Suddenly – I mean the signs had been everywhere for a long time and “suddenly” doesn’t really apply – the whole house of cards came tumbling down.
This is the transcript from my podcast last Sunday, THE WOLF STREET REPORT:
I just listened to a friend of mine, telling me how he now feels comfortable with his investing skills and his strategies after two years of studying the markets. He retired two years ago, and that’s when for the first time in his life he started paying attention to stocks and bonds. He has stocks and bonds, and he feels really good about his portfolio, he said. There are going to be minor sell-offs in the market, he said, but his portfolio was designed to ride this out without damage.
And he was talking about his future. Clearly, the future success of his portfolio was starting to impact his decision-making today about the future, how, with this additional income from his portfolio, he could do all sorts of things, and the income from his portfolio would pay without sweat for the high costs of living in San Francisco.
This type of story has now become a constant theme. It goes like this: I’m really smart and know what I’m doing and will make money forever, because over the past few years I made money, and everything I touched made money, and now I’m a genius.
I remember feeling that way in 1999. Only this time, it’s a lot bigger and a lot broader, and a lot more leveraged, and a lot more people are involved in it. And all doubts have evaporated.
These kinds of conversations are popping up everywhere. It’s just a casual conversation among geniuses.
I was feeling that way in 1999. The market had taught us to do the craziest things because they made the most profits. Doubts evaporated. Just about everything made money, crazy things made more money, and the craziest things made the mostest. We knew what we were doing. We were self-anointed geniuses.
We had a big pile of “fuck-you money.” That’s the money that allowed you to blow off your boss and give the company you worked for the finger – because you had enough wealth to where you didn’t really need to work. Work was just sort of something you wanted to do but didn’t have to do, because your large income from your bets in the markets would make you more money than you could ever earn working. This “fuck-you money” was an escape hatch to a better place, and it was open and ready for you to wander through.
And other folks had early retirement in mind. And other folks did crazy stuff.
I quit my job at the end of 1995 and without actually meaning to or having planned it, ended up traveling around the world until January 1999, going to over 100 countries, including 25 in Africa [here’s my book about the first part of that journey, mostly in Japan, and how the “Asian girl” got it all started]. For three years, I was living out of a bag, and I had a blast. It was the best thing I’ve ever done. And my “fuck-you money” allowed me to do it. When I finally came back, in February 1999, the bull market was roaring, and everyone in it was a genius.
And people who thought this market was crazy, and who sat it out, were considered pitiful morons.
The conversations in 1999 were eerily like the conversations today. There was the same wise acknowledgment that there would be dips, but so be it, our portfolios and strategies were designed to get us through them without damage. There was the same notion that we have now mastered the future, and that our wealth wasn’t at all staked on highly risky, over-inflated iffy instruments, and that, even if something untoward happened, we could always get out in time.
Then suddenly – and I mean the signs had been everywhere for a long time for all to see and the word “suddenly” doesn’t really apply – the whole house of cards came tumbling down.
The infamous “fuck-you money” evaporated, early retirement plans were shelved, bosses had to be put up with, and life went on. But instead of fun and the aura of genius, people grappled with the loss of everything, and there was a growing sense of humility about these iffy bets that had been taken, and these folks were steeped in pain as dreams went up in smoke.
The Nasdaq, where most of the fun had been had, ended up plunging 78%. For people with leveraged positions and margin debt, the losses could be total. The S&P 500 plunged over 50%.
And after the S&P 500 had barely recovered, it was knocked down again by 55% during the Financial Crisis.
It took a coordinated effort by the major central banks around the world, to the tune of over $10 trillion of money printing and asset buying to bail out those investors, or make those folks immensely rich that were not in the market when the shit hit the fan and still had plenty of liquidity, borrowed or otherwise, to be able to jump in with both feet when the markets bottomed out.
And now the same conversations are back that were had in 1999, the same cock-sure self-confidence about mastering the future, about nothing being able to go wrong because we’re so smart now.
At the same time, the market is more leveraged than ever. Corporate America – that’s your stocks and bonds and loan funds – is more leveraged than ever, with even weak companies being able to pile on debt.
Back in 1999, the exuberance was largely limited to stocks, and focused in particular on what was called tech stocks, which was anything with a “.com” near its name, given that this was the first big bubble of the internet. Hence the word, Dotcom Bubble.
Now the exuberance is everywhere: In the stock market nearly across the board, in the housing market, in the huge credit market that includes bonds of all kinds and leveraged loans and Collateralized Loan Obligations and Mortgage Backed Securities and subprime auto-loan-backed securities, and rent-backed securities, and old bicycle-backed securities, and other credit instruments. And, of course, in the derivatives market. Everyone is chasing yield. Risks don’t exist.
We call it the Everything Bubble for good reasons. In fact, the Dotcom Bubble, as huge and crazy and irrational as it was, pales against the Everything Bubble.
So there are two guiding principles now: One, nothing can go wrong. And two, there are no risks.
And if those two guiding principles fail and things do go wrong and risk suddenly exist and trample on everyone’s dreams, then the third guiding principle kicks in: The Fed will always bail us out.
So I invite you to look at the stock markets where central banks have tried everything in the book to inflate them and bail everyone out, with strategies such as negative interest rates and massive QE.
Turns out, US stock indices, such as the S&P 500, are the exception rather than the rule. Not because American corporations are so much better – far from it – but for other reasons that may no longer apply in the future. And we’ll get there in a moment.
In major markets where stocks are denominated in currencies that are relatively stable against the dollar – such as the euro, the yen, the Chinese renminbi, the pound sterling, and the Canadian dollar – we discover a universe that has been a shitty long-term investment.
Currency matters when we look at other markets, because, for example, the stock market in Venezuela has shot to astronomical highs simply because the currency those stocks are denominated in has totally collapsed due to hyperinflation.
I also exclude from this comparison countries like India whose currency has lost close to 50% against the dollar over the time frame.
So here are the biggest non-US markets denominated in currencies that are relatively stable against the US dollar. Starting with Asia:
In China, the Shanghai composite is now back where it had first been over 12 years ago, and it’s down 53% from its peak in Oct 2007.
Japan’s Nikkei index is back where it had first been in 1986, and is down nearly 50% from the peak in 1989. That was 30 years ago. And the index is also down from two years ago.
In Germany, the DAXK which is comparable in its structure to the S&P 500, is back where it had first been in 1999.
In the UK, stocks reached a new high in May 2018 but have since fallen off. Currently, the index is just 7% above where it had first been in December 1999. So it made 7%, not per year, but over the course of two decades.
The French stock index is back where it had first been in 1999 and is down 24% from its peak in 2000.
Italian stocks are still down 60% from their peak in 2000.
Spanish stocks are down 45% from their peak in 2008 and are below where they’d first been in 1999.
The Canadian stock index, the TSX, is up about 10% from its prior peak in 2008, with a huge plunge in between. So that’s a gain of less than 1% a year. Not even keeping up with inflation.
The entire world as come to invest in the S&P 500 because it was the only big index that was thought to be going anywhere, and this money-flow from around the world has helped inflate it.
But American companies are no better than German or Japanese companies. Far from it. They are, however, very good at financial engineering – which is not a beneficial long-term strategy.
And the fact that the S&P 500 has continued to surge, while nearly all other markets with stable currencies have been shitty, is not proof that this outperformance will just continue in the same manner.
The blind exuberance about stocks and just about all other asset classes in the US tells me that there may not be a lot of eager buyers left to keep inflating every corner of the vast Everything Bubble. Signs of that are already everywhere.
Central banks have not been able to levitate those other stock markets, despite all their efforts. This includes the efforts by the Bank of Japan, whose huge QE program includes buying equities. In the end, there is no cure for a bubble other than unwinding the bubble. And this – as those other stock markets have shown – can take decades of down-trends, where buy-and-hold is a losing strategy, and where lucky market timing is the only thing that works, but where unlucky market timing is profoundly destructive.
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The thing that derailed me with market research, back around 1999, was to eventually learn (during The Dotcom Bubble burst) that none of the research provided by corporations was accurate or useful. I based all my faith in SEC docs which ended up being highly flawed and highly non predictive and unprofitable. They do suggest that past performance is not related to future performance, so that’s the lesson … it all works until it breaks down.
Amen. What I learned in business school, not to mention the largely irrelevant (to investing) education which I received at law school, only sets limits on the reality that I can accept. In other words, even if I accepted the accounting reports of the listed corporations (which have been increasingly manipulated in more and more clever ways since Enron), the resulting price earnings ratios ceased supporting current stock prices long ago. We are now in fantasy land.
Except for remarkable stocks, like AMD’s, which have key technologies and are favorably placed in a unique market (x86 compatible processors of which only AMD and Intel have patents/licenses), in which I just managed to make a bundle, most stocks are very, very overpriced. The corporations’ repurchases of their own stocks has only weakened their future prospects and makes the price earnings rations for their stocks even more inflated. The cocksure attitude of investors, like the prior, similar attitude discussed by Wolf, long ceased to be founded on any objective reality.
I hear commentators like Nouriel Roubini, who I believe is seeing the fundamental truth but has his predictions forestalled by “Federal” Reserve and related entities’ market manipulation, essentially predict economic doom for our country. Aside from the major bank’s derivatives gambling, or a collapse in the world’s trust in the U.S. dollar, such doom may be delayed for years.
However, I do not see how the enormous real estate or stock or auto loan (etc.) bubbles that the “Federal” Reserve has created to help its crony banks can be “unwound.” They are so interrelated that unwinding one may collapse another. If the Fed raises interests significantly, bonds paying lower interest rates will dip in value, stocks paying miniscule dividends and with few prospects will revealed as overpriced, ARMs mortgages may cause real estate defaults, then the stock market price may collapse and as a result consumers may cease spending… etc.
Of course, if the interest rates paid on treasuries rise, the amount in the Federal budget available for other programs will decrease. Any resulting investor fears may prevent the US from rolling over its treasuries and result in it having to monetize its gigantic debts.
Our country produces food, has vast land, does not absolutely limit immigration, has other vast resources, and a very educated population. Thus, absent a nuclear war, “doom” will only take the form of a huge economic depression that may last decades, at worst.
It will be another great Depression, like in the 1930s but with less government borrowing power to get the economy moving. Still, the US can always just print money to get out of debts and our gigantic debts are as much the problem of our creditors as they are ours. Our debts are denominated in dollars, so the investors will have to take them, even if they become worthless.
I just feel sorry for the veterans, pensioners, elderly, and others that will suffer when the economic consequences of these bubbles find us: I predict that many decent, honest people (and most Americans fit that description) will be eating out of others’ trash cans. Given the banksters’ effective embezzlements/thefts of our government’s funds for decades, that angers me substantially.
As a former employee, I can say that AMD is one of the worst run companies ever. They did well for a short time after they basically reverse acquired ATI (i.e. AMD bought ATI but ATI wound up running AMD), but the processor market is crap unless you’re Intel – and these days, is just crap period.
Not any more, at least in their engineering departments. Their Infinity Fabric architecture is brilliant and until Intel develops something similar (which they are) Intel is TOAST in the price/performance area.
Infinity Fabric allows a processor to be broken up into much smaller dies which have a much higher production yield and are much cheaper as a result. Further savings are made because this also allows partially functional dies to be combined into various CPUs in different prices ranges.
Meanwhile, Intel is trapped, for now, producing very large and therefore inherently lower yield and much more expensive monolithic dies.
I used to pay extremely close attention to the details of microprocessor technology development, but got bored when Intel had a virtual monopoly and they, as a result, didn’t innovate much. I am now KICKING MYSELF because I would have invested heavily in AMD if I had still been paying attention!
Well, AMD has had 3 different eras where the stock went up…then went down.
I worked before the first one: the Nexgen acquisition which yielded the first AMD processor that outperformed Intel.
Intel crushed AMD by cutting its top line processor prices while slowing down their older process price cuts – a strategy which worked because AMD’s 1 fab didn’t have great yields, had limited production capability and couldn’t replicate anywhere else.
The second AMD bubble came from its ATI acquisition – the idea that ATI’s video card tech would complement AMD’s processors. Not.
This bubble is most likely a function of the overall stock market and cloud growth – and is likely to end the same way.
US stocks are outperforming because US corporations are using the currency, central banks eagerly make available, to wisely purchase there own shares. In the future that currency has no value so they are providing shareholders with fantastic value by lowering the shares outstanding and thus increasing the earnings per share.
Do you think currency will somehow become more precious and US corporations will be stuck with onerous debt that must be rolled at higher interest rates? if yes I have two questions for you 1) if central banks raised interest rates how would their governments service their debts 2) if central banks fail to print endless sums of money to buy government bonds how can governments continue to fund their growing deficits.
When governments openly print money to pay for government spending you reach end game for the currencies. I know many believe deflation is coming, I just don’t see the mechanism for that. Will we wake up tomorrow and find gravity has reversed, I don’t think so – money printing will destroy the currencies.
I see this current dip as nothing short of a smash and grab. I believe primary dealers know QE has started up again and jammed the market down so they could accumulate. That little dip was a gift, I doubt there will be any more from this point on. Place your bets, assets or currency, central banks are not giving you a choice – we are all gamblers now.
Fundamentally today’s stock market is much more overvalued than the summer of ’29 and the fundamentals today show 1873 was less overvalued than today due to the future today looking worse than bleak to put it mildly. Such an outlook didn’t exist for the years succeeding 1873. Today’s stock market is the biggest ponzi or house of cards since the tulip bulb craze.
What you say is true only if you are looking through a lens of stable currency. The bubbles you reference popped because the occurred during periods of stable currencies. Today we don’t have stable currencies.
Central banks are lecturing governments about fiscal policy and deficit spending – the central banks are telling governments they need to increase deficit spending. Those dumbs-dumbs seem to actually believe you can print wealth to enrich everyone. The economy is not a zero-sum game but it is at least a finite-sum game – economists can’t see it.
The crash of 1929 was followed by a severe devaluation of the USD from 20.67 in gold to 35.00.
Luckily the banksters and hanger on crooks like Joe Kennedy were able to haul vast amounts of gold coin to offshore depositories just before the devaluation. That is where the large amount of gold coin that is still being sold comes from.
Real corporate profits, by any measure, have been tapering down since Q1 2012. Over 7 years. Yet real market capitalization is up 70%.
Based on the last 10 years of evidence, the Fed is now the market’s b*tch. And even if the Fed decides to do its job, as van points out they will still have to lower interest rates and print just to maintain government solvency.
I favor Taleb’s approach, which is to focus mainly on safe investments, with some minor allocation to high risk / high reward speculation. That along with a trading model based on machine learning has proved lucrative.
What does Taleb consider safe?
Treasury bills.
You wrote your own machine learning algorithm? On what data set? Thanks, interested if someone can access novel data from home or if you work at a large bank.
share buyback should be illegal
if CEO or other employee compensation is significantly based on share price increase
it is shameful
If buybacks are illegal the companies will simply increase their dividends.
Yep. But the CEO’s stock options do get dividend payouts. Thus stock buyback is a better option executives compensation.
amen!!!!!!!!!!!!!!!!
absolutely
stealing from your employer
Since the first Great Bubble in 1720, there have been five. Making ours number six. 2007 did not have all of the classic features, this one does.
All five previous ones crashed in the fall.
And one of the characteristics of the Great Contractions has been that the senior currency becomes chronically firm against other currencies as well as commodities.
For most of the time.
Wolf’s article is to the point and —timely.
“A to the point article”
Much of what I have read so far has helped back that statement up.
Re: F U money. As about 70K people currently residing in this country are worth $50 M or far, far more (Credit Suisse High Net Wealth Report, pg 23), I wonder where F EVERYBODY level money begins?
Good comment, Van.
Inflation has and always will be a function of supply and demand. The economy has been bifurcated into two separate economies those with access to QE money in those without access. In the world of QE money excess money has created an artificial demand for financial securities and prices have risen. In the non-qe world of the personal consumer there is no excess money. Until the supply of money for personal consumers rises or demand for goods rises or supply of goods falls there will be no hyper inflation. also the Advent of debit credit cards has eliminated the release valve of Bank runs on debt expansion. not to say that the government won’t resort to actually giving large amounts of money to individuals and consumers through helicopter drops or huge tax refunds but it’s still a ways away and would only be done to stop an insurrection. As it stands major deflation is more likely or continued inflation in financial assets and muted inflation in consumer goods
This is much truth in what you say. However, I disagree that the companies doing this are acting “wisely.” Please keep in mind that company X (for example) is a self sustaining economic entity. Assume it is independent for this example.
It may be in the interests of its investors for it to issue massive dividends and repurchase its stocks to drive up the prices and enable its shareholders to sell out with a profit. However, some shareholders will be left after all others sell their shares.
Then, what will happen? If there is a significant economic downturn as in 2008, that company X may become unable to pay its current liabilities or to pay its total liabilities: i.e., insolvent. Its creditors can then force it into bankruptcy if two act jointly. Otherwise, they may just go after its assets in lawsuits.
Then, it will have to go into a Chapter 11 bankruptcy to keep its core assets (assuming it is not a bankster-controlled entity that can have the “Federal” Reserve essentially give it free money through ultra low interest rate loans and QE commissions, etc.) and its remaining shareholders will then lose their shares. That is what happens to legitimate, non-bankster corporations in Chapter 11.
They may survive but their creditors become their new owners, if those creditors in a particular class vote and agree to a plan or are fully paid off. The existing shareholders of an insolvent corporation lose their power to control it in Chapter 11: only the legal entity survives, with new shareholders, who are the creditors that agreed to receive shares in exchange for the debts owed to them.
The old investors of a company that went into Chapter 11 lose everything, unless they are banksters and receive preferential treatment. The alternative is sale of all corporate assets, which are then distributed to creditors on a pro-rata basis according to total corporate debts versus that creditor’s proven claim: any sums given to investors after the corporation became insolvent are fraudulent transfers and recoverable on behalf of the corporation by creditors.
Thus, the directors of corporations buying back their shares or issuing massive dividends are essentially often betraying their long term shareholders’ interests. Many mutual funds and other “dumb” money will often not sell out when a corporation starts issuing unreasonable dividends or buying back massive portions of its stocks. They will lose everything, if the company/corporation goes insolvent.
An interesting viewpoint: that corporations are buying back shares as a service to society – absorbing the vast amounts of Fed created liquidity.
As opposed to enriching the CEOs and board members who award themselves stock…
I have made a lot of money in oil, tobacco, and utility stocks. They typically have low multiples high dividends, and the customers are not going to stop buying the products. Investors don’t like them now because they’re looking for dynamic growth, but they could come in quite handy in the event of trouble in the markets. Sure, they could go down, but their businesses will keep running along.
I agree. They are good bond substitutes.
Be careful. Check out the draw down of XLU vs SPY from late 2008 to mid-2009. Both went down 30%. Utilities were just as volatile as S&P500
I closed my XLU positions two months ago. Will get back in for the long term if it gets to a reasonable valuation.
But this 60/40 stock/bond gospel is obsolete. I would rather have REITs and utilities bought at fair value to bonds.
When a market is going up, everything looks brilliant.
The problem is that multiples go down across the board during major corrections.
If your strategy started before 2008 and worked across the GFC period, then it has some more merit. Anything post 2014 is suspect.
It would be interesting to know how much in the way of stock buy-backs foreign companies are doing relative to US companies. If US companies spent many times as much to buy back their own stock as did foreign companies that could explain a lot. Stock buybacks seem like a huge waste of money, just to make executive options more valuable.
When all you have is vomit.. after clearing-out the pantry.. then all you’re left with, is to slurp it back up !
Talk about indigestion ..
Images of the 90’s, retired men in their pajamas watching CNBC and playing the market. Cramer who is now a respected analyst, was a shill for Mr Softy, and Maria waved the pompoms in the AM, while his fund sold into the rally. I don’t think most investors today really understand they are in a futures market, not a stock market. Indeed if you imagine your utility bills might go higher you can buy some contracts. (Stock players might imagine the dollar will lose more purchasing power?) How you profit from all that is uncertain.
Just before the dotcom bust I owned a company that manufactured the metal components for cell phone towers for two of the biggest players in the industry. In January 2001 the head of Global Purchasing for the biggest of the two was in our office shouting and pounding the table that we had invest in more capacity and up production or we would be kicked to the curb. They proclaimed that the market for towers would be growing for decades and demand would never slack off. 2 months later the dotcom bust hit at the same time as the telecom bust. This customer ended up sitting on $50 million in unsold cell tower components and the Global Purchasing manager was fired. I drug my feet and did not invest in new capacity and survived the crash. Same Koolaid, different time.
Truth is this so called friend of mine will be living on the street begging for spare change when this ponzi of all ponzi’s implodes. Like they say you’re never too old to learn and he’ll learn the hard way.
They’re going to take a lot of us with them.. Folks with nothing in the market will be his just as hard, probably worse, than those who have leveraged it all. That plan worked the last time..
How’s that? Have cash and safe accounts making ~5%, plus a rental and other cash based Income…. I sleep well at night.
“accounts making 5%”
You are quite the comedian.
The bubble circus we’re in now, is unique, because the issue of market manipulation is a greater factor than ever, instead of a large amount of corrupt corporations front running the SEC and DOJ, we have a president, tweeting to manipulate the media and the markets. It’s my opinion that our game show casino crook conman president is manipulating markets for private (hidden) gains — but of course the SEC, DOJ and IRS would never allow that and trump is making America great … right?
Trump last Friday touted the monthly federal jobs report roughly an hour before the data was released later that day, a breach with decades of protocol on how to handle market-moving information.
Trump in a 7:21 a.m. tweet wrote that he was “looking forward to seeing the employment numbers at 8:30 this morning.
https://thehill.com/policy/finance/391354-dem-senators-call-for-insider-trading-probe-into-trump-jobs-report-tweet
Regarding market manipulation, I believe administrations view it as a highly neutral form of Trickle Down Economics. (“neutral” if you’re in the market) Sadly, the market has become our scorecard. The problem is that stimulus only works if investors respond to it the right way. Looking at the last interest rate announcement, it seemed to have the opposite effect than intended. This is where policy and fiscal incompetence start to demolish the incentives to invest. As heard this week on CNBC: “Who would invest cap-ex in this market?”
@ perro…I accept your point that there are most likely corrupted friends and followers getting info….even before the tweets. But the comparrison stops there, as the Nazis were installed after hyper-inflation. We just have plain old ho-hum currency debasement with chosen winners. For now.
Another difference is the population of the 30s were beaten down. Today’s population is pretty well armed and full of expectations. I see the problem in the coming attractions, not the current train wreck. Further, while media attacks are similar, I don’t think they can put the cork back in the social media bottle. They will surveil and they will manipulate, but the jails and detention centres are already full.
Wait until there is no health care or EBT cards. Then run.
I believe that I read somewhere that senators are exempt from insider trading rules. Can anyone verify that?
Do you mean by comparing their net worth from the time they enter office until they leave?
All of Congress is exempt (again). Due to an public outcry during 2011 election season a law was passed to make it illegal for Congress too. Two years later Congress quietly rescinded that law again for “public security” reasons.
For most members of Congrease, quiet ‘translucency’ is a virtue !
Yes, Congress exempted themselves. Insider trading is no longer enforced anyway so it’s de facto legal regardless. The SEC would never go after a high net worth individual anymore and they are the only ones with inside information to begin with.
Where I’m from (Seattle) speeding is technically illegal but it’s not enforced so everyone does it. Corruption is rampant, white collar crime (like speeding) is just not something that is enforced any longer, if you are wealthy you can break the law with impunity (provided you don’t rip off another high net worth individual – Madoff’s mistake).
This country elected a left leaning populist immediately after rampant financial fraud created a worldwide financial crisis and yet Obama’s justice department prosecuted no one. All agreed, massive fraud was committed but it was decided not to prosecute anyone – and Democrats wonder how Trump got elected. This country is drowning in corruption.
As a group, members of congress have access to business information, regulatory information, and information on pending government spending that almost no one else has. They can also move with absolute impunity, which is something that the average corporate officer cannot do.
At this point, both sides are just fighting over the the best spots at the trough.
I’ve had the question in the back of my mind regarding proponents of the F.I.R.E. movement. Some of these guys have families with several kids and a mortgage. Granted they’re making some money through their websites promoting the F.I.R.E movement and other odd-jobs, but it still makes me cringe to think what will happen to these guys when things do turn hard.
I’ve not seen a comparison of accounting standards between different countries, no doubt US standards are not as strict as in a conservative country like Switzerland. One thing to note is that the American Way is to let everybody run wild during bubbles with very little regulation or oversight, and after the inevitable collapse to bail out the biggest players. The small fry go to the wall. There are Enron’s and Bernie Madoffs hiding out there in plain sight, but due to the mediocre accounting standards and lack of good regulation we have to wait until the collapse to find out where they are. Of course people also continue to throw money at perpetual money pit companies. My guess is that after the collapse accounting standards will be changed and tightened up.
I have only one question. What will prick the bubble?
I will guess brexit
Despite all the volatility so far, nothing has slayed the dragon. I suppose markets are forward looking and have not priced an accident in the future yet. Let’s party.
My guess is the mid east and Iran….spiking oil prices. Winning is easy, right?
A recession. However, it appears will be a while before one happens. Of course, the out of power political party will try to talk us into one. Warren has already been pounding the recession table. It is possible that after the 2008 recession and housing downturn, which was made exponentially worse then it should have been after all the negative talk, people have smartened up … I hope. Fool me once, shame on you. Fool me twice, shame on me.
Chinese Yuan set at 7.15 one of these evenings!
no GFC this time, because banks are better capitalized. Just a slow constant deflation of asset prices.
China.
The trade war with China seems to be mutating away from “business” and into “pride & principles” territory.
Which means that now it’s about getting even or at least giving the other party a good scar before going down.
Now Chinese won’t buy US farm products.
Later, they will have customs work to rules on something trivial like fasteners, and JIT assembly lines in Korea will choke up on half-made electronics (Fasteners are low-tech items that are complex to make with almost no margin in them so there is little capacity idling in the hope that margins improves).
It will be “one damn thing after another”, seemingly at random, then “all at once”.
When everybody on Wolfe Street is all in on stocks and bonds. Before that happens, they will keep it up until that happens.
Iamafan:
“What will prick the bubble?”
A significant (no less than full percentage point) interest rate hike as a result from an unpredictable global event.
In 1999 or 2000 stock valuations were in the stratosphere. Not as bad today. One concern is unsecured corporate loans. Another concern is the reorganization of the retail sector.
United States West Coast real estate is expensive compared to median household income.
I expect when the new tariffs hit on Sept 1, it will affect US companies dependent on Chinese exports.
China may have a real estate bubble, it is hard to say. Occasional reports of Chinese illiquidity surfaced in the news. In some areas prices of used homes have dropped. Hong Kong developers are nervous.
Australia had a home price downturn. A construction company reported problems.
A report out of Vancouver explained the troubles with residential real estate have not affected commercial real estate.
Japan was the second largest economy in the world in 1990. It imploded. The US economy skidded, but the stock market avoided a bear market crash.
Sit the next year out, enjoy the beach. That’s my plan. ?
Wow! Great article! There doomed! Along with this market as i write now!
Interesting take on the future. I’m not sure I would interpret your data the same way as you have. First, I would question the other indices and how they have updated their membership to the degree we have in the U.S.
If you look at the 500 largest corporations in the world, most are in the U.S. and on our exchanges. They are the largest because they are exceedingly entrepreneurial and risk-taking, and they have the U.S. capital markets to help them finance their aggressive growth and acquisition strategies.
China is certainly its own unique case, and I’ve been waiting for the inevitable clash of irreconcilable economic systems that has recently come to fruition. It never made sense to me how it could last, and I think the Chinese themselves have seen this coming for a long time. So far, they have wisely chosen to maximize their opportunity. As their security becomes more at-risk, their economy will become more sequestered.
There is not another market in the world that has the legal and technical advantages or the management style of the U.S. equities market. That’s why people choose to invest there. It doesn’t mean we’re not in for a big correction, just that we are the #1 market for building new global business leaders. It is specifically these technical advantages that our corporations enjoy that enable their wealth – and why my skin crawls when I hear a U.S. CEO claim he had no help in becoming rich beyond their wildest dreams.
remember me Long-Term Capital Management and their genious Merton and Scholes, Nobel economist
The Blackman-Scholes equation still works, it’s the lack of infinite capital backing them that caused the bankruptcy. The new Bernanke theory seems to be: keyboarding weightless money into a highly leveraged global economy that has an interest rate falling below the zero lower bound. All of this to protect the banks from $500 trillion of toxic derivative exposure. Of course, the Fed has no problem with the “infinite” capital.
When I think about negative yield, it looks like the ones have most to lose are old savers because they have cash. It’s a way for the government to get back part of their pensions and retirement or what they already earned previously. Robin hood in wolves clothing.
Re “Is the Everything Bubble Ripe Yet?”
Short answer is No…
Over the past 40 years all major market adjustments and recessions have closely coincided with changes in party control of the Presidency. 1980 Carter->Reagan was a recession. Bush’s 1988 continuation of Reagan led to the 1990-91 recession that led to Clinton. 1999-2000 Clinton->Bush2 led to recession. Bush2->Obama was the 2008 Financial Crisis. It’s almost as if each party-in-power pushes the knobs so far in their own favor that it leaves a mess behind, and then the new guys have to clean it up. But it’s always a new corporatist faction in charge.
Oddly enough the exception was 2016. Obama->Trump was a huge shift and should have been a recession. Except Trump was a surprise. The stage had been set for Obama->Clinton, which would have been like Reagan->Bush.
Since 2016 the anti-Trump factions have sought a recession to kill Trump’s support and get him out of the White House. The pro-Trump team certainly knows this, and has held them off thus far. That evidence, together with the past 40 years, says that the faction in power can and will keep the balls in the air as long as possible.
So I doubt we get the opposition-fantasy market crash or recession in 2019 or 2020. But 2021 is an open question!
So what about the infamous 70s bear market? It occurred entirely within the Presidency of Nixon. And was significantly due to Johnson’s Great Society spending and JFK’s Vietnam war (continued by Johnson).
Similarly, Bush I lost re-election because of a recession – he didn’t cause it.
Your historical analysis is confusing correlation with causation.
A recession may cause a 2 party switch – it doesn’t arise from it necessarily.
You just made my point by saying that Johnson’s policy excesses set up the subsequent mess for Nixon.
I also don’t think that the present analysis applies as well to the Gold Standard Era, since the financial constraints on government were quite different prior to the mid-1970s.
The Dot Com days were great, I was in college working at a golf course part time in the SF Bay Area. We had all kinds of corporate accounts with tech companies where their sales execs would rack up the tab playing corporate golf with clients. We always had the TV on in the pro shop usually on CNBC. I vividly remember this one d-bag from Lucent Technologies (remember them?) who used to throw his weight around walk in and glance at the TV. He was stunned. It was a huge down day and you could see that his net worth via Lucent stock just got cut down about 75%. Suffice to say he didn’t golf that day and I never saw him again. Oh where is he now?
Ha! Love it! The perfect viewpoint to watch it unfold!
Uber.
People forget that you are not really owed a return on your capital. It is only if that capital is invested in something that creates value do you get a share for providing part of the investment to create that value. For a long time now people have lost track of that because most investments for the last 30 or 40 years have been speculation or ponzi schemes of one sort or another. Every year the true value creation component of the economy gets smaller and the “Bezzle” gets higher. I expect that when this bubble gets pricked we will find out that the underlying real value of the economy is a shadow of what most think it is and the concept of your money earning an income for you may vanish overnight.
This can’t be overstated. Just like most jobs aren’t worth doing–does filling out this form or remaking the same junk web app really create anything–most ‘value’ is illusory. What’s the value of Uber? Netflix?
Think about this sp500 div is $56. If SP500 is 3000 then if you have $300,000 That’s a dividend income of $5600 per year. $3,000,000 = $56,000 income. Thats not a good deal.
10 year treasury offers about the same level of income. Not a good deal either.
Can sit in cash and hope for a better time to invest or dig around and try to find something better or just suck it up and cut spending.
One thing I have been seeing is that by several valuation measures we are at the 99th percentile as far as stock market valuation. To me if you don’t sell most of your holdings at that level, you believe we are in some new era where valuation doesn’t matter.
This everything bubble sure has many signs of being super frothy. Markets are manic and irrational. Many players are just gaming the system for their own advantage.
But is it about to blow? Many commenters here on WS think so. Others have ideas about safe havens. My view is that there is no way to know. No matter how totally insane things appear to be, they could get much worse before imploding. One of the early financial books I read about 35 years ago told about shorting a stock at $200. It was a good analysis as the stock went below $25. But, it continued on to over $500 before collapsing. Good analysis and bad timing equals having your head handed to you.
A key issue in all of this are governments doing “whatever it takes” to keep the snowball rolling. They are highly motivated to not let the “big event” happen on “my watch”. They have powerful tools to tilt the playing field and keep that snowball going. However, as formidable as these tools might be, they ultimately are not bigger than markets.
In times of such insanity we want to think in terms of days, weeks or, at the most, months. But these market systems operate on cycles of years, decades and even multiple generations.
Is it feasible to protect yourself from an economic disaster? If the driver is inflation/hyper-inflation then stocks likely will be provide some buffer. Bonds will be totally wiped out. If it is a Depression like deflation, then the opposite is true. Inflation is probably a more likely outcome since current financial thinking is totally paranoid about deflation. For a small subset of folks there is the five acre farm or a bunker stocked with a year’s supplies. There are probably as many other ideas as there are comments to this discussion.
So will it blow? YES, but, when is not knowable. Certainly there will be a lot of pain. And, the world will keep on turning.
Do the statistics re: the foreign indexes include dividends? Usually when the media reports on indexes over time they forget to include the dividends received, which can be substantial.
Neither the S&P 500 nor the foreign indices include dividends. Apple and apples.
Wolf, not quite – they’d only be apples if they all had the same dividend yields. They’re all citrus fruits but some are meyer lemons, some are navel oranges, some are mandarins… Even within the major US indices the dividend yields vary widely.
The inflation adjustments are also different, but nations don’t measure inflation consistently (nor with much accuracy…) and real-world inflation is different for each individual anyway.
And exchange-rate changes are significant as well. A US investor’s return in China or France etc. isn’t the same as a local investor’s… especially when the Yuan or the Euro is trending down.
Some would argue that one should simply measure everything in ounces of gold or barrels of oil. But gold has its own fluctuations relative to the things one might spend on, and oil comes in different flavors at different prices.
I’m not sure that that’s entirely accurate – I read recently that the dax includes dividends.
Jason,
Yes, that’s exactly what I’m saying. That’s why you cannot compare the DAX and the S&P500. You have to use the DAXK and the S&P500, as I pointed out in the article and in my comment below
Wow! Wolf you always go out of your way to avoid obscenities. In one post you have “fuck” and “shitty”. This must be really serious. ;-)
The bubble has been ready to burst for a long time. It’s just hard to see when the pin is coming from inside the bubble, just like you can’t tell when the critical snowflake hits the snow pack.
“Fuck you money” was a widely used technical term at the time :-]
Jon Corzine has received approval to return to the hedge fund business. Madoff is sure to join him in a year or two. The degeneracy of the system is in full view for all to see.
Everybody see corpses.
Extremely wealthy men surrounded by bubbles collapsing
on them in their dreams.
Pnf SPY daily, 2pts, x1 reversal, will send SPY to 250 – 260 area, above Dec 2018(L) and the next panic will be over.
– One thing is certain about panic. It could never
occur if it were foreseen.
– 1873 panic from the devastating folly of over trading on greenback
basis.
Gold is real money. Over time, it faithfully records what things are worth. Just ask yourself , why is the U.S. federal Government running trillion dollar deficits… Why is the Fed cutting rates… Why would anyone buy a bond with a negative rate? And how come American families are going deeper into debt when employment is at record highs? Just a thought!
A friend of mine does notary service “on the side”. She has seen an uptick in assignments over the past 2 weeks, with the majority being refinances with money out. A huge mistake in my opinion and a recipe for (another) disaster. If the bubble bursts as predicted in this article, Armageddon 2008 could be rerun. “A wise man learns from the mistakes of others, a fool only from his own”.
Depends on what the money is being used for. If the money is being used for speculation or daily living expenses, not great.
If the money is being extracted as a hedge against losing the house due to job loss, major housing price correction, etc – quite a different story.
The reality is that buying a house is a bet on inflation exceeding cost of service. While interest rates are unlikely to become high due to the impact on the national debt, the likelihood that investment returns approach historic lows over the next generation are very high – in which case significant mortgages become killers.
https://www.msn.com/en-us/money/news/20-year-mortgages-hit-zero-for-first-time-in-danish-rate-history/ar-AAFtb2Z
Well at zero , the amortization table would be easy to calculate .
I’m in Boise I work for a real estate attorney and have done an increase of liens against properties for non payment for supplies.
What’s sad is that these suppliers are providing lumber And labor to these out of state builders and they are small businesses who really can’t afford being in the hole $50k
This global investment in the S&P 500 supports the US dollar and vice versa. Based on so many other stable currencies and their respective market performance as outlined, Where else is there to go?
How come no one has spoken about precious metals?
Wolf’s story about the guy who has figured out the equity market reminds me of the Joe Kennedy Sr. 1929 story when he was getting his shoes signed and the shoeshine was going Kennedy tips on what stocks to buy.
Kennedy Sr. that day pulled his investments out.
Having lived through all the above bubbles, I’d say that today’s mega bubble is much much less capitvating to a broader swath of the American public than the original dot-com bubble. There was an innocence to pets.com that is absent fron the tireless sweatshops of Amazon.com warehouses.
Hopeless nihilism is the mantra of our time.
Most people today neither dabble in the stock markets and most serious funds have been selling US stocks. I assume you live in a much wealthier circle and this is clouding your viewpoint on just what people think, or who is doing the thinking.
I look at the many places around America that I’ve lived and see gentrified towns and cities and suffering people with little hope.
Only a very select group of investors with direct contact and insight into the workings of the FED now consistently make money. Those are deep pockets, no doub,t but that select group is manipulating the entire markets up and down today.
This is a fair comment, although the impact of this everything bubble is quite widespread in different ways.
For example, I would argue that the ongoing subsidies of enormously lossmaking operations like Tesla and Uber is a consequence of the Everything Bubble. While Tesla is very much a 1% type product, Uber has a significant number of 99% customers.
The collapse of “lose money on every transaction, make money by selling stock” business model will affect a lot of people’s lives – unlike in 2002 where the (first) internet bubble collapse affected almost no one outside of the companies themselves.
Hussman had a good concept about stock market bubbles and why they occur. Basically as the market gets overvalued there is more risk of catastrophic loss so there is more reward for taking the risk until you are at such a high level and things get really fragile. A blow off top is kind of the norm. Buffet has the good saying that if Cinderella knew what was going to happen she would have left a little earlier.
One thing we know for sure…the market reacts in crowd like fashion…and with the amount of money invested in passive style products such as ETF’s and index mutual funds…the rush for the exits may be the likes of never seen before. The fact that the markets were down almost 1000 points and not one call for “circuit breakers” indicates that most investors are not nervous about the valuations, bubbles, margin debt, and no fear due to Fed intervention….which will only exacerbate the downfall when it does occur…Beware the Herd Mentality
Theyve been trained to BTMFD. go to r/personalfinance or r/FIRE and read what they say when the market’s down. I swear to God, there are Goldman interns in sheep’s clothing soothing the herd. They have been trained that down days ate corrected nearly immediately. I once posted an article in response to a user’s misgivings that went through the math of the buy and hold strategy and how that model goes tits up if you stay in during a crash. A young dude immediately attacked and called me, in choice terms, a party pooper. The problem is that most of these people weren’t invested for Nasdaq or 2008 and theyve only seen the sick gainz from 2014 on. In a bull market -and this is the longest one ever- everyone looks like a genius, as Wolf has so eloquently pointed out in this post.
1) Bubbles divergence.
There are no bubbles in the rest of the world, ex US.
EM in a trading range since 2008.
Japan is trying to revive the last bubble, from 30Y ago.
Chinese bubble was pricked in 2015.
Europe in a negative rates bubble.
Negative rates send money to us. Money flow create bubbles in the stock markets, bonds and RE.
Gold, providing zero dividends, can compete with negative rates.
2) From tranquility to volatility.
System control with positive feedback create bubbles.
– Unexpected panic can send the market down, like in 1932 or 2009.
– Opening the valve, in repetition, can release some steam.
The DOW was subjected to two steam releases, since 2018.
The monthly RSI show a zigzag.
First leg from Dec 2017 @ 87.43 to 68.36 and next from Sept 2018
@ 76.57 to 51.29 in Dec 2018.
The 1987 blip can hardly be noticed, but the monthly
RSI show the most extreme sudden collapse. In a zigzag.
From Mar 1986 @ 92.42, the highest on the chart, to 66.46 in
Sep 1986. And again from Aug 1987 @ 85.99 to 45.16.
Once RSI cross 66.666 from above, it can jump, because the RSI
is a log osc.
It can happen on the other side.
Once RSI cross 33.333 from below to the middle it can jump.
Feb 2009 RSI @ 18.36 to Apr 2010 @ 57.10 was a big jump
on the chart.
Thanks for no readers on the jumps.
No bubbles outside the US? For stocks maybe, but there are HUGE bubbles in real estate in much of the developed world. And maybe I should add, a negative bubble in cash (get out before it becomes totally worthless).
I’ve seen a number of mentions now about how trading volume is down dramatically since roughly October 2018.
Wolf, I believe, mentioned this in conjunction with bank trading desks.
The NYSE and NASDAQ make it really difficult to see historical data unless you pay, so I have no way of independently verifying this, but this is a serious issue if true.
c1ue – Not necessarily. Trading volume ain’t what it used to be. Back in the day, actual people bought stocks – held for a while – so volume had some significance to gauge Mr. Market’s frame of mind.
Today, trading volume comes heavily from automated or semi-automated computer programs. – with holding times as low as microseconds – so volume doesn’t mean the same thing now.
A change since October 2018 might mean the automated programs (what we used to call “Bank Trading Desks”) were changed, perhaps after having their a**es handed to them on a platter during the mini-crash last fall?
Supposedly the trading volume is down 80% from peak. Again, since the data isn’t freely available, I cannot confirm or examine.
If true, however, that is a very significant change.
The Dutch AEX stock index, despite a huge increase in the last years, is 25% below its peak from 2000 and near 1997 level. I’m sure the ECB can do something about that though, with their plans to start buying equities soon (as they have run out of less insane options).
At the same time, Dutch home prices have increased 6-20x from the early nineties (depending on how you measure, the 6x is official “average home price” statistics, the 20x is repeat-sales (similar to Case-Shiller in the US). In the early nineties less than 0.1% of properties in my hometown would cost MORE than 100K euros; today less than 0.1% of properties costs LESS than 100K euros (at this cost, you are looking at a property with serious problems, in a relatively small city in a corner of the country). And all this without significant buying from foreigners! Everyone ensures me that home prices can only go up and even if they don’t, over 90% of mortgages from the last decade came with a free government-guaranteed put option: you can never loose money when selling a Dutch home! And even more importantly “if the sky falls, everyone will have a blue hat” – people assume the government will bail them out (and no doubt they will try, but at what cost …).
Result: RE speculation of all kinds is rampant, Tulip Mania all over again (ever bigger first homes, second homes, Airbnb or even homes left empty for years because the appreciation is more than enough). Every sane person has been sidelined in this frantic money grab. I don’t think most people here are doing crazy things though with their easy money, life has gotten so expensive that most people rely on the craziness to get by financially. If rates ever go up disaster is waiting, but negative rates are an even bigger disaster for society in the long term IMHO.
I learned a hard lesson about “investing” around 2000 but seems that such lessons no longer apply. Over the last 25 years our RE speculators have been rewarded beyond imagination, while savers have suffered tremendously (close to zero rates on savings accounts, a yearly wealth tax on savings plus significant inflation; while RE gains are totally tax free and mortgage cost is fully deductible from income taxes). In the “free rental market” sometimes have to pay over 50% of income on rent alone. Savers and renters, and later on pensioners, will pay the price for the insanity of others – thanks to politicians and central banks.
I’m sure the bubble will pop, but nobody knows how due to all the market manipulation by governments and central banks. Dutch Tulip Mania from 1637 ended with the lynching of a few politicians because – despite two years of debating – parliament could not find an acceptable solution for settling the huge outstanding debts. They will be lucky to have such minor casualties when the current bubble finally pops.
When you see ads telling you about all the money you can make selling puts, then you can add that to the list of market tells. After noting the Joseph Kennedy comment above, that old shoeshine boy tends to reappear in various incarnations. Which version will it be? The friendly kid or the Joe Pesci character from Casino, ready to assault people?
I disagree that the overseas markets have done so horribly, since reinvestment of dividends add to the dollars someone would see in an account. Here is the DAX (German stock market) with dividends:
https://finance.yahoo.com/quote/%5EGDAXI/chart?p=%5EGDAXI
I do agree that the S&P 500 is overvalued. The Shiller PE10 (29.6) has it 74% above its long term average (17).
But if you look at this metric for many other countries, it is in fact quite reasonable today precisely because their markets have not been on a tear like the US market:
UK – 14, Spain – 13, Russia – 8, China – 13, Hong Kong – 15, Australia – 16
Dividend yields are also quite strong, about 50% higher than in the US for the EAFE index. Price to sales and Market Cap to GDP are also good indicators that returns outside the US will be pretty good going forward. Not tomorrow certainly or next year, but in 10 or 15 years from today. Certainly better than a US Treasury bond paying 1.7%. And WAY better than a Bund confiscating 0.5% annually. Even CDs paying 2.5%.
So I just don’t buy the “Everything Bubble” thesis. Overseas stocks are a good value today. You just need to be able to stomach the ups and downs that come with investing in broad based stock index funds.
You have to compare apples to apples. If you use the DAX (your link), you have to compare it to the total return S&P500.
But we’re talking about the standard S&P500 which does not include dividend yield. So you cannot compare it to the DAX, which DOES include dividend yield. You have to compare the S&P500 to indices that do NOT include dividend yield, such as the DAXK, for apples and apples.
Good news! Yahoo provides Total Return index for the S&P 500 as well, so we can get apples to apples:
https://finance.yahoo.com/quote/%5ESP500TR/chart?p=%5ESP500TR
The index for the S&P (including dividends reinvested) peaked at approx 2100 in 2000, 2400 in 2007 and now sits at 5873. 179% gain from 2000 “bubble” to today, or 9.5% simple per year.
For the DAX, the corresponding index peaked at 8,000 in 2000, 8,100 in 2007, and is 11,694 today. 46% gain over the last 19 years, or 2.4% per year.
My point is that most people rarely dump every penny they have in the market at the tippy top, but for most of the world’s stock markets they have still come out ahead even if they did. And that there is value today in many equity markets precisely because of their relative underperformance over the last decade.
I just don’t see buying a CD or a T-bill at rock bottom rates when every central bank in the world is trying to trash the value of cash. It will buy so much less 10 years from now.
A black swan by definition is an event no one foresaw . Maybe an earthquake this time( like 1906). All I know is the leverage is out of this world this time. Don’t get fooled into thinking that the fed can always save the day.
Wolf – American company earnings have flat-lined since late 2014, with only buybacks increasing EPS. Horizontal is deflationary in a debt fueled system, so it seems the everything bubble has been releasing air for quite some time, just not measured by the market indices yet and not fast enough to cause any sort of panic. My theory is that we have been in a slow moving economic decay/mini-recession since 2014/2015, with only the credit impulse China, EU, and Japan keeping the truth from being exposed (plus tax break and deregulation hide the truth too). Pull up a chart of China’s PPI vs CPI, and you will see that their credit impulse in December 2015 spiked their PPI drastically, yet CPI remained stable. Shanghai Accord 1 worked as planned, as central banks coordinated a short term strategy, hoping the real economy on main street would recover with enough time, which it never did. And today, China PPI is falling drastically, with CPI spiking instead so that seems to have been a one trick pony. There will be no similar China rescue for 2020, and they are the key to the debt fueled global economy. Tariffs could be the final straw for a synchronized global recession, not the actual currency cost of tariffs funny enough (tiny compared to GDPs), but the negative sentiment shift as global central banks and governments stop coordinating to keep the scheme afloat. It is when the political governments make the central banks turn on each other and investors lose faith in central bank god puts, that is when this whole scheme falls apart. When this happens is anyone’s guess.
Thank you for your open-mindedness. It will become very useful in your future endeavors.
For the past few years, I’ve been studying how Empires rise and then fall.
If you study the little Venetian/Genoese later -TheSpanish Empire/The Dutch Republic then Great Britain you can see trends. One of the LAST trends before they fall is hyper-financialization. Slightly before, and during the Empire’s financialization sphere comes competitors who find ways to chip away at the seemingly air-tight armor of said Empire. Different currencies prevail with trade while diplomacy becomes a real statecraft device
We are seeing these signs with China, Russia, parts of the Middle East and in the EU. A slow unwind of using the US$$ hegemony is clearly visible. Instead, some in the EU is trading with China using their own currencies. Ditto in trade with Iran/Russia/Others. (You’re also seeing Western Banks act similarly with Gold.)
China’s One Belt/One Road, their technological advancement and transit operations are reaching out to most Asian/some Middle Eastern states along with Russia/the EU. Meanwhile many of these nations are slowly doing away with the use of the US$$.
Moreover, there a few US experts envisioning the end of the US$$ hegemony within the next 7 years. Without the $$$, the military goes bankrupt.
Again, the US is repeating what all empires fail to change – to embark on extremes of financialization. And with it, this Empire will fall, too.
Time to look at the Big Picture.