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Red Screen At Morning, Investor Take Warning
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Red Screen At Morning, Investor Take Warning
Growing up as I did in coastal New England, this old rhyme was drilled into us as children:
Red sky at night, sailor’s delight;
Red sky at morning, sailor take warning.
Because many of the people in town still made their living on the sea, the safety of person and property depended on being able to recognize the signs of approaching danger.
A notably red sky at morning is usually due to sunrise reflection off of moisture-bearing clouds, signifying an arriving a storm system bringing rain, wind and rough seas. Those who ignored a red sky warning often did so at their peril.
Red Sky In The Markets
I’m reminded of that childhood rhyme because the markets are giving us a clear “red sky” warning right now. One that comes after (too) many years of uninterrupted fair winds and smooth sailing.
The markets have plunged nearly 8% over just a single week. And the losses are across the board. Nearly every asset class from stocks to bonds to commodities to real estate are participating in the pain. Market displays are a sea of red.
We’ve written so often and recently of the dangerous level of over-valuation in asset prices (caused by years of central bank intervention) that to re-hash the premise again feels unnecessary.
But the chart below is worth our attention now, as it really drives home just how dangerously over-extended the markets have become. It’s a 20-year chart of the S&P 500, showing how it has traded vs its 50-month moving average (the thin green line).
Importantly, the chart also plots the Bollinger bands for this moving average. These are the thin red (upper) and purple (lower) lines above and below the green one.
…click on the above link to read the rest of the article…
It’s Looking A Lot Like 2008 Now…
It’s Looking A Lot Like 2008 Now…
Economic and market conditions are eerily like they were in late 2007/early 2008.
Remember back then? Everything was going great.
Home prices were soaring. Jobs were plentiful.
The great cultural marketing machine was busy proclaiming that a new era of permanent prosperity had dawned, thanks to the steady leadership of Alan Greenspan and later Ben Bernanke.
And only a small cadre of cranks, like me, was singing a different tune; warning instead that a painful reckoning in our financial system was approaching fast.
It’s fitting that I’m writing this on Groundhog Day, as to these veteran eyes, it sure has been looking a lot like late 2007/early 2008 lately…
The Fed’s ‘Reign Of Error’
Of course, the Great Financial Crisis arrived in late 2008, proving that the public’s faith in central bankers had been badly misplaced.
In reality, all Ben Bernanke did was to drop interest rates to 1%. This provided an unprecedented incentive for investors and institutions to borrow, igniting a massive housing bubble as well as outsized equity and bond gains.
It’s worth taking a moment to understand the mechanism the Federal Reserve used back then to lower interest rates (it’s different today). It did so by flooding the banking system with enough “liquidity” (i.e. electronically printed digital currency units) until all the banks felt comfortable lending or borrowing from each other at an average rate of 1%.
The knock-on effect of flooding the US banking system (and, really, the entire world) in this way created an echo bubble to replace the one created earlier during Alan Greenspan’s tenure (known as the Dot-Com Bubble, though ‘Sweep Account’ Bubble is more accurate in my opinion):
…click on the above link to read the rest of the article…
