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Market analyst John Hussman, who is a market bear, has claimed that the stock market will lose about $20 trillion in the next crash. That is equal to 60% of the market value.

Hussman has been warning that stock valuations have been extreme for years, and is long overdue for a return to historical norms, according to Investopedia. “The only time we’ve ever seen a confluence of risk factors anywhere close to those of today was the week of March 24, 2000, which marked the peak of the technology bubble,” he wrote in a recent blog post quoted by Business Insider.

While Hussman’s prediction is certainly severe, a drop of that magnitude is far from unprecedented. In fact, it is not much worse than the last bear market that ran from 2007 to 2009, also known as the Great Recession. Additionally, some other market indices fared even worse than the S&P 500 in these episodes. Most notably, the tech-heavy Nasdaq Composite Index (IXIC) lost a whopping 78% of its value during the notorious “dotcom crash.”

The market value of all publicly traded U.S. stocks reached $30 trillion in January, per Barron‘s. Since then, the Russell 3000 has fallen by 1.5%, suggesting that its market value is just slightly lower today. As a result, the $20 trillion plunge predicted by Hussman would represent roughly a 66% decline. Other prominent investors and market watchers have issued bearish forecasts in 2018. –Investopedia

Hussman is blaming the Federal Reserve’s quantitative easing program for this major problem. “The current back-slapping about the success of extraordinary monetary policy is a lot like declaring victory in a football game at halftime, just before a flock of fire-breathing dragons swoops onto the field and eats the leading team.

…click on the above link to read the rest of the article…

A Financial Professional’s Perspective

November 15, 2018

ShedConnect.com

A Financial Professional’s Perspective

What’s the current market volatility signalling?

Given the recent volatile gyrations of the markets, we thought it an opportune time ask a full-time financial advisory firm whom we respect for their take on the current environment.

As most PeakProsperity.com readers are aware, we highly advise investors to work in concert with a professional financial advisor whose strategy takes into account the “Three E” macro risks highlighted in our foundational series, The Crash Course.

If folks experience difficulty finding such a professional, we refer them to Peak Prosperity’s endorsed financial advisor: New Harbor Financial. The folks at New Harbor have been mindful of our analysis — as well as that of other experts we admire, such as John Hussman — for over a decade now.

We aked them for their latest evaluation of the current situation in the markets, how they’re positioned right now, and what guidance they’re offering to their clients.

Here’s what they have to say:

Environment

Risk in global stock markets is exceedingly high at the present time in our opinion. Much of the work that we do in evaluating risk levels in the stock market at any given time is derived from valuations, and other key market metrics like stock market breadth, sentiment, and technicals. Valuations, measured the way that we think they should be, have never been higher. Both the cyclically adjusted price earnings (CAPE) ratio developed by Robert Shiller, and the margin-adjusted CAPE, as developed by John Hussman, are at or near historic extremes. Valuations cannot be used to precisely time the short-term movements of stock indices, but over the long-term of 5 to 10 years or more, valuations have a very high correlation to actual realized returns over those timeframes.

…click on the above link to read the rest of the article…

Sucker Traps and the Arithmetic of Risk

March 4, 2018

Sucker Traps and the Arithmetic of Risk

John Hussman has another excellent article out this week but it will be ignored. Mathematically, it must be ignored.

In the Arithmetic of Risk, Hussman posted the above chart. I added the anecdotes regarding where we are. Here are some pertinent snips.

At present, I view the market as a “broken parabola” – much the same as we observed for the Nikkei in 1990, the Nasdaq in 2000, or for those wishing a more recent example, Bitcoin since January.

Two features of the initial break from speculative bubbles are worth noting. First, the collapse of major bubbles is often preceded by the collapse of smaller bubbles representing “fringe” speculations. Those early wipeouts are canaries in the coalmine.

In July 2007, two Bear Stearns hedge funds heavily invested in sub-prime loans suddenly became nearly worthless. Yet that was nearly three months before the S&P 500 peaked in October, followed by a collapse that would take it down by more than 55%.

Observing the sudden collapses of fringe bubbles today, including inverse volatility funds and Bitcoin, my impression is that we’re actually seeing the early signs of risk-aversion and selectivity among investors. The speculation in Bitcoin, despite issues of scalability and breathtaking inefficiency, was striking enough. But the willingness of investors to short market volatility even at 9% was mathematically disturbing.

See, volatility is measured by the “standard deviation” of returns, which describes the spread of a bell curve, and can never become negative. Moreover, standard deviation is annualized by multiplying by the square root of time. An annual volatility of 9% implies a daily volatilty of about 0.6%, which is like saying that a 2% market decline should occur in fewer than 1 in 2000 trading sessions, when in fact they’ve historically occurred about 1 in 50.

…click on the above link to read the rest of the article…

“This Is Where They Completely Lost Their Minds” – Hussman

February 10, 2018

“This Is Where They Completely Lost Their Minds” – Hussman

– Hussman warns ‘the S&P 500 to lose approximately two-thirds of its value over the completion of this cycle’
– ‘the market has lost value, even since 2009, when overvalued, overbought, overbullish conditions were joined by divergent internals’
– Believes the market is going to learn lessons about the crash ‘the hard way’

In an almost prophetic blog post from John Hussman last week, we are warned about the bubble waiting to collapse in the US equity market and the hard lesson investors are about to learn.

Drawing on both his own experience and the work of the much revered Didier Sornette, Hussman looks at the current state of the US equity market, where it sits in its cycle and how it compares to history.

The prognosis is not good. Hussman warns that ” the market has lost value, even since 2009, when overvalued, overbought, overbullish conditions were joined by divergent internals…I expect the S&P 500 to lose approximately two-thirds of its value over the completion of this cycle.”

Of course, the lesson may have finally begun. On Monday February 5th the Dow Jones dropped over 1,000 points, the largest single day drop ever, on a points-basis. Meanwhile, also on the 5th, the S&P500 went negative for 2018 closing down more than 7 percent from a record set in January. Similar action was repeated on the 8th February, with many traders declaring they’d never seen anything like it.

Gold performed well following the rout and we believe gold prices may rise further as the drama leads period of risk aversion and a new found appreciation by investors looking for gold’s hedging and safe haven attributes.

You can hear more about our bubble crash predictions in our Goldnomics podcast. Here we take a look at one of the important financial questions of our day – is this the greatest stock market bubble in history?

…click on the above link to read the rest of the article…

2017 Year In Review

December 27, 2017

Tortoon/Shutterstock

2017 Year In Review

Markets fiddle while Rome burns

Every year, friend-of-the-site David Collum writes a detailed “Year in Review” synopsis full of keen perspective and plenty of wit. This year’s is no exception. As with past years, he has graciously selected PeakProsperity.com as the site where it will be published in full. It’s quite longer than our usual posts, but worth the time to read in full. A downloadable pdf of the full article is available here, for those who prefer to do their power-reading offline. — cheers, Adam

Introduction

“He is funnier than you are.”

~David Einhorn, Greenlight Capital, on Dave Barry’s Year in Review

Every December, I write a survey trying to capture the year’s prevailing themes. I appear to have stiff competition—the likes of Dave Barry on one extreme¹ and on the other, Pornhub’s marvelous annual climax that probes deeply personal preferences in the world’s favorite pastime.² (I know when I’m licked.) My efforts began as a few paragraphs discussing the markets on Doug Noland’s bear chat board and monotonically expanded to a tome covering the orb we call Earth. It posts at Peak Prosperity, reposts at ZeroHedge, and then fans out from there. Bearishness and right-leaning libertarianism shine through as I spelunk the Internet for human folly to couch in snarky prose while trying to avoid the “expensive laugh” (too much setup).³ I rely on quotes to let others do the intellectual heavy lifting.

“Consider adding more of your own thinking and judgment to the mix . . . most folks are familiar with general facts but are unable to process them into a coherent and actionable framework.”

~Tony Deden, founder of Edelweiss Holdings, on his second read through my 2016 Year in Review

“Just the facts, ma’am.”

~Joe Friday

…click on the above link to read the rest of the article…

The Waiting Is The Hardest Part

October 5, 2017

BLOG

imgflip.com

The Waiting Is The Hardest Part

Tom Petty’s anthem for today’s investors

Man, what an awful stretch of events.

When I penned last week’s article on tragedy, little did I expect something as horrible as the Las Vegas massacre would immediately follow. And nearly lost in the headlines was the untimely passing of rock legend, Tom Petty, one of my all-time favorite musicians. Sure can’t wait for this week to be over…

In memory of Tom, I’ve been listening to a lot of his and the Heartbreakers’ best hits. The lyrics to one song in particular, The Waiting, well-captures an important message today’s investors should take to heart:

The waiting is the hardest part

Don’t let it kill you baby, don’t let it get to you

Those waiting for the financial markets to experience some sort (any sort!) of pullback have been waiting a long, looong time. How long?

It has been over 100 months (more than 8.5 years) since the current bull market began in April of 2009
It has been 15 months since the last (and very brief) drop of 5% in the S&P 500
This past September saw record low volatility, including a stretch now claimed to be “the most peaceful days in the history of the markets”
Since last year’s presidential election, at which point the markets were already considered dangerously overvalued, the Dow Jones Industrial Average is up over 20%
As of this article’s publishing, the Dow, the S&P and the NASDAQ are all trading at record highs

Or, to put it visually:

The stock market is now 70% higher than it was at the previous bubble peak immediately preceding the 2008 Great Financial Crisis.

Reflect for a moment how painful the crash from Oct 2008-March 2009 was. How much more painful will a crash from today’s much dizzier heights be?

…click on the above link to read the rest of the article…

Van Halen, M&Ms, And The Next Market Downturn

September 3, 2017

Van Halen, M&Ms, And The Next Market Downturn

How watching the right indicators will avoid disaster

The planet-sized egos of rock & roll performers are legendary.

Few things symbolize this better than the outrageous requests they often make when on tour.

These requests are referred to as “riders”, and appear in the contract a tour venue receives in advance of the artist’s arrival. These contract riders specify the physical conditions that the singer/band requires to be in place before arriving to perform. Stage lighting settings, sound equipment, furnishings, etc — that kind of stuff.

And these rider requests can get pretty funky – often extremely so — when it comes to backstage perks the performers want.

For example: A wooden pond filled with koi carp (Eminem). A driver who will not speak or make eye contact (Katy Perry). 20 white kittens and 100 doves (Mariah Carey). Seven dwarves (Iggy Pop). 50,000 bees (Slayer). A sub-machine gun (Mötley Crüe). And, yes, even a great white shark (Hank III).

The practice of making these kind of outrageous demands stems from a rider Van Halen inserted into the contract for its 1982 world tour, which insisted on a bowl of M&Ms to be provided backstage, but with all of the brown M&Ms removed.

As this image below of the actual rider shows, the band was very explicit in its seriousness about this:

Once the media got whiff of this, it had a field day roasting the band’s narcissistic chutzpah. A new high-water mark of diva capriciousness had been established, which quickly became legend. A feat of prima donna pampering that subsequent performers have been trying to top ever since.

But as crazy as it sounds, Van Halen’s “no brown M&Ms” rider had nothing to do with caprice. There was a solid rationale behind it.

In fact, it was quite brilliant.

…click on the above link to read the rest of the article…

A Murderous Complacency

February 4, 2017

A Murderous Complacency

Dark omens are circling everywhere in today’s markets

murder: a flock of crows

~ Miriam-Webster dictionary

Many view the appearance of crows as an omen of death because ravens and crows are scavengers and are generally associated with dead bodies, battlefields, and cemeteries, and they’re thought to circle in large numbers above sites where animals or people are expected to soon die.

~ “Nature”, PBS.org

Running PeakProsperity.com requires me to read and process a lot of data on a daily basis. As it’s hard to digest it all in real-time, I keep a running list of charts, tables and articles that catch my attention, to return to when I have the time to give them my full focus.

Lately, that list has been getting quite long. And it’s largely full of indicators that concern me; signals that the long era of “extend and pretend” in today’s markets may finally be at its terminus.

Like crows circling overhead, every day brings with it new worrisome statistics that portend an ill change ahead. Indeed, these omens are increasing so quickly now that it’s hard not to feel like Tippi Hedren in Hitchcock’s suspense classic The Birds:

So what are the data that make me think these crows will soon be feasting on the carcass of the great bull market that has powered stock, bonds, real estate and most other asset classes to record highs since 2009?

Rogue’s Gallery

Complacent Investors

Investors have enjoyed remarkably gentle treatment by the stock markets over the past half-decade. Retracements have occurred much less frequently than historical norms, and have been shallow and short-lived when they happened.

Tom Lee, head of research at Fundstrat and often referred to as “Wall Street’s biggest bull” notes that 2016 was the mildest year on record for the S&P 500, with only 7 days in which the index traded at less than 3% of its 52-week high.

…click on the above link to read the rest of the article…

Worst Case Scenario = 73% Down From Here

March 31, 2016

WORST CASE SCENARIO = 73% DOWN FROM HERE

As the stock market gyrates higher and lower in a fairly narrow range, the spokesmodels and talking heads on CNBC breathlessly regurgitate the standard bullish mantra designed to keep the muppets in the market. They are employees of a massive corporation whose bottom line and stock price depend upon advertising revenues reaped from Wall Street and K Street. They aren’t journalists. They are propagandists disguised as journalists. Their job is to keep you confused, misinformed, and ignorant of the true facts.

Based on the never ending happy talk and buy now gibberish spouted by the pundit lackeys, you would think we are experiencing a bull market of epic proportions and anyone who hasn’t been in the market has missed out on tremendous gains. There’s one little problem with that bit of propaganda. It’s completely false. The Fed turned off the QE spigot at the end of October 2014 and the market has gone nowhere ever since.

QE1 began in September 2008, taking the Fed balance sheet from $900 billion to $2.3 trillion by June 2010. This helped halt the stock market crash and drove the S&P 500 up by 50% from its March 2009 lows. QE2 was implemented in November 2010 and increased the Fed balance sheet to $2.9 trillion by the end of 2011. This resulted in an unacceptable 10% increase in the S&P 500, so the Fed cranked up their printing presses to hyper-speed and launched the mother of all quantitative easings, with QE3 pushing their balance sheet to $4.5 trillion by October 2014, when they ceased their “Save a Wall Street Banker” campaign.

As Main Street dies, Wall Street has been paved in gold. The S&P 500 soared to all-time highs, with 40% gains from the September 2012 QE3 launch until its cessation in October 2014. Like a heroine addict, Wall Street has experienced withdrawal symptoms ever since, and begs for more monetary easing injections.

…click on the above link to read the rest of the article…

Deranged Central Bankers Blowing Up the World

February 15, 2016

DERANGED CENTRAL BANKERS BLOWING UP THE WORLD

It is now self-evident to any sentient being (excludes CNBC shills, Wall Street shyster economists, and Keynesian loving politicians) the mountainous level of unpayable global debt is about to crash down like an avalanche upon hundreds of millions of willfully ignorant citizens who trusted their politician leaders and the central bankers who created the debt out of thin air. McKinsey produced a report last year showing the world had added $57 trillion of debt between 2008 and the 2nd quarter of 2014, with global debt to GDP reaching 286%.

The global economy has only deteriorated since mid-2014, with politicians and central bankers accelerating the issuance of debt. These deranged psychopaths have added in excess of $70 trillion of debt in the last eight years, a 50% increase. With $142 trillion of global debt enough to collapse the global economy in 2008, only a lunatic would implement a “solution” that increased global debt to $212 trillion over the next seven years thinking that would solve a problem created by too much debt.

The truth is, these central bankers and captured politicians knew this massive issuance of more unpayable debt wouldn’t solve anything. Their goal was to keep the global economy afloat so their banker owners and corporate masters would not have to accept the consequences of their criminal actions and could keep their pillaging of global wealth going unabated.

The issuance of debt and easy money policies of the Fed and their foreign central banker co-conspirators functioned to drive equity prices to all-time highs in 2015, but the debt issuance and money printing needs to increase exponentially in order keep stock markets rising. Once the QE spigot was shut off markets have flattened and are now falling hard. You can sense the desperation among the financial elite. The desperation is borne out by the frantic reckless measures taken by central bankers and politicians since 2008.

…click on the above link to read the rest of the article…

This Time Isn’t Different

January 4, 2016

THIS TIME ISN’T DIFFERENT

Last year ended with a whimper on Wall Street. The S&P 500 was down 1% for the year, down 4% from its all-time high in May, and no higher than it was 13 months ago at the end of QE3. The Wall Street shysters and their mainstream media mouthpieces declare 2016 to be a rebound year, with stocks again delivering double digit returns. When haven’t they touted great future returns. They touted them in 2000 and 2007 too. No one earning their paycheck on Wall Street or on CNBC will point out the most obvious speculative bubble in history. John Hussman has been pointing it out for the last two years as the Fed created bubble has grown ever larger. Those still embracing the bubble will sit down to a banquet of consequences in 2016.

At the peak of every speculative bubble, there are always those who have persistently embraced the story that gave the bubble its impetus in the first place. As a result, the recent past always belongs to them, if only temporarily. Still, the future inevitably belongs to somebody else. By the completion of the market cycle, no less than half (and often all) of the preceding speculative advance is typically wiped out.

Hussman referenced the work of Reinhart & Rogoff when they produced their classic This Time is Different. Every boom and bust have the same qualities. The hubris and arrogance of financial “experts” and government apparatchiks makes them think they are smarter than those before them. They always declare this time to be different due to some new technology or reason why valuations don’t matter. The issuance of speculative debt and seeking of yield due to Federal Reserve suppression of interest rates always fuels the boom and acts as the fuse for the inevitable explosive bust.

…click on the above link to read the rest of the article…

Deja Vu All Over Again

December 14, 2015

Deja Vu All Over Again

Janet Yellen will increase interest rates for the first time in nine years on Wednesday. She isn’t raising them because the economy is strengthening. The economy just happens to be weakening rapidly, as global recession takes hold. The stock market is 3% lower than it was in December 2014, and has basically done nothing since the end of QE3. Wall Street is throwing a hissy fit to try and stop Janet from boosting rates by an inconsequential .25%. Janet would prefer not to raise rates, but the credibility and reputation of her bubble blowing machine is at stake. The Fed has enriched their Wall Street benefactors over the last six years, while destroying the real economy and the middle class.

The quarter point increase will be reversed in short order as soon as we experience market collapse part two. It will be followed with negative interest rates and QE4, as these academics have only one play in their playbook – print money. They created the last financial crisis and have set the stage for the next – even bigger collapse. John Hussman explains how their zero interest rate policy has driven speculators into junk bonds as the only place to get any yield.

Over the past several years, yield-seeking investors, starved for any “pickup” in yield over Treasury securities, have piled into the junk debt and leveraged loan markets. Just as equity valuations have been driven to the second most extreme point in history (and the single most extreme point in history for the median stock, where valuations are well-beyond 2000 levels), risk premiums on speculative debt were compressed to razor-thin levels. By 2014, the spread between junk bond yields and Treasury yields had fallen to less than 2.4%. Since then, years of expected “risk-premiums” have been erased by capital losses, and defaults haven’t even spiked yet (they do so with a lag).

…click on the above link to read the rest of the article…

The Worse Things Get For You, The Better They Get For Wall Street

October 27, 2015

The Worse Things Get For You, The Better They Get For Wall Street

On October 2 the BLS reported absolutely atrocious employment data, with virtually no job growth other than the phantom jobs added by the fantastically wrong Birth/Death adjustment for all those new businesses springing up around the country. The MSM couldn’t even spin it in a positive manner, as the previous two months of lies were adjusted significantly downward. What a shocker. At the beginning of that day the Dow stood at 16,250 and had been in a downward trend for a couple months as the global economy has been clearly weakening. The immediate rational reaction to the horrible news was a 250 point plunge down to the 16,000 level. But by the end of the day the market had finished up over 200 points, as this terrible news was immediately interpreted as good news for the market, because the Federal Reserve will never ever increase interest rates again.

Over the next three weeks, the economic data has continued to deteriorate, corporate earnings have been crashing, and both Europe and China are experiencing continuing and deepening economic declines. The big swinging dicks on Wall Street have programmed their HFT computers to buy, buy, buy. The worse the data, the bigger the gains. The market has soared by 1,600 points since the low on October 2. A 10% surge based upon lousy economic info, as the economy is either in recession or headed into recession, is irrational, ridiculous, and warped, just like our financial system. This is what happens when crony capitalism takes root like a foul weed and is bankrolled by a central bank that cares only for Wall Street, while throwing Main Street under the bus.

…click on the above link to read the rest of the article…

Two Outs in the Bottom of the Ninth

September 26, 2015

Two Outs in the Bottom of the Ninth

The housing market peaked in 2005 and proceeded to crash over the next five years, with existing home sales falling 50%, new home sales falling 75%, and national home prices falling 30%. A funny thing happened after the peak. Wall Street banks accelerated the issuance of subprime mortgages to hyper-speed. The executives of these banks knew housing had peaked, but insatiable greed consumed them as they purposely doled out billions in no-doc liar loans as a necessary ingredient in their CDOs of mass destruction.

The millions in upfront fees, along with their lack of conscience in bribing Moody’s and S&P to get AAA ratings on toxic waste, while selling the derivatives to clients and shorting them at the same time, in order to enrich executives with multi-million dollar compensation packages, overrode any thoughts of risk management, consequences, or the impact on homeowners, investors, or taxpayers. The housing boom began as a natural reaction to the Federal Reserve suppressing interest rates to, at the time, ridiculously low levels from 2001 through 2004 (child’s play compared to the last six years).

Greenspan created the atmosphere for the greatest mal-investment in world history. As he raised rates from 2004 through 2006, the titans of finance on Wall Street should have scaled back their risk taking and prepared for the inevitable bursting of the bubble. Instead, they were blinded by unadulterated greed, as the legitimate home buyer pool dried up, and they purposely peddled “exotic” mortgages to dupes who weren’t capable of making the first payment. This is what happens at the end of Fed induced bubbles. Irrationality, insanity, recklessness, delusion, and willful disregard for reason, common sense, historical data and truth lead to tremendous pain, suffering, and financial losses.

…click on the above link to read the rest of the article…

It Wasn’t a Crash – But it Could Become One

September 9, 2015

It Wasn’t a Crash – But it Could Become One

A Reminder by John Hussman

In light of the Nikkei Index soaring by more than 1,300 points (!) overnight – a single day gain of 7.7% – it is time to briefly review the current market situation. As to the Nikkei, we would note two things: 1. it was “catching up” to what other markets have been doing, after having been the only stock market index that was significantly down the previous day (whereas all other markets soared after the close of trading in Japan) and 2. such enormous volatility – regardless of its direction – is usually not a bullish sign. Quite the contrary, in fact.

brokenlinkchain

The Nikkei jumps by 1,343 points overnight – click to enlarge.

In his weekly market comment, John Hussman tries to defuse the hysteria surrounding the recent market break a bit, by reminding everybody that a 10% correction is not a “crash”, but actually a quite normal occurrence. The only reason why it felt abnormal was that there hasn’t been any market volatility for such a long time. It is this long absence of market volatility that was abnormal, not the 10% decline. He writes:

“The market decline of recent weeks was not a crash. It was merely an air-pocket. It was probably just a start. Such air pockets are typical when overvalued, overbought, overbullish conditions are joined by deterioration in market internals, as we’ve observed in recent months. They are the downside of the “unpleasant skew” that typically results from that combination – a series of small but persistent marginal new highs, followed by an abrupt vertical decline that erases weeks or months of gains within a handful of sessions (see Air Pockets, Free-Falls, and Crashes).

…click on the above link to read the rest of the article…

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