valuation

Insider

Shutterstock

The Coming Valuation Crisis

And why it will be so difficult to contain
Friday, July 27, 2018, 6:49 PM

Executive Summary

  • The Fed's inability to recognize the true dynamics of the 2008 crisis has re-inflated a market bubble and unfairly rewarded the big banks
  • More credit/liquidity cannot solve valuation/collateral crises. But that's exactly what central banks tried to do -- creating today's "Everything Bubble"
  • How the Crisis of 2018/2019 will differ from 2008
  • Why this time, the Fed's fixes will be futile

If you have not yet read The FAANG-nary In The Coal Mine, available free to all readers, please click here to read it first. Note that this Part 2 is an updated version of a report first published in 2014.

In Part 1, we noted the eroding good options for investment capital in today's "Everything bubble" financial markets, as well as the dangerous risks that another 2008-style crisis is brewing. If markets are fractal, as argued by Benoit Mandelbrot, then we can anticipate more “once in a lifetime” crises than economists expect, and that such crises will be less predictable than expected.

In Part 2 of this report, we explain why the policies of the governments and central banks around the world that have boosted assets such as stocks, bonds and real estate to new bubble highs will cause a crisis that will be as damaging as 2008 -- yet unfold quite differently, in ways the system is not prepared for.

Fighting the Wrong Battles

The outlines of the coming crisis were readily visible in 2007; the subprime domino was toppling the market for mortgage backed securities which in turn was toppling the market for credit defaults, collateralized debt obligations (CDOs) and a host of other exotic financial instruments.

Those of you who were actively following stock markets in 2007 and 2008 may recall the wild surges of euphoria that accompanied every Fed policy announcement. Stock indices shot up every time, only to falter once again as the liquidity injections failed to resolve the underlying collateral/valuation crisis.

When liquidity programs failed to fix the erosion of collateral, markets went into a free-fall.

We can anticipate that the Fed (and other central banks) will respond to a renewed collateral/valuation crisis in the same way they resolved the crisis in 2009—by buying assets directly in vast quantities.  The Fed’s option of buying stocks directly (for example, index contracts or funds) is sometimes referred to as the Nuclear Option, the ultimate backstop to a global meltdown.

But the nuclear option won't fix anything, because... » Read more

Blog

BrAt82/Shutterstock

The Weighted Average Cost Of Capital

When it goes up, prices go down. It's going up...
Friday, December 2, 2016, 8:59 PM

Get ready to live in an era of rising interest rates. It's going to be unfamiliar territory for all of us... » Read more

Podcast

John Hussman: The Stock Market Is Overvalued By 100%

Expect prices to drop by 50% (or more)
Saturday, November 8, 2014, 5:04 PM

John Hussman is highly respected for his prodigious use of data and adherence to what it tells him about the state of the financial markets. His regular weekly market commentary is widely regarded as one of the best-researched, best-articulated publications available to money managers.

John's public appearances are rare, so we're especially grateful he made time to speak with us yesterday about the precarious state in which he sees global markets. Based on historical norms and averages, he calculates that the ZIRP and QE policies of the Fed and other world central banks have led to an overvaluation in the stock market where prices are 2 times higher than they should be. » Read more