John Hussman’s latest article references his actual warnings in 2000, 2007, and 2014. Today’s article is as close to a warning of an imminent stock market collapse as you are going to get. The market is now so overvalued that it doesn’t even need a negative shock to fall. It will collapse under its own weight.
Here is the first part of his weekly letter, detailing his previous prescient warnings. They were unheeded in 2000 and 2007 by the momentum crowd. He was ridiculed then and he is ridiculed today. He was right then and he’s right now.
“The information contained in earnings, balance sheets and economic releases is only a fraction of what is known by others. The action of prices and trading volume reveals other important information that traders are willing to back with real money. This is why trend uniformity is so crucial to our Market Climate approach. Historically, when trend uniformity has been positive, stocks have generally ignored overvaluation, no matter how extreme. When the market loses that uniformity, valuations often matter suddenly and with a vengeance. This is a lesson best learned before a crash rather than after one. Valuations, trend uniformity, and yield pressures are now uniformly unfavorable, and the market faces extreme risk in this environment.”
Hussman Investment Research and Insight, October 3, 2000
“One of the best indications of the speculative willingness of investors is the ‘uniformity’ of positive market action across a broad range of internals. Probably the most important aspect of last week’s decline was the decisive negative shift in these measures. Since early October of last year, I have at least generally been able to say in these weekly comments that ‘market action is favorable on the basis of price trends and other market internals.’ Now, it also happens that once the market reaches overvalued, overbought and overbullish conditions, stocks have historically lagged Treasury bills, on average, even when those internals have been positive (a fact which kept us hedged). Still, the favorable market internals did tell us that investors were still willing to speculate, however abruptly that willingness might end. Evidently, it just ended, and the reversal is broad-based.”
Market Internals Go Negative, Hussman Weekly Market Comment, July 30, 2007
“The worst market return/risk profiles we estimate are associated with an early deterioration in market internals following severely overvalued, overbought, overbullish conditions. This is what we observe at present. In contrast, the strongest market return/risk profiles we estimate are associated with a material retreat in valuations coupled with early improvement in market internals. I have every expectation that we will observe this combination over the completion of the present market cycle. So I expect that, perhaps to the surprise of many who don’t understand this approach, we will be quite bullish and aggressively invested as market conditions shift over the completion of the present market cycle. But now is emphatically not that time.”
A Hint of Advance Warning, Hussman Weekly Market Comment, August 4, 2014
The most hostile subset of market conditions we identify couples overvalued, overbought, overbullish extremes with a breakdown in market action: deterioration of breadth, leadership and other market internals, along with a shift toward greater dispersion and weakening price cointegration across individual stocks, sectors and security types (what we sometimes call “trend uniformity”). The outcomes are particularly negative, on average, when that shift is joined by a widening of credit spreads. That’s a shift we observed in October 2000. It’s a shift we observed in July 2007. It’s a shift that we observe today.
Remember that severe market losses are not by their nature broadly announced by obvious catalysts. As I noted approaching the 2007 peak: “Once certain extremes are clear in the data, the main cause of a market plunge is usually the inevitability of a market plunge. That’s the reason we sometimes have to maintain defensive positions in the face of seemingly good short-term market behavior.” Asking what particular news event will trigger a market loss “is like having an open can of gasoline next to your fireplace and blaming the particular spark that sets it off. We need not investigate the personality, life history or future career path of that particular spark.”
Present market conditions comprise an environment where risk-premiums are thin and are being pressed higher. See Low and Expanding Risk Premiums are the Root of Abrupt Market Losses for more on why this matters. The current shift does not ensure that the market will decline over the short-term, nor that it will crash in this instance. It’s also worth noting that we don’t rely on a crash, and that we can certainly allow for the possibility that valuations and market internals will improve in a way that reduces or relieves our concerns without severe market losses.
Still, what we are concerned about here and now is the steeply negative average behavior of the market in historical periods that match present conditions, as well as the decided skew of that probability distribution, which features extreme negative observations far more often than would be expected under a “normal” bell-shaped distribution. Interestingly, the 3-day average implied skew embedded in S&P 500 index option prices surged last week to the highest level on record. The potential for a “fat-tail” event should be taken seriously here.
The arrogant Wall Street pricks who think they have it all figured out will eventually get what they deserve. They are all following the same strategy – buy the dips because grandma Yellen has their back. They don’t invest in stocks based on valuations, growth, or value. They use the same HFT supercomputers programmed by the same Ivy League douchebag MBAs with the same lemming strategies. They all think they can exit before the other douchebags. They are all wrong. The time to panic is before everyone else panics. The attempted exit should be extremely entertaining. The bankers and their politicians will again demand a bailout or they will take down the financial system. Will the American people fall for it again?
Our concerns at present mirror those that we expressed at the 2000 and 2007 peaks, as we again observe an overvalued, overbought, overbullish extreme that is now coupled with a clear deterioration in market internals, a widening of credit spreads, and a breakdown in our measures of trend uniformity. These negative conditions survive every restriction that we’ve implemented in recent years that might have reduced our defensiveness at various points in this cycle.
My sense is that a great many speculators are simultaneously imagining some clear exit signal, or the ability to act on some “tight stop” now that the primary psychological driver of speculation – Federal Reserve expansion of quantitative easing – is coming to a close. Recall 1929, 1937, 1973, 1987, 2001, and 2008. History teaches that the market doesn’t offer executable opportunities for an entire speculative crowd to exit with paper profits intact. Hence what we call the Exit Rule for Bubbles: you only get out if you panic before everyone else does.
Market crash dead ahead. You’ve been warned.
I should be clear that market peaks often go through several months of top formation, so the near-term remains uncertain. Still, it has become urgent for investors to carefully examine all risk exposures. When extreme valuations on historically reliable measures, lopsided bullishness, and compressed risk premiums are joined by deteriorating market internals, widening credit spreads, and a breakdown in trend uniformity, it’s advisable to make certain that the long position you have is the long position you want over the remainder of the market cycle. As conditions stand, we currently observe the ingredients of a market crash.
See the rest of John Hussman’s Weekly Letter
No comments? Very spooky.
[img
[/img]
I’ve asked hub many times just whom does he think he will sell to when the exits are clogged full of other smart guys like him trying to maintain a lifetime of work?
No answers other than the vague, “there’s always a buyer.”
“Yeah, but at what price? And, not always, see Weimer, Argentina, Zimbabwe”
“Won’t happen here.”
Cognitive dissonance abounds.
And will keep the lemmings in the market while the true PTB strip it bare at its peak.
My only hope/wish is that one of these times (and with time between crashes and peaks growing ever shorter every new cycle, aren’t we all just guessing it will come back?) when the market plunges, the dollar is subverted and the world hunkers down to try and avoid the blowback from our monetary/government spending implosion, then my hope is the bastards finally have nothing to buy.
I don’t think it is this one. Until the events play out, we can’t know that for sure.
My true wish would be to start putting plans in place to opt out of this insanity, go all in a plan for family protection/future living, and stop playing with our deck 100% loaded and based on the insanity of the Dow.
After 8 years of trying to open his eyes, I do believe it is well past time to admit to myself it ain’t going to happen.
Now to figure out how to mentally deal with the coming destruction and ego-busting of the hub while simultaneously figuring a way to continue feeding my kid. I just hope the bastard doesn’t go completely off the reservation and kill us all.
Alas….I’ve been warning friends,family etc of the coming crash that I’ve become the chicken little of the family. We keep saying the signs are there but the DOW keeps rising.
“Yo” – This Market is Set For a Major Correction
by Michael Pento • September 29, 2014
Wall Street came to a halt recently, as Chinese e-commerce giant Alibaba made its Initial Public Offering debut. The media became myopically focused over this so-called “historic event” and by its celebrity founder Jack Ma. By the time the closing bell had rung, the hype and fanfare propelled Alibaba up 36 percent on its first day of trading and caused the world’s largest IPO to display a market cap worth $231 billion. The investing public seems to have forgotten the dangers associated with disregarding valuation metrics—Alibaba is trading at a Price to Book value ratio north of 27!
This hysteria is scarily reminiscent of the late 1990’s, where an over-hyped stock market soared to new heights fueled by an accommodative Federal Reserve. Today, just as in 1999, a vastly superfluous money supply is finding its way into the pockets of any flimsy business model, with stock valuations that far outstrip the book value or potential profits.
During the peak of the late 90’s tech bubble, the Price/Earnings ratio of the Nasdaq 100 was far in excess of 200. This confirmed investors were willing to pay very high prices for stocks, due to their delusional expectations of earnings growth. The problem, which is now easily acknowledged by using hindsight, was these companies never had the potential to reach the valuations ascribed to them—all they had was eyeballs. But a central-bank manipulated increase in the money supply does strange things to investors, it ails them with a condition Alan Greenspan referred to as “irrational exuberance.”
Today we see that same type of irrational exuberance, as investors fall over themselves to buy stock of a Chinese internet company, despite the fact the communist government of China retains total control over that country’s internet. If China’s Premier Li Keqiang decides to pull the plug on the company, it will become worthless overnight. However, while Alibaba does have revenue and earnings, the gross overvaluation of the enterprise echoes the tech bubble with frightening similarity.
But Alibaba is not even the best example of this current Fed-induced social media frenzy. The paragon of “irrational exuberance” would have to be the social media app called YO. What is the intellectual property behind this life-changing technology you ask? Brace yourselves; it just sends friends the thought provoking message “Yo,” Yo was developed in eight hours and was launched on April Fool’s Day of 2014. As idiotic as this idea may sound, it has a valuation of $10 million. The actual meaning behind the word “Yo” is subject to interpretation. And not even its founder, Mr. Arbel, whom I imagine is “Yoing” all the way to the bank, is willing to provide Webster’s with a definition. Some presume its code for “hey”, which I am sure will be the next app to raise millions of dollars very soon as well. But, more than likely the significance of this word really is, “Yo, this market is a bubble; get out now!”
But it’s not just irrational investments, such as Yo, and overhyped IPO’s, that are signaling a top to this market. There are technical indicators in the market that are also setting off loud warning bells. The breadth of the market is troubling to say the least, with nearly 50 percent of stocks in the NASDAQ down more than 20 percent from their peak in the last 12 months. Additionally, more than 40 percent have fallen that much in the Russell 2000 Index. In fact, the Russell 2000 index of smaller companies is now down over 4 percent on the year, and has in technical terms reached a “death cross”. A death cross occurs when a stock or index’s 50-day moving average trend line dips below its 200-day moving average; and is a sign momentum is fading.
t’s clear as the Federal Reserve reins in its economic stimulus plans that the appetite for risk is narrowing. QE III totals $1.7 trillion worth of Treasury and Mortgage Backed Security purchases and this program ends in October. And the Fed’s massive money printing scheme, which resulted in record-low interest rates for the last 6 years, has manifested in stock, real estate and bond bubbles occurring all at the same time.
After a Fed-induced five-year rally in stocks, which added almost $16 trillion to equity values, it’s been three years since investors saw a 10 percent decline in the S&P 500. But we are starting to see the early anecdotal and technical signs that this market has gotten too frothy and a significant pullback is imminent. With the total market cap of stocks as a percentage of the economy at 117%, its highest point since the dot.com bust and far above its level reached in 2007, the toboggan ride down can’t be too far off. Perhaps those who haven’t gotten out in time will yell this as their portfolios plunge, “Yo, I should have known better.”
[img
[/img]
We are in an endgame. We do not know how long it will last. But the East is buying bullion with paper money at a fairly stiff pace. And since the financiers have not yet figured out how to create real precious metals, just fakes and frauds of them, there will be an end to it.
The malefactors may not go quietly. They have blood on their hands, and they will carry this mark with them, forever. They may never be discovered or held to account in this world, if that is what God wills. They may even continue to strut about and offer their opinions and prescriptions to their victims unashamedly. But there will be an end to it, and a final reckoning. To think otherwise is the opium of the powerful. They never see it coming.
The Recovery™ is a charade. The reason for this is quite simple, and it can be seen in one chart here.
It should be no surprise that the pig men are getting carried away. There does not appear to be anyone to save them from themselves this time, to raise a flag and turn them at the edge of the abyss. Who could stop, when it feels so good to be winning.
Jesse
I just hope the bastard doesn’t go completely off the reservation and kill us all.
Aside from the patently yet unintentional racist talk of reservations, that is one dark picture you paint of the hub. If he is wound up tight and a general anus, yea, I would bet your a goner for sure. But the picture you’ve painted before of a happy go lucky easy going fellow, then no, I don’t think you’ll be checking out like Janet Leigh.
I’m standing by my ’15 bottom call.
Martin Armstrong calls for the beginning of the fall in the third quarter of 2015. I don’t know what to think anymore. I’ve been anticipating a collapse for a long, long time now but the criminals on Wall Street keep it rockin’ on. I guess if one controls the business and make the laws that steers the economy, one can do no wrong and the sky’s the limit.
I’ve heard and read dire predictions from well established experts and players in the financial world since the 1980’s. All their arguments were sound and their predictions of imminent doom were very believable, except……. nothing happened.
In the 1980’s the survivalist movement took off and went practically mainstream. There were magazines on the news stands, many books written, and the initial reason for survivalism in the first place, which was nuclear war/race war, was superceded by financial doom.
But nothing happened. This time around I think I’ll adopt the attitude of a Zen monk and say “we’ll see”. After all, at this point it’s all I can do.
“In the 1980′s the survivalist movement took off and went practically mainstream. There were magazines on the news stands, many books written, and the initial reason for survivalism in the first place, which was nuclear war/race war, was superceded by financial doom.”
Have you walked past a news stand recently? It seems EVERYONE has either a “special issue” dedicated to “Survival” or an outright magazine dedicated to it… If you go by the subject matter at the news stands, folks are genuinely scared. A survival magazine or some Doomer mag comes in and 3 days later they’re sold out.
“But nothing happened. This time around I think I’ll adopt the attitude of a Zen monk and say “we’ll see”. After all, at this point it’s all I can do. ”
That’s a fact. The only thing I can do is keep on socking away preps, improving the farm, the land, etc. The Doom of our time will get here when it gets here, and not one moment sooner. I’m not going to go bugshit worrying about it. When it gets here, it’ll be run whatcha brung time anyways, and short of a multimillionaire with his own private fort, I don’t know anyone who is completely 100% ready…