leading them away from danger. Ironically, the truth is wholly the opposite.”

If you have an ounce of common sense, ability to think critically, and appreciation for risk, you should leave the herd now before the inevitable stampede. Staying with the herd as it heads for the cliff is not an effective strategy.

At present, we observe a herd at the peak of a valuation cliff, where an increasing proportion of the herd is backing away. It’s increasingly urgent to dig in one’s hooves to keep from dashing over the edge. We can do little for those who insist on remaining in full gallop, imagining that sustenance awaits them ahead.

After experiencing two Federal Reserve induced booms and busts in the last fifteen years, you would think people would learn. But the true lesson of history is that people never learn from the lesson of history.

How did the S&P 500 trace out a total return of zero between 2000 and the end of 2011? By first losing half its value, then more than doubling, then losing more than half its value, and then doubling again. Across history, extreme valuations have invariably been followed by similar behavior – wide cyclical swings, yet only modest overall returns over the following decade.

Anyone fully invested in the stock market at this point in time is delusional and mad. If they think they can sense danger before the rest of the herd and exit once the stampede starts, they are badly mistaken. Just as they were in 2000 and 2007. Now is the time to regain your senses and stop playing in this rigged Wall Street game.

After years of Fed-induced yield-seeking speculation that has driven equity valuations to the second most extreme point of overvaluation in history (and the single most extreme point on the basis of median valuations), investors have somehow convinced themselves that this time will be different; that this time the market will maintain at a permanently high plateau. That belief is nothing new – it’s the same delusion that investors have held at speculative peaks across history, refusing to accept the familiar signs of danger until the equally familiar losses were conclusively in hand.

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one.”

Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds

Read Hussman’s Weekly Letter

 

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Tue, 12/29/2015 - 17:31 | 6975497 GhostOfDiogenes
GhostOfDiogenes's picture

"When you talk to your relatives, neighbors and coworkers they all act like they are buy and hold long term investors. They are either lying or oblivious."

What?

These people are insane.

Long term investments have ALWAYS trumped these keynesian cock suckers who take your money and give it to rich jews and their shabbos goyim friends.

I wish a nuke would go off in in ny city.

The world would be a better place.

Tue, 12/29/2015 - 17:35 | 6975515 MountainsRoam
MountainsRoam's picture

Be careful what you wish for,, you and your loved ones most likely will not survive the aftermath..

Tue, 12/29/2015 - 17:38 | 6975523 GhostOfDiogenes
GhostOfDiogenes's picture

Yup.

Our survival rate is pretty high when we allow the kosher nostra to dictate monetary policy.

Sounds to me you are someone on a nice fat pension who won't rock the boat.

Tue, 12/29/2015 - 17:58 | 6975586 SILVERGEDDON
SILVERGEDDON's picture

Doesn't matter what happens - our society hangs by a fragile technological thread.

Any event of major significance in economy, geopolitics, weather, or game changing unexpected event ( asteroid, Carrington event, earthquake, etcetera, ad nauseum ) - will result in a probable 90 percent die off of population at this point in time.

Optimistically speaking.

News flash - Siri ain't gonna have an answer for ya.

Tue, 12/29/2015 - 18:46 | 6975720 Citxmech
Citxmech's picture

Fucking hilarious:

"Siri, how do I survive an EMP?"

"Siri? . . . "

Tue, 12/29/2015 - 19:55 | 6975973 Wulfkind
Wulfkind's picture

FORWARD SOVIET LEMMING !!!

Tue, 12/29/2015 - 17:32 | 6975502 gmak
gmak's picture

Deja vu. All over again.  Is Zh just recycling stories from prior years?

Tue, 12/29/2015 - 17:50 | 6975562 DavidPierre
DavidPierre's picture

Just more blah, blah, blah from ZH's resident 9/11MORON.

He hasn't written anything new in many years.

He still deep throats the ZioNazi's cum load about 9/11.

https://www.corbettreport.com/911-a-conspiracy-theory/

Still waiting for his stance on 9/11 Terrorism.

Tue, 12/29/2015 - 19:56 | 6975980 roccman
roccman's picture

Yup

Tue, 12/29/2015 - 22:06 | 6976420 Still Losing Money
Still Losing Money's picture

so which 9-11 video is right? the one that says the planes were remote controlled or the one that tells me they were CGI or the one that says the towers were dropped by controlled demo with thermite or by a directed energy weapon form space?  or the one that says the passenegrs were gassed to death or the one that says they never got on the plane, the one that says they are dead or the one saying they are in a FEMA camp or is it a remote tropical island.  Oh right it was all the fault of the JOOOOOOSSSSS

Wed, 12/30/2015 - 03:08 | 6977227 DavidPierre
DavidPierre's picture

 

Fox Banned News

9-11 The Israeli Connection, Mossad, AIPAC, Art Students Spy Ring

http://trutube.tv/Fox-Banned-News-9-11-The-Israeli-Connection-Mossad-AIP...

.....................................

Christopher Bollyn - Solving 9-11

https://www.youtube.com/watch?v=v0quVNNwcz0

.........................................

Take a couple of hours off from being a total asshole and educate yourself...
Mr. 9 weeks 5 days... till then...

S.T.F.U.

Tue, 12/29/2015 - 17:33 | 6975508 MountainsRoam
MountainsRoam's picture

I don't give a fuck about the herd,, they are gonna deserve what is coming as much as the Wall Streeters.. Maybe some dumbasses will wake up when they get wiped out by the head criminals in charge..

Tue, 12/29/2015 - 18:24 | 6975653 TAALR Swift
TAALR Swift's picture

The lemming herd jumping over the cliff is a Disney fraud.  Thanks for perpetuating fraud, Jim Quinn.

Tue, 12/29/2015 - 17:39 | 6975525 stormsailor
stormsailor's picture

the exploding condom machine story had more relevance

Tue, 12/29/2015 - 17:47 | 6975558 GhostOfDiogenes
GhostOfDiogenes's picture

I am still trying to figure that story out.

Without pictures its hard to tell.

But it is Germany so go figure.

Tue, 12/29/2015 - 17:49 | 6975560 stormsailor
stormsailor's picture

there is a thread here from yesterday, has pics and everything.  the comments were a hoot and everybody had fun with it

Tue, 12/29/2015 - 17:41 | 6975533 Soul Glow
Soul Glow's picture

The reason for a herd is that not everyone gets picked off.  So yes, when the shitshow collapses many will be done for, but many in the herd will be fine.  It's the nature of the game.

And yes it is better to be outside the herd at this point in time.  People have been falling off the cliff for years.  

Tue, 12/29/2015 - 17:43 | 6975536 Jstanley011
Jstanley011's picture

Look at the small caps. The Russell's PE as of Christmas Eve stood at 152.76, slightly higher than its estimated 17.89.

READ THAT AGAIN: 152.76

And that's after TF has failed since the September downdraft to regain what the ES and YM clawed back. Because while the big boys do buybacks and accounting gimicks, the little guys just get crushed and the whole of middleclass America with them.

Tue, 12/29/2015 - 17:46 | 6975550 Tallest Skil
Tallest Skil's picture

Reminder that "lemmings jump off cliffs" only exists in the public consciousness because Disney hired a guy who took lemmings to a cliff, pushed them off, and filmed it as being part of "nature".

Tue, 12/29/2015 - 17:50 | 6975564 NotApplicable
NotApplicable's picture

Funny how nature do that.

Tue, 12/29/2015 - 17:59 | 6975589 Flying Wombat
Flying Wombat's picture

True, amusing story! Lemmings will never be the same. LOL

Tue, 12/29/2015 - 19:36 | 6975887 DaveA
DaveA's picture

The truth is that lemmings desperate for space *will* jump into and attempt to swim across bodies of water even if they cannot see the other side. During a population explosion, each lemming *must* travel at maximum speed in a straight line away from its birthplace, for if it hesitates or deviates, it will find that other lemmings have already nibbled the vegetation down to bare dirt.

Tue, 12/29/2015 - 17:46 | 6975555 stormsailor
stormsailor's picture

my small business has been dog paddling since 2009.  most everything has gone up except revenue.  maybe i'm doing it wrong, it's a class c corporation with 0 debt and personally held stock.  maybe i should go borrow a couple of mill and enjoy the bennies. and if it fails it fails.  thoughts?

Tue, 12/29/2015 - 17:51 | 6975565 NotApplicable
NotApplicable's picture

What kind of people pay to have their dog paddled?

Tue, 12/29/2015 - 18:21 | 6975646 corporatewhore
corporatewhore's picture

Leona Helmsley, are you still alive?  I thought you were dead.

Borrow and live it up while you still can get financing.

Tue, 12/29/2015 - 18:44 | 6975711 newnormaleconomics
newnormaleconomics's picture

Yes, stormsailor. Good idea. Borrow millions. Take the cash to a destination unsaid where you can live at comfortable subsistence on the cash for XX years (depending upon your age and how much scotch/bourbon you'll need). Liquidate biness of assets. Done. 

You're gone, gone, gone Galt, you get it, and only the lender is harmed (big bloody bleeping deal; charge-offs are akin to writing off the costs of the CEO's mistresses, kids' private school tuition, weed or cocaine stash, offshore account fees, and wife's [wives'] cosmetic surgeries). 

Do it. Seriously. Get out of here. Get your ticket to being a denizen of Anglo-American empire, and take your XXX-equivalent cases of malty satisfaction. 

Good luck, brother. :-) 

 

Tue, 12/29/2015 - 17:53 | 6975572 stormsailor
stormsailor's picture

the picture of the gazelles with the cheetah chasing is just nature. the slowest or stupidest gazelle gets caught the others survive and make faster smarter gazelles.  eugenics is a valid science.

Tue, 12/29/2015 - 17:57 | 6975581 WTFUD
WTFUD's picture

Herd, it all before!

Clifford Clavin

Tue, 12/29/2015 - 18:26 | 6975662 Lumberjack
Tue, 12/29/2015 - 18:33 | 6975678 scubapro
scubapro's picture

 

 

well I do think the time is nigh.   end of year, beginning of new year, the collective subconscious makes a few tweeks here and there, adding up to a bit of movement; perhaps slight selling of giant winners....after the new year to delay taxes, naturally.   was that what actually occurred in 2001 perhaps?  a dip and a rip and then no one willnig to buy at a higher price than they just sold at?

 

also the idea that the wsj, cnbs, barrons, marketwatch (all owned by same company i think)  nary a 'beware' article in the bunch.  a few brief ones ive seen only allow for 'reasons' for a decline along the lines of sunspots, unexpected events, isis, or other bogeymen.

Effecient Market Hypothesis: item 1:  all investors are rational       just stop reading after that.

Tue, 12/29/2015 - 18:49 | 6975729 Lumberjack
Lumberjack's picture

We know that there is a lot of anger out there and the media knows this as does leadership and they work hand in hand. The Trump candidacy and media attention IMHO seem to be a method of diffusing that angst via psychological methodology. Bread and circus if you will to prevent issues. A release if you will. I am convinced that the powers that be are so in over their heads that Donald is the only person who can bring that anger out and tone things down. We all know wrestling is fake but for some, it somehow brings a comforting feeling to the fooled masses that enjoy it. To that I say, To Each His Own. I note the business dealings with Soros et.al. as well as the Clintons and the Bushes approving of this skit.  Don may bow out (fake body slam) and throw his support to... I am skeptical of everything at this time. 

 

 

 

Tue, 12/29/2015 - 19:10 | 6975794 Caleb Abell
Caleb Abell's picture

This clown doesn't know what he's talking about.  All you have to do to make money is buy when Cramer says you should.  Easy as pie.

Tue, 12/29/2015 - 19:54 | 6975852 Slave2Fashion
Slave2Fashion's picture

What, in you guys' opinion, will happen to the price of gold should this happen? I used to think that when the market went up, gold went down. After watching things over the last few years, I don't know what to think.

Do you think the bottom is in for gold? In my opinion, it pretty much is for silver as I've been buying it off and on for many years and it seems that the price is about where it ought to be. But gold... still seems a little overvalued.

Tue, 12/29/2015 - 20:52 | 6976190 DOGGONE
Tue, 12/29/2015 - 23:16 | 6976729 jomama
jomama's picture

They'll be carrying The Donald on their way over the precipice.

Wed, 12/30/2015 - 11:00 | 6978017 Forced Fed Said
Forced Fed Said's picture

If Hussman was a market, what would be is weekly RSI reading?

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