This Time Isn't Different
Submitted by Jim Quinn via The Burning Platform blog,
Last year ended with a whimper on Wall Street. The S&P 500 was down 1% for the year, down 4% from its all-time high in May, and no higher than it was 13 months ago at the end of QE3. The Wall Street shysters and their mainstream media mouthpieces declare 2016 to be a rebound year, with stocks again delivering double digit returns. When haven’t they touted great future returns. They touted them in 2000 and 2007 too. No one earning their paycheck on Wall Street or on CNBC will point out the most obvious speculative bubble in history. John Hussman has been pointing it out for the last two years as the Fed created bubble has grown ever larger. Those still embracing the bubble will sit down to a banquet of consequences in 2016.
At the peak of every speculative bubble, there are always those who have persistently embraced the story that gave the bubble its impetus in the first place. As a result, the recent past always belongs to them, if only temporarily. Still, the future inevitably belongs to somebody else. By the completion of the market cycle, no less than half (and often all) of the preceding speculative advance is typically wiped out.
Hussman referenced the work of Reinhart & Rogoff when they produced their classic This Time is Different. Every boom and bust have the same qualities. The hubris and arrogance of financial “experts” and government apparatchiks makes them think they are smarter than those before them. They always declare this time to be different due to some new technology or reason why valuations don’t matter. The issuance of speculative debt and seeking of yield due to Federal Reserve suppression of interest rates always fuels the boom and acts as the fuse for the inevitable explosive bust.
In 2009, during the depths of the last crisis that followed such speculation, economists Carmen Reinhart and Kenneth Rogoff detailed the perennial claim that feeds these episodes in their book, This Time is Different:
“Our immersion in the details of crises that have arisen over the past eight centuries and in data on them has led us to conclude that the most commonly repeated and most expensive investment advice ever given in the boom just before a financial crisis stems from the perception that ‘this time is different.’ That advice, that the old rules of valuation no longer apply, is usually followed up with vigor. Financial professionals and, all too often, government leaders explain that we are doing things better than before, we are smarter, and we have learned from past mistakes. Each time, society convinces itself that the current boom, unlike the many booms that preceded catastrophic collapses in the past, is built on sound fundamentals, structural reforms, technological innovation, and good policy.”
“The essence of the this-time-is-different syndrome is simple. It is rooted in the firmly held belief that financial crises are something that happen to other people in other countries at other times; crises do not happen, here and now to us… If there is one common theme to the vast range of crises we consider, it is that, excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom.”
The third speculative boom in the last fifteen years fueled by Federal Reserve idiocy is about to become a the third bust in the last fifteen years. The unwashed masses who believe what they are told by CNBC are going to be pretty pissed off when they lose half their retirement savings again. None of their highly paid financial advisors are telling them to expect 0% returns over the next twelve years, but that is their fate. The numbers don’t lie over the long haul.
My view on “this time” is clear. I remain convinced that the U.S. financial markets, particularly equities and low-grade debt, are in a late-stage top formation of the third speculative bubble in 15 years. On the basis of the valuation measures most strongly correlated with actual subsequent market returns (and that have fully retained that correlation even across recent market cycles), current extremes imply 40-55% market losses over the completion of the current market cycle, with zero nominal and negative real total returns for the S&P 500 on a 10-12 year horizon. These are not worst-case scenarios, but run-of-the-mill expectations.
Hussman recently saw the brilliant take down of Wall Street – The Big Short – and thought it was a highly accurate portrayal of the rampant criminality of the Wall Street banks. They created fraudulent mortgage products, doled them out to suckers, and created complex toxic derivatives, selling them to clients while shorting them at the same time. Hussman’s only problem with the movie was that it left the true villain off the hook with nary a mention. Wall Street could not and would not have created the trillions of fraudulent products if the Federal Reserve had not kept interest rates at 1% and had performed their regulatory obligations of overseeing the banks.
The answer is straightforward: as the bubble expanded toward its inevitable collapse, the role of Wall Street was to create a massive supply of new “product” in the form of sketchy mortgage-backed securities, but the demand for that product was the result of the Federal Reserve’s insistence on holding interest rates down after the tech bubble crashed, starving investors of safe Treasury returns, and driving them to seek higher yields elsewhere.
See, the Fed reacted to the collapse of the tech bubble and the accompanying recession holding short-term rates to just 1%, provoking yield-seeking by income-starved investors. They found that extra yield in seemingly “safe” mortgage securities. But as the demand outstripped the available supply, Wall Street rushed to create more product, and generate associated fees, by lending to anyone with a pulse (hence “teaser” loans offering zero interest payments for the first 2 years, and ads on TV and radio hawking “No income documentation needed! We’ll get you approved fast!”; “No credit? No problem! You have a loan!”; “Own millions of dollars in real estate with no money down!”). The loans were then “financially engineered” to make the resulting mortgage bonds appear safer than the underlying credits were. The housing bubble was essentially a massive, poorly regulated speculative response to Federal Reserve actions.
And now the Fed has done it again. The stock market on most valuation measures is the most overvalued in world history. The rolling tsunami is about to wipe away the life savings of millions for the third time in fifteen years.
The current, obscenely overvalued QE-bubble is simply the next reckless response to Federal Reserve actions, which followed the global financial crisis, which resulted when the housing bubble collapsed, which was driven by excessively activist Federal Reserve policy, which followed the collapse of the tech bubble. As my wife Terri put it “It’s like a rolling tsunami.”
The pompous professionals inhabiting the gleaming skyscrapers in the NYC financial district are still arrogantly ignoring the imminent bust headed their way. The Fed juiced gains over the last six years will evaporate just as they did in 2007-2009. Cheerleading for and denying the existence of the bubble is a common them among those whose paycheck depends upon them doing so.
One had to suffer fools parroting things like “being early is the same thing as being wrong” until the collapse demonstrated that, actually no, it’s really not. The 2007-2009 collapse wiped out the entire total return of the S&P 500, in excess of risk-free Treasury bills, all the way back to June 1995.
Since two crashes weren’t enough to teach the lesson, here we are again, at what’s likely to be seen in hindsight as the last gasp of the extended top formation of the third speculative bubble in 15 years. The median stock actually peaked in late-2014.
And now for the bad news. At current market valuations, a run of the mill bust will result in a 50% decline. A bust that puts valuations back to 1982 bear market lows would result in a decline exceeding 75%. Whether it is a violent collapse or long slow decline, there is no doubt that returns over the next decade will be non-existent. This is not good news for Boomers or GenX entering or approaching retirement.
For the S&P 500 to lose half of its value over the completion of the current market cycle would merely be a run-of-the-mill outcome given current extremes. A truly worst-case scenario, at least by post-war standards, would be for the S&P 500 to first lose half of its value, and then to lose another 55% from there, for a 78% cumulative loss, which is what would have to occur in order to reach the 0.45 multiple we observed in 1982. We do not expect that sort of outcome. But to rule out a completely pedestrian 40-55% market loss over the completion of the current cycle is to entirely dismiss market history.At present, investors should expect a 12-year total return from the S&P 500 of essentially zero.
The reckless herd has been in control for the last few years, but their recklessness is going to get them slaughtered. Corporate profits are plunging. Labor participation continues to fall. A global recession is in progress. The strong U.S. dollar is crushing exports and profits of international corporations. Real household income remains stagnant, while healthcare, rent, home prices, education, and a myriad of other daily living expenses relentlessly rises. The world is a powder keg, with tensions rising ever higher in the Middle East, Ukraine, Europe, and China. The lessons of history scream for caution at this moment in time, not recklessness. 2016 will be a year of reckoning for the reckless herd.
There’s no question that at speculative extremes, recent history always temporarily belongs to the reckless herd that has ignored concerns about valuation and risk at every turn. Fortunately, the future has always belonged to those who take discipline, analysis, and the lessons of history seriously. Decide which investor you want to be.
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Blah, blah, blah...
Nothing changes so long as productive people accept bullshit paper/digital promises from the useless fucking paper-pushers and actually believe what those political puppets keep saying. BOTH of these classes of society contribute nothing of real value (bankers, financiers, and politicians) and should be fucking executed.
There will never be a real recovery until retribution has been paid and the useless fucks (at the top and bottom) have been taken the fuck out.
Call whatever you want, evolve or die motherfuckers.
same as it ever was...
Diminishing return on investment will make the productive people accept less wealth when paid and pay more for resources. The fiat system is ever inflating, even if demand for such goods as oil/gold falls. Sure there will always be demand but people in the US and Europe have lived in excess for decades and decades. WHat's a few less hamburgers and a few less clothes? A few less cars for the rich? People will manage.
So it does change. People learn to garden, walk to school, walk to the store, watch less TV and eat less fast food. They learn to cook rice and beans and chop wood. This for the poor, the rich, and people inbetween. SUre there will always be millionaires, but there will be less. Most millionaires don't deserve all that wealth anyway.
And the people that have millions of dollars in stocks and bonds and dollars in savings accounts, they lose it. Life goes on. They will survuve when their assets are cut in half. The reversion to the mean feels like a bitch if a person doesn't see it coming, but then we could say if they don't see it coming they didn't deserve that amount of wealth in the first place.
Bullshit. History is littered with examples of societies that thought they would simply adapt, but then ended up eating each other before dissappearing. Never before has there been almost 8 billion of us, so I suspect that the collateral damage this time will in fact be unprecedented. Where you going to run to? Mars?
Been to greece lately? guess what? You cannot "chop wood" if there are no trees left. This insistance by certain people that there are no hard limits is simply mind boggling.
While mark-to-fantasy remains in force then yes, this time will be different.
The curtain was pulled back on the wizard ages ago and Dorothy still thinks he can get her back to Kansas.
DJ 16,999....weird looking number.
How about S & P 666? They did that just for laughs.
\m/
"Corporate profits are plunging. Labor participation continues to fall. A global recession is in progress. The strong U.S. dollar is crushing exports and profits of international corporations. Real household income remains stagnant, while healthcare, rent, home prices, education, and a myriad of other daily living expenses relentlessly rises."
In that case, you'd think that a rational Fed and a rational US.gov would try to weaken the dollar, not strengthen it. But, alas, they are deliberately doing the latter? Why? Quis bono - who benefits (the most)? Besides the self-chose Insiders, who get to bet correctly in this Casino Capitalism?
If they keep crushing global currencies, they might just decouple from (dump) the USD and find a new Reference Frame (which is all that the USD is: a Reference Frame, albeit an elastic one), with which they can trade with each other directly.
11:04 ET, silver 13.90
....aaaaaand, it's GONE!
I still have as many ounces as I had yesterday.
:)
This bubble will make the last one look like soda-pop fizz!
This time I'm indifferent.
Got food,water,ammo,bandaids,PM's?
Get out of this market while you still can !
The four most expensive words for Pax Americana today are : Saud is an Asteroid.
Its the geopolitical risk that has brought the petrodollar to bubble in cauldron trouble. Something that did not exist in 2012, but became center stage when Putin re-bacame Czar of Red Square.
The Key player now is Putin. And that means its not just Saud's skin which is on the line. Its that of the petrodollar hegemony of Dear Henry's days.
Putin called the Pax Americana bluff; as they played along with the petromonarchies; to "engineer" the Arab Spring into a new Arab Disneyland for Saud and Qatar, by taking out the "rogue alligators" Q-daffy and Assad from the ME swamp.
Putin, having seen the mayhem in Libya, said "Niet" when the show came north of the Suez divide.
It got the Imperial ball rolling in Ukraine and in bounced to Damascus via the Stamboul train which beeped it was both part of Nato as well Sunni brotherhood under Erdogan's Ottoman put.
Now Putin has called that put and Iran has backed him up to the hilt.
Well, puts and calls are what make the WS beanstalk a place for derivative duck soup and 1% hay rides on free money!
Now there is blowback churning as Saud's dreams and oil wealth starts burning. And WS is looking gray around the gills.
I actually understood most of that, for a change. [I'm not sure if that's a good thing.]
PS mandatory +1 for Graham Greene reference.
Well as W. Buffet is apt to say : Lady if you can't tell the Blackwood from Blackfoot, you will never learn to call GRAND SLAM !
You are treading a fine line between clanging and perspicacity.
https://en.wikipedia.org/wiki/Clanging
Please continue.
its that fine line which is the spice of life; but then my wife does not find it funny. So like her you may hate to arrive at the airport five minutes before end of check-in. I hate to wait in deep lines.
Fine lines and dead times. Rather a clanger than dead to the beat.
Well put falak. The irony being all the laws and regulations the 'merica CONgress are trying to rush through are very similar to what the Soviets tried prior to their collapse.
Global oligarchs accelerating the ultimate outcome, specifically, global Weimar.
My guess is that the Fed must try one more time to 'get it right'. There is little to stop them from adding soooo much cash to the system that DOW 35,000 comes into view with wheelbarrow sellers leding the way.
We are in a purely fiat monetary system and only bookkeeping can slow them down now.
Historically our highest sales days have been the week after New Years, but this time is different. Stimulus moved up industry projects by 10-15 years. I guess it’s time to start jobs not needed for 20-25 more years.
Hope and Change = Total Farce!
When will the "plunge protection" team join in and drive it to new highs?
I dont know but I'm tired of pulling up to a fast food window and seeing a 40 year old guy wearing a wedding ring standing there to wait on me.
These are suppose to be minimum wage entrance type jobs for kids, not desperate husband, father type jobs.
Thanks a freaking bunch Washinton. Hope your all nice and cushy with your lobbiest play money and awesome tax payers provided benefits.
Waves of bankruptcy are heading to town, eh.
http://www.counterpunch.org/2015/09/23/waiting-for-collapse-usa-debt-bombs-bursting/
Why not try something quite different and novel ......... http://forums.theregister.co.uk/forum/2/2015/12/31/automated_stylometry_can_deanonymise_programmers_binaries/#c_2736125
Stunning Success is Virtually Guaranteed.
OT-PPT appears to be involved now.
Only if the FED really means it's time for this.
We live in a world of infinite fiat with no rules that are abided by anymore.
They can do anything they want to do until it all breaks down and that includes headfaking people into BTFD right into a deflation tsunami or pulling the football out from under shorts at will with the PPT.
In short they run shit until they destroy the currrency at which time they'll just give us a new improved currency they have new game plans for which includes the richest winning and the rest of us losing.
Rinse and repeat until they are stopped.
Oh shit, get ready for the biggest SHORT SQUEEZE of all time. FUCK !!!
remember we were at DOW 7000 just six years ago. that's pretty much going to be a benchmark, despite the complexity of the problem they have had some time to figure it out. This Time Isn't Different, they have all sorts of financial tools, tested in the previous crash, as well as some new ones, including QE lite offered as a rate hike. the rate hike will take some of the speculative investment from energy development and put a floor under commodity prices. the rate hike will prop up the money markets. gold isnt signalling crash. the SP might go negative 2% for the year. that isnt' exactly financial armeggedon. the real problem is the malinvestment, the worst stocks performing better than the best stocks, and when it is time to sell the only collateral is in the best stocks. if they sell the gold and keep the tin, buy the gold. the only real problem is that government control of anything is less preferable than the free market. the usg stock market isnt worth owning but you're not going to be schleping a bag of gold coins down to the black market behind the old superstore to get a couple turnips. lets be real. more service jobs more inflation in service job wages. burger flippers cant afford the burgers. two things to put on your calender, one of them is the IMF SDR rollout. big can big kick long long road
Trillions in Fed Easy Money just made the rich even richer, the working classes poorer and the lazy poor more comfortable. Let’s do it again this time will be different.
Well the important thing is that the bankers got saved by QE. At least we can take solace in that fact.
Gold seems to be doing rather well today. When the bankers realize that it might be a good hedge... which they already have ... gold will b on its way to 4000 - 5000 by end of 2016. Only confiscation can prevent this.