Stock market crash – Page 7 – The Burning Platform

PANIC BEFORE EVERYONE ELSE DOES

For the lazy people who don’t like to slog through Hussman’s entire data laden weekly tome, I’ve picked out the most pertinent sections. For the really lazy, I’ve bolded the most important sentences. When everyone on Wall Street is using the same algorithms in their HFT supercomputers, and John Q. Public isn’t even in the market, who will these supercomputers sell to when they all get the sell signal at the same time? When that time comes, and it won’t be long, I’ll be munching popcorn and watching the festivities unfold. The talking heads, government apparatchiks, and Ivy League educated big swinging dicks on Wall Street will declare a national emergency and demand another bailout. Will we be stupid enough to fall for it again, or will we start hanging bankers?

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The higher the price an investor pays for a given stream of expected cash flows today, the lower the return that an investor should expect over the long-term. As detailed below, investors have responded to zero interest rates by driving stock valuations up to the point where expected market returns over the coming decade are also zero. Given that outcome, one is quite free to say that stocks are reasonably valued “relative” to zero interest rates, but one should still expect zero 10-year returns on stocks.

My impression is that’s not how investors are thinking. Particularly at market peaks, investors seem to believe that regardless of the extent of the preceding advance, future returns remain entirely unaffected. The repeated eagerness of investors to extrapolate returns and ignore the Iron Law of Valuation has been the source of the deepest losses in history.

Current valuations are above the 2007 peak, and are now within about 15% of the 2000 extreme.

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WHY STOCKS WILL CRASH IN TWO CHARTS

“Things always become obvious after the fact” – Nassim Nicholas Taleb

“Facts do not cease to exist because they are ignored.” – Aldous Huxley

The S&P 500 currently stands at 2,126, fractionally below its all-time high. It is now 300% above the 2009 low and 34% above the 2008 and 2001 previous highs. Most people believe this is the new normal. They are comfortably numb in their ignorance of facts, reality, the truth, and the inevitability of a bleak future. When the herd is convinced progress and never ending gains are the norm, the apparent stability and normality always degenerates into instability and extreme anxiety. As many honest analysts have proven, with unequivocal facts and proven valuation measurements, the stock market is as overvalued as it was in 1929, 2000, and 2007.

Facts haven’t mattered, as belief in the infallibility and omniscience of Federal Reserve bankers, has convinced “professionals” to program their high frequency trading supercomputers to buy the all-time high. If central bankers were really omniscient and low interest rates guaranteed endless stock market gains, then why did the stock market crash in 2000 and 2008? The Federal Reserve’s monetary policies created the bubbles in 2000, 2007 and today. There was no particular event which caused the crashes in 2000 and 2008. Extreme overvaluation, created by warped Federal Reserve monetary policies and corrupt Washington D.C. fiscal policies, is what made the previous bubbles burst and will lead the current bubble to rupture.

Benjamin Graham and John Maynard Keynes understood how irrational markets could be over the short term, but eventually they would reach fair value:

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” – Graham

“The market can stay irrational longer than you can stay solvent.” – Keynes

Graham’s quote reflects the difference between hope and reality. This explains the ridiculous overvaluation of Amazon, Shake Shack, Twitter, Linkedin, Tesla, Google, and the other high flying new paradigm stocks. Story stocks soar because the herd believes the stories peddled by Wall Street and company executives. Five of these six stocks don’t have a PE ratio because you need earnings to calculate a PE ratio. In the long run the market will weigh the value these companies based upon profits and cashflow. It is the same story for the market as a whole. There is no question who is to blame for what now amounts to a three headed hydra of bubbles poised to burst.

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DANGER WILL ROBINSON

It’s funny how the truth sometimes leaks out from the government. I’m guessing that Mr. Ted Berg will not be working for the Office of Financial Research much longer. This new agency was created by the Dodd Frank Law and is supposed to protect consumers from the evil Wall Street banks. But we all know the evil Wall Street banks wrote the bill, have gutted the major provisions, have captured all the regulatory agencies, own the Federal Reserve, and control all the politicians in Washington D.C. So, when an honest government analyst writes an honest truthful report that unequivocally proves the stock market is grossly overvalued and headed for a crash, the Wall Street banking cabal will surely call the top government apparatchiks to voice their displeasure. Truth is treason in an empire of lies.

The soon to be fired Mr. Berg’s verbiage is subtle, but pretty clear.

Option-implied volatility is quite low today, but markets can change rapidly and unpredictably, a phenomenon described here as “quicksilver markets.” The volatility spikes in late 2014 and early 2015 may foreshadow more turbulent times ahead. Although no one can predict the timing of market shocks, we can identify periods when asset prices appear abnormally high, and we can address the potential implications for financial stability.

Markets can change rapidly and unpredictably. When these changes occur they are sharpest and most damaging when asset valuations are at extreme highs. High valuations have important implications for expected investment returns and, potentially, for financial stability.

However, quicksilver markets can turn from tranquil to turbulent in short order. It is worth noting that in 2006 volatility was low and companies were generating record profit margins, until the business cycle came to an abrupt halt due to events that many people had not anticipated.

The full report can be found here:

http://financialresearch.gov/briefs/files/OFRbr-2015-02-quicksilver-markets.pdf

The meat of the report is in the charts. The CAPE Ratio, which has been a highly accurate predictor of market tops is now almost two standard deviations above the long term average and at the same level it was before the 2008 crash. It has only been higher in 1929 and 1999. That should give you a nice warm feeling about the coming bull market. Right?

Profit margins are at all-time record highs as corporations don’t have to pay higher wages, can borrow for virtually free, and continue to outsource to foreign countries. Profit margins are 60% above the long-term average and always revert to the mean. Do you expect them to expand or contract from here?

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WHO NEEDS FUNDAMENTALS WHEN YOU HAVE THE FED

These two charts tell you all you need to know about how disconnected Wall Street is from reality. Corporate profits are tanking. Consumer spending is tanking. Inflation in the things you need to live your everyday life is rising. Real median household income lingers at levels from 25 years ago. Greece, Portugal, Italy, Spain and Ireland are more insolvent than they were three years ago. The EU is disintegrating. Japan is committing economic hara-kiri. China’s trillions of real estate mal-investment is going bust. The OPEC countries, along with Russia, Brazil and Mexico are seeing their economies destroyed by low priced oil.

The US shale oil boom is going bust rapidly. Without the $500 billion of subprime auto and student loan debt injected into the veins of the American debt drug addicts, the economy would officially be in recession. Instead, recession is only a fact of life for the 99%. This cannot be sustained. So it won’t. At this point, we don’t even need a trigger event. The house of cards is so high, it will tumble just due to its sheer size. Look out below.

FOURTH TURNING – THE SHADOW OF CRISIS HAS NOT PASSED – PART TWO

In Part One of this article I laid the groundwork of the Fourth Turning generational theory. I refuted President Obama’s claim that the shadow of crisis has passed. The shadow grows ever larger and will engulf the world in darkness in the coming years. The Crisis will be fueled by the worsening debt, civic decay and global disorder. I will address these issues in this article.

Debt, Civic Decay & Global Disorder

The core elements propelling this Crisis – debt, civic decay, and global disorder – were obvious over a decade before the financial meltdown catalyst sparked this ongoing two decade long Crisis. With the following issues unresolved, the shadow of this crisis has only grown larger and more ominous:

Debt

The national debt has risen by $7 trillion (64%) to $18.1 trillion since 2009 and continues to accelerate by $2.3 billion per day, on track to surpass $20 trillion before Obama leaves office and $25 trillion by 2019.

The national debt as a percentage of GDP is currently 103% (it would be 106% if the BEA hadn’t decided to positively “adjust” GDP up by $500 billion last year). It is on course to reach 120% by 2019. Rogoff and Reinhart have documented the fact countries that surpass 90% experience economic turmoil, decline, and ultimately currency collapse and debt default.
Despite the housing collapse and hundreds of billions in mortgage, credit card, auto, and corporate debt being written off, dumped on the backs of taxpayers and hidden on the Federal Reserve balance sheet, total credit market debt has reached a new high of $58 trillion.

Harvard professor Laurence Kotlikoff has been a lone voice telling the truth about the true level of unfunded promises hidden in the CBO numbers. The unfunded social welfare liabilities in excess of $200 trillion for Social Security, Medicare, Medicaid, and Obamacare are nothing but a massive future tax increase on younger and unborn generations. Kotlikoff explains what would be required to pay these obligations:

“To honor these obligations we could (a) raise all federal taxes, immediately and permanently, by 57%, (b) cut all federal spending, apart from interest on the debt, by 37%, immediately and permanently, or (c) do some combination of (a) and (b).”

The level of taxation and/or Federal Reserve created inflation necessary to honor these politician promises is too large to be considered feasible. Therefore, these promises, made to get corrupt political hacks elected to public office, will be defaulted upon.

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LIQUIDITY DOES NOT CREATE SOLVENCY

The actions of central bankers around the globe which have been driving stock prices higher are not a sign of control. They are signs of desperation. They are losing control. Their academic theories have failed. Their bosses insist they turn it up to eleven. Something is going to blow. You can feel it. John Hussman knows what will happen. Do you?

That said, it’s worth noting that the inclinations of central banks toward quantitative easing and interest rate suppression are increasingly taking on a tone of desperation in the face of accelerating economic weakness in Japan, Europe and China. While the stated objective is to increase inflation, low inflation isn’t really the economic problem – low growth, intolerable debt burdens, and misallocated capital are at the core of global challenges here. Unfortunately, QE only misallocates capital toward more speculation and low-quality debt (primarily junk and leveraged loan issuance), without much impact on real growth. China’s move was prompted in part by a surge in bad loans to the highest level in nearly a decade. The largest European banks now have gross-leverage ratios as high as 30-to-1 (during the credit crisis, one could order the sequence of defaults accurately using this metric, with Bear Stearns, Lehman, and Fannie Mae right at the top). But liquidity does not create solvency, and with credit spreads widening, the growing desperation of monetary authorities is more a negative signal than a positive one.

This is much like what we saw in 2007-2008: when concerns about default are rising, default-free, low-interest rate money is not considered to be an inferior asset, and as a result, its increased availability does not provoke risk-seeking behavior. If we observe narrowing credit spreads and stronger uniformity in market internals, we will be able to infer a shift toward risk-seeking (and in turn, a greater likelihood that monetary easing will provoke further speculation). That won’t make stocks any cheaper, and downside risk will still need to be managed, but our immediate concerns would be less dire. At present, current market conditions and the lessons of history encourage us to be aware that very untidy market outcomes could unfold in very short order.

The upshot is this. Quantitative easing only “works” to the extent that default-free, low interest liquidity is viewed as an inferior holding. When investor psychology shifts toward increasing risk aversion – which we can reasonably measure through the uniformity or dispersion of market internals, the variation of credit spreads between risky and safe debt, and investor sponsorship as reflected in price-volume behavior – default-free, low-interest liquidity is no longer considered inferior. It’s actually desirable, so creating more of the stuff is not supportive to stock prices. We observed exactly that during the 2000-2002 and 2007-2009 plunges, which took the S&P 500 down by half in each episode, even as the Fed was easing persistently and aggressively. A shift toward increasing internal dispersion and widening credit spreads leaves risky, overvalued, overbought, overbullish markets extremely vulnerable to air-pockets, free-falls, and crashes.

Read all of John Hussman’s Weekly Commentary

TRUTH vs PERCEPTION

The stock market reached all-time highs last week based upon the machinations of central bankers and the perceptions of speculators that these bankers will always have their back. Yellen, Kuroda, and Draghi are growing increasingly desperate as everything they have done in the last five years has failed to revive their moribund economies. The average person in the U.S., Japan and Europe is far worse off today than they were in 2009 at the height of the worldwide recession. The .1% have vastly increased their riches through the ZIRP and QE policies of central bankers. The rise in stock markets is nothing but a confidence game built upon the false belief that there will always be a greater fool to buy overvalued assets acquired by borrowing from the central bankers at 0%. John Hussman understands the nature of markets:

We’re mindful that the financial markets move not based on what is true, but by what is perceived.

At present, the entire global financial system has been turned into a massive speculative carry trade. A carry trade involves buying some risky asset – regardless of price or valuation – so long as the current yield on that asset exceeds the short-term risk-free interest rate. Valuations don’t matter to carry-trade speculators, because the central feature of those trades is the expectation that the securities can be sold to some greater fool when the “spread” (the difference between the yield on the speculative asset and the risk-free interest rate) narrows.

He is also understands the move by the BOJ on Friday was made out of panic. It will set in motion tragic consequences for the Japanese people and world financial systems:

With regard to the recent move by the Bank of Japan, seeking to offset deflation by expanding the creation of base money, the move has the earmarks of a panic, which is counterproductive. The likely response of investors to panic is to seek safe, zero-interest money rather than being revolted by it. The result will be a plunge in monetary velocity and a tendency to strengthen rather than reduce deflationary pressures in Japan. In our view, the yen has already experienced a dramatic Dornbusch-type overshoot, and on the basis of joint purchasing power and interest parity relationships (see Valuing Foreign Currencies), we estimate that rather than the widely-discussed target of 120 yen/dollar, value is wholly in the other direction, and closer to 85 yen/dollar (the current exchange rate is just over 112). The Japanese people have demonstrated decades of tolerance for near-zero interest rates and the accumulation of domestic securities without any material inclination to spend them based on the form in which those securities are held. Rather than provoking strength in the Japanese economy, the move by the BOJ threatens to destroy confidence in the ability of monetary authorities to offset economic weakness – in some sense revealing a truth that should be largely self-evident already.

The carry trade is like picking up nickles in front of a steam roller. We’ve seen it all before. The result will be the same.

The narrative of overvalued carry trades ending in collapse is one that winds through all of financial history in countries around the globe. Yet the pattern repeats because the allure of “reaching for yield” is so strong. Again, to reach for yield, regardless of price or value, is a form of myopia that not only equates yield with total return, but eventually demands the sudden and magical appearance of a crowd of greater fools in order to exit successfully. The mortgage bubble was fundamentally one enormous carry trade focused on mortgage backed securities. Currency crises around the world generally have a similar origin. At present, the high-yield debt markets and equity markets around the world are no different.

Hussman can prove that QE and suppressed interest rates below the rate of inflation have completely failed to benefit the real economy and the real people. It has only benefited Wall Street profits, insiders, and rich speculators. They have set the stage for a financial collapse that will make 2008 seem like child’s play.

High real interest rates generally reflect strong demand for borrowing, driven by investment opportunities that are seen as productive enough to justify borrowing at those rates. They also encourage savings that can be directed to those productive investments. As a result, higher real rates are generally associated with more efficient investment and faster economic growth.

In contrast, depressed real interest rates are symptomatic of a dearth of productive investment opportunities. When central banks respond by attempting to drive those real interest rates even lower to “stimulate” interest-sensitive spending such as housing or debt-financed real investment, they really only lower the bar to invite unproductive investment and speculative carry trades.

We wouldn’t suggest that the Fed target above-equilibrium interest rates, but we are also entirely convinced that below-equilibrium interest rates are harmful to long-term economic and financial stability. Despite the ability of these policies to create short-term bursts of demand – enough to hold the global economy at growth rates that remain just at the border that has historically delineated expansions from recessions – the ultimate and rather predictable result of these policies will be another round of financial chaos.

Bernanke and Yellen created $3.5 trillion out of thin air since 2008 and have done absolutely nothing for Main Street USA. None of that $3.5 trillion has ever reached average people in the real world. It has been funneled to the .1% and used to speculate in the markets, creating simultaneous stock, bond and real estate bubbles. Now central bankers around the world desperately attempt to keep the bubbles from bursting simultaneously. They will fail once again.

As the central bank creates more money and interest rates move lower, people don’t suddenly go out and consume goods and services, they simply reach for yield in more and more speculative assets such as mortgage debt, and junk debt, and equities. Consumers don’t consume just because their assets have taken a different form. Businesses don’t invest just because their assets have taken a different form. The only activities that are stimulated by zero interest rates are those where interest rates are the primary cost of doing business: financial transactions.

What central banks around the world seem to overlook is that by changing the mix of government liabilities that the public is forced to hold, away from bonds and toward currency and bank reserves, the only material outcome of QE is the distortion of financial markets, turning the global economy into one massive speculative carry trade. The monetary base, interest rates, and velocity are jointly determined, and absent some exogenous shock to velocity or interest rates, creating more base money simply results in that base money being turned over at a slower rate.

Those expecting hyperinflation from these money printing measures will have to wait awhile. It will happen after deflation engulfs the world and those in power panic. But, confidence in fiat currency and those controlling its issuance is waning rapidly.

Hyperinflation results when there is a complete loss in the confidence of currency to hold its value, leading to frantic attempts to spend it before that value is wiped out. I expect we’ll observe significant inflationary pressures late in this decade, but present conditions aren’t conducive to rapid inflation without some shock to global supply.

The fact is that all financial markets are extremely overvalued and will crash. The speculators have already forgotten the tremors of the coming earthquake which occurred two weeks ago. Treasury rates plunged, along with stock markets, as there were no buyers to be found. Confidence dissipated in an instant. Fear was palpable. Everyone has a choice. You can look like an idiot before the crash or after it.

Overvalued bull market peaks may still be drawn-out and frustrating. They can seem endless (see The Journeys of Sisyphus) and then suddenly unravel far more rapidly than it seems they should (see Chumps, Champs, and Bamboo) at which point the “lagging” features of a defensive stance are often reversed with striking speed. As the late MIT economist Rudiger Dornbusch once observed, “The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.” Recall that the 2000-2002 decline wiped out the entire total return of the S&P 500 – in excess of Treasury bill returns – all the way back to May 1996. The 2007-2009 decline wiped out the entire total return of the S&P 500 – in excess of Treasury bill returns – all the way back to June 1995.

As I’ve noted before, the problem with what we call the Exit Rule for Bubbles – “you only get out if you panic before everyone else does” – is that you also have to decide whether to look like an idiot before the crash or an idiot after it.

Read all of John Hussman’s Weekly Letter

CRASH ALERT: EXAMINE YOUR EXPOSURES

Wall Street is filled with individualists. Right?

Do you believe this time is different? Then buy stocks on margin come Monday morning. Do you believe the Federal Reserve can permanently elevate stock markets? If so, borrow against your house and buy stocks with both hands on Monday. Do you believe stocks are undervalued, despite a century of data indicating they are 50% overvalued? If so, backup the truck and buy Twitter, Apple, and Amazon stock. Do you feel lucky?

Excerpted from John Hussman’s Weekly Market Comment,

Present conditions create an urgency to examine all risk exposures. Once overvalued, overbought, overbullish extremes are joined by deterioration in market internals and trend-uniformity, one finds a narrow set comprising less than 5% of history that contains little but abrupt air-pockets, free-falls, and crashes.

* * *

“Abrupt market weakness is generally the result of low risk premiums being pressed higher. There need not be any collapse in earnings for a deep market decline to occur. The stock market dropped by half in 1973-74 even while S&P 500 earnings grew by over 50%. The 1987 crash was associated with no loss in earnings. Fundamentals don’t have to change overnight. There is in fact zero correlation between year-over-year changes in earnings and year-over-year changes in the S&P 500. Rather, low and expanding risk premiums are at the root of nearly every abrupt market loss.

“One of the best indications of the speculative willingness of investors is the ‘uniformity’ of positive market action across a broad range of internals… I’ve noted over the years that substantial market declines are often preceded by a combination of internal dispersion, where the market simultaneously registers a relatively large number of new highs and new lows among individual stocks, and a leadership reversal, where the statistics shift from a majority of new highs to a majority of new lows within a small number of trading sessions.

“This is much like what happens when a substance goes through a ‘phase transition,’ for example, from a gas to a liquid or vice versa. Portions of the material begin to act distinctly, as if the particles are choosing between the two phases, and as the transition approaches its ‘critical point,’ you start to observe larger clusters as one phase takes precedence and the particles that have ‘made a choice’ affect their neighbors. You also observe fast oscillations between order and disorder in the remaining particles. So a phase transition features internal dispersion followed by leadership reversal. My impression is that this analogy also extends to the market’s tendency to experience increasing volatility at 5-10 minute intervals prior to major declines.”

Market Internals Go Negative, Hussman Weekly Market Comment, July 30, 2007

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“We’ve started to see the pattern of abrupt jumps and declines at 10-minute intervals that is often a hallmark of nervous markets. My continued concern is that numerous market plunges have been indifferent to both interest rate trends and even valuations, with the main warning flag being deterioration in the quality of market internals, as we observe at present. Both in the U.S. and internationally, ‘singular events’ tend to occur well after internal market action has turned unfavorable, and prices are well off their highs.

“Though I don’t want to put too much emphasis on intra-day behavior, if you examine tick data or daily ranges before major declines both in the U.S. and elsewhere, you’ll generally see price movements become chaotic at increasingly short intervals even before the event itself. One way to describe it without mathematics is to spin a quarter on the table and watch (and listen to it) closely – you’ll observe a similar dynamic at the abrupt point that the coin moves from an even spin to an irregular one, and again just before it stops. If you imagine a pen drawing out its movements, you would see it tracing out faster and faster circles as it moves from stability to instability.”

Broadening Instability, Hussman Weekly Market Comment, January 28, 2008

* * *

In recent weeks, the market has transitioned to the most hostile return/risk profile we identify: the pairing of overvalued, overbought, overbullish conditions with deterioration in market internals and price cointegration – what we call “trend uniformity” – across a wide range of stocks, sectors, and security types (see my September 29, 2014 comment Ingredients of a Market Crash). As in 2007 and 2000, we’re observing characteristic features of that shift. One of those features is that early selling from overvalued bull market peaks tends to be indiscriminate, as deterioration in market internals and the “average stock” often precedes substantial losses in the major indices. As of Friday, only 28% of NYSE stocks are above their respective 200-day moving averages.

In the current cycle, both the Russell 2000 small-cap index, and the capitalization-weighted NYSE Composite set their recent highs on July 3, 2014, failing to confirm the later high in the S&P 500 on September 18, 2014. Through Friday, the NYSE Composite is down -7.3% from its July 3rd peak, and the Russell 2000 is down -12.8%, while the S&P 500 is down only -4.0% over the same period. What’s happening here is that selling is being partitioned in secondary stocks, and more recently high-beta stocks (those with greatest sensitivity to market fluctuations). Market action is narrowing in a classic pattern that reflects the effort of investors to reduce risk around the edges of their portfolios, in what typically proves an ill-founded belief that a falling tide will not lower all ships.

Abrupt market losses are typically not responses to obvious “catalysts” but instead reflect a shift in investor preferences toward risk aversion, at a point where risk premiums are quite thin and prone to an upward spike to normalize them. That’s essentially what’s captured by the combination of overvalued, overbought, overbullish coupled with deteriorating internals. Another characteristic of these shifts is increasing volatility at short intervals – what I described at the 2007 peak and in early-2008 by analogy to “phase transitions” in particle physics. The extreme daily and intra-day market volatility in recent sessions is typical of that dynamic.

…

No doubt – this pile of zero-interest hot potatoes has helped to compress risk premiums across the entire range of risky assets toward zero (and we estimate, in some cases, below zero). But understand that the bulk of the advance in financial assets in recent years has not been a reasonable response to the level of interest rates, but instead reflects a dangerous compression of risk premiums.

…

In short, every 3-month period of additional zero-interest rate policy promised by the Fed is worth about a 1% premium over historical valuation norms. Another year would be worth a premium about 4% over historical norms. But with the market more than double historical norms on reliable measures, the Fed would have to promise a quarter of a century of zero interest rate policy before current stock valuations would reflect a “reasonable” response to interest rates. No – stocks are not elevated because low interest rates “justify” these prices. They are elevated because the risk premium for holding stocks has been driven to zero. We presently estimate negative total returns for the S&P 500 on every horizon shorter than 8 years.

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Though we should allow for a potential improvement in market conditions, I do believe that now is a particularly bad time to rely on the idea that “this time is different” with money you cannot afford to lose. This does not require forecasts about market direction – only proper consideration of market risk. Make sure that the portfolio of risks you do hold is the portfolio that you want to hold over the completion of the market cycle, understand the risk profile and actual losses that various asset classes have experienced over prior market cycles, take account of the prospective returns that are embedded into current valuations, and insist on historically reliable measures of valuation that demonstrate a strong association with actual subsequent returns over numerous market cycles across history.

…

Investors should understand that “prices and valuations are high” is another way of saying “future returns have already been realized, leaving little to be gained for quite some time.”

EVENTUALLY GRAVITY WINS

Keep ignoring John Hussman, Robert Shiller, Jeremy Grantham, and all the other data oriented people who honestly assess the stock market and are positive we are in for a big fall. The market is so overvalued at this point that it won’t even need an external event to trigger a crash. Gravity always wins in the end.

Opinion: Being a stock-market bull just got a lot harder

By Mark Hulbert

Published: Sept 9, 2014 6:00 a.m. ET

The U.S. is overvalued when using many different metrics

It’s hard to ignore the cyclically adjusted price-to-earnings ratio (CAPE) of stocks pioneered by Yale professor Robert Shiller. The CAPE has been higher only three times in the past: in 1929, 2000 and 2007.

London (MarketWatch) — Making the bullish case is getting a lot harder.

Let’s say that you want to wriggle out from underneath the bearish conclusions of the cyclically adjusted price-to-earnings ratio (CAPE), which for some time now has been very bearish. Sidestepping that conclusion turns out to be a lot harder than you think.

The CAPE is the version of the traditional P/E ratio that has been championed by Yale University finance professor (and recent Nobel laureate) Robert Shiller. Currently, for example, the CAPE stands at 25.69, which is 55% higher than its average back to the late 1800s of 16.55 and 61% higher than the ratio’s median level of 15.95. In fact, there have been only three times since the 1880s when the CAPE has been higher than where it stands today: 1929, 2000 and 2007 — all three of which, of course, coincided with major market highs.

The CAPE isn’t a perfect indicator, as Shiller himself will tell you. There are legitimate reasons to question its approach to market valuation. In addition, the bulls have shamelessly come up with myriad other “reasons” not to pay attention to it.

But Mebane Faber, chief investment officer at Cambria Investment Management, has this to say to all these so-called CAPE haters: “Fine, don’t use it. Let’s substitute in book and cash flows, two totally different metrics.”

Unfortunately for the bulls, the conclusion of looking at the market from those alternate perspectives is almost identically bearish.

Courtesy of data from Ned Davis Research, Faber ranked 43 countries’ stock markets around the world according to their relative valuations according to the CAPE as well as to cyclically adjusted ratios of price-to-book, price-to-cash flow, and price-to-dividend. When ranked according to the CAPE, for example, with top ranking going to the most undervalued country’s stock market, the U.S. is in 41st place. Only two countries are more overvalued according to this indicator.

Indicator	US market’s rank out of 43 countries, with #1 being most undervalued
CAPE	41
Cyclically-adjusted price-to-book ratio	37
Cyclically-adjusted price-to-dividend ratio	39
Cycilcally-adjusted price-to-cash-flows ratio	36

The accompanying table shows where the U.S. market would rank according to the other three indicators. Notice that ignoring the CAPE doesn’t get the bulls very far.

To argue that the U.S. stock market isn’t overvalued, in other words, the bulls not only have to dismiss the CAPE but also argue why the U.S. market should be priced so richly relative to book value, cash flows and dividends.

That’s not necessarily impossible. But it is clear that the bulls have a lot more work cut out for them.

Furthermore, even if the bearish conclusions of these diverse indicators turn out to be right, you should know that they are long-term indicators, telling you very little about the market’s near-term direction. My favorite analogy to describe the situation comes from Ben Inker, co-head of the asset-allocation team at Boston-based money management firm GMO.

He likens the market to a leaf in a hurricane: “You have no idea where the leaf will be a minute or an hour from now,” he says. “But eventually gravity will win out and it will land on the ground.”

Click here to inquire about subscriptions to the Hulbert Sentiment Indexes.

THE FOURTEEN YEAR RECESSION

“When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.” – Napoleon Bonaparte

“A great industrial nation is controlled by its system of credit. Our system of credit is privately concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men … [W]e have come to be one of the worst ruled, one of the most completely controlled and dominated, governments in the civilized world—no longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and the duress of small groups of dominant men.”– Woodrow Wilson

When you ponder the implications of allowing a small group of powerful wealthy unaccountable men to control the currency of a nation over the last one hundred years, you understand why our public education system sucks. You understand why the government created Common Core curriculum teaches children that 3 x 4 = 13, as long as you feel good about your answer. George Carlin was right. The owners of this country (bankers, billionaires, corporate titans, politicians) want more for themselves and less for everyone else. They want an educational system that creates ignorant, obedient, vacuous, obese dullards who question nothing, consume mass quantities of corporate processed fast food, gaze at iGadgets, are easily susceptible to media propaganda and compliant to government regulations and directives. They don’t want highly educated, critical thinking, civil minded, well informed, questioning citizens understanding how badly they have been screwed over the last century. I’m sorry to say, your owners are winning in a landslide.

The government controlled public education system has flourished beyond all expectations of your owners. We’ve become a nation of techno-narcissistic, math challenged, reality TV distracted, welfare entitled, materialistic, gluttonous, indebted consumers of Chinese slave labor produced crap. There are more Americans who know the name of Kanye West and Kim Kardashian’s bastard child (North West) than know the name of our Secretary of State (Ketchup Kerry). Americans can generate a text or tweet with blinding speed but couldn’t give you change from a dollar bill if their life depended upon it. They are whizzes at buying crap on Amazon or Ebay with a credit card, but have never balanced their checkbook or figured out the concept of deferred gratification and saving for the future. While the ignorant masses are worked into a frenzy by the media propaganda machine over gay marriage, diversity, abortion, climate change, and never ending wars on poverty, drugs and terror, our owners use their complete capture of the financial, regulatory, political, judicial and economic systems to pillage the remaining national wealth they haven’t already extracted.

The financial illiteracy of the uneducated lower classes and the willful ignorance of the supposedly highly educated classes has never been more evident than when examining the concept of Federal Reserve created currency debasement – also known as inflation. The insidious central banker created monetary inflation is the cause of all the ills in our warped, deformed, rigged financialized economic system. The outright manipulation and falsity of government reported economic data is designed to obscure the truth and keep the populace unaware of the deception being executed by the owners of this country. They have utilized deceit, falsification, propaganda and outright lies to mislead the public about the true picture of the disastrous financial condition in this country. Since most people are already trapped in the mental state of normalcy bias, it is easy for those in control to reinforce that normalcy bias by manipulating economic data to appear normal and using their media mouthpieces to perpetuate the false storyline of recovery and a return to normalcy.

This is how feckless politicians and government apparatchiks are able to add $2.8 billion per day to the national debt; a central bank owned by Too Big To Trust Wall Street banks has been able to create $3.3 trillion out of thin air and pump it into the veins of its owners; and government controlled agencies report a declining unemployment rate, no inflation and a growing economy, without creating an iota of dissent or skepticism from the public. Americans want to be lied to because it allows them to continue living lives of delusion, where spending more than you make, consuming rather than saving, and believing stock market speculation and home price appreciation will make them rich are viable life strategies. Even though 90% of the population owns virtually no stocks, they are convinced record stock market highs are somehow beneficial to their lives. They actually believe Bernanke/Yellen when they bloviate about the dangers of deflation. Who would want to pay less for gasoline, food, rent, or tuition?

Unless you are beholden to the oligarchs, that sense of stress, discomfort, feeling that all in not well, and disturbing everyday visual observations is part of the cognitive dissonance engulfing the nation. Anyone who opens their eyes and honestly assesses their own financial condition, along with the obvious deterioration of our suburban sprawl retail paradise infrastructure, is confronted with information that is inconsistent with what they hear from their bought off politician leaders, highly compensated Ivy League trained economists, and millionaire talking heads in the corporate legacy media. Most people resolve this inconsistency by ignoring the facts, rejecting the obvious and refusing to use their common sense. To acknowledge the truth would require confronting your own part in this Ponzi debt charade disguised as an economic system. It is easier to believe a big lie than think critically and face up to decades of irrational behavior and reckless conduct.

What’s In Your GDP

“The Gross Domestic Product (GDP) is one of the broader measures of economic activity and is the most widely followed business indicator reported by the U.S. government. Upward growth biases built into GDP modeling since the early 1980s, however, have rendered this important series nearly worthless as an indicator of economic activity. The popularly followed number in each release is the seasonally adjusted, annualized quarterly growth rate of real (inflation-adjusted) GDP, where the current-dollar number is deflated by the BEA’s estimates of appropriate price changes. It is important to keep in mind that the lower the inflation rate used in the deflation process, the higher will be the resulting inflation-adjusted GDP growth.” – John Williams – Shadowstats

GDP is the economic statistic bankers, politicians and media pundits use to convince the masses the economy is growing and their lives are improving. Therefore, it is the statistic most likely to be manipulated, twisted and engineered in order to portray the storyline required by the oligarchs. Two consecutive quarters of negative GDP growth usually marks a recession. Those in power do not like to report recessions, so data “massaging” has been required over the last few decades to generate the required result. Prior to 1991 the government reported the broader GNP, which includes the GDP plus the balance of international flows of interest and dividend payments. Once we became a debtor nation, with massive interest payments to foreigners, reporting GNP became inconvenient. It is not reported because it is approximately $900 billion lower than GDP. The creativity of our keepers knows no bounds. In July of 2013 the government decided they had found a more “accurate” method for measuring GDP and simply retroactively increased GDP by $500 billion out of thin air. It’s amazing how every “more accurate” accounting adjustment improves the reported data. The economic growth didn’t change, but GDP was boosted by 3%. These adjustments pale in comparison to the decades long under-reporting of inflation baked into the GDP calculation.

As John Williams pointed out, GDP is adjusted for inflation. The higher inflation factored into the calculation, the lower reported GDP. The deflator used by the BEA in their GDP calculation is even lower than the already bastardized CPI. According to the BEA, there has only been 32% inflation since the year 2000. They have only found 1.4% inflation in the last year and only 7.1% in the last five years. You’d have to be a zombie from the Walking Dead or an Ivy League economist to believe those lies. Anyone living in the real world knows their cost of living has risen at a far greater rate. According to the government, and unquestioningly reported by the compliant co-conspirators in the the corporate media, GDP has grown from $10 trillion in 2000 to $17 trillion today. Even using the ridiculously low inflation BEA adjustment yields an increase from $12.4 trillion to only $15.9 trillion in real terms. That pitiful 28% growth over the last fourteen years is dramatically overstated, as revealed in the graph below. Using a true rate of inflation exposes the grand fraud being committed by those in power. The country has been in a never ending recession since 2000.

Your normalcy bias is telling you this is impossible. Your government tells you we have only experienced a recession from the third quarter of 2008 through the third quarter of 2009. So despite experiencing two stock market crashes, the greatest housing crash in history, and a worldwide financial system implosion the authorities insist we’ve had a growing economy 93% of the time over the last fourteen years. That mental anguish you are feeling is the cognitive dissonance of wanting to believe your government, but knowing they are lying. It is a known fact the government, in conspiracy with Greenspan, Congress and academia, have systematically reduced the reported CPI based upon hedonistic quality adjustments, geometric weighting alterations, substitution modifications, and the creation of incomprehensible owner’s equivalent rent calculations. Since the 1700s consumer inflation had been estimated by measuring price changes in a fixed-weight basket of goods, effectively measuring the cost of maintaining a constant standard of living. This began to change in the early 1980s with the Greenspan Commission to “save” Social Security and came to a head with the Boskin Commission in 1995.

Simply stated, the Greenspan/Boskin Commissions’ task was to reduce future Social Security payments to senior citizens by deceitfully reducing CPI and allowing politicians the easy way out. Politicians would lose votes if they ever had to directly address the unsustainability of Social Security. Therefore, they allowed academics to work their magic by understating the CPI and stealing $700 billion from retirees in the ten years ending in 2006. With 10,000 baby boomers per day turning 65 for the next eighteen years, understating CPI will rob them of trillions in payments. This is a cowardly dishonest method of extending the life of Social Security.

If CPI was calculated exactly as it was computed prior to 1983, it would have averaged between 5% and 10% over the last fourteen years. Even computing it based on the 1990 calculation prior to the Boskin Commission adjustments, would have produced annual inflation of 4% to 7%. A glance at an inflation chart from 1872 through today reveals the complete and utter failure of the Federal Reserve in achieving their stated mandate of price stability. They have managed to reduce the purchasing power of your dollar by 95% over the last 100 years. You may also notice the net deflation from 1872 until 1913, when the American economy was growing rapidly. It is almost as if the Federal Reserve’s true mandate has been to create inflation, finance wars, perpetuate the proliferation of debt, artificially create booms and busts, enrich their Wall Street owners, and impoverish the masses. Happy Birthday Federal Reserve!!!

When you connect the dots you realize the under-reporting of inflation benefits the corporate fascist surveillance state. If the government was reporting the true rate of inflation, mega-corporations would be forced to pay their workers higher wages, reducing profits, reducing corporate bonuses, and sticking a pin in their stock prices. The toady economists at the Federal Reserve would be unable to sustain their ludicrous ZIRP and absurd QEfinity stock market levitation policies. Reporting a true rate of inflation would force long-term interest rates higher. These higher rates, along with higher COLA increases to government entitlements, would blow a hole in the deficit and force our spineless politicians to address our unsustainable economic system. There would be no stock market or debt bubble. If the clueless dupes watching CNBC bimbos and shills on a daily basis were told the economy has been in fourteen year downturn, they might just wake up and demand accountability from their leaders and an overhaul of this corrupt system.

Mother Should I Trust the Government?

We know the BEA has deflated GDP by only 32% since 2000. We know the BLS reports the CPI has only risen by 37% since 2000. Should I trust the government or trust the facts and my own eyes? The data is available to see if the government figures pass the smell test. If you are reading this, you can remember your life in 2000. Americans know what it cost for food, energy, shelter, healthcare, transportation and entertainment in 2000, but they unquestioningly accept the falsified inflation figures produced by the propaganda machine known as our government. The chart below is a fairly comprehensive list of items most people might need to live in this world. A critical thinking individual might wonder how the government can proclaim inflation of 32% to 37% over the last fourteen years, when the true cost of living has grown by 50% to 100% for most daily living expenses. The huge increases in property taxes, sales taxes, government fees, tolls and income taxes aren’t even factored in the chart. It seems gold has smelled out the currency debasement and the lies of our leaders. This explains the concerted effort by the powers that be to suppress the price of gold by any means necessary.

Living Expense	Jan-00	Mar-14	% Increase
Gallon of gas	$1.27	$3.51	176.4%
Barrel of oil	$24.11	$100.00	314.8%
Fuel oil per gallon	$1.19	$4.07	242.0%
Electricity per Kwh	$0.084	$0.134	59.5%
Gas per therm	$0.712	$1.078	51.4%
Dozen eggs	$0.97	$2.00	106.2%
Coffee per lb	$3.40	$5.20	52.9%
Ground Beef per lb.	$1.90	$3.73	96.3%
Postage stamp	$0.33	$0.49	48.5%
Movie ticket	$5.25	$10.25	95.2%
New car	$20,300.00	$31,500.00	55.2%
Annual healthcare spending per capita	$4,550.00	$9,300.00	104.4%
Average private college tuition	$22,000.00	$37,000.00	68.2%
Avg home price (Case Shiller)	$161,000.00	$242,000.00	50.3%
Avg monthly rent (Case Shiller)	$635.00	$890.00	40.2%
Ounce of gold	$279.00	$1,334.00	378.1%

Mother, you should not trust the government. There is no doubt they have systematically under-reported inflation based on any impartial assessment of the facts. The reality that we remain stuck in a fourteen year recession is borne out by the continued decline in vehicle miles driven (at 1995 levels) due to declining commercial activity, the millions of shuttered small businesses, and the proliferation of Space Available signs in strip malls and office parks across the land. The fact there are only 8 million more people employed today than were employed in 2000, despite the working age population growing by 35 million, might be a clue that we remain in recession. If that isn’t enough proof for you, than maybe a glimpse at real median household income, retail sales and housing will put the final nail in the coffin of your cognitive dissonance.

The government and their media mouthpieces expect the ignorant masses to believe they have advanced their standard of living, with median household income growing from $40,800 to $52,500 since 2000. But, even using the badly flawed CPI to adjust these figures into real terms reveals real median household income to be 7.3% below the level of 2000. Using a true inflation figure would cause a CNBC talking head to have an epileptic seizure.

The picture is even bleaker when broken down into the age of households, with younger households suffering devastating real declines in household income since 2000. I guess all those retail clerk, cashier, waitress, waiter, food prep, and housekeeper jobs created over the last few years aren’t cutting the mustard. Maybe that explains the 30 million increase (175% increase) in food stamp recipients since 2000, encompassing 19% of all households in the U.S. Luckily the banking oligarchs were able to convince the pliable masses to increase their credit card, auto and student loan debt from $1.5 trillion to $3.1 trillion over the fourteen year descent into delusion.

When you get your head around this unprecedented decline in household income over the last fourteen years, along with the 50% to 100% rise in costs to live in the real world, as opposed to the theoretical world of the Federal Reserve and BLS, you will understand the long term decline in retail sales reflected in the following chart. When you adjust monthly retail sales for gasoline (an additional tax), inflation (understated), and population growth, you understand why retailers are closing thousands of stores and hurdling towards inevitable bankruptcy. Retail sales are 6.9% below the June 2005 peak and 4% below levels reached in 2000. And this is with millions of retail square feet added over this time frame. We know the dramatic surge from the 2009 lows was not prompted by an increase in household income. So how did the 11% proliferation of spending happen?

The up swell in retail spending began to accelerate in late 2010. Considering credit card debt outstanding is at exactly where it was in October 2010, it seems consumers playing with their own money turned off the spigot of speculation. It has been non-revolving debt that has skyrocketed from $1.63 trillion in February 2010 to $2.26 trillion today. This unprecedented 39% rise in four years has been engineered by the government, using your tax dollars and the tax dollars of unborn generations. The Federal government has complete control of the student loan market and with their 85% ownership of Ally Financial, the largest auto financing company, a dominant position in the auto loan market. The peddling of $400 billion of subprime student loan debt and $200 billion of subprime auto loan debt has created the illusion of a retail recovery. The student loan debt has been utilized by University of Phoenix MBA wannabes to buy iGadgets, the latest PS3 version of Grand Theft Auto and the latest glazed donut breakfast sandwich on the market. It’s nothing but another debt financed bubble that will end in tears for the American taxpayer, as hundreds of billions will be written off.

The fake retail recovery pales in comparison to the wolves of Wall Street produced housing recovery sham. They deserve an Academy Award for best fantasy production. The Federal Reserve fed Wall Street hedge fund purchase of millions of foreclosed shanties across the nation has produced media proclaimed home price increases of 10% to 30% in cities across the country. Withholding foreclosures from the market and creating artificial demand with free money provided by the Federal Reserve has temporarily added $4 trillion of housing net worth and reduced the number of underwater mortgages on the books of the Too Big To Trust Wall Street banks. The percentage of investor purchases and cash purchases is at all-time highs, while the percentage of first time buyers is at all-time lows. Anyone with an ounce of common sense can look at the long-term chart of mortgage applications and realize we are still in a recession. Applications are 35% below levels at the depths of the 2008/2009 recession. Applications are 65% below levels at the housing market peak in 2005. They are even 35% below 2000 levels. There is no real housing recovery, despite the propaganda peddled by the NAR, CNBC, and Wall Street. It’s a fraud.

It is the pinnacle of arrogance and hubris that a few Ivy League educated economists sitting in the Marriner Eccles Building in the swamps of Washington D.C., who have never worked a day in their lives at a real job, think they can create wealth and pull the levers of money creation to control the American and global financial systems. All they have done is perfect the art of bubble finance in order to enrich their owners at the expense of the rest of us. Their policies have induced unwarranted hope and speculation on a grand scale. Greenspan and Bernanke have provoked multiple bouts of extreme speculation in stocks and housing over the last 15 years, with the subsequent inevitable collapses. Fed encouraged gambling does not create wealth it just redistributes it from the peasants to the aristocracy. The Fed has again produced an epic bubble in stock and bond valuations which will result in another collapse. Normalcy bias keeps the majority from seeing the cliff straight ahead. Federal Reserve monetary policies have distorted financial markets, created extreme imbalances, encouraged excessive risk taking, and ruined the lives of working class people. Take a long hard look at the chart below and answer one question. Was QE designed to benefit Main Street or Wall Street?

The average American has experienced a fourteen year recession caused by the monetary policies of the Federal Reserve. Our leaders could have learned the lesson of two Fed induced collapses in the space of eight years and voluntarily abandoned the policies of reckless credit expansion, instead embracing policies encouraging saving, capital investment and balanced budgets. They have chosen the same cure as the disease, which will lead to crisis, catastrophe and collapse.

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” – Ludwig von Mises

BLACK MONDAY?

Germany is coming to their senses. They have run their country the right way, while the PIIGS have lived far above their means for decades. The entire European Union rests on the back of Germany. They’ve bailed out Ireland. They’ve bailed out Greece. It looks like they are going to tell Italy to fuck off. Most people don’t realize how big Italy is. They have the 8th highest GDP in the world. Their GDP is $2 trillion. Germany’s is $3.3 trillion. Germany will bankrupt itself trying to save the Italians. Plus, Germany knows that Spain is in worse shape than Italy. They have the 12th largest economy in the world.

If Germany is balking, then European stocks will crater on Monday. Asian stocks will crater in anticipation that Europe and the US markets will collapse on Monday. The earliest indication we have is Saudi Arabia, whose market is down 5.5%.

You can bet that the phone lines are buzzing between Timmy Geithner, Bennie Bernanke and their friendly puppet master CEOs – Lloyd Blankfein, Jamie Dimon, Vikrim Pandit, Ken Lewis, John Mack. These are the people trying to retain their wealth and power. They DO NOT care about you, the country, or the long term best interests of our nation. They care about their billions. This is a game to them. They are agreeing on a plan of attack to manipulate the markets on Monday.

It is highly likely that the markets will plunge at the opening as a knee jerk reaction to the S&P downgrade. The criminal Wall Street banks will then instruct their computers to buy stocks and an unbelievable rally will commence. This is supposed to pump confidence back into the investing public. CNBC will do their part and tell you to buy the fucking dip. This is all a show.

The S&P downgrade should have happened two years ago. The US is a bad long term credit. We will default by printing money and paying interest to gullible foreigners in worthless pieces of paper. The US economy is in recession. Stocks fall 40% during recessions. The wheels are coming off this bus. It doesn’t matter whether stocks finish up or down on Monday. They will be at least 30% lower in the next year. You can Buy the Fucking Dip or you can focus on the facts and the truth.

It Just Went From Bad To Far, Far Worse As Germany Says Italy Is Too Big For EFSF To Save, Refuses To Carry Euro Bailout Burden

Submitted by Tyler Durden on 08/06/2011 12:20 -0400

Remember when we said (yesterday) that Germany will soon balk over the fact that it is pledging its entire economy to bail out an insolvent Europe? Well, that moment has come.

Dow Jones just hitting the tape referencing Spiegel

German Govt: Italy Too Big For EFSF To Save – Spiegel
German Govt: Doubts Whether Tripling EFSF Would Help It Save Italy
German Govt: Italy Must Make Savings, Reforms To Exit Crisis – Spiegel
Italy Debt Guarantee Could Raise Doubts Over Germany’s Finances – Spiegel
German Govt: EFSF Should Only Help Small, Mid-Size Countries – Spiegel

As a reminder, yesterday’s stopgap announcement by the ECB to expand its SMP purchases of secondary market Italian and Spanish bonds was merely as a precursor to full EFSF monetization until its comes fully online in September (or sooner) in a vastly expanded format (between €1.5 and €3.5 trillion).

If Germany is now against this, which appears to be the case, it pretty much means, well, game over.

Add the uncerainty over the unwind of the Europe rescue “gamechanger” as one of the more naive CNBC anchors said yesterday, and Monday is now guaranteed to be a bloodbath.

As for those saying China will gladly step in and fund a $5 trillion EFSF shortfall, they may want to read the following article from Reuters:

Italian Economy Minister Giulio Tremonti said on Thursday that Asian investors are reluctant to buy Italian bonds because it sees they are not being bought by the European Central Bank.

Speaking at a news conference, Tremonti also said it would be desirable for the central bank to follow the lead of the Japanese and Swiss central banks in taking expansionary steps to tackly the euro zone’s crisis.

“I note that the Bank of Japan today launched quantitative easing and the Swiss cen bank cut rates to zero, we are waiting for decisions if possible, but desirable (from the ECB),” Tremonti said.

When you talk to Asia they say: “We don’t understand what Europe is,” he continued. “The second point is that they say ‘if your central bank doesn’t buy your bonds, why should we buy them”?

P.S. Time to unwind that Bund short we suggested yesterday. In fact, if true, it is time for a big rush to safety.

THE FOURTH AMERICAN REVOLUTION (Featured Article)

The next Fourth Turning is due to begin shortly after the new millennium, midway through the Oh-Oh decade. Around the year 2005, a sudden spark will catalyze a Crisis mood. Remnants of the old social order will disintegrate. Political and economic trust will implode. Real hardship will beset the land, with severe distress that could involve questions of class, race, nation and empire. The very survival of the nation will feel at stake. Sometime before the year 2025, America will pass through a great gate in history, commensurate with the American Revolution, Civil War, and twin emergencies of the Great Depression and World War II. – The Fourth Turning – Strauss & Howe -1997

Harpers Ferry – 1859 Tucson – 2011

The mass murder in Tucson is another brick in the wall of this Fourth Turning Crisis. The importance of this tragic event is not what happened in that Safeway parking lot, but the reaction in the aftermath of the shooting. Turnings are not about specific events, but how generations react to the events based on their stages of life. A turning is an era with a characteristic social mood, a new twist on how people feel about themselves and their nation. It results from the aging of the generational constellation. A society enters a turning once every twenty years or so, when all living generations begin to enter their next phases of life. We entered this Fourth Turning between 2005 and 2008, with the collapse of the housing market and subsequent financial system implosion.

We have crossed the threshold into a decisive era of secular upheaval, when the values regime will propel the replacement of the old civic order with a new one. The Silent Generation (1925-1942) is dying off, Baby Boomers (1943-1960) are entering elder hood, Generation X is entering midlife, Millenials are entering young adulthood—and a new generation of child Artists are being born. Strauss & Howe have documented that a long human life of 80 to 100 years makes up a social cycle of growth, maturation, entropy, and death (and rebirth) known as a Saeculum. Within each cycle, four generations proceed through their four stages of life. Every 15 to 25 years a new Turning surprises those who only think of history in a linear way. Strauss & Howe are historians who have been able to document this generational cycle going back to the 1400s.

The Anglo-American saeculum dates back to the waning of the Middle Ages in the middle of the fifteenth century. In this lineage, there have been seven saecula:

Late Medieval (1435-1487)
Reformation (1487-1594)
New World (1594-1704)
Revolutionary (1704-1794)
Civil War (1794-1865)
Great Power (1866-1946)
Millennial (1946-2026?)

The Turnings of history are like the seasons of nature. Seasons cannot be rearranged, seasons cannot be avoided, but humans and nations can prepare for the challenges presented by each season. Winter has descended upon our nation.

We are still in the early stages of this Fourth Turning and the mood of the country continues to darken like the sky before an approaching blizzard. Generational theory does not predict the specific events that will happen during a Turning. The events, personalities, and policies that become the chapters in history books are not what drive a Turning, it is how each generation reacts to the events, personalities and policies. Someone who is 60 years old will react differently to an event than they would have reacted at 20 years old. The issues that are driving this Fourth Turning (un-payable entitlement obligations, Wall Street greed & power, globalization gutting the middle class, increasing government control, wealth distribution) were all known and understood in 1997. It took the spark of a housing market collapse and the generations being in proper alignment to catalyze the mood of the country.

Chapter one of this Fourth Turning is approaching its end. Chapter two guarantees to be more intense, with more violence, and periods of great danger. Strauss & Howe envisioned this chapter based upon their analysis of the issues looming back in 1997:

The risk of catastrophe will be very high. The nation could erupt into insurrection or civil violence, crack up geographically, or succumb to authoritarian rule. If there is a war, it is likely to be one of maximum risk and effort – in other words, a total war. Every Fourth Turning has registered an upward ratchet in the technology of destruction, and in mankind’s willingness to use it. Thus, might the next Fourth Turning end in apocalypse – or glory. The nation could be ruined, its democracy destroyed, and millions of people scattered or killed. Or America could enter a new golden age, triumphantly applying shared values to improve the human condition. The rhythms of history do not reveal the outcome of the coming Crisis; all they suggest is the timing and dimension. – The Fourth Turning – Strauss & Howe -1997

American Revolutions

“A Fourth Turning is a solstice era of maximum darkness, in which the supply of social order is still falling but the demand for order is now rising. As the community instinct regenerates, people resolve to do more than just relieve the symptoms of pending traumas. Intent on addressing root causes, they rediscover the value of unity, teamwork, and social discipline. Far more than before, people comply with authority, accept the need for public sacrifice, and shed anything extraneous to the survival needs of their community. This is a critical threshold: People either coalesce as a nation and culture – or rip hopelessly and permanently apart.” – The Fourth Turning – Strauss & Howe -1997

“Photo credit: ComfortBetrays.com”

There have been three prior Fourth Turnings in U.S. history: the American Revolution, Civil War and Great Depression/World War II. The American Revolution preceded the Civil War by 87 years. The Great Depression followed the Civil War by 69 years and this Millenial Crisis arrived 76 years after the Great Stock Market Crash of 1929. Essentially, each prior Fourth Turning has represented a Revolution in American history.

The First American Revolution began in 1773 when Parliament’s response to the Boston Tea Party ignited a colonial tinderbox—leading directly to the first Continental Congress, the battle of Concord, and the Declaration of Independence. History always seems easy to predict in retrospect. This is another of the many faults in human thinking. There was very little talk or thought of the colonies breaking away from the mother country during the 1760s. Up until the Boston Tea Party catalyst event, no one could have predicted the events which would occur in a chain reaction over the next 21 years. There were dark cold bitter days during this Crisis winter. In the end, George Washington’s honor, courage and fortitude symbolized the character of a new nation.

Historians Charles and Mary Beard described the Civil War as the Second American Revolution. The Civil War Crisis began with a presidential election that southerners interpreted as an invitation to secede. The attack on Fort Sumter triggered the most violent conflict ever fought on New World soil. The war reached its climax with the Emancipation Proclamation and Battle of Gettysburg (in 1863). The epic conflagration redefined America. The slavery issue was settled for good, signed in the blood of 600,000 men. The industrial might of the North was rechanneled toward progress as a world industrial powerhouse. In retrospect many will say the Civil War was entirely predictable, but that is completely untrue.

The great compromise generation (Henry Clay, John C. Calhoun, Daniel Webster) of the 1850s passed from the scene, leaving the country in the hands of firebrands on both sides. John Brown’s raid on Harper’s Ferry and subsequent execution served to increase the brooding mood of the country. The bloodiest war in the history of mankind was not predictable even one year before it began. The aristocracy of Washington DC actually took carriages in their Sunday best to watch the First Battle of Bull Run. Shortly thereafter Lincoln mobilized 500,000 men and unleashed a catastrophic spiral of butchery over the next four years that exhausted itself with the assassination of Lincoln and the surrender at Appomattox in the same week. The resolution of this Crisis felt more like defeat than victory.

Renowned American historian Carl Degler called FDR’s New Deal the “Third American Revolution”. The Crisis began suddenly with the Black Tuesday stock-market crash in 1929. After a three-year economic free fall, the Great Depression triggered the New Deal Revolution, a vast expansion of government, and hopes for a renewal of national community. After Pearl Harbor, America planned, mobilized, and produced for world war on a scale never seen in the history of mankind, making possible complete victory over the Nazis and Fascists. In 1928 did anyone foresee an 89% stock market crash, worldwide depression, vast expansion of government power, a world war more devastating than the prior war, and the usage of an atomic weapon of mass destruction? Not a chance. Only in retrospect do people convince themselves that it was predictable.

Black Tuesday, October 29, 1929 marked the abrupt unforeseen end of the Roaring Twenties. The bewilderingly rapid collapse of the worldwide financial system in the space of three years left the American people shaken and desperate. With their wealth destroyed and unemployment exceeding 20%, the American public turned to Franklin Delano Roosevelt and his New Deal promises of government social and work programs. He declared “nationwide thinking, nationwide planning, and nationwide action, the three essentials of public life”. This was truly a Third American Revolution. FDR’s policies changed the course of American history. The renewed spirit of American youth during the 1930s was essential in preparing them for the trials that awaited from 1941 through 1945. It is somewhat ironic that FDR’s revolutionary social programs, begun during the last Crisis, will be a major factor in the current Crisis – the Fourth American Revolution.

Fourth American Revolution

“The US government is on a “burning platform” of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon.” – David M. Walker

No one knows exactly what events will transpire over the next 15 to 20 years as this Fourth Turning morphs from regeneracy to climax and finally to resolution. The mainstream media, most politicians, and self proclaimed progressives are blind to the cyclicality of history. They believe history proceeds in a linear upwards path. These are the people you see on TV talking about toning down the rhetoric, false gestures of bipartisanship, and soothing words about the financial crisis being a thing of the past. They fail to understand that once the mood of the country is catalyzed by a trigger event or events, there is no turning back the clock. Winter must be dealt with head on. Very few, if any, “financial experts” anticipated a housing collapse, followed by a deep recession, a 50% stock market crash, and a financial system which came within hours of total implosion on September 18, 2008 (as detailed in the documentary Generation Zero). Absolutely no one anticipated the extreme measures taken by the U.S. government and Federal Reserve to “Save” the country from a 2nd Great Depression. These measures have added $5 trillion to the National Debt in the last 40 months. It took 205 years to accumulate the 1st $5 trillion of debt.

While it is impossible to predict the exact trials and tribulations that will confront America over the next decade, the issues that will drive this Fourth Turning were clearly visible to anyone with their eyes open, many years in advance of the Crisis. Strauss & Howe clearly detailed the easily observable issues that led to the current Crisis back in 1997. Their book is not prophecy, but historically provable interactions between generations based upon the circumstances confronting society at the time.

“Sometime around the year 2005, perhaps a few years before or after, America will enter the Fourth Turning. A spark will ignite a new mood. It will catalyze a Crisis. In retrospect, the spark might seem as ominous as a financial crash, as ordinary as a national election, or as trivial as a Tea Party. It could be a rapid succession of small events in which the ominous, the ordinary, and the trivial are commingled.” – The Fourth Turning – Strauss & Howe -1997

The authors use their common sense, based upon known trends, to posit potential catalyst scenarios such as:

A global terrorist group blows up an aircraft and announces it possesses nuclear weapons.
Beset by a fiscal crisis, states begin to balk at Federal mandates leading to secession actions, militia violence, cyber attacks on the IRS, and demands for a new Constitutional Convention.
An impasse over the federal budget reaches a stalemate. The government shuts down. The President declares emergency powers. Congress rescinds his authority. Financial markets spiral out of control. Default looms.

These “theoretical” scenarios were put forth in 1997. The authors concluded that these were unlikely, but that no matter what the catalyst, the response by the generations would be predictable. It seems this Fourth Turning is being driven by a succession of smaller triggers, rather than one large trigger. The housing collapse, which began in 2005, ultimately led to the world financial system collapse in 2008. The overreach by government in attempting to repair the damage done by Wall Street and K Street led to the Rick Santelli Tea Party Rant heard round the world in February 2009. The Tea Party movement has since taken the country by storm, surprising the linear thinkers and stunning the ruling elite. Last week a congresswoman and a dozen bystanders were gunned down, further darkening the mood of the country and inflaming passions among competing political ideologies. So what happens next?

Strauss & Howe postulated on the possible path of this Crisis and I see nothing to doubt their analysis:

“An initial spark will trigger a chain reaction of unyielding responses and further emergencies. The core elements of these scenarios (debt, civic decay, global disorder) will matter more than the details, which the catalyst will juxtapose and connect in some unknowable way. It is unlikely that the catalyst will worsen into a full fledged catastrophe, since the nation will probably find a way to avert the initial danger and stabilize the situation for a while.” – The Fourth Turning – Strauss & Howe -1997

The CNBC talking heads, mainstream media pundits, clueless Washington politicians, corrupt Wall Street shysters, and non-thinking robotic masses have been convinced that the actions taken by Ben Bernanke, Barack Obama, Tim Geithner and Congress have averted a financial disaster and saved the world. One hundred years from now when Chinese historians look back on the period from 2000 until 2025 they will ask themselves, “what the hell were they thinking?” The causes of this Crisis are as clear as day to anyone willing to see. A small group of Wall Street bankers and corporate interests through their proxy, the Federal Reserve, created the largest housing bubble in the history of the world generating hundreds of billions in obscene undeserved profits, while destroying the wealth and futures of millions of middle class Americans. Once the fraudulent nature of the bankers’ pillaging of the nation’s wealth came to light, the entire ponzi scheme collapsed, as they always do. On a parallel track, the Federal government, knowing full well that its un-payable social welfare commitments could never be fulfilled, decided to engage in two wars of choice, made additional un-payable social welfare commitments, and created new bloated bureaucratic agencies in the name of security and safety.

What will truly amaze future historians is the “solutions” that our leaders chose to save the country. Despite already being the largest debtor the planet has ever seen, with a National Debt of $8 trillion in 2005, the President and Congress have added an additional $6 trillion of debt, with plans to increase that debt at a rate of $1.5 trillion per year for the foreseeable future. Despite the fact that the housing boom was created by loose monetary policy and non-enforcement of existing laws and regulations by the Federal Reserve, our leaders have allowed this bank owned entity to reduce interest rates to 0%, buy $1.5 trillion of toxic mortgages from the Wall Street banks that caused the crisis, suspend requirements for banks to report their assets at their FMV, monetize the debt spending by the Federal Government, and create inflation through the printing of money out of this air. The Federal government’s response to the crisis was to create a mandated healthcare benefit for 35 million more Americans with no means to pay the untold trillions in future costs. Our leaders’ solution to a crisis caused by excessive debt has been to create twice as much debt. A passage from the Book of Matthew which Abraham Lincoln utilized during a prior Fourth Turning Crisis is a fitting description of where we stand today:

“Every kingdom divided against itself is brought to desolation; and every city or house divided against itself shall not stand.” – Matthew 12:25

The country is deeply divided. There is a vast swath of America that has chosen ignorance over knowledge. With 50% of Americans paying no income taxes, they will vote for anyone who promises them more. The rest of America is split between those who believe the answer lies in increased Federal government coordination and control and those who want a return to liberty, individual responsibility and a vastly reduced Federal government footprint. As I have tried to figure out the most likely path of this Fourth Turning I was focused on an external conflict in the Middle East or an incident on the Korean Peninsula providing the next spark. After the shooting in Tucson, this Fourth Turning is beginning to crystallize.

What I realized was that the three previous American Revolutions all occurred on U.S. soil. The First American Revolution was fought on American soil by a loose confederation of autonomous states against the overbearing control of a great European empire. The Second American Revolution was fought by Americans against Americans and resulted in a vast expansion of Federal government power and diminishment of state power. The Third American Revolution took place under the auspices of saving America from the depths of Depression with government social programs and the birth of the Nanny State. Each Revolution has further expanded the power and control of the Federal government. I believe the Fourth American Revolution will ultimately come down to a battle between the Liberty movement and the ruling oligarchy of Wall Street, Mega-corporations and supporters of the Military Nanny State.

I trust that Strauss & Howe correctly assessed the main factor that will drive the next phase of this Crisis – the Great Devaluation:

“It could be a series of downward ratchets linked to political events that sequentially knock the supports out from under the residual popular trust in the system. As assets devalue, trust will further disintegrate, which will cause assets to devalue further, and so on. Every slide in asset prices, employment, and production will give every generation cause to grow more alarmed. With savings worth less, the new elders will become more dependent on government, just as government becomes less able to pay benefits to them. Before long, America’s old civic order will seem ruined beyond repair.” – The Fourth Turning – Strauss & Howe -1997

There is no doubt in my mind that the next downward ratchet in this Crisis will be caused by Ben Bernanke and his attempt to generate just enough inflation to make our un-payable debt load less burdensome. His track record regarding economic forecasting, assessment of housing prices and anticipation of economic distress is flawless. He hasn’t been right once. With the top 1% richest Americans controlling 42% of the financial wealth in the country, an all-time high, the next leg down will boil over into class warfare. The middle class has been devastated thus far. Another stock market collapse and more job losses would push them over the edge. The evident failure of government solutions will invigorate the Liberty Movement to become even more strident in their anti-government message. The subsequent battle between the Haves and Have Nots is likely to flair into protests, riots and increasing violence. There will be no compromises. The 2012 Presidential election could incite reactions on par with the election of Lincoln in 1860. While the country convulsively flails about, foreign adversaries will take advantage of our weakness. Peak oil will throw a further wrench into the downward spiral. Out of this tempest, the country will either turn to a strong leader and more government control or move back toward a smaller Federal government footprint and a return to rule by the people and for the people. The outcome is unknown, but the path is foreseeable. Let’s hope that Ben Franklin was right.

All of us who were engaged in the struggle must have observed frequent instances of superintending providence in our favor. To that kind providence we owe this happy opportunity of consulting in peace on the means of establishing our future national felicity. And have we now forgotten that powerful friend? Or do we imagine that we no longer need his assistance? I have lived, Sir, a long time, and the longer I live, the more convincing proofs I see of this truth-that God governs in the affairs of men. And if a sparrow cannot fall to the Ground without his Notice, is it probable that an Empire can rise without his Aid?” – Benjamin Franklin, To Colleagues at the Constitutional Convention

“History offers no guarantees. If America plunges into an era of depression or violence which by then has not lifted, we will likely look back on the 1990s as the decade when we valued all the wrong things and made all the wrong choices.” – The Fourth Turning – Strauss & Howe -1997