Market Crash? The Moon Is Blue and Reuters Makes a Reasonable Prediction
By Staff News & Analysis - August 25, 2014

Here's what it will take to trigger the next stock market correction … As Wall Street hit another new record Thursday, it is worth considering what could cause a serious setback in stock market prices around the world. Since I started writing this column in 2012, I have repeatedly argued that the rebound in stock market prices from their nadir in the 2008-09 global financial crisis was turning into a structural bull market that could continue into the next decade. Asset prices, however, never move in a straight line. It has been more than two years without even a 10 percent correction and five years without a 20 percent setback. This cannot go on. – Reuters

Dominant Social Theme: The stock market is doing just fine but needs a correction.

Free-Market Analysis: The moon is blue and we agree with Reuters. Yes, this is an unusual occurrence, especially with this particular columnist. But we do agree with his summation: Equity markets – especially the US market – are due for a correction, but not one that will necessarily ruin the Wall Street Party.

The difference between our view and this columnist is that we do not believe the stock market can be analyzed rationally – that it is at this point extremely artificial and more responsive to regulatory influences and monetary policy than any underlying "valuations."

The Wall Street Party is a thoroughly manufactured occurrence that has little relation to reality. But it exists. And it may well expand.

That won't do for the mainstream press, though. They can't mention the underlying artificiality. They're stuck with analyzing the markets through the prism of 20th century "value" disciplines, or perhaps modern portfolio theory. Either way, the idea is that markets are legitimate and providing fair pricing for equities.

Here's more:

Sometime in the not-too-distant future, investors are certain to suffer some big and painful losses — even if I am right in expecting equity prices to continue rising in the long term. What kind of event is most likely to end this bull run, or at least interrupt it with a setback of 20 percent or more? The obvious answer is a major economic crisis, such as the near-breakup of the eurozone in 2011-12 or a U.S. recession.

Another possible trigger would be a substantial increase in interest rates. All the worst bear markets in living memory — 1973-74, 1980-82, 2000-02 and 2007-09 — occurred after a series of rate hikes by the Federal Reserve, and monetary tightening is the most widely discussed investment risk today. But on closer inspection, neither economic fundamentals nor monetary policy looks like a serious threat, at least in the year ahead.

Almost all recent evidence from the U.S. economy suggests acceleration rather than slowdown. Though a renewed recession in Europe or Japan is more likely, this would not cause much financial shock, since neither of these economies has yet fully emerged from the slump of 2009.

An increase in interest rates big enough to trigger a stock market correction appears even less likely in the next 12 months. This is because stock markets tend not to react adversely to the start of a monetary tightening cycle, which generally signals an improving economic outlook.

History suggests that it takes a long series of rate hikes, spread over several years, to trigger a bear market. But if no major economic crisis or substantial monetary tightening is on the horizon in the next year or so, we must conclude either that equity prices will keep rising without interruption or that the next bear market will be caused by something other than monetary policy or economic fundamentals.

Well done, Reuters … at least on the surface. This is indeed a description of the risks the US market is facing given the central banking parameters that have already been set for it.

If the markets manage to negotiate the fall without tumbling off the proverbial cliff, we could see continued gains next year. Market crashes usually happen in autumn. Also, much of the current negative conversation taking place revolves around market overvaluations and fragility.

The article, in fact, mentions that a turning point for this market would be "extreme and unsustainable valuations as growing investor confidence turns into over-optimism and complacency."

Has the market reached this point? The article answers: "This seems implausible, for two reasons. First, because standard valuation metrics are only just above their average levels in the United States and lower than average in most other markets — a point made repeatedly by Federal Reserve Chairwoman Janet Yellen and explained in my recent article on valuations …

"Second, because the market's behavior itself confirms that today's valuations are not unreasonably elevated. If valuations were genuinely over-extended, investors would have sold equities far more aggressively in response to such pressures as the Fed's tapering of bond purchases, the stalling of U.S. growth last winter, the disappointment (yet again) with European economic prospects or the conflicts in Iraq and Ukraine."

This is an interesting analysis, though not necessarily true. The US "plunge protection team" probably has more short-term clout than most individual investors. If the "team" doesn't want a downturn, it can probably forestall one, at least in the short term. And then there is flash trading that makes up perhaps 50 percent of market volume.

While the article goes off the rails here, it recovers with the conclusion that "If stock market valuations are not yet high enough to cause a big correction – and if monetary and economic conditions are likely to remain benign for the next year or two – then the unavoidable conclusion is that equity prices will just keep rising until they really do become over-extended."

Yes, the crash is being forestalled and forestalled until it is inevitable. It is being cultivated like some sort of gigantic hothouse flower. When this market finally breaks, it will be with a resounding crash that may echo throughout history.

We've rehearsed the reasons many times before. Regulatory changes have concentrated and expanded both investor participation and the amount and kind of offerings that can be provided to buyers. Then there is monetary policy that is entirely crazy. Around the world, central bankers have pressed monetary accelerators to the floor in a race to print as much currency as possible.

The world is swimming in the money: A "correction" may be a serious possibility – even a crash such as which happened in 1987. But the 1987 crash in retrospect was not a 1929-style disaster but a temporary setback, for the market rebounded and made new highs in the 1990s, and then beyond.

This Reuters article provides a good many surface reasons why markets are continuing to make progress in the long term. Of course, it avoids the real reasons, which is that markets have been strenuously organized to rise. But we aren't really supposed to talk about those reasons. The job of the mainstream press is to rationalize market rigging by avoiding reporting on it.

We'd rather incorporate larger market influences – and corruption – into our analysis. But we reach the same …

After Thoughts

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  • Bruce C

    The feeling I get when I read articles like this one from Reuters is “insipidness”. It seems superficial in that it’s analysis is so general that it is almost useless.

    “if no major economic crisis or substantial monetary tightening is on the horizon in the next year or so, we must conclude either that equity prices will keep rising without interruption or that the next bear market will be caused by something other than monetary policy or economic fundamentals. “

    Who can argue with that? That statement could apply to any point throughout the stock market’s long history: Either a correction will be caused by a change in monetary policy or economic fundamentals, or it will be caused by something else. That’s pretty useless.

    I agree that Reuters is avoiding mention of manipulation and I do believe there is some sort of “plunge protection” scheme in place, but I still don’t think that matters. I just don’t think the financial markets can be controlled much longer. Not that “the elites” aren’t going to try, but that even they are not omnipotent.

    The central banks have been actively trying to reflate and stabilize the global economy for 5 years already (since 2009), and have done so amidst unprecedented levels of corruption, breakdowns in the rule of law, “mal-investments”, and financial repression. Although asset values have risen – most notably in the stock market – wages have stagnated, deflationary forces are still strong, unemployment remains high, there is social unrest, growing geo-political tensions and turmoil, and a shadowy but growing crop of other instabilities brewing that are almost too numerous to mention (e.g., derivatives).

    My point is that, despite the overall tone of the Reuters article, the financial system, global economy, and geo-politics are becoming more UNstable, not less.

    It’s impossible to know when something will give, but whatever it is, almost by definition, it’s going to be something off the “radar” that “no one” will see coming.

    The fact that the Reuters article didn’t even mention the rapid escalation of the wars in the Middle East is stunning, not to mention some other brewing skirmish (e..g, Ukraine) or even the issue in “Furgeson” igniting turmoil throughout the US.
    Or, another major “natural disaster” like a major solar flare up that knocks out satellite communications. Even “the elites” can’t control that.

    • Xlimey

      Will the trigger for a predicted Wall Street meltdown be when the known unknown happens of the US Treasury finally admitting that its national debt liabilities exceeds its income? Will future international creditors have fled from the Fed auctions before than? Will the required austerity budget to “fix” this bankrupt status include cutting back on welfare and public pensions plus higher taxation? Monetizing our debt so flagrantly in order to extend our undeserved high standard of living, compared to most all of our international creditors, can only end in hyper-inflation when we will all suffer, excepting the 1% elite who can emigrate in their private jets.

      • Party on, Wayne

        “Will future international creditors have fled from the Fed auctions before then?”

        Only if they are looking for a regime change or perhaps a debilitating scandal for the responsible parties, followed by a swift reversal by their successor.

      • Bruce C

        No to all of the above. I don’t think so. If the stock market even just “corrects”, let alone “tanks”, it will be for reasons that humans (even “elites”) will not be able to foresee or counter.

        What is so remarkable about these times is that so much IS – or at least seems to be – under control, no matter how transparent or illegal or pragmatic it may be.

        History is cruel to the idealists. The worst outcome for the most people will probably be what happens, but one can always hope.

    • Pater Tenebrarum

      Most crashes happen for no obvious reason. As Jon Hussman recently remarked, what happens is simply that compressed risk premiums normalize – and they tend to do so very quickly. Suddenly news that were previously ignored seemingly “cause” large price declines that seem way out of line with the importance of the news. Only later does it become clear that the market actually signaled that a significant fundamental shift was in train.

  • juergenwahl

    The Wall Street party will go on until it stops. But remember, Wall Street professionals can make money whether the market rises or falls – direction makes no difference to them, just volatility. The reason for this spectacular rise is to suck in every nickel and dime that the retail investors have left in their dwindling bank accounts and under that big rock in their back yards. Retail investors have been bludgeoned to near-death financially, by the Fed’s zero interest rate policy. Joe Investor is now, and has been, chasing yields. At some point in the future, all of the low-hanging fruit will have been gathered, the trap will be sprung, and all of Joe’s hard earned cash will be officially in the hands of the monied elite. It should be noted that: 1) the stock market is a Ponzi scheme – to keep going, the game needs new funds to continue because there is a constant drain from the pool of funds by commissions, dividends paid out, and taxes; and 2) there is no money in the markets – person A buys a share from person B, A pays B (plus commissions from both parties), and now B has A’s cash while A has the share = there is no cash in the market, as B now has it as does the broker. It is a classic Ponzi scheme run for the benefit of the stock exchange boys! It is a most dangerous game for the unwary, and is as dangerous now as any time in the history of the markets!

  • Yes, the trend often lasts much longer, and goes much farther, than anyone has anticipated – even in the case of a market responding to artificially contrived conditions and manufactured propaganda. The farther we go, the more divorced this equity market becomes from reality – but when has that ever stopped a bull market? When it does, that is when, and not before : )

  • moralcompass

    I disagree.
    Normal economics do not apply any longer.
    War is manufactured for profit and wall-street only reflects such trends. It does not take a genius to see war is at the center of the Anglo-american conglomerate.

    All wars are banker’ wars! Said an honorable General with ethics.

  • Alice Maxwell

    Any correction is just a “hope” not an actuality. When you look at the extent of the “kiting” which now involves the whole world, any reckoning can be postponed by new ways to “kite” and that is what is happening everyday now.

    Today banks do not need reserves because reserves are always on the move, in someone else’s possession and often only digital, not actual. For God’s sake, all of you know how Larry Summers invented renting of Harvard’s great endowments and that became the bellweather for meeting any accounting limits re sums and times for them to appear.

    Economics is now an illusion that has a 24 hour span so far as the regulators are concerned. if you have “reserves” on hand you pass and then you pass your reserves to the next guy who needs it often with the auditor from the firm you both contract.
    It is a game of who can move the reserves faster that makes the billions today.

    Hedge funds rely on speed and the men and women who know how to play the game better than others. The Sephardim are still experts at using figures so they are prominent in this even as they were two thousand plus years ago. These elites will never be dislodged since they know how to disgorge when necessary. That is why the central banks use them all over the world.

    You are all dealing with outmoded concepts and you had best get up to date fast, if you are to survive!

  • NietzschesNephew

    very good analysis, more rational analysis with Sergei Glaziev
    click cc by gear symbol for captions


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