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Economy booming? Maybe a dead cat bounce.

shady28

shady28

Platinum Member
In inflation adjusted real dollar terms, S&P still has not beat its Aug 2000 high.

I think 2014 is going to be sucker punch time for folks heavily invested in stocks.

Daily updated chart :

http://www.multpl.com/s-p-500-price/

The big picture :

"The peak in 2000 marked an unprecedented 151% overshooting of the trend — nearly double the overshoot in 1929. The index had been above trend for two decades, with one exception: it dipped about 11% below trend briefly in March of 2009. "


SP-Composite-real-regression-to-trend.gif
 
Since the markets are currently fairly valued, based on BV alone, it's not hard to see them perform well in 2014 and 2015 before Fed interest rate rises really start cooling the equities boom. That's what happens during booms; stocks become overvalued and revert to the long-run mean at some point.
 
With each passing year since 2009's bottom it becomes harder for me to appreciate doom and gloom predictions. They made a lot of sense to me then but it appears I along with others were just not right. I have emotionally divested myself from bracing for any impact. We will have another recession and or crash at some point but I refuse to predict it is just around the corner.
 
First said:
Since the markets are currently fairly valued, based on BV alone, it's not hard to see them perform well in 2014 and 2015 before Fed interest rate rises really start cooling the equities boom. That's what happens during booms; stocks become overvalued and revert to the long-run mean at some point.
Click to expand...

What is "BV"?

(I mean, it can't be book value, right?)

Fern
 
I expect the economy to continue to do well in 2014, although the housing market will slow somewhat due to higher interest rates and the new CFPB regs.
 
First said:
Since the markets are currently fairly valued, based on BV alone, it's not hard to see them perform well in 2014 and 2015 before Fed interest rate rises really start cooling the equities boom. That's what happens during booms; stocks become overvalued and revert to the long-run mean at some point.
Click to expand...

It's mostly just inflation. Money supply increased by a factor of what, 3 or 4? The stock market goes up almost 1/3 in one year? That seems about right. Will it keep going up? As long as they keep printing money, yeah it will keep going up, unless the fed loses control of the bond market, which they have. The fed hasn't made significant changes in money printing or interest rates, but the 10 year treasury yield nearly doubled since summer. People are mistakenly thinking this rising rate means the economy is improving, but the opposite is true. Interest rates go up when the economy is improving if the fed is the one raising interest rates. The rates being raised by market forces means people are losing faith in our government. A lot of things like mortgages and short term bonds (margin debt) are tied to the 10 year treasury, so the rising interest rates might slow down or potentially crash the stock market if people on margin decide to jump out. The whole thing is unstable. I wouldn't tell someone to sell and live in a cave, but prepare for a crash, put your trailing stops in place, and watch the bond market.

This year's "best" stock market was Venezuela's. It's up a little less than 500% due to massive inflation. Guys like Krugman think it's a stunning success.
 
Doppel said:
With each passing year since 2009's bottom it becomes harder for me to appreciate doom and gloom predictions. They made a lot of sense to me then but it appears I along with others were just not right. I have emotionally divested myself from bracing for any impact. We will have another recession and or crash at some point but I refuse to predict it is just around the corner.
Click to expand...

This kind of honesty can take you a long, long, way :thumbsup:
 
Doppel said:
With each passing year since 2009's bottom it becomes harder for me to appreciate doom and gloom predictions. They made a lot of sense to me then but it appears I along with others were just not right. I have emotionally divested myself from bracing for any impact. We will have another recession and or crash at some point but I refuse to predict it is just around the corner.
Click to expand...
Me too. I considered taking my 401k mostly out of mutual funds, but decided to let it ride. If the market crashes I could not predict it anyway, and if it doesn't come back I'll have more pressing problems. Once one accepts that the market will rise and fall it's easier to not get too emo in either direction.

Besides, if too many people decide the economy is about to crash then it will crash. I don't want to be part of that. Better to take a short term hit which is meaningless anyway until you pull it out.
 
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I am suspicious of price bubbles in assets whose price charts since QE3 started look like charts of Fed balance sheet over that period. Economic upside has already been priced in those assets by speculators buying them with borrowed Fed money.
If underlying economy is indeed picking up, I'd be more interested in cyclical assets, like commodities, which haven't rallied and don't have a Fed premium priced in.
 
senseamp said:
I am suspicious of price bubbles in assets whose price charts since QE3 started look like charts of Fed balance sheet over that period. Economic upside has already been priced in those assets by speculators buying them with borrowed Fed money.
If underlying economy is indeed picking up, I'd be more interested in cyclical assets, like commodities, which haven't rallied and don't have a Fed premium priced in.
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We'll know the economy is fixed when bubbles are caused by people being crazy rather than being caused by the fed. Right now everyone is just trying to front run the fed. The fed is buying treasuries, so people were buying treasuries to sell to the fed, but this seems to be reversing now that our biggest creditors are calling for a de-Americanized world (China) and even trying to ban the use of US dollars (Russia). What's really scary is what will happen if the fed ever announces an unwinding of QE. People will once again try to front run the fed and sell/short treasuries before the fed does. Even if the fed decides to hold the bonds to maturity, people would still jump out of the bond market because of that looming threat that the fed could start selling. This would cause a gigantic spike in interest rates, so then the fed needs to print more money to suppress interest rates and we're back in QE infinity. It'll look like the 1970's but worse because now our debts are much larger and our demographics are upside down.

I feel like making a prediction that can be quoted and laughed at later. I predict we will have a budget crisis, followed by inflation, then default, then recovery. It'll look exactly like Russia in the 1990's.
 
werepossum said:
Me too. I considered taking my 401k mostly out of mutual funds, but decided to let it ride. If the market crashes I could not predict it anyway, and if it doesn't come back I'll have more pressing problems. Once one accepts that the market will rise and fall it's easier to not get too emo in either direction.

Besides, if too many people decide the economy is about to crash then it will crash. I don't want to be part of that. Better to take a short term hit which is meaningless anyway until you pull it out.
Click to expand...

Geez, the lower the market goes the more of it you can buy each month. The only time you want the market high is when you sell.
 
Spungo said:
It's mostly just inflation. Money supply increased by a factor of what, 3 or 4? The stock market goes up almost 1/3 in one year? That seems about right. Will it keep going up? As long as they keep printing money, yeah it will keep going up, unless the fed loses control of the bond market, which they have.
...
This year's "best" stock market was Venezuela's. It's up a little less than 500% due to massive inflation. Guys like Krugman think it's a stunning success.
Click to expand...

This is exactly the problem, or part of it.

Greenspan's solution to the .com / market bubble crash of 2000-2001 was to lower rates.

That led to the housing boom and bust which, if not for massive federal debt driven bailouts, would have taken into another depression.

Bernanke's solution to the housing crash was QE.

If you read the following, the other shoe has yet to fall for QE. Inflation.

http://useconomy.about.com/od/glossary/g/Quantitative-Easing.htm


"However, it didn't achieve the Fed's goal of making more credit available. It gave the money to banks, which basically sat on the funds instead of lending it out. Banks used the funds to triple their stock prices through dividends and stock buy-backs. The large banks also consolidated their holdings, so that the largest .2% of banks control more than 70% of bank assets. Since banks didn't lend out the money, inflation wasn't created in consumer goods. As a result, the Fed's measurement of inflation, the CPI, stayed within the Fed's target. (Source: WSJ, Confessions of a Quantitative Easer, November 12, 2013)"

"However, QE did create asset inflation, first in gold and other commodities, and then in stocks, as investors were forced out of bonds. An ounce of gold more than doubled, rising from $869.75 to $1,895 between 2008 and 2011. After that, investors shifted to stocks. The Dow rose 24% in 2013 as corporations followed the banks' example and boosted stock prices with buybacks and dividends."
 
This is actually alot like 1929. There was a crash in 1920 / 1921 then 8 years of massive debt before anyone had to realize any losses. Everyone thinks 2008 was 1929 averted. Nope.

http://en.wikipedia.org/wiki/Depression_of_1920–21

The recession of 1920–21 was characterized by extreme deflation — the largest one-year percentage decline in around 140 years of data.[2] The Department of Commerce estimates 18% deflation, Balke and Gordon estimate 13% deflation, and Romer estimates 14.8% deflation. The drop in wholesale prices was even more severe, falling by 36.8%, the most severe drop since the American Revolutionary War. This is worse than any year during the Great Depression (adding all the years of the Great Depression together, however, yields more severe deflation). The deflation of 1920–21 was extreme in absolute terms, and also unusually extreme given the relatively small decline in gross domestic product.
Click to expand...

Reminds me of gas going from $4 to $1.55 no?

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

In 1920–1921, there was an acute recession, followed by the sustained recovery throughout the 1920s. The Federal Reserve expanded credit, by setting below market interest rates and low reserve requirements that favored big banks, and the money supply actually increased by about 60% during the time following the recession. By the latter part of the decade "buying on margin" entered the American vocabulary as more and more Americans over-extended themselves to speculate on the soaring stock market and expanding credit. Very few expected the crash that began in 1929, and none suspected it would be so drastic or so prolonged.
Click to expand...

History doesn't repeat but it rhymes I guess. We'll see 🙂

This is still the party from the Aug 2011 bottom. Don't underestimate the herd/positive feedback. It could certainly carry through 2014 I have no doubt.
 
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Doppel said:
With each passing year since 2009's bottom it becomes harder for me to appreciate doom and gloom predictions. They made a lot of sense to me then but it appears I along with others were just not right. I have emotionally divested myself from bracing for any impact. We will have another recession and or crash at some point but I refuse to predict it is just around the corner.
Click to expand...

The fed is delaying the inevitable. Its a house of cards. I would say soonish.
 
OverVolt said:
This is actually alot like 1929. There was a crash in 1920 / 1921 then 8 years of massive debt before anyone had to realize any losses. Everyone thinks 2008 was 1929 averted. Nope.

http://en.wikipedia.org/wiki/Depression_of_1920–21



Reminds me of gas going from $4 to $1.55 no?

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



History doesn't repeat but it rhymes I guess. We'll see 🙂
Click to expand...

This is nothing like 1929.

That chart also misses some key points, namely the huge shift from dividends to stock buybacks which affect that chart greatly.
 
LegendKiller said:
This is nothing like 1929.

That chart also misses some key points, namely the huge shift from dividends to stock buybacks which affect that chart greatly.
Click to expand...

I actually place a higher importance on culture and policy than charts and numbers. Everything that has happened since then makes all the data incompatible. Life is a crapshoot like that. All I'm going on are correlations which I realize are not causation it just seems like this is a cyclical thing throughout history.
 
Moonbeam said:
Geez, the lower the market goes the more of it you can buy each month. The only time you want the market high is when you sell.
Click to expand...
I want the market to be healthy all the time since it serves a lot of Americans who need it to be healthy now.
 
werepossum said:
I want the market to be healthy all the time since it serves a lot of Americans who need it to be healthy now.
Click to expand...

A market isn't a measure of health but a measure of the perception of health, it seems to me. So I would say if you want the market to be healthy from your perspective, all you have to do is prevent your own mood swings, no?
 
werepossum said:
I want the market to be healthy all the time since it serves a lot of Americans who need it to be healthy now.
Click to expand...

The need part is the interesting part it never used to be that way. It crashed in 2001, I'm sure it ruined some peoples retirement at the time but the world didn't end. People shouldn't risk what they can't afford to lose. Such a basic tenet lost on everyone.
 
Moonbeam said:
A market isn't a measure of health but a measure of the perception of health, it seems to me. So I would say if you want the market to be healthy from your perspective, all you have to do is prevent your own mood swings, no?
Click to expand...
A measure of aggregate perception, maybe. A measure of my perception, no. The value of others' savings is practically totally unaffected by my perception because my own holdings are an insignificant portion of market valuation. My perception of market health won't be an issue for another decade.

OverVolt said:
The need part is the interesting part it never used to be that way. It crashed in 2001, I'm sure it ruined some peoples retirement at the time but the world didn't end. People shouldn't risk what they can't afford to lose. Such a basic tenet lost on everyone.
Click to expand...
True. People tend to forget that the market is a calculated risk.
 
shady28 said:
In inflation adjusted real dollar terms, S&P still has not beat its Aug 2000 high.

I think 2014 is going to be sucker punch time for folks heavily invested in stocks.

Daily updated chart :

http://www.multpl.com/s-p-500-price/

The big picture :

"The peak in 2000 marked an unprecedented 151% overshooting of the trend — nearly double the overshoot in 1929. The index had been above trend for two decades, with one exception: it dipped about 11% below trend briefly in March of 2009. "


SP-Composite-real-regression-to-trend.gif
Click to expand...




I thought I would bring this back up, as it seems relevant given the date of post (12/31) and the current pattern :

z




And of course, adjusted for inflation :

dow_cpi_lies1900on.png



I think we are starting the 2nd and most powerful leg of a secular bear market that started in 2000 and never really left us.

This is going to be a hell year for the economy and stocks, and it wont end until 2016-2018.
 
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