A Murderous Complacency - Dark Omens Are Circling Everywhere In Today's Markets

Tyler Durden's picture

Submitted by Adam Taggart via PeakProsperity.com,

murder: a flock of crows

~ Miriam-Webster dictionary

Many view the appearance of crows as an omen of death because ravens and crows are scavengers and are generally associated with dead bodies, battlefields, and cemeteries, and they’re thought to circle in large numbers above sites where animals or people are expected to soon die.

~ "Nature", PBS.org

Running PeakProsperity.com requires me to read and process a lot of data on a daily basis. As it's hard to digest it all in real-time, I keep a running list of charts, tables and articles that catch my attention, to return to when I have the time to give them my full focus.

Lately, that list has been getting quite long. And it's largely full of indicators that concern me; signals that the long era of "extend and pretend" in today's markets may finally be at its terminus.

Like crows circling overhead, every day brings with it new worrisome statistics that portend an ill change ahead. Indeed, these omens are increasing so quickly now that it's hard not to feel like Tippi Hedren in Hitchcock's suspense classic The Birds:

So what are the data that make me think these crows will soon be feasting on the carcass of the great bull market that has powered stock, bonds, real estate and most other asset classes to record highs since 2009?

Rogue's Gallery

Complacent Investors

Investors have enjoyed remarkably gentle treatment by the stock markets over the past half-decade. Retracements have occurred much less frequently than historical norms, and have been shallow and short-lived when they happened.

Tom Lee, head of research at Fundstrat and often referred to as "Wall Street's biggest bull" notes that 2016 was the mildest year on record for the S&P 500, with only 7 days in which the index traded at less than 3% of its 52-week high. Similarly, the 2013-2016 period has seen the lowest volatility of any 4-year stretch in history:

Number of days S&P 500 off its 52-week highs chart

Lee notes that despite the record calm, annual returns are moderating. As conditions begin to mean-revert, he worries that lower prices are ahead and is predicting a 5-7% market correction in the first half of 2017.

JP Morgan's lead quant Marko Kalanovic also issues a striking similar warning: "Following the recent rally, a level of risk complacency has started to set inThe ratio of S&P 500 Puts to Calls has dropped to a ~3 year low, and the VIX reached near-record lows of ~10. " He, too, is calling for a ~5% pullback in the first half of this year.

Bizarre Price Action

Assets like stocks are (or, at least, are supposed to be) valued based on expectations of income. If income is increasing, then so should prices. But that's not what we're seeing.

The famed Dow Jones Industrial Average hit 20,000 for the first time ever on January 25th. Things must be going great, right?

Well, not that great. Wolf Richter shows that the total aggregate revenues for the 30 companies that make up this index was actually lower in 2016 than in every year from 2011 onwards:

Total DJIA revenues chart

Hmmm. Well, revenue isn't everything. At the end of the day, it's earnings that matter. Perhaps corporate America is becoming more efficient and posting record profits.

Nope.

S&P 500 vs T12M EPS chart

(Source)

We're seeing a clear trend of rising prices in the face of lagging performance. One of those will need to correct. Which seems more likely? 

Dismal Outlook For Future Returns

John Hussman was been warning us for years that QE/etc has pulled all the value of future returns into present asset prices. Today's investor has to make a choice: either buy now and expect no/low returns for the next 10 years; or wait for a price correction in the markets and then buy at low valuations to get appreciation from there.

Lance Roberts visualizes this pickle in the chart below, which shows that, historically, markets as richly-priced as today's have offered sub-par annual returns for the following decade:

PE vs 10-year returns chart

(Source)

As you can also see from the above chart, the S&P spends at lot less time at price-to-earnings (P/E) ratios above 20 as it does below. At today's average P/E of 28+, prices have a long way to fall when a return to historic averages occurs.

Complacent Consumers

Like investors, consumers' worries about the future have dissipated as borrowing rates have lowered, and home and 401k prices have risen. Consumer confidence hit a 16-year high in December, surpassing levels preceding the 2008 financial crisis:

Consumer Confidence Index chart

(Source)

Note how confidence levels at this current height are nearly always followed soon after by recession.

Bubblicious Housing Prices

The latest Case-Shiller home price index report shows that US housing prices have, in aggregate, for the first time exceeded their previous peak seen right before the 2007 collapse:

(Source)

Are current prices unsustainably high? Very likely. But what's not up for debate is an important point Zero Hedge makes about the above chart. It's latest data point is from November 2016 (that's the most recent Case-Shiller data available as of now). Mortgage rates have spiked dramatically since then. Given the mathematical 'see saw' relationship between home prices and mortgage rates, the most likely future trajectory for this chart is downwards.

Unbalanced Bets

The net result of all the above is that the vast majority of investment capital is crowded into the same trades. Trades, mind you, that anticipate the recent near-magical era of historically-low volatility and historically-high stock prices will continue unabated for the foreseeable future.

As in sailing, whenever everyone crowds to the same side of the boat, folks usually end up wet:

crowded trades chart

(Source)

So is it any surprise that those with a superior record of profitable trading (due, usually, to unfair advantage -- but that's a different story) are positioned very differently than the herd? Sentiment Trader's Smart Money/Dumb Money Confidence index is showing an historically extreme divergence, with the "dumb money" betting on a continued rally and the "smart money" anticipating a decline: 

Smart Money vs Dumb Money index

A Reality-Check

Given the multiplying and shrilling-squawking omens of hubris and overconfidence in today's hyper-extended markets -- a murder of complacencies, if you will -- we conclude we've reached the point in this storyline where the suspense has risen to its zenith, and the real violence then begins. Hitchcock would be proud.  

We reiterate our advice to prepare for approaching mayhem in the markets. If you have money in stocks and bonds (in a brokerage account, retirement account, pension, trust, etc), please make sure you are working with a financial professional who is taking the above risks in mind in their approach to managing your portfolio (if you're having trouble finding one who is, consider scheduling a free consultation with the adviser we endorse).

If you're a homeowner, prepare for the probability of lower prices ahead. If you're thinking of selling your house in the near future, you may want to move up your timetable. Conversely, if you're a potential buyer, ask yourself if you can afford to wait until a correction offers better bargains.

Of course, a major market correction doesn't just affect the prices of stock, bonds, and housing. Through repercussions like job layoffs, company closures, cuts to social programs, and the like -- the mood and functioning of society at large is impacted.

And we're not the only ones concerned about what the future holds. Our recent report When The Rich Become Preppers, It's Time To Worry is a must-read for understanding that the average Joe is being played for a sucker by today's "everything is awesome" meme.

Those executives who run the companies we hold stock in? They're furiously preparing for a future of social unrest.

Click here to read When The Rich Become Preppers, It's Time To Worry (free to all)

 

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Looney's picture

 

I can’t wait to see the number of nailgun accidents involving bankers to pick up. AGAIN!   ;-)

Looney

stitch-rock's picture

The market can stay irrational longer than you can stay solvent

new game's picture

ultra long common sense...

on the sidelines with carmelized pocorn.

flaminratzazz's picture

And I saw an angel standing in the sun; and he cried with a loud voice, saying to all the fowls that fly in the midst of heaven, Come and gather yourselves together unto the supper of the great God;

 

That ye may eat the flesh of kings, and the flesh of captains, and the flesh of mighty men, and the flesh of horses, and of them that sit on them, and the flesh of all men, both free and bond, both small and great.

flaminratzazz's picture

Lol you again

to hell with the locusts, RELEASE THE KRAKEN!!!

Miskondukt's picture

I was saying this to a friend just this morning.

flaminratzazz's picture

i say i say boy, i say listen here son.. Just look at that chart I say,, now do you get it?  I say son pay attention here boy..do you see the chart? do you understand son?

 

business as stusual's picture

I say, I say, that boy is more mixed up than a feather in a whirlwind!

NoWayJose's picture

Stocks and bonds and real estate are doomed. You might think gold will do well, but it sold off down to $800 in the 2007 crash. The dollar may go down, but against what?

More likely we will see inflation but weak employment wage increases. Best bet seems to be to load up on toilet paper and other essential supplies.

Seasmoke's picture

And then went UP to $1900USD. 

indygo55's picture

Right! I was gonna say. It went way up and it was going higher until a bunch of globalist bankers all met and then like the next day it crashed and has been repeatedly beaten weekly ever since. 

ThanksIwillHaveAnother's picture

That was during a great deflation that didn't last long.  CNC machine tools could be bought for pennies on the $ back then.  This time is different since govs are going to print, print, print.

Not My Real Name's picture

Gold does well in inflationary times. In deflationary times gold's price drops in nominal terms, but its purchasing power increases because gold is money, which would be in short supply.

In fact, gold's purchasing power is actually better in deflationary periods than inflationary ones.

 

business as stusual's picture

The big difference between then, and now, is that the central banks can not produce anymore debt. The fiat currency system is failing, the world will recognize in very short order that paper's value, is the value of the paper. No more no less. Yes, gold and silver will probably sell off initially, but will quickly recover as those who were forced to liquidate to meet margin requirements quickly realize that selling PMs to save paper is a fools game.

AllMightyDollar's picture

"You might think gold will do well, but it sold off down to $800 in the 2007 crash."

 

No, it went down to $690, then a four year upward boom to $1900

Skiprrrdog's picture

Global debt jubilee...the fair thing that makes sense at this point...and *unfuck everyone*...

ThanksIwillHaveAnother's picture

Think the Hoover Dam about to burst.   Trickle, then more trickles, then burst!

falak pema's picture

Moar superlatives about market dystopia after 7 years  of same in a market that is not one. "Oh the end is near"...

What is eating into this guy. Has he got the Duck's bug to quack "fire fire fire", like  Potus sings "country in carnage  with awl these pesky terrorists!" ?

Cry wolf is a game of over enflamed investor mania, but to what effect?

A Duck thats says : "our banks have pulled out the stops now all you guys have to do is to jump in to make AMerica Great!"

Dodd Frank's cadaver is hardy cold, they should all be celebrating until the wall of Mehico gets fully nutted and bolted.

"Whadelse we are now reaching for the moon."

Rebel yell's picture

Excuse me Adam. We're trying to conduct a Ponzi scheme in the stock market. We don't want the shitty gold. It's the only thing that you didn't mention. Why is that? $35 an ounce in '71 vs. $1220.04 today. Average home price at that time $24,000 compared to today's 184,000 where homes are on average twice the size in many cases. Either homes have to rise a great deal, or gold has to fall a great deal.

new game's picture

excuse me adam, have you met eve? she is luring you into her garden. yes the garden where money grows on everything the fiat gods deem to be safe for consumption...

Rebel yell's picture

Most importantly fiat gold since gold can now be produced through biosynthesis in Anabaena cylindrica bacteria! Midas touch!

Oh yes we can!
http://www.beilstein-journals.org/bjnano/single/articleFullText.htm?publ...

The ions can pick up electrons from magnesium making it exactly the same as gold. Sorry goldbugs. You lose.

elephant's picture

Gold ions pick up electrons from magnesium.  This does not produce the element, it just results in its reduction.

Rebel yell's picture

Did you read the paper? It certainly does produce gold! The only thing that prevented it from being gold were electrons. To become pure gold , the only thing required is the missing electrons. That's just reality. Magnesium is an electron emitting element. Simply placing the gold ions in water with magnesium and agitating it would cause the ions to adopt electrons from the magnesium.

bardot63's picture

I get your point, Rebel Yell.  For those not in the know, gold in 1933 was 20.67 per ounce.  That was an artificially, government decreed price.  It rose to 35 an ounce after FDR, a government guy, artifically devalued the dollar by decreeing the price of gold at 35 in the year 1934.  That was the product of government money printing.

In 1946, my father, returning from WWII, took out a loan to pay 11,000 for a 'regular' house, in what turned out 70 years later to be a primo neighborhood......house is now marketable for about $250,000. 

Gold price today is still artifically, government induced, but has still grown to $1225, after being artiificially manipulated from a high of $1950 in 2011.  True dollar value of gold is XXX times current COMEX b.s. mirage number.   Gold price is not a function of gold.  It's a function of a shrinking, devalued dollar value.

Rebel yell's picture

Well then good thing trixxxi is fedcartel chair!

scv's picture

disclosure: msft founder gates lost 40 pounds. when the company publically says he's fine, when they know his health is not fine,
legal it.

SuperRay's picture

Hope its excruciating

buzzsaw99's picture

please make sure you are working with a financial professional...

fuck that. i'd rather take advice from the carl's jr. drive through attendant.

flaminratzazz's picture

so you are going long Big Ass Fries?

Rebel yell's picture

LOl! The professionals that annihilated the global economy. Can't go wrong!

There's picture

The Billionaire Class will win again, saved by the patriots. 

Mustafa Kemal's picture

buzzsaw99, thanks for for the belly laugh.

There's picture

Yes, it is a closely held mathmatical truism that up to half your retrement pile goes to fees and advisors over a 30 year period. And now we have the Orange Savior studying the fidutiary protections.

mo mule's picture

The world is going crazy. People's emotions are running much higher than average. People are expressing themselves much more dramatically and they are being freer with their actions as they act out their higher emotional release and new freedom of self expression. This is caused by and are mainly the result of Cesium 134 and 137 being released in large amounts constantly on the trade winds over the entire USA and the total destruction of the nuke-ing and killing of the entire Pacific Ocean, whcih is now mostly dead. Fukushima, from it the people of world, 1st the Northern Hemisphere, are poison or kill by Cesium 137 and 134. This coming civil war is being made possible b/c people can't control themselves anymore. They are more willing to act out their thoughts, they just can't help themselves. US Army Nuke testing done in Nevada during the 1950's shows these sort of results to soldiers that were exposed to high levels of Cesium 137 and 134.

Rebel yell's picture

Or maybe the result of a heroin, crack, crystal meth, anti depressant, alcohol, marijuana,induced society might have something to do with it. Just sayin.

Mustafa Kemal's picture

Or it could be the economy sucks and the tyranny sucks, but people dont have a clue about where the suckiness comes from.

Vlad the Inhaler's picture

Sound logic vs Fed printing press.  Place your bets.

StopBeingstupid's picture

Birds are going crazy in Texas what ominous event is going to happen there? https://m.youtube.com/watch?v=FSXq7-AdZ5s&time_continue=10

Apeon's picture

This is all part of the Process wherein the Wealthy Oligarchs Plunder the masses.  Been going on a lloooonnnnnnggggg Time.

Miss Informed's picture

Doesn't seem all that serious. Maybe somebody was just out throwing stale bread to the crows

orangegeek's picture

2011 Dow revenues > 2016 Dow revenues.

 

LMFAO!!!!

 

BTFATH!!!!