The risks are piling up, but does anyone care?
AFP/Getty ImagesI have, in previous articles here on MarketWatch, pointed out the fundamental risks in the U.S. stock market.
I have identified the liquidity risks created by the European Central Bank and the Federal Reserve in the tightening of monetary policy, in the reduction of the Fed’s balance sheet, and the likelihood that these risks will prick the asset bubble that the market is in today.
Most people I speak and email with agree. The risks are high, as the price-to-earnings multiple of the S&P 500 SPX, +0.67% (about 25, depending on the indicator) is far greater than its historical norm (14.5). The truth, however, is that no one knows for sure. But, still, people are apathetic.
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In fact, my experience over the past 20 years and through each of the past two major asset bubbles (the internet bubble in 2000 and the credit crisis in 2008-2009), is that the unanimous identification of an asset bubble did not take place until after the asset bubble had burst. By that time, all of the major indices — the Dow Jones Industrial Average DJIA, +0.56% S&P 500, Nasdaq 100 NDX, +0.98% and Russell 2000 RUT, +0.85% — had already fallen.
The result largely handcuffed investors to investments that were severely underwater. As luck would have it, though, after the credit crisis, the Fed’s policy-making body printed $2 trillion and, with that money, bought assets to prop up the economy and save investors from destruction.
Largely, this perceived savior is probably why investors are so lethargic when it comes to the asset bubble that we are probably in right now. This bubble even seems to include real estate and bonds in addition to stocks, and it has been driven by fabricated central bank liquidity.
Admittedly, I cannot be sure what will happen. I do not know if this bubble will burst, and I do not know if central banks will come running to the rescue again, as they did after the credit crisis. Unfortunately, I do know a great deal of people who believe that the central banks of the world will simply print more money if the going gets tough again, but that is a seriously risky bet.
With major indices coming off all-time highs and technical trading patterns (dojis) surfacing in long-term chart patterns last week, potential reversal signals are coming on a technical basis. As much as it is appealing to opt for relaxation and vacationing during the summer months, some time must be spent evaluating the conditions the market is facing right now.
In previous articles, I have offered alternatives to the traditional buy-and-hold methodology, and I think everyone should consider heading that way because strategies like “lock and walk” can work no matter what happens. The risks in the market today are extremely high for buy-and-hold investors because the liquidity picture is changing for the worse, and that is fundamental in nature. But longer-term technical observations point toward serious risks as well.
My longer-term macroeconomic analysis, The Investment Rate, is offering warnings that this market is 66% higher than it should be. Given the changes in liquidity and technical observations happening now, those risk warnings should be heard with an acute ear.
Thomas H. Kee Jr. is a former Morgan Stanley broker and founder of Stock Traders Daily. Kee managed the fourth-best-performing strategy in the world in 2016, according to HedgeCo.
No…no one cares.
The bubbles have been beyond lunacy for YEARS. The structural imbalances are staggering, and yet the machine rolls on.
Sometime in the future the wheels will fall off, but there is very little to be done until then and zero to be gained by worrying.
Stock prices are about 30% overvalued, but it’s corporate earnings that are extremely high relative to history. The unusual corporate profits make the current PE (price divided by earnings) less obscene. The problem is that corporate earnings are the most “mean-reverting” series in finance. Corp profits can and will drop again.
http://gulfcoastcommentary.blogspot.com/2017/07/stock-valuations-worse-than-it-appears.html
Every one of these market analysts are comparing the current market to the past. The market we have today is something out of the norm (distortion):
Retail participation very, very low.
ZIRP for many years
QE’s did their damage
Automated buy/sell by robo’s
Foreign Gov’ts buying stocks
And probably the PPT is buying also
Never before in history have we had a global central banking authority that is openly creating money out of thin air and giving it to the wealthy. This sort of thing happened throughout history, but only on the national or even just a city-state level. And when it did, hordes of barbarians would storm the city and burn it down, or its currency would simply hyperinflate until the bottom 99% burned it down themselves. But when the phenomenon is global, it takes a long time for the wealth of the bottom 99% to be sucked out to the point where they might actually want to do something. There is in fact so little resistance to the banksters that I cannot even form an estimate on when the breaking point will be reached. The average person has lost roughly half their purchasing power over the last 20 years. The next 20 years will take much more than just another 50%.
Icon,
You are so correct. We haven’t seen the 1/2 of it.
Imagine what will happen when the hypnotic trance
we are in ends? The losses will be far greater than
an overvalued/phony market dropping.
‘Largely, this perceived savior (bought assets)is probably why investors are so lethargic when it comes to the asset bubble that we are probably in right now’
1) Not probably… WE ARE!
2) Why worry when the investors know that “Joe 6 pack” ie middle class is going to be forced to bail them out via the Fed anyways!
Alfred E Nueman …. “What Me Worry???”
Yep. Flatman60, you nailed it. Look at the new Illinois “budget”. It has a massive provision of giveaway to bond holders in it that allows them to take over public assets if the SHTF. It will of course, and good luck to the bondholders attempting to enforce such, but you get the idea. It is risk city, but people will still buy it, because they believe.
Everyone believes they will get bailed out. No one understands math, and those that do are going to ride this horse until it literally falls over dead. The big problem now is that no one, and I do mean no one, knows when this horse will fall over. It is like a fuse that has gone in to a box – you have no idea if that fuse has 1 inch to go, or 10 feet to go before the boom, but there is no question that a boom lies at the end.
I personally think that this time period should be used as a period that the intelligent among us use to educate ourselves, get out of debt and dependency, and get as independent and self sufficient as possible. Everyday the boom does not come, is a day extra we have to prepare. It is going to happen, and everyone knows it, but the more prepared you are when it does ultimately come (slow burn, or big boom) the less the blast will effect us all. Let the libtards, sheeple, that neighbor that buys a bunch of crap with borrowed money etc. enjoy their lifestyle now, because the day of reckoning will come. I saw it in 2008 when contractors around here lived like Rockefeller’s, and flaunted their crap to the rest of us working stiffs. Then in 2009, those same guys were in bankruptcy, and living in a hotel room with 5 kids….. How is that speed boat now dickhead……
This bubble cannot be sustained but what to do as a small investor is something no one can tell you what to do stay in and lose 66% or cash out pay the tax on gains and watch the value of your currency evaporate 66%
Buy more ammo !
People are hooked on the theme of saving for
retirement. What is the be-all motivator for
staying in a shit job? It is the pension! And
any other dough people have squirreled away.
One may as well down size and get debt free
now. And quit buying crap to impress the
neighbors.
Who gives a rodent’s scrotum where the stock market is? I’m 64, and for damn near half my life the dow was below 1000. We lived, ate good, slept better than we do today, and had a hellofalot better things to discuss than the point spread, put options, or IPOs, thank you much. The only real value is in the bible (piss on churches), the garden, the fridge, the basement, the closet, the water jugs, and the business end of a gun. Everything else is just cosmetic and isn’t worth worrying about. Does anyone out there really believe that in 1945 the people in Berlin, Hiroshima, or Nagasaki, and about 300 other cities being nuked, conventionally bombed, or raped, pillaged, plundered, and bayoneted gave a tinker’s damn about the value of stock, bonds, and real estate. Think people, think!