After 100 Months Of Buying-The-Dip - Stockman Warns Of "Peak Crazy"

Authored by David Stockman via The Daily Reckoning,

Just call it Peak Crazy and move on. There is absolutely no reason for the stock markets to be at current levels, let alone melting-up day after day. The fact that this is happening is a measure of how impaired capital markets have become as a result of massive central bank intrusion.

The robo-machines and day traders keep buying the dips because that has “worked” for the last 100 months. There is nothing more to it than residual momentum.

Under a regime of honest money and price discovery, the stock market discounts the future. There is no plausible future from here that’s worth 24 times S&P 500 value or 96 times the Russell 2000.

Surely the year-ahead earnings boom that Wall Street’s artists have penciled in is not in the slightest bit plausible. With 84% of the S&P 500 reporting Q2 results, LTM earnings are still 1.3% below where they were in September 2014.

Nothing has happened to corporate earnings in the last three years except deflation in the energy, materials and industrial sectors. After hitting $106 per share in September 2014, the global deflation cycle brought them to a low point of $86.44 per share in March 2016 in response to low $30s oil prices. The latter has since recovered to the $50 dollar zone – bringing S&P 500 earnings back to $104.61 during the current quarter.

The question remains: How does an aging business cycle and immense global headwinds justify the expectation of a red hot earnings breakout during the next 18 months? Yet that’s what’s happening on Wall Street. We’ve hit nearly $133 per share of GAAP earnings (and $145 of the ex-items variety) for the LTM period ending in December 2018, meaning a prospective surge of 27%.

Even if you credit Wall Street’s ex-items approach to operating earnings, the story is the same. Why will the eventual 2018 outcome be any different than the cliff-diving of the last three years?

Earnings Est of SPI

As things stand, 2018 expectations look way elevated.

The current earnings growth estimated for 2018 would amount to more than the 23% gain that has been recorded during the past decade!

In June 2007, reported LTM earnings for the S&P 500 was posted at $85 per share. That would mean that earnings have grown at the tepid rate of 2.1% per annum for the last 10-years; and those are nominal dollars.

Take out inflation and share buybacks and there’s essentially no gain at all on a peak-to-peak basis.

When it comes to robo-traders, there are some very powerful muscle memory aspects pushing the averages relentlessly higher. It’s the deformation you get when the normal mechanisms of market discipline, such as short sellers and economic pricing of options and hedges, that are destroyed by wealth effects based central planning.

It is Wall Street’s extreme vulnerability to violent crashes that come when two-way markets are destroyed in the name of tricking people into believing they are wealthier than they actually are. The bubble reaches its height and then there is nothing left below because stock prices have become decoupled from economic and profit fundamentals.


The financial truth remains that nothing grows to the sky, including the Dow index. The cracks are already emerging all around. The end-of-bubble narrowing to fewer and fewer big cap safe havens is proceeding rapidly.

Since July 25, before Amazon’s big earnings miss, most of the market had been falling or treading water. While the Dow is up by 2.2%, the transports were down by 2.8% and the Russell 2000 is off by 2.6%. The S&P 500 equal weight index is off by 0.8% and even the NASDAQ 100 is 0.5% below its July 25th level.

In this machine driven market, any of these indices could resume their mad momentum based climb. But negative divergences are breaking out everywhere, and that’s usually a sign that the end is near.

Margins on debt has again reached an all-time high of $550 billion. The chart below leaves little doubt as to what comes next. After the 2000 peak, margin debt collapsed by 50% as stocks were violently liquidated to meet margin calls. All this while in 2008 the shrinkage of margin debt was even larger – nearly 60%. This time, however, a similar shrinkage would cause a $325 billion decline in margin balances. That’s a lot of stocks on a fire sale.

NYSE Margin Debt

The casino will eventually collapse under its own weight, even as the fractures and divergences continue to mount.

The economic Swans are coming. If Trump’s continued tweet-storms are any indication, the first Swan is likely to be Orange. The fact is, the occupant of the Oval Office is flat-out delusional and unhinged.

Within 4-5 weeks Trump will be impaled on a debt ceiling and continuing resolution crisis which will suck all the air from the governance process in Washington. The event will make a mockery of the White House pitch and any belief for House action on the tax bill in October.

The only thing which will happen by year-end on Capitol Hill is an inglorious defeat on ObamaCare repeal (instead, there will be an insurance company bailout in return for some tiny changes in the ObamaCare insurance mandates). Expect repeated short-term patches on the debt ceiling and continuing resolutions that will manage to keep the lights on in the Washington Monument a few weeks at a time.

We seriously doubt the Donald will survive the market crash which is likely to be triggered by the unexpected fiscal bloodbath just around the corner. From there he will rue the day that he left Janet Yellen at the Fed in place, rather than allowing the “big fat, ugly bubble” to collapse on their account in January.

Now that Trump and his surrogates are taking ownership of a hideously over-valued stock market, there’s little doubt that the coming crash will be the straw that breaks the camel’s back.

As we have previously noted, Tricky Dick’s election in 1972 was also treated with a 15% market bump. And that was on the back of a 42-28 million vote landslide and running the tables on the electoral college with 504 votes.

S&P Index Nixon

Nixon appeared to be especially invincible in January 1973 because he had spent 27 years on the GOP circuit. He had spoke for more GOP politicians and candidates than any President in recorded history, before or since.

Still, the Nixon bubble evaporated steadily – dropping by more than one-third until Tricky Dick was shown his way out of the White House.

It now seems likely that Trump Bubble’s collapse will be far faster, deeper and more violent. The Orange Swan is what now hangs over the market like the Sword of Damocles. The question is only about when, not if, it comes plunging down on a casino mad with Peak Crazy.


order66 Tue, 08/15/2017 - 16:31 Permalink

ZH, are you ever going to publish anyone who's actually been correct on market calls? Track record of your "authors" is shit at best.

John Kerry-Heinz adr Tue, 08/15/2017 - 16:46 Permalink

Arcade games, remember them as a kid?  You know, back in the day when you had 2 quarters in your pocket.  You would walk into the arcade, carefully picking out which one was the coolest and allow for the longest play time per quarter.  Drop in the first quarter, hit start and yank on the joystick, frantically pushing buttons in an attempt to keep the game in play.  Then you died… Ok, last quarter.  I’ll play harder and smarter this time.  You notice there are a few other kids on the other side of the arcade watching you, but they can’t quite see the screen and surely don’t know you’re broke after this play.  You slowly and cautiously drop in the last coin.  Move the pointer over to START GAME and hit the button.  This time you die even quicker and video game ends, but you immediately ramp up the violence on the joystick back and forth, up and down, slamming the all the buttons as fast and as hard as possible.  The game ended 10 seconds ago.  The kids across the room are now paying attention and want in.  Then you walk away……. The game is over folks, reality does not exist any longer.    The markets are operating purely out of necessity in order to keep the illusion alive.   
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In reply to by adr

Crazy Or Not dasein211 Tue, 08/15/2017 - 17:45 Permalink

So we have robotic automation replacing workers, drivers, operators... (robots don't shop).Peer to peer direct consumer lending and crowdfunding,Retail crashing and online sales tax avoidance,leasing over purchasing,Cryptocurrency, offshoring and XAU physical exchangeWhere is the volume to come from? It's not it won't be allowed to fail, more how can it not fail....(I am sure the FT and others will try to keep the stench from leaking out but the patient is already being measured for its casket).Kali Yuga is here.

In reply to by dasein211

Clowns on Acid order66 Tue, 08/15/2017 - 18:27 Permalink

Well....the " market risks" are usually well represented and presented on ZH articles. Who knows when the Fed is going to (be forced ?) to pull the rug out from under the market. ZH cannot spoon feed you that.That is what most of the srticles are pointing out...the tremendous malfeasance of the Fed as it pusued QE 1 to 3 to perhaps a secretive QE 4 via FX swaps with SNB or other CB.order66 you have to make you own buy/sell decisions....but don't call ZH shitty market timing because for a long while BTFD was the prevailing theme on ZH after article such as these.Stockman's usual articles highlight Fed and market malfeasance and warnings that there could not only be a market correction but also tremendous socio-economic strife because of the impact "money out of thin air" has on the socio-economic fabric. See the emergence of BLM and Antifa as prime examples of that socio-economic impact.In this article however, Stockman finally poses a theorem that the Deep State and Fed are now positioned to remove artificial market support, cause a 10% market retracement, have a Media drama produced over the Debt ceiling "negotiations"....etc... .In other words...order is the time to lighten up or get short.   

In reply to by order66

Erwin643 Clowns on Acid Tue, 08/15/2017 - 21:40 Permalink

Yeah, and since ZH has been putting out all these doomer porn articles, people have been making money, except for those who pay attention to all this doomer crap. Yes, it's money printing, the Central Banks, whatever, but for the last eight years, it's been working.David Stockman is just pissed because he got left out, after being Ronald Reagans' Boy Wonder.

In reply to by Clowns on Acid

Give Me Some Truth Clowns on Acid Wed, 08/16/2017 - 01:39 Permalink

I'm a Stockman fan but disagree with his prediction here. He writes that "in 4 to 5 weeks, Trump will be impaled on a debt ceiling and continuing resolution crisis ..."Write this down. Copy and paste it. Check back in two months to see who was right - Stockman or "Give Me Some Truth ..."Resolution of the "debt ceiling crisis" will be anti-climatic, a half-day story and then we will move on to the next story. Continuing resolutions to fund the government will also be passed, same as they always are.Now, the news that our government will extend the debt ceiling, perhaps even "suspend" the "ceiling" SHOULD be very significant. This, after all, is an ACKNOWLEDGEMENT that the government of the United States will always print money as needed and issue debt as needed. Indeed it will do this in an ever-more-extreme manner. This SHOULD cause stock markets to crash and prices for safe-haven, anti-inflation assets like gold and silver to soar. In a sane world where markets were not rigged and someone (who matters) might care, the ever-expanding debt and money creation would matter. But - trust me here - we don't live in such a world anymore. SPECIFIC PREDICTIONS: Instead of the stock market crashing, the stock market will continue to rise. Instead of precious metals soaring or rising significantly, they will either decline in price or move sideways. They will certainly remain at a very low, "sentiment-awful" level. That is, the opposite of what should happen will happen. When the debt ceiling is invariably extended this will be spun as a positive story - a crisis averted - and the stock market and precious metals "markets" will respond as they are "supposed to." Book it, Dano.   

In reply to by Clowns on Acid

khakuda Tue, 08/15/2017 - 16:32 Permalink

Yup.  Rates are too low and the market is dominated by momentum algos, indexers and risk parity funds instead of valuation cognizant fundamental folks.  It should end well.

LawsofPhysics Tue, 08/15/2017 - 16:51 Permalink

Well, central bankers/financiers have to do something with all that FREE MONEY (thanks to ZIRP/NIRP) they have GIVEN (AND CONTINUE TO GIVE) THEMSELVES!!!!!!!ALL STIMULUS IS FUNGIBLE FUCKNUT! Remind me fucker, are central banks balance sheets shrinking or growing?The capital and resource mis-allocation continues..."Full Faith and Credit"tick tock motherfucker

silverer Tue, 08/15/2017 - 17:01 Permalink

When the majority of the doom and gloomers predict a major crash, as in "the market will crash in three months", that's when the market usually hits another high.

ludwigvmises Tue, 08/15/2017 - 17:07 Permalink

I love Stockman but my god has he been wrong with his perma bearishness the last couple years. This bull market really destroyed him, even though everything he says is 100% correct.

Jack Oliver Tue, 08/15/2017 - 17:27 Permalink

Markets should have collapsed years ago - but collapsed markets don't build weapons or US bases the world over !

Expect more of the same - a manipulated and controlled market is all they have left !

A lot of countries will be enabled by Russia - these countries will say FUCK you to the 'one world currency' aka ZWO !!

Grandad Grumps Tue, 08/15/2017 - 17:16 Permalink

What part of "price is controlled by computers and price is policy" does Dave not understand?

If the price goes down, it is only because policy has been created to make the price go down. Those who are involved in the policy know what is going to happen with price. The rest of us don't know and therefore are the "marks".

Dave does not seem like a mark. So, what is the deal, Dave?

Akdov Telmig Tue, 08/15/2017 - 17:39 Permalink

I haven't seen a market so easy to short since 2007, with North Korea and the debt ceiling brawl around the corner and a perofessional bullshitter at the head of the government what direction do you think the market is going to take? I'm short the S&P 500 and the USD/CHF.

Erwin643 Akdov Telmig Tue, 08/15/2017 - 21:53 Permalink

Good luck with that. "So easy to short"? There is no indication whatsoever of a bearish trend.There is nothing in the short term or long-term technicals to indicate that the S&P is in a bear-mode. Even if you were right, you'd be way too early.If anything you should be long the S&P (something like SPXL), since it is just coming off the bottom of a pullback. Your timing is completely backwards.

In reply to by Akdov Telmig

Akdov Telmig Erwin643 Wed, 08/16/2017 - 01:40 Permalink

Thanks for your advice but I reiterate my piece of a cake short call, now than the earnings season is mostly over there is no catalyst left to break that major all time high in the S&P 500 for the end of the summer, on the contrary there are major swans on the horizon like North Korea Iran and the debt ceiling, there is no way the S&P 500 can go above 2480 it is an absolute top. 

In reply to by Erwin643

Erwin643 Akdov Telmig Wed, 08/16/2017 - 03:34 Permalink

I don't see this piece of cake you're talking about. An astute trader does things based on what the chart is telling him. If RSI is overbought on the weekly chart (hitting the 70-line) for instance, you get out, take profits, and don't worry if it makes a little more after you pull out, while waiting for the correction.North Korea and Iran are just excuses for the market to move, after the fact. I was already in cash, waiting for SVXY to correct, when Trump opened his mouth about Korea.Do you really think the Central banks and plunge protection teams are going to let this market drop below its 20-week moving average? Right now on the S&P (SPX), it closed yesterday right at its 4-week moving average, which is still trending above the other weekly moving averages. If you look at the RSI, it was already overbought before Trump ran his mouth. On the daily, it's back above the 20-week moving average.

In reply to by Akdov Telmig

Fundies Tue, 08/15/2017 - 17:47 Permalink

Oh well, those of us who have missed out on the melt up craziness, are very well prepared to capitalise on the impending market implosion....which will come...just need to remain patient.

Ben A Drill Tue, 08/15/2017 - 18:57 Permalink

The games over when .gov retirees get their pension cut in half at least.
The game is over when food stamps get cut in half.
The games over when are bridges can't be crossed.
And so on and so on....