'Excesses over the past (almost) decade have been in the "Roaring Twenties" caliber: Prolonged, deeply structural and accompanied by epic misperceptions. And there's no mystery why markets regress into a dysfunctional mechanism that hears no evil, sees no evil and speaks no evil. Given time (and ample "money" and Credit), asset inflation trumps worry; greed concurs fear.
Prolonged Bubble Dynamics ensure everyone eventually gets aboard the great bull market. Once on the ride, a myopic optimistic view takes on a life of its own, crushing dissent in the process. And the deeper the structural deficiencies - the more resolute central bankers will be with ongoing accommodation. Especially during periods of central bank activism (the current cycle and the "Roaring Twenties" topping the list), structural deficiencies over time turn bullish for asset prices and financial speculation.
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Incessant U.S. monetary inflation overwhelmed the world with dollar balances, with the process of inflating the world's reserve currency unleashing synchronized monetary inflation and Bubbles around the globe. The U.S. has deindustrialized, shifting to a financial, consumption and services-based economic structure. These and related powerful forces have fomented intractable financial and economic fragilities, wealth inequality, social discontent and geopolitical instability.
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The conventional view holds that the economy drives the securities markets. In reality, and after several decades of financial innovation and policy activism, the securities markets lead economic performance like never before. This is where structural issues can suddenly and unexpectedly play a decisive role.
Milton Friedman and others referred to the 1920s as the "golden age of capitalism." Were financial and economic structural underpinnings robust in the late-twenties, only to be undercut by the failure of the Federal Reserve to respond (with money printing) forcefully to the 1929 stock market crash and associated bank capital shortfalls? Or, instead, had underlying structures become progressively impaired by a prolonged period of Terminal Phase (financial and economic) Bubble excess? Was the Great Crash inevitable - an historic inflection point marking the commencement of an unavoidable adjustment process: the fusing of what had become an epic divide between inflated market perceptions and deflating financial, economic, social and geopolitical prospects.
April 5 - MarketWatch (Mark DeCambre): "Vanguard founder Jack Bogle has been around the block. The 88-year-old investing titan, who is basically the father of passive investing, says this renewed regime of volatility in stocks is uncanny… "I have never seen a market this volatile to this extent in my career. Now that's only 66 years, so I shouldn't make too much about it, but you're right: I've seen two 50% declines, I've seen a 25% decline in one day and I've never seen anything like this before." '
- Doug Noland,
Market Realities, April 7, 2018
"Sooner or later a crash is coming, and it may be terrific."– Roger Babson, September 5, 1929
'Roger Babson’s first rule of investing was “keep speculation and investments separate.” He is remembered not only for founding Babson College in Massachusetts, but also for his speech at the National Business Conference, warning of an impending crash just two days after the 1929 peak, at the very beginning of a decline that would wipe out 89% of the value of the Dow Jones Industrial Average.
As I’ve observed before, the back-story is that Babson’s presentation began as follows: “I’m about to repeat what I said at this time last year, and the year before…” The fact is that Babson had been “proven wrong” by an advance that had taken stocks relentlessly higher, doubling during those two preceding years. Over the next 10 weeks, all of those market gains would be erased. If Babson was “too early,” it certainly didn’t matter. From the low of the 1929 plunge, the stock market would then lose an additional 79% of its value by its eventual bottom in 1932 because of add-on policy errors that resulted in the Great Depression.
To slightly paraphrase Ben Hunt, how does something go down 90%? First it goes down 50%, then it goes down 80% more.
This lesson has been repeated, to varying degrees, at every market extreme across history. For example, the 1973-1974 decline wiped out the entire excess total return of the S&P 500 Index (market returns over and above T-bill returns) all the way back to October 1958. The 2000-2002 market decline wiped out the entire excess total return of the S&P 500 Index all the way back to May 1996. The 2007-2009 market decline wiped out the entire excess total return of the S&P 500 Index all the way back to June 1995. I expect that the completion of the current market cycle will wipe out the entire excess total return of the S&P 500 Index all the way back to about October 1997. That outcome wouldn’t even require the most reliable valuation measures we identify to breach their pre-bubble norms.
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..I expect that the completion of this market cycle will take the S&P 500 to the 1000 level or below..
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We know from a century of evidence on complete market cycles that the most reliable valuation measures (based on their correlation with actual subsequent market returns) are actually those that mute cyclical variations in profit margins. Put another way, when we examine the market as a whole, revenues are much more reliable “sufficient statistics” of long-term, deliverable cash flows than current or forward operating earnings are..'
- John P. Hussman, Ph.D.,
Risk-Aversion Meets a Hypervalued Market, April 6, 2018
Context'..the U.S. equity market .. exceeding even the levels observed in 1929 and 2000..''..government and central bank-related risk distortions are fundamental to self-reinforcing Bubble inflation and resulting deep structural maladjustment.''Bernanke .. His radical reflationary doctrine captivated - and then changed - the world.' - Doug Noland'..Central banks have inflated the greatest Bubble in history..'