Calling for an 80 percent drop in the S&P 500 is a bold claim, one that not too many people would make, unless they were convicted in their belief. Meet Etai Friedman, CEO of Eyal Capital Management, formerly of MKM Partners and Steve Cohen’s SAC Capital. Etai points to an oft-used metric, Tobin’s Q, to state part of his case in a series of articles describing his extremely bearish outlook of the U.S. economy.
If you missed class on the day your finance professor reviewed Tobin’s Q, here’s a quick breakdown. “The Q Ratio” was developed by James Tobin, an American Economist, who was awarded a Nobel Prize for his work in Economics. It’s actually a fairly straightforward equation: You take the total market value of the market, plus liabilities, and divide it by the book value of the market, plus liabilities.
An in-depth look of Tobin’s Q can be found in the book “Valuing Wall Street,” as well as from this link by Advisor Perspectives. However, the main point is this: Since 1900, an arithmetic mean for Q Ratio is 0.68. The highest this ratio has ever been is 1.64 during the Tech Bubble. While the lowest Q Ratio has ever been is 0.30 during the Great Depression as well as the 1982 economic recession. Etai believes that due to the Fed’s manipulation of markets, we’re heading to these lower Q ratio levels sooner rather than later.
Etai gives a brief overview of the Q-ratio:
“Over the last 100 years it’s been in a range, and that range is on the low side. It’s gotten as low as 0.3 several times, including during the Depression, but not just during the Depression. On the high side it’s gotten up to maybe 1.15, maybe 1.20. That was let’s say in 2000. In May of 2015 it hit 1.10 or 1.12 and it hit a fairly high watermark.”
Etai then gives his grim outlook:
“I believe because the Fed does not have the tools to engineer another bailout like they did in 2007, I think Tobin’s Q is going to go to 0.3. So I envision, take the S&P 500 top to bottom I think it’s going to drop 80% over the next couple of years. It may take three years, four years, or two years. I can’t tell you how long it’s going to take but I’m anticipating an 80% drop or 70% drop, something in that neighborhood. Tobin’s Q got down to 0.54 in 2009.”
As for the reason we got here, Etai didn’t hold back on his criticism of the Fed:
“The reason it didn’t go lower is because we had the biggest fucking bailout ever orchestrated in the history of the banking system. If that had not happened, you know equities would have gone down a hell of a lot more. Things would have been trading for a fraction of book value.”
This is just a snippet of the blistering criticism of our current Federal Reserve System. In a series of articles that Benzinga will release, Etai drills deeper into the U.S. festering debt, TARP, bank bailouts, and Keynesian economic criticism.
Etai’s view on the current state of U.S. debt compares to a funny, and often apt drinking quote: When you drink or indulge in a bit more alcohol than you really should, you’re just borrowing happiness from tomorrow.
Am on the fence. I get the impression from M. Armstrong that EU (and the EURO) will dive and this will cause monetary flows to U.S. which will trigger our stock markets to explode. This seems rather sensible (to me). Then, I become exposed to articles such as this one, along with knowing other negative data on this long-in-the-tooth rally.
Which is why I don’t give one hoot about company ‘Fundamentals’ – they are generally rigged and meaningless in a world where investing has changed to very short-term in and out of the market. It all boils down to getting in at a point where probability is in your favor and getting out when ‘x’ happens (each individual has to decide what their ‘x’ is).
While I am familiar with this, I think a combination of factors will prevent that steep a decline. We have it as closer to a 15 percent drop max by November, but more likely manipulation driven rather than fundamentals driven. It could be used as a hammer for the nail if certain events come to fruition. Watch the riyal and Hong Kong dollar as outliers.
Kokoda, the problem with that scenario is that capital flight to the USD could strengthen the dollar against other currencies in such a way that the stock market stays at a depressed level, which will also hurt US exporters.
All the money in the markets will be looking for a safe place to go as the decline progresses. I don’t foresee an ebb and flow from market to market as they will all decline together much like 1929 to 33.(nothing goes strait up or down) The realization that all fiat will collapse will come after most go to cash. Then the rush to real money will be on but there will be none available since we pissed it all away.
Tax collections drop as layoffs increase to the point goobermint nationalizes everything, 401k, pensions, bank accounts, food, etc, just to keep paying it’s hit men police force that protect them. Buy yourself some riot gear like the pigs have and stay armed.
It is only a matter of time before the Fed is openly buying stocks. The ECB and JCB are already doing it. Even if they are just purchasing corporate bonds, it is the exact same thing as buying stocks, because the proceeds from the bond sales are used to buy back stocks. So this is a “direct indirect” purchase of equities by central banks. Now that the door is open, only the amounts are in question. Mark my words it will be trillions within 5 years. They arent going to wait till the DOW is down 80%. Doesnt even matter that it isnt legal. The Fed illegally bought Fannie Freddie debt. Only the Ginnie Mae debt was legally purchased. The law doesnt stop them.
I’ll go out on a limb and say that God and Foreign Nations both have a bigger say in our future. If they see Hillary elected, The Four Horsemen will be unleashed; she would be the last straw to God, China and Putin. All the Prophecies about Earthquakes, Meteors, Wars, Famine and Disease will happen and there is nothing FEMA, the UN and her demonic seances can do to stop it. If Trump is elected, controls his ego, takes a couple pages from Reagan and respects Christianity as he says he will, then the USA could so mend Global Economics and Foreign Relations that it will be a Miracle from God. If my people, which are called by my name, shall humble themselves, and pray, and seek my face, and turn from their wicked ways; then will I hear from heaven, and will forgive their sin, and will heal their land. Choose this day who you will serve: Hillary is an anti-Christ (or I’m a Unicorn); Trump is a blow-hard but also a leader leaning God’s way.