The Stock Market Gives us 2 Classic Warnings. Will We Listen?

Propelled by vapors and dreams.

By Larry Kummer, Editor of Fabius Maximus, a multi-author website with a focus on geopolitics: 

Again the US stock market skates on the edge of an abyss, this time without the Fed holding a safety net. We’ve seen this combination of peaking economy and overvalued stocks; it never ends well. Too bad we don’t learn from history. But I suspect we’ll soon get another opportunity.

The Fed is like the chaperon who orders the punch bowl removed just when the party is warming up.”
— Attributed to William McChesney Martin Jr., Chairman of the Fed from 1951–1970. Those days are long gone.

Pigs running off a cliff

The biotech party

Here’s the weekly StockCharts view of the exchange-traded fund for the S&P Biotech Index (IBB). The heart of the bubble, it has the classic parabolic rise of an investment mania. Now down almost 30% from its July record high. Propelled by vapors and dreams, we need not consult Nostradamus to guess at what comes next. For details see Don’t ask if there’s a biotech bubble. Ask why we have another bubble.

EFT of the S&P Biotech Index

The social media mania, and Tesla

The media stocks are the frothy edge of the bubble. Their boom began with the IPO of Facebook on 18 May 2012 at $38. It peaked at $99 in July, now at $89 (down 10% from peak). While Facebook has carved out a dominant and profitable niche, most of its scores of competitors remain little but dreams given form by Venture Capitalists — many doomed to die as independent companies when Wall Street has squeezed the last drips of juice from the mania.

Here’s the weekly StockCharts view of the Global X exchange-traded fund for the social media industry (SOCL), now fallen 20% from peak to its long-term support — with nothing below but the void. For details see The advertising glut dooms the social media industry.

Global X Social Media Index ETF

Here’s a poster child for the bubble: the weekly StockCharts view of the stock for Tesla Motors (TSLA), a less-than tiny auto company inexplicable worth more than highly profitable giant competitors. Sometimes dreams come true, but that’s seldom the way to bet.

Tesla (TSLA)

What could go wrong?

From the crash until Q2 of last year the US economy was flying just above the treetops (i.e., stall speed of 2%, below which it’s at risk of falling into recession — much like an airplane going too slow, generating insufficient lift to stay aloft).  The economy has to grow enough for debtors to pay interest and principal on the $31trillion of private sector debt ($14T of households, $17T of businesses). The slowdowns in 2011 and 2013 were met by massive government stimulus programs, which worked.

Real GDP YoY

Now the world economy is slowing as the weakness of China and the oil exporters spreads across the emerging nations, and the US along with it. It’s not the apocalypse the bears so confidently predict (again and again). Also, the Atlanta Fed’s algorithm-based forecast has been rising for the past  weeks, moving to match the forecast of carbon-based economists.


But the economy has only a loose and complex relationship with stock prices. It’s the combination of insane overvaluation and a weak economy that creates historical inflection points (like boy and girl rabbits, you need both to make trouble). The result is usually ugly. The peaking of corporate profits provides a spark to the tinder.

To see how ugly, read this analysis by John Hussman (former professor of economics at U MI, now running the Hussman Funds): “Valuations Not Only Mean-Revert; They Mean-Invert“. This time there probably will be no government rescue of the economy and stock market, at least one in time to prevent a crash in the frothy parts of the market — and a broad bear market. How would a stock market crash affect America? Here’s the answer. By Larry Kummer, Editor of Fabius Maximus

And then what, beyond the obvious victims? Read… Who Gets Hurt from the Next Stock Market Crash?

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  9 comments for “The Stock Market Gives us 2 Classic Warnings. Will We Listen?

  1. Petunia says:

    I just watched a video put out by Carl Icahn warning that the valuations and earnings are all smoke and mirrors. Something is definitely up when they start telling the truth.

  2. illumined says:

    I for one have learned the lessons of history and placed my bets accordingly. I’m ready to ride the next leg down all the way to the bottom.

  3. J P Frogbottom says:

    Don’t you just love viewing this stuff? The FEDS have no budget, no money, but they DO have a printing press…
    Business is stating interesting numbers, but our competitors are melting overseas…. HUH???
    Place your bets, ladies and gentlemen. The Casino IS open…

  4. NOTaREALmerican says:

    Dude, like, where’s your optimism? This is unMerican defeatist crazy talk.

  5. Dan Romig says:

    The USA has:
    A national debt greater than GDP … for decades to come.
    An underemployed work force being paid wages that barely cover expenses … except for the 1% at the top.
    Students graduating (those that actually do get a degree, that is) from University with tremendous debt. Many of these graduates will not find good jobs in their field of newly acquired expertise.
    Farmers who are probably not going to make a profit in the next couple of years, and are losing money in 2015.
    Retirees who can’t get any return on their nest-eggs they’ve worked all their life for, which in large part, is a result of the Fed screwing with monetary supply and interest rates, but hell, Wall Street is loving it.

    There’s plenty more to say, but it’s time for dinner and a cold beer up here in Minneapolis. Good luck to you all, eh?

  6. rich black says:

    People have lost fortunes underestimating the power of the Fed. The Paul/Sanders and Bloomberg audits gave us a glimpse of the Fed’s power in 2008 and 2009, when the Fed made $23.8 trillion available to the mega banks that make up the international banking cartel. Just as the Fed made trillions of dollars available to the big banks, so that they could buy Treasuries and buy back their TARP bonds, the Fed could make trillions available to those same banks, who in turn could leverage those trillions to unfathomable sums, in order to prop up the values of selected stocks. The ponzi can continue as long as the Fed’s helicopter keeps flying, and without an audit, the public will not be the wiser.

    Remember, if the Fed can create money out of thin air, then the Fed can, logically, make the debt, created by that money, vanish into thin air.

    • Wolf Richter says:

      Rich, remember, as they say … monetary policy sooner or later gets to the currency. It’s easy to devalue a currency. But once a rout has started due to “monetary policy,” it’s hard to stop it or even slow it down.

      A currency devaluation is an impoverishment of everyone who earns money in that currency and hold assets denominated in that currency. Monetary policy is not a free lunch.

      • rich black says:

        In the long run, that has to be true, but the BOJ has been monetizing the yen since 1999, and, in spite of all the ‘time bomb’ warnings, that currency has survived (which it will continue to do, until it doesn’t). At this point in time, there seems to be a “beggar thy neighbor” policy built into almost every currency. If the US starts racing its currency more quickly to the bottom, I would expect that other countries will join that race.

        Today’s USD is worth a tenth of what it was worth in 1950, so it’s probably safe to say that the currency devaluation ship has long since sailed. Nixon and Connally gave that ship some serious tailwinds in 1971, but, as Connally stated to our trading partners, “it’s our currency, but it’s your problem”. Most countries, today, seem be inclined to devalue their currencies. Usually, when currencies get devalued, asset prices in those same currencies inflate.. Unless, of course, there is hyperinflation. and In that case, the prices of necessities will rocket up far faster than the prices of stocks and real estate.

  7. Julian the Apostate says:

    Umm, Rich, did I hear you right? The Fed are playing with themselves?

Comments are closed.