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Warning: Stocks Likely to Crater from Here

Losses of over 50% (!) may be in store
Thursday, February 28, 2013, 10:34 AM

I don't relish the job of constantly pointing out the risks to the equity markets. But since few on Wall Street seem willing (or able) to do this, I'm "making the call" for a market correction, as enough variables have aligned to indicate a high likelihood of stocks heading downwards from here.

I've only given one other such warning about equities before, and that was in March of 2008, when I warned of the possibility of a 40% to 60% decline in stock prices by Fall. I am making a similar call today, with the understanding that I am usually a bit early to the game with my views.

Before I get into the details, the broad outline is that I see a case where speculative fevers, propelled by the Fed's $85 billion thin-air money printing program, have more or less run their course, with the Dow and S&P indexes stalled near their all-time highs. That is, $85 billion a month is what it takes to merely keep the Dow near 14,000 and the S&P 500 near 1,500.

On a fundamental basis, I see numerous signs of consumer weakness, political in-fighting and paralysis in DC, high insider selling, and the return of the retail investor (a.k.a. "greater fool") to the stock market. 

On a technical basis, there are numerous tell-tale signs of a market top, including too much bullish sentiment, waning momentum on multiple timeframes, and too many NYSE stocks being above their 200-day moving average (at least until recently; that's begun to correct).

(Source)

Triple Top?

The S&P 500 and Dow Jones are both once again near all-time highs…for the third time.  The old saying third time’s a charm can work both ways when it comes to the stock market.  Sometimes an index will bust through to new highs, and other times it will fail spectacularly crashing to new lows.

We should all be watching the behavior of the major indexes here, because the possibility of a major triple-top failure is quite high, for reasons outlined below.

If the S&P 500 fails at the triple top and breaks down, from a charting perspective the next thing for it to do is revisit the bottom and then make up its mind as to what it wants to do next.  The implication here is that a major failure of the S&P 500 will open the possibility of it revisiting the 600-800 level, or some 45% to 60% lower from the 1,500 level where it currently churns.

It will take some time to get to that level, typically 3-6 months, unless there’s some sort of financial accident to hasten things along, in which case it could all be over in a month or two.

Assuming a failure at the triple top, we’ll just have to watch and see what the market wishes to do once it plumbs the bottom once again.  For now, the daily and weekly charts of the S&P 500 show waning momentum, and the weekly chart remains in overbought territory (green lines and circles):

These overbought and slumping momentum indicators are headwinds to the Fed’s efforts to keep the stock market elevated. 

From a historical standpoint, stocks are cheap when they sport a collective p/e in the high single digits.  Currently they are anything but cheap on that basis. 

(Source)

With a current p/e of 22, the S&P 500 is on the expensive rather than cheap side of things, and is roughly 35% above its long-term average and more than 100% above what we could legitimately call 'cheap.'

The summary here is that if stocks do indeed retreat from here, a triple-top failure will deliver quite a punishing blow to the current efforts to repair the public’s trust in the stock market as a place to send their hard-earned savings to grow.  It would be quite difficult to engineer a run at a fourth top, given the importance of retail participation in providing fuel for the rise of stocks especially given that the boomers are retiring at the rate of 10,000 per day and drawing upon their investments instead of adding to them.

The younger generation(s) have been the main victims of the high unemployment and general wage stagnation that have been the hallmarks of the Great Recession.  It is not likely that they will be able to save and invest at a rate equal to the boomer's withdrawals, creating one more equity headwind for the Fed to overcome.

Sell in May and Go Away

Of course, another old adage that applies to the stock market is sell in May and go away, which has proven to be a remarkably effective strategy over the years.  The average return between May and September is -0.5%, while it is over 12% for the rest of the year.

(Source)

Why this yearly vacillation of returns occurs is open to speculation, but a betting person would have to think long and hard about buying stocks here with May approaching and the Dow and S&P at all-time highs rather than staying on the sidelines and then buying back in September or October if one was so inclined.

However, given the macro forces at play at this time, this May-to-September period could easily offer much more dramatic losses than 0.5%.  I am personally thinking as much as two full orders of magnitude greater, as -50% is right in the middle of my target window for losses.

As always, the best time to begin repositioning one’s portfolio is before any big moves get underway, so I personally would not wait until May to make adjustments, assuming one was of a mind to do so.

Whether or not you forego selling stocks, lighten up your positions, or take on some form of portfolio protection in the form of puts or inverse ETFs, these seem like good things to do before April is over.

Danger Ahead

Technically stocks are overbought. Fundamentally, the picture is even worse: they are facing a litany of economic drags (including weakening GDP growth, higher taxes, the impact of Obamacare, sequester cuts, high gasoline prices, chronic unemployment, etc.) and robust insider selling.  We explore these fundamental risks and their likely impact in great depth in Part II.

For all of these reasons, equity markets face a very high chance of falling over 40% between now and fall of 2013.  (Yes, I'm aware of how extreme a price prediction this is.)

While there’s always a chance that the Fed can keep things magically elevated and they’ve done a very good job so far –  it is my view that they cannot do this for much longer without a serious correction to justify an even larger program of overt and covert intervention. 

In Part II: How the Market Failure Will Happen, I detail how the pattern I expect to see will play out and why I expect the fall in equity prices to happen within the May-September window.  This downdraft will be characterized by lots of volatility, formed by market routs and Fed-inspired rescues, alternating until some form of bottom is reached.  Along the way there will likely be a flight for "safety" into the dollar and Treasury paper, but only during the first stage of the next crisis.

Once a bottom is reached again, this might be anywhere from 40% to 60% lower than the current ~1500 level on the S&P 500 the process will begin to be dominated by rising government borrowing, which will cause interest rates to begin to rise. 

When that happens, expect capital to flee the paper market for hard assets.  In particular, that's when the upwards price revolution in the gold and silver markets will kick into high gear.

Click here to read Part II of this report (free executive summary; enrollment required for full access).

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61 Comments

Denny Johnson's picture
Denny Johnson
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Sandy the Swede
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Market direction

Flow of funds: Where else can investment dollars go?  Bank deposits and CD's - I don't think so.  Medium and/or long-term bonds?  Suicide, unless you believe we are headed to deflation/depression (How likely is it that the Fed will not do everything in its power to prevent this as it is doing now?).  If the Fed cannot reverse any future downward deflationary spiral, it's 'game over.'  The Fed and our elected dolts in congress will continue the party until they can't - and probably a lot longer than you or I care to admit.  What was that old saw about the market being able to continue in a confounding and contrary direction longer than your liquidity?  Push comes to shove, our government (however you define that, TPTB, etc) will use America's two aces up the sleve: (1) our vast natural resources - the carrot, and (2) our unsurpassed military strength - the stick.  Just pray that a Black Swan doesn't show up on our doorstep.   

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Long time coming

It's amazing the markets have held strong this long.  I'm curious to hear from more financially savvy readers what this type of correction would mean for the "real economy" in terms of jobs and income opportunities for most americans.  Also, what happens once a bottom has been reached?  Do we then reverse trend and move full steam ahead to the fourth peak, or are the pumps that drove this most recent "recovery" out of juice?  Where do we go from here and what happens to those of us who didn't have enough time to shake off student debt and buy farm land?

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China won't be the catalyst unless they choose to be..

I like Jessie, 

But he spends too much time and energy on thinking that China will be a catalyst to crisis.  It won't happen.  China can do what they want, when they want, with very little repercussions.  They've increased their reserves in most commodities, unlike the Western Countries.  All of this along with Foriegn Reserves sitting in the bank.  China will not be an issue...unless they choose to be.  

Now, if China decides to sink the West, that would be the only catalyst that I could see from them that would cause such havoc.

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Funds don't go anywhere, but

Funds don't go anywhere, but the bank, pocket or matress.

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j111
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I'm after a bit of advice on

I'm after a bit of advice on this if I may - I have an inherited fund which is in a managed portfolio with about 70% in equity. What should I do? If I take it all out I have to pay a bunch of capatal gains tax on it.. Or leave it in and have the broker buy some bonds? Of course the broker is telling me to calm down and take the rough with the smooth and look long - yeah right. Any advice appreciated.

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If you must stay in

Personally, and I'm not a professional, I would move it into the Central Fund of Canada (CEF).

http://www.centralfund.com

RJE's picture
RJE
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Brother,

Can you just go to cash?

I personally DO NOT listen to a Stock Broker, who isn't a Stock Broker as I define them to be but are in fact a salesman. Trust your gut. These Stock Brokers get Golf Balls to push a certain Mutual Fund onto the clients, and do the company spiel of Buy and Hold, while the company shorts or longs the market.

Note: I DO NOT favor other people handling my money, and is why I torcher myself every day doing this, which I truly love.

BOB

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Buy when there is blood in the streets..

Where is there blood now?  Where is the puck headed?  Certainly not bonds, though a market dump could bring about some short term gains.  Some blood out there in the PM metal funds like CEF (mentioned above), PSLV, and PHYS.   

The most blood is in the miners of metals, and the drillers of oil;

SDT, rights to the oil stream from US-based horizontal drilling;  current yield is 17.8 %

http://www.bloomberg.com/quote/SDT:US

GORO,  Gold miner, P/E = 11.2, yield = 5.5 %

http://www.bloomberg.com/quote/GORO:US

IAG, Gold miner, P/E = 8, yield = 3.7 %

http://www.bloomberg.com/quote/IAG:US

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This analysis misses the point

Chris-

The real question is, What will Bernanke do when the market drops 20%? The answer is charge banks for holding excess reserves. This was in Ben's famous deflation speech. What will happen to markets when he does that-rally, big time to new highs and then some.

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Fundamentals

Copper, Oil, Gold, and Silver = Rising Dollar?. First in and first out of a Recession?

BOB

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Charging Interest on Excess Reserves

wroth5 wrote:

Chris-

The real question is, What will Bernanke do when the market drops 20%? The answer is charge banks for holding excess reserves. This was in Ben's famous deflation speech. What will happen to markets when he does that-rally, big time to new highs and then some.

Someone is already mulling that idea and may put it to the test before the US.

Bank of England mulls negative interest rates

Paul Tucker, deputy governor for financial stability, raised the possibility in front of MPs after saying the Bank could be doing more to help the economy, including measures to boost lending to small businesses.

Negative interest rates would mean high street lenders paying the central bank to place their money with it.

The move would be intended to encourage more lending to businesses and households. But it could also lead to a reduction in the interest paid on individual savers’ accounts held with high street banks.

The Bank has considered cutting rates from their record low of 0.5pc in the past but decided against doing so for fear of bankrupting a number of smaller building societies. To get round the problem, the Bank is reviewing a possible change to its remit so it can set a separate interest rate specifically for excess deposits placed by financial institutions at the central bank.

Addressing the Treasury Select Committee, Mr Tucker said: “I hope that we will think about the constraints of setting negative interest rates. This would be an extraordinary thing to do and it needs to be thought through carefully.”

To the extent that we have positive inflation, a vast blob of Treasury paper is already yielding negative interest rates and still banks buy and hold them.  In order for the applied negative interest rates to be effective, the rate of (negative) interest has to be sufficient to overcome the lack of desire to lend.

I'm not sure what that rate would be, but I'll bet that it's a lot more than the Fed would be willing to entertain right out of the gate.

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It would in fact cost the Fed less

Why do you think Bernanke would show any hesitatation in the face of a precipitous decline? He got burned reacting slowly once. Why would he risk it again?

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I look at this whole

I look at this whole situation and wonder how they can ever get out of the created mess.

Can't cut out of it

Can't manage out of it

Can't grow out of it.

Literally in what is known in the aviation world as a coffin corner.

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equity market apocalypse requires black swan

I read five things:

  • technical indicators look problematic
  • chart patterns (triple top possibility) cause for concern
  • valuation isn't "cheap"
  • summertime isn't the best time to own stocks
  • macro issues about energy, taxes, etc, are of concern

I agree with everything.  But to go to the next step and say this will cause a 50% drop in stock prices seems...extraordinary.  In 2008, we had a decade-long property bubble pop and trillions in threatened deflation from loans going bad - by surprise - to cause the market to drop 50%.  Bear went down, Lehman went down, AIG went down, Freddie & Fannie went down.  All the major banks were dead men walking.  Literally, the realization that TRILLIONS in loans were all going to go bad hit over the space of about six months.

This time, what waits in the offing to cause that same level of financial catastrophe?

To me, for this big of a move to occur, there has to be some ponzi/bubble element that is revealed in some section of the economy.  For instance, it could be Credit Default Swaps at the major banks, or a sovereign default in some nation that our banks have lent a bunch of money to.  Breakup of the eurozone, popping of the credit bubble in Japan, a problem with "the Bomb", or a major rise in US interest rates.  These are my concerns, and if any of these events come to pass might well lead to major equity market corrections.

But all I get out of the current list together with the current timing is the potential for a 10-20% correction.  The US Government continues to borrow and spend a trillion a year to keep the economy afloat.  As long as that goes on, and there is no major upheaval in the world, why would this particular correction lead to the apocalypse?

I do think a trend change might be coming.  Getting long now is not buying cheap.  But unless a Black Swan hits, I don't see that conditions have changed enough for anything more dramatic than a 10-20% move.

I also believe we got to SPX 1500 by increasing corporate profits rather than through a shadowy manipulation scheme.  If you look at the big four economic data series: Industrial Production, NonFarm Payrolls, Real Personal Income, and Real Sales, they've all been climbing steadily during the past 3 years.  This causes the major equity market indicies to climb steadily right along with them.  The manipulation that is happening is very straight forward - the Fed is keeping rates absurdly low through all its bond-buying, the Treasury is injecting a trillion dollars more than it collects each year into the economy, there are a lot of people out of work, and these things helps business lower cost of debt, keep employee wages low, keeps the dollar relatively low, keeps demand afloat, and profits stay high.  That drives the market higher.  Simplest explanation is most likely correct - Occam's Razor and all that.

Oh none of it is sustainable long term, it will end in tears, and so on.  But I don't think the meltdown will happen in the US until some other places in the world blow up first.  The core dies last - and I strongly believe, the US remains the core economy.

Here's a link containing 3 of the most critical economic time series alongside a chart of the DJIA.  You can see how nicely they all flow together - picture is worth 1000 words, etc.

http://mdbriefing.com/recession.shtml

So my opinion is: correction - odds are increasing.  Apocalpyse?  Not until a bubble-pop type of black swan hits of the magnitude of the one in 2008.

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We don't know what the market will do

Since we can't know what the market will do, I attempt to stay in the stock market during an uptrend and begin selling when in a correction.

On March 16, 2011, Chris Martenson gave the following: "Alert: Nuclear (and Economic) Meltdown in Progress."  He called it "the highest level alert to my readers than [sic] I have to date".  The market has been up 14% since then.

Instead of trying to guess what's going to happen next, or predict a doomsday scenario (often based on a world view instead of evidence), it makes more sense to be in the market during an uptrend, start selling when it's under pressure and to start getting out when it's in a correction.

People have been predicting an apocolypse forever.  I doubt it but, even a broken clock is right twice a day.

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Grantham

I enjoy the many different views presented here. The indivudual I "trust most" is Jeremy Grantham. From his February letter:

Investment Implications
Courtesy of the above Fed policy, all global assets are once again becoming overpriced. This reminds me of the idea sometimes attributed to Einstein that a workable definition of madness is constantly repeating the same actions but expecting a different outcome! But, as always, asset prices are not uniformly overpriced: emerging markets and, we believe, Japan are only moderately overpriced. European stocks are also only a little expensive, but in today’s world are substantially more risky than normal. The great global franchise companies also seem only moderately overpriced. Forestry and farmland, which is not super-prime Midwestern, is also only moderately overpriced but comes with our nook and cranny sticker attached. But much of everything else is once again brutally overpriced. Notably, U.S. stocks (ex “quality”) now sell at a negative seven-year imputed return on our numbers and most global growth stocks are close to zero expected return. As for fixed income – fugetaboutit!  Most of it has negative estimated returns on our data, and longer debt, as always, carries that risk that may be slight in any period, but is horrific if it occurs – accelerating inflation.

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Nate

agreed, Grantham is well respected by me too.

BOB

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we don't know what the market will do

I totally agree about staying with the trend.  I also can't agree more about not knowing what the market will do.

As a result, I think it is important to have strict criteria - a clear, and well-defined point at which you will bail out, one that you determine prior to the correction happening, so you can take emotion (hope, fear, greed) out of the execution of your trade.  Otherwise, you run the risk of riding the correction down in the hope (emotion) that it really isn't a correction at all.  And if Chris is right and this turns into something more dramatic, the loss would turn from unfortunate to catastrophic.  After all, not knowing what the market will do must include the chance that Chris is right about the outcome and the timing.

Many - if not most - people do not have this discipline, and they hold on and hold on (hope) and end up selling right at the bottom (fear), when all hope is gone and it looks like the world is going to descend into depths from which it will never recover.

I also agree that its unwise to make trades based on macro observation, but rather from how the market itself is reacting to events.  For example, if it rises on bad news - that's positive.  If it sinks on good news, then that's negative.  High volume down days are not good - and low volume up days following the high volume down days - taken together are a sign of a top.

This stuff isn't easy, or we'd all be rich and retired.

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Playing the market...

...from a statistical standpoint, and using the 80/20 numbers given by the Professor, and I am certain his numbers are well thought out, and he did his homework, then this market is a relatively safe bet from a Risk standpoint. I see no issues shorting, and have shorted because my work suggests (to me) very little upside, and a millisecond (dramatic) move to the downside (HFT). Followed with carefully placed stops. I am comfortable with my bet, and DO NOT offer this as advise, just my point of view is all.

Secondary to my strategy and very important to me is too ready myself for quite the ride in volatility, and using the moves in the market that are still clear and fresh in my mind from the 2008/09 period. It will be a wild ride are my anticipations.

I have begun my research in saved materials from this period. I love RISK, and frankly have stated before and here again, I have waited for these market conditions to arrive for a few years now. I believe the Professor to be 100% correct in his call here.

Good Luck Folks

BOB

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two aces reply

         Seems to me all you have to think about is the trillion dollar derivative and debt strategy.Most cannot pay debts back . Could be because Robots have taken over.Robots do not eat or sleep or produce kids. But they do use energy to build and to maintain and chips to run.Idol humans who are out of a job use more energy out of frustration in searching for either jobs or entertainment.(Not good) Trillions of dollars created to pay off loans defaulted on either by malicious entent(fewer than majority) or businesses that don't work or are to competitive or the extreme are monopolized. Regulations which hamper encentive to invest in businesses.Extreme pensions promises at the wrong demographic era. Mis guided political hacks lying to the public for superior gains. All of this points to one solution. JUst the opposite of what elected officialdom is doing and proposeing. Fear is rampant and ignored as long as you check arrives in the mail and your grocery store is fully stocked.The price of energy used to create excess energy is what this is about.Infrustructure is what this is about. Possible chaotic rebellion is what this is about. Neither side has any leaders or at least any leaders that have any solutions.So we seem to be on the border of another hyperinflation to squeeze the money out of the high math graduates.Because there is no other way that is politically acceptable. In this country right now ,we are  lucky to have access to truth of the past.

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Professor,

I come here first and formost to study you and learn as a student does.

On Feb.19th in an essay posted by Gregor (another hero) that my charts, and my gut suggested a move was imminent by the curl to the downside I seen in Oil (-$7), Copper (-$21), Gold  (-$30) and Silver (.$1.25). These numbers could be plus or minus in the cents. Are these significant numbers? Well, we do see a correction as our future, and it is generally accepted that these commodities are tells to a market correction. First in, first out. China today has announced actions to control an over heated heated housing market, and this doesn't bode well for copper. The world economies are not responding well to the high price of crude, and adding all of this up with the issues in China, Europe, Japan, and the US economy then..

http://www.zerohedge.com/news/2013-03-04/china-tumbles-real-estate-inflation-curbs-biggest-property-index-drop-2008-japan-dow

It is why I support your latest call for a correction. Alasdair add to my concerns with his eye opening (with respect to his astute statistical conclusions, especially concerning Italy) Podcast of Europe, McGregor's Robots essay still has me focused on that issue, and Charles just makes sense for me.

This is why I am here Chris because you leave nothing unturned in gathering your analysis, and I trust you. That's it. Plus, I like that my focus is such that I can remain disciplined to see possible changes as they happen, and not well after the fact. So thank you, I feel you have taught me well, and I like victories for time spent following everyone, and everything.

The Fed is going to fight so hard to keep all the balls in the air but they will fail are my hopes.

Regards

BOB 

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Corrected for QE?

Do the Dow or the S&P take M1 into consideration?

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Probably will not be just a

Probably will not be just a correction, but a new wave of global crisis ( http://crisismir.com )

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mid-2008-2013

It's almost five years now that I've been reading about and anticipating some undefined crumbling of the "system." Of course the stock market is not the real economy but it is the psychological proxy. Today the stock market opened at all time highs and just one peek at the CNBC website will give you an idea of the celebration. Folks, Happy Days are Here Again!

When it did indeed look as if we had reached a shtf point in 2009, the PTB pulled out some real magic! That magic loosely based on Keynsian economics, tweaked to fit the circumstances has worked....for a long time now.  My rudimentary understanding of the Austrian School of Economics and my sense of logic and intuition has guided me, leaving me to believe that the magic can't go on forever. Maybe it's not "magic" ... maybe I just don't get it!

I have pretty much missed all the fun and my modest financial portfolio feels it. I am starting to get angry with myself for falling for the alternative to the mainstream narrative. Magic? Nah, it's just power so awesome, even "god-like," that it defies the laws of nature. The PTB's know what they are doing! Too late for me to throw in the towel but I,(so far anyway) have been dead wrong. 

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Water under the bridge

anexaminedlife wrote:

It's almost five years now that I've been reading about and anticipating some undefined crumbling of the "system." Of course the stock market is not the real economy but it is the psychological proxy. Today the stock market opened at all time highs and just one peek at the CNBC website will give you an idea of the celebration. Folks, Happy Days are Here Again!

When it did indeed look as if we had reached a shtf point in 2009, the PTB pulled out some real magic! That magic loosely based on Keynsian economics, tweaked to fit the circumstances has worked....for a long time now.  My rudimentary understanding of the Austrian School of Economics and my sense of logic and intuition has guided me, leaving me to believe that the magic can't go on forever. Maybe it's not "magic" ... maybe I just don't get it!

I have pretty much missed all the fun and my modest financial portfolio feels it. I am starting to get angry with myself for falling for the alternative to the mainstream narrative. Magic? Nah, it's just power so awesome, even "god-like," that it defies the laws of nature. The PTB's know what they are doing! Too late for me to throw in the towel but I,(so far anyway) have been dead wrong. 

anexaminedlife,

Ever look back at choices you made and wish you had done something different? Unless it helps you make better choices in the future, it appears (to me) as just wallowing in self pity. Sorry, but that won't do anything other than waste time and leave you depressed.

Where do you go from here? The Dow is breaking out to all time (nominal) highs as I write. Looking at the (muted) Fed inflation calculator, the Dow would need to be over 16,000 to equal the purchasing power that it had when it last reached these nose-bleed peaks. Why don't any of the mainstream finance types ever talk about that? If they did, these new highs wouldn't be so impressive and they wouldn't be able to coax moms and pops into "investing" in the new trend. The big money has been made and the rotation to the bag holders is gaining steam.

In my opinion, there are only 2 things driving today's market - boatloads of liquidity and a dearth of other investment options. I don't know where things are going in the short term. I've never been able to pick the opportune time to enter or exit. I'm left with making educated guesses about the fundamentals, investing accordingly, and then waiting for the chips to fall. Sometimes, the chips fall out of the buffalo.

Depending on your investment horizon, you should focus on the fundamentals. Why? Eventually, fundamentals will trump liquidity. So what are the fundamentals that are important? You've been around here long enough to figure that out for yourself.

Grover

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anexaminedlife
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Thanks Grover but you misunderstand

Wow , that was a leap; maybe I didn't express myself appropriately. My point was not self-pity at all! My point is maybe I am wrong in my assessments, e.g.., fundamentals don't trump liquidity. There are some very good arguments and analyses out there that argue against a lot of what is touted here and on other "alternative" venues. I am simply not a true believer and I am open to considering that I have been wrong. 

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Lnorris
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Yes, it seems irresponsibility

Yes, it seems irresponsibility has been rewarded in these situations where people stopped paying and then were able to modify their loan.  For those of us that have lived within our means it is unfair.  

I can only square this in my mind by acknowledging that they have learned nothing from their behavior.  They think they have gotten away with something and maybe they have for now.  I choose to believe that what goes around comes around and that one day they will get comeuppance.

Life has a funny way of working out sometimes.

Lynne

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rhare
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Crumbling has occured

anexaminedlife wrote:

It's almost five years now that I've been reading about and anticipating some undefined crumbling of the "system."

It has crumbled.  Record unemployment (real not manipulated), record food stamp use, inflation (I see runing about 8% on real goods), gold doubled since 2008, infrastructure crumbling, record deficits, wealth gap increasing.

If you took your wealth and stuck it in gold back in 2008, you would be much better off than in the stock market.

Gold -   $966 ->  $1575   +63%

Dow - 12,204 ->  14,253  +16%

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Wendy S. Delmater
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investing in resilliency

And if you did not put your funds into precious metals, but rather into energy efficiency, food and water resiliencey?

Here's how that can work, for ROI (return in investment).

  • Investment: Airtight wooburning stove instead of electric (standard in the South) heat? Initial outlay, $6,000 minus tax credit $1500 = $4500 investment.  ROI? Money saved per year $1,000. We made 45% the first year, and will for the life of the stove - 30/yr minimum. The payback period s 4 years. Everything after that is gravy. And if things collapse, we have heat
  • Investment: To increase cooling efficiency a solar attic fan ($750), eco-foil ($200), and insulated window shades $200) . Initial investment total = $1350. ROI, money saved per year $300. We made 22% the first year, with a five year payback. After that, the savings just keep piling up.
  • Investment: Food resiliency. This is a little more complicated. Initial outlay over a three year period, $500 for raised beds, $60 for two truckloads of community-based compost, $300 for seeds (seeds cost us $200 the first tyear, $100 the second, and should remain at $50 this year and future years), $200 one-time cost for fruit and nut trees & bushes, $260 one-time cost for a waterbath canner, a pressure canner, canning book, canning jars. The first year we saved $100 on produce and canned good, the next we saved $400 and this past year we saved $800. We've leveled out at saving at least $750 a year for now until our fruit and nut trees mature. Initial investment $1,620. Payyback time 26 months. We have an ongoing net return of at least $750/yr. And it will get better when start to use the pressure canner.

Resilliency: the gift that keeps on giving.

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Grover
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Not the first time I've misunderstood

anexaminedlife,

I'm sorry. I reread your post and come to the same conclusion. Especially based on this:

anexaminedlife wrote:

I have pretty much missed all the fun and my modest financial portfolio feels it. I am starting to get angry with myself for falling for the alternative to the mainstream narrative.

My wife accuses me of being an insensitive bastard at times. This must be one of those times.

I'm curious. So you aren't swimming in self-pity. Rhetorically, what can you do about the past? More importantly, what are you going to do in the future? Can you provide an example of mainstream analyses that you consider "very good"?

Grover

PS - I agree that fundamentals don't trump liquidity in the short term. Eventually, liquidity burns itself out. I can't say when that will occur so I invest/speculate according to fundamentals.

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ao
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anexaminedlife wrote: It's

anexaminedlife wrote:

It's almost five years now that I've been reading about and anticipating some undefined crumbling of the "system."

anexaminedlife

Maybe, but mostly I've read about a crash or a collapse of the system when a crumble is what is occurring ... and it's discontinuous in nature.

Don't get weak kneed now.  Remember, the Titanic was highest out of the water just before it went down.  Be patient for a few more years and you'll be glad you did.  But many will be suckered back in (the dumb money draw) and they'll regret it.  I've never gone with the crowd and I've never regretted it but I'm also guided by the Joe Lewis (RIP) adage, "Don't be first and don't be last.";-)

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Oliveoilguy
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Diversification is Prudent

anexaminedlife wrote:

It's almost five years now that I've been reading about and anticipating some undefined crumbling of the "system." Too late for me to throw in the towel but I,(so far anyway) have been dead wrong. 

You are probably right ...not "dead wrong", but the real question is, can you hold your position and wait it out.

In this complicated and manipulated financial game " being right"  may not make you a winner today or tomorrow or even in your lifetime. 

My strategy therefore is to pick my side. (Inflationary outcome) and place 60% of my bets in that direction. But 40% goes against my belief in case I am wrong. I am not trying to hit a home run, just survive.

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anexaminedlife
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No problem at all Grover

I probably didn't make myself clear.

As for what can I do about the past - nothing and it is not and never was my concern. What can I do about the future is a better question. : - )

Econtalk.org has quite a few podcasts where Russ Roberts (an Austrian School economist) has some great conversations with Keynesian economists. It's a great place to learn because Dr. Roberts does not push any agenda. 

Eventually anything can happen. If nothing else, Keynes got it right when he famously said:

The long run is a misleading guide to current affairs. In the long run we are all dead.

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Grover
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Thanks for the tip

Thanks for the tip on econtalk.org and Russ Roberts. I'll listen to a podcast tomorrow.

anexaminedlife wrote:

Eventually anything can happen. If nothing else, Keynes got it right when he famously said:

The long run is a misleading guide to current affairs. In the long run we are all dead.

When I first heard of the circumstances behind this quote, I thought it was a flippant answer to a serious question. Keynes died on 21 April 1946 - the personal fulfillment of his profound statement. His theories live on and have been misused by any politician who could. This has allowed the government and financial systems to get so out of whack today. When will reality make a comeback? I don't know, but eventually it will. When it does, it won't be kind to those betting heavily that it won't return.

http://en.wikipedia.org/wiki/John_Maynard_Keynes

Grover

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anexaminedlife
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Agree

Oliveoilguy said:

You are probably right ...not "dead wrong", but the real question is, can you hold your position and wait it out.

In this complicated and manipulated financial game " being right"  may not make you a winner today or tomorrow or even in your lifetime. 

However, if it is not in my lifetime then I was dead wrong.

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davidallan
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Hold Fast

Money is a game. Pretty much anything can be done as we've been seeing lately.  However money does not exist separate from the real world and we can't escape the laws of physics.

I could talk about the implications of the 2nd law of thermodynamics and how societal complexity is dependent on maintaining the flow of energy. But maybe that's unnecessarily technical.  I can't put it more simply than Chris has in the Crash Course. We have an Economy that must grow, connected to Energy supplies that can't grow indefinitely and and Environmental resources also finite in nature. Simple as that.

I have to admit that like some on the site I am under water with some of my PM investments, silver in particular. However I have no doubt that my investment is safe and very well positioned for the future. As Adam said in his article last week Hold Fast

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rhare
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At least by absorbant paper....

Wendy S. Delmater wrote:

Resiliency: the gift that keeps on giving.

Wendy, I agree completely that investment into things that add resiliency offer the best returns.  However, if you aren't ready or able to take those steps, you can at least protect some of your wealth for later use. 

Even simply buying and storing long term durable goods (Toilet Paper, Paper towels, etc) you would be better off than the Dow.  Looking through some of my past records, assuming they didn't drop the size of the product between 2008 and 2010, it looks like Paper Towels have increased by 45% between 2008 and today.  So instead of buying paper financial assets you could buy a much more absorbent and useful package of paper towels in 2008 and be better off. surprise

  3/5/2008 3/5/2013 Change
10 Year T-note 3.62 1.89 -48%
DOW 12,204 14253 +16%
S&P 1304.34 1539.79 +18%
Gasoline $3.21/gal $3.83/gal +19%
NASDAQ 2272.81 3224.13 +42%
Paper Towels @ Costco $0.0175/sq. ft $0.0254/sq. ft +45%
Silver $19.48 $28.74 +48%
Gold $966 $1575 +63%

The gain on Paper Towels is actually even greater since you don't pay taxes on that gain!

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RJE
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Rhares participation here at PP

Excellent!

BOB

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Wendy S. Delmater
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sssshhh!

rhare,

I don't advertise my paper towel gains. Someone might break in and steal them! wink

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Rob P
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If CM (and others) are correct

. . . and I think they are, I think there will be an incredible buying opportunity in equities - but it's not happening right now.  I've been watching and playing markets for a long time.  I think (hope) I know a bubble formation/hyperbolic uptrend - whatever you want to call it - when I see one.   Consider, for instance: those of you who were into PMs in spring of 11 may recall when silver made that move to almost $50 and then dropped like a lead balloon, or to cite another recent example, when WTI petroleum prices went to 147 in July of 08 and then dropped to $32.  I could mention '87 and a number of other such moves too. To me, this current stock market has that same feel - just waay tooo many days in row of up up up.  Way too much irrational optimism

For whatever it's worth, I'll just tell you that I'm selling into this bull (as in BS) market - taking profit - a little more every week, every day, instead of buying.  This is in regard to Pharmaceuticals, Utilities, Energy (I think especially inflated at this moment), and consumer staples -  selling em off steady and sure.  There's only one kind of stock I'm buying right now and that's PM stocks - and those slowly, a little bit every week - cost averaging in to new positions and hedging in case there's another drop. The fundamentals in PMs will prevail at some point - but they could also move down with a general market drop.

Anex do not dispair,  I really don't think you've missed anything at all.  I think there will be a major correction or even a real market collapse (think 08/09) and it will be a HUGE buying opportunity - particularly in regard to energy stocks.  It may come this year or next, who knows, but I'd say be ready. Stocks at that time, which may be hard to call, will be a much more solid investment than they are now.  Just my two cents.

BUT, as with PM stocks right now, you'll have to be willing to buy when everybody and their cousin is saying it's the worst move in the world and that you're a total idiot for doing it. That's the deal - it really is "blood in the streets" .

Just my two cents.

Wendy, I couldn't agree more in regard to investing in resiliency.  It pays off in many many ways. 

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kevinoman0221
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Wendy S. Delmater

Wendy S. Delmater wrote:

rhare,

I don't advertise my paper towel gains. Someone might break in and steal them! wink

They'll have to pry them from my clean, well-dried hands!

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kevinoman0221
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There's only one kind of

There's only one kind of stock I'm buying right now and that's PM stocks

Any thoughts about buying inverse ETFs, such as the Proshares Ultrashort S&P500?

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Rob P
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well

well, one thing that really makes me nervous is giving anyone else specific investment info - but, in general, I think you've got to be very very careful with those inverse ETFs, especially the ones that are 2x and 3x.    Most of them are adjusted to a daily return (key idea).  So, if you already know this, excuse - but this is my main concern, so I'll just put it out there in case you don't know it.  If it is a "daily" relationship to the market (And I'm fairly certain that one is),  then if the SPX goes up yours goes down 3x (whatever) for the day.  This Diminishes your base.  Like, say you start with 100 and the first day the market goes to 101 - well, inverse 3x takes you 97.   Let's say the next day same thing - spx goes to 102 - now you're at 94.x .  Your base keeps shrinking daily.  SOOOO, then, to come up out of that hole you're in you have to start from a greatly dimished base. for instance, if you're now at 90, and SPX goes from 100 to 99, well, you only go to 92.7 for the day.   Remember, and this is key, this occurs DAILY, not on an ongoing continuum.  So, you know the Ultra short, as a concept, is great if and when the market is tanking but it could really really be a bitch and diminish a lot of your capital base if, as may well be the case, the spx continues to climb.   Do not assume that it will just move up and down in a sort of linear relationship relative to a fixed entry point on the spx - not so.  I hope that makes sense.

The same essential structure is there for 1x and 2x Daily etfs, but, 3x especially, could eat you alive. proceed with caution.

The other popular way to short is to play options - buy "puts',  but don't do this until and unless you really know about it and have practiced with monopoly money (hey, come to think of it, our Federal Reserve notes are monopoly money - ha, ha, on us.).

From all I can tell, that one does look well enough mangaged - It's one of the ones I've been watching but I've never bought it.  

The inverse ETF can be a really good strategy for hedging, but I'd say you have to keep an eye on your portfolio and consider it a one day - day at a time - sort of  investment. That's what I do when I buy them.  Look, if you haven't done it before (I don't mean to be presumptuous), set up a watch list and watch what the thing does - as if you've bought it.

Another concern is liquidity.  But that's a big one and it's trading all the time.

Supposedly CM is going to let is in on it when he decides to short the markets.  Might be interesting, but I doubt he'll be specific about his MO.

Back to the cabbage seedlings - hope that helps.

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kevinoman0221
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Posts: 125
thanks Rob

Rob, thank you for your answer. 

I had played with that particular fund in a trading game I played with some coworkers. Monopoly money ;)

Reading Chris' brief mention of considering an inverse ETF got me thinking about it and psyched up to try it for real. 

You make a good point about the leveraged funds that are 2x or 3x. The Proshares one I mentioned is 2x and I will watch that very closely.

Though with regards to a 1x inverse fund, I don't see how that is very different from any investment in that, any investment that falls 1% must then grow again greater than 1% just to get back to where it was. I suppose the only thing inherently more risky about a 1x inverse fund is that you are betting on overall shrinkage, rather than growth in the market - and that's just not how things are supposed to work.

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ao
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Posts: 2220
history repeating itself

kevinoman0221 wrote:

There's only one kind of stock I'm buying right now and that's PM stocks

Any thoughts about buying inverse ETFs, such as the Proshares Ultrashort S&P500?

We've talked about this topic numerous times here in the past.  Stay away from these, especially the leveraged ones.  You'll get ripped to shreds.  

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Rob P
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Posts: 85
the 1x

Kevin, with the 1x look at the inverse relationship bewteen the index and the etf. Think about it - model it as a daily percentage shift with a lot of daily volatility up and down - but more up than down in the index. I believe the base will still shrink in the etf while the base of the index expands so that increasingly large real moves inthe index produce smaller real  movements in the etf - although they began at 1 to -1.   No problem with a 1x straight correlation that I can see. Both start and end daily 1 to 1, whatever the ratio.

Sorry if it's a redundant discussion.

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davefairtex
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Posts: 1498
rhare: bond yields falling = bond prices rise

In your chart you showed the 10 year bond yield falling from 2008's yield (3.62%) to 2013 (1.89%) as a -48% loss.  That's not correct.  A drop in yield means the price for that 10Y bond bought in 2008 went up - between 10-15%, give or take.

Simple thought experiment: would you rather earn 3.62% on your money, or 1.89%?  3.62% of course.  So the 2008 bond (3.62%) is much more attractive than the 2013 bond (1.89%) - therefore, the price of that 2008 bond must rise - why would the seller sell such a bond for the same price as one yielding 1.89%?

In 2008, that 3.62% bond was sold for $1000 - par value.  Today, it might fetch $1100, because its coupon (3.62%) is higher than the prevailing rate for the same sort of bonds sold today (1.89%).  Things get complicated because the 10Y bond in 2008 is now actually a 5Y bond today, but - it would still sell for a premium.

Bottom line: 10Y bonds from 2008-2013 +10-15%, not -48%.  When yields fall = happy news for bondholders.

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rhare
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Posts: 1271
Thanks for the correction...

davefairtex wrote:

In your chart you showed the 10 year bond yield falling from 2008's yield (3.62%) to 2013 (1.89%) as a -48% loss.  That's not correct.  A drop in yield means the price for that 10Y bond bought in 2008 went up - between 10-15%, give or take.

That makes sense.  Thanks for correcting that.  I'm not very familiar with the bond market. 

Even with that, the 10-15% still isn't keeping up with inflation.

kevinoman0221 wrote:

They'll have to pry them from my clean, well-dried hands!

cheeky As far as the paper towels, if I had a recent price on a packet of TP, I would have used that instead.  It seems much more comparable to stocks. wink

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