THREE HURRICANES HEADED OUR WAY – NO WHERE TO HIDE…”The next crash will make 2008 look like a walk in the park.”
James Quinn
TheBurningPlatform.com
28th April 2015
There are three financial hurricanes hurtling towards our country and most people are oblivious to the coming catastrophe. The time to prepare is now, not when the hurricane warnings are issued.
Hussman makes his usual solid case that stocks and bonds are as overvalued as they have ever been in the history of investing. People are under the false impression that bonds are always a safe investment. The fact that you are already getting a negative real return on bonds doesn’t seem to compute with math challenged Americans. Over the next ten years you will absolutely lose money in bonds.
Liquidity in both the stock and bond markets is thinning considerably. In bonds, quantitative easing by global central banks has resulted in a scarcity of available collateral, a collapse in repo liquidity, and increasing frequency of delivery failures, all of which is shorthand for a bond market that is becoming less liquid and more fragile to any credit event. Meanwhile, risk premiums are minuscule. Avoiding a negative total return on 10-year bonds now requires that interest rates must not rise by even one percentage point over the next three years. Bond yields have historically covered investors against a meaningful change in yields before resulting in negative total returns. On a one-year return horizon, bond yields presently cover investors for a yield change amounting to only about 0.25 standard deviations – matching mid-2012 as the lowest level of yield coverage in history.
The fragility of the economic, financial, and social systems of the U.S. is at extreme levels. The median American household has less real income than they had in 1989. The social fabric of the country is tearing as we speak, with Baltimore and Ferguson as the warning shots of coming chaos and civil strife. The ruling elite control the monetary system, so the rigged financial markets continue to rise and have reached bubble proportions. An unexpected pin will be along shortly to pop the bubble. The next crash will make 2008 look like a walk in the park. It may be decades until markets reach these levels again.
Market crashes always reflect two features: extremely thin risk premiums in an environment where investors have shifted toward greater risk-aversion, and lopsided selling into an illiquid market. Under present conditions, we observe the precursors for both. That doesn’t force or ensure a crash, but it creates the underlying fragility that allows one.
Last week, the Nasdaq Composite finally clawed its way to breakeven, 15 years after its spectacular bubble peak in 2000. It’s a testament to the overvaluation of technology stocks in 2000 that it has required the third equity bubble in 15 years to reclaim that 2000 high, at least briefly. As you may remember, the Nasdaq Composite reached its intra-day high of 5132.52 in March 2000, plunging to 795.25 (down -78%) by October 2002. The Nasdaq 100, representing the most glamourous of the group, peaked at 4816.25 in March 2000, plunging to 795.25 (down 83%) by October 2002. Even a decade later, in 2010, both indices were still 60-65% below their 2000 highs. The 2000-2002 decline also took the S&P 500 down by half, wiping out the entire total return of the S&P 500 – in excess of Treasury bill returns – all the way back to May 1996.
The Rest…HERE
