Hussman analytically describing the process leading to a crash. It hasn’t happened yet, so it won’t happen. Right?
From an investment standpoint, market conditions remain characterized both by obscene valuations and still-negative market internals. It’s that combination that continues to suggest potentially vertical downside risks. When people think about crashes, they tend to think about an event – as if some massive, grotesque, red, scaly, fire-breathing, razor-toothed catalyst should be obvious beforehand. But we know from history that that’s not the way it works. Instead, the sequence goes like this: the conditions that create vulnerability to a crash emerge first (elevated valuations coupled with deterioration in market internals and/or widening in credit spreads), the crash emerges second, and catalysts are then identified – often just flashpoints that were consistent with speculative breakdown. Many investors think that “Lehman” caused the global financial crisis, but the mortgage crisis was already unfolding well before that. Lehman and Bear Stearns before it were only symptoms, not causes. The cause is always speculative distortion that was well-known for quite some time: elevated valuations, often accompanied by speculation and new issues of low-quality stocks representing some “new economy” theme, or yield-seeking speculation and heavy issuance of low quality debt. The main reason investors don’t believe that such speculation will end in a crash is simply that a crash hasn’t happened yet.
In shorter-term market action, we see a general tendency toward distribution, for example, declines on expanding volume coupled with low-volume recoveries on mixed breadth and narrowing leadership (which was also the pattern last week). We note that prior to Friday, the Dow Jones Industrial Average had gone 40 trading sessions without setting a 20-day high or low. If we look across history for periods of extended range-bound activity in overvalued markets where: a) the DJIA had gone more than a month without setting a 20-day high or low; b) the DJIA was confined to a range of less than 6%; c) the DJIA was within 10% of a 2-year high; and d) the Shiller P/E was 18 or higher, there are only 7 clusters that fit the bill (1929, 1937, 1965, 1973, 1999-2000, 2007-2008, and today). While the full-cycle resolution was repeatedly brutal, I should note that the short-term resolution was not very informative at all, and didn’t depend on whether the initial break out of the range was higher or lower. What’s interesting about the general pattern is that range-bound action often coincides with distribution on price-volume measures. In October 2000, I mentioned similar measures of distribution, such as one that Peter Eliades called the “sign of the bear” based on range-bound market breadth. As I also observed then, neither elevated valuations, nor internals, nor distribution patterns ensure a market crash, but we don’t like the probabilities. Still, we aren’t terribly impatient about the near-term resolution of what we see as a likely topping process here.
You’ve been warned.
When examining complex systems, the normal human attempt to search for meaning in events leads inexorably to post hoc, ergo propter hoc logical fallacies.
There are no meanings, because complex systems (like human social behavior characterized by markets, including stock and bond markets) are not mechanistic. They are probabilistic.
Human minds are not adapted to think in probabilistic terms, which is why history repeats in rhyming fashion, and some things never change.
The crash will come, we just don’t know when. All the necessary elements are already baked in, and all necessary lessons (e.g., never sell your stocks because they always come back) have been taught.
95-98% asset market collapses are rare events, perhaps once in 300 years. All the necessary precursors are here.
I wonder if Admin has recognized his readership has all but stopped commenting on a thread that headlines the coming collapse. I wonder why that is? Anyone comfortable addressing such subjects is someone that anticipates that their preparations give them a decent chance of walking out the other side of the storm. The rest just plow their heads back in the sand and hope they can learn how to unknow something, Ignorance really is bliss. The human mind is capable of some truly amazing feats of contortion. A Doctor will tell a wife her husband has a fatal condition and her first question is when will he be able to go back to work.
Someone once said being forewarned is being forearmed.
Thank you Admin for continuing to post such topics!
But the Crash will be an event and I think it will be equivalent to a 10 earthquake in NYC.
Sensetti – I am busy posting my ass off around here last few days. I love a good doom story. The rest of the monkeys need to join in.
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Sensetti, I think there is a reluctance to post certain things on a public forum, even one as topical as this one. Going dark with certain things is just common sense. I would bet a lot of folks reading this have significant bug out capability they just don’t want to talk about.
“‘Cause we can’t stop this world from its… Crash And Burn”
https://www.youtube.com/watch?v=fsoU7vmzla4&index=1&list=PLqlrSLUFWNanE76QE97L2DJAUDuISzRhZ
There remains utter confusion about the proper actions to take.
Bug out to the country?
Bug out OF the country?
Form a community?
Join a cult?
Buy gold/silver/etc. and store it in another country?
” ” ” and bury it in the back yard?
Stockpile guns and ammo?
Cash in the IRA’s (there’s a big tax bite.)
Do what with the cash?
No one knows, and some on this list will result in disaster. Some folks fleeing the brewing storm in the UK & Western Europe in 1938 moved to Singapore and South Sea Islands and ended up in Japanese concentration camps.
When epochal change is on the horizon, knowing just exactly what to do is vexing.
dc.sunsets
It’s simple. We all move to Llpoh’s Australian estate. I think he gave an open invitation to all TBP members.
Here’s a recap of my forecast:
1. Bond rates will subtly creep higher (check).
2. Stock market volatility will be low (check).
3. At some point stocks will gap lower and fall hard for a few days, with every means of “playing” the downside popping so far, so fast that anyone not already positioned will be unable to enter a position safely.
4. Stocks will fall 15-20% in a matter of days, then stop for a day or two. Latecomers to bear positions will quickly find themselves in a loss position (probably stopped out at a significant loss.)
5. No one will sell. They are all quite sure that stocks will return to All Time Highs sooner or later.
6. Stocks will begin just stair-stepping lower, grinding down a little here, a little there, week after week, month after month.
7. There will be a mini-crash here or there, but overall the markets will simply grind lower.
8. By summer of 2016 stocks will be down 50% or approaching the lows of 2009, and the consensus will be that this is the same thing as happened in 2002/3 and 2009, and it’s the buying opportunity of a lifetime (again…so they must mean the lifetime of a hamster.)
9. Stocks will rally, possibly 20% to even 75% of the next couple years.
10. Starting in 2018-2020 stocks will roll over again and this time the carnage will be epic.
11. By 2021 banks will be bailing in, the FDIC will need a bail-out and be rejected (because Uncle Sam will be cut off from selling bonds in a rapidly rising interest rate environment) and wealth will be evaporating like a puddle of water in Death Valley.
12. Stocks will bottom in 2022 give or take a year, amidst ultimate capitulation, where people have lost so much that they don’t even care about their accounts any more.
13. Prices for stocks will be about the same as they were before the Great Debt Bubble began, similar to levels of 1974. That’s a fall of over 95% from current levels.
14. The country and world will be mired in the deepest deflationary depression in recorded history.
15. Congress will seize the Fed and attempt to print enough banknotes to reflate the banking system and economy, and the USA will be off to the races for the Zimbabwe Option. Hyperinflation will arrive soon after.
Gee, Admin, that sounds GREAT!
I’ll bring the beer.
This time around, the uncertain period may dragged on a bit longer, partially, because of highly valued Chinese assets are in the process coming into the global index mix, at such a force like never before; read recent Barron’s
Actions by its central bank suggested that they have decided to keep and maintain such high asset valuations for the foreseeable future, to gereally acclaimed easying of monetary policues
Only unpredictable geopolitical conflicts may upset this central bankers’ well rehearsed apple cart rodeo show; therefore, watch out for such events
Chances are the Ruble exchange rate and crude oil volitilities skirmishes earlier were just bits of a rehearsal
dc, excellent job — you’ve summed up the deflationary collapse scenario in a perfect-enough way. Don’t forget the likeliest path for the precious metals — down, up, DOWN, then UP, UP, UP!