Most People Don’t Believe It, But We Are Right On Schedule For The Next Financial Crash

But the truth is that what we are observing right now is classic bubble behavior.  The stock market crashes of 1929, 1987 and 2008 were all preceded by irrational market rallies in the spring or summer.  The financial markets have become completely divorced from economic reality, and such a state of affairs never lasts forever.  It is just a matter of time before a correction comes. 

But every time there is a bubble, most people end up getting caught up in all of the euphoria.  And it is happening again.  In fact, CNBC has just reported that bearishness among market newsletter writers is the lowest that it has been since 1987.  But of course we all remember what happened back in 1987... 

For example, Nobel Prize-winning economist Robert Shiller is warning that market valuations are tremendously bloated right now... 

Shiller, a Yale University professor who is often cited as one of the most influential people in economics and finance in the world, created a metric that compares stock prices with corporate profits. The metric recently climbed above 25. That level has only been surpassed three times since 1881: 1929, 1999 and 2007. 

Steep market tumbles followed each instance, including the bursting of the dotcom bubble in the early 2000s.

The Two Pillars of Full-Cycle Investing 

John P. Hussman, Ph.D.

History teaches clear lessons about how this episode will end – namely with a decline that wipes out years and years of prior market returns. The fact that few investors – in aggregate – will get out is simply a matter of arithmetic and equilibrium. The best that investors can hope for is that someone else will be found to hold the bag, but that requires success at what I’ll call the Exit Rule for Bubbles: you only get out if you panic before everyone else does. Look at it as a game of musical chairs with a progressively contracting number of greater fools.

In any event, the reason most investors won’t get out of this bubble is that it will require other investors to get in by taking the stock off their hands – and with bearishness running at the lowest level in 27 years, those potential buyers increasingly represent value-conscious investors like us whose demand is likely to emerge only at materially lower valuations.

DYI Comments:   Amen to that John; price to dividends are now 117% above their long term average going back to 1871.  A 50% to 60% decline will change our investment stance significantly, currently of course DYI's model portfolio maintains a very defensive stance.

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 09/1/14

Active Allocation Bands (excluding cash) 0% to 60%

85% - Cash -Short Term Bond Index - VBIRX

13% -Gold- Precious Metals & Mining - VGPMX

 2% -Lt. Bonds- Long Term Bond Index - VBLTX

 0% -Stocks- Total Stock Market Index - VTSAX
 0%-REIT's- REIT Index Fund - VGSLX

[See Disclaimer]

Even the Council on Foreign Relations Is Saying It: Time to Rain Money on Main Street

When an article appears in Foreign Affairs, the mouthpiece of the policy-setting Council on Foreign Relations, recommending that the Federal Reserve do a money drop directly on the 99%, you know the central bank must be down to its last bullet. 

The September/October issue of Foreign Affairs features an article by Mark Blyth and Eric Lonergan titled “Print Less But Transfer More: Why Central Banks Should Give Money Directly To The People.” It’s the sort of thing normally heard only from money reformers and Social Credit enthusiasts far from the mainstream. What’s going on? 

The Fed, it seems, has finally run out of other ammo. It has to taper its quantitative easing program, which is eating up the Treasuries and mortgage-backed securities needed as collateral for the repo market that is the engine of the bankers’ shell game. The Fed’s Zero Interest Rate Policy (ZIRP) has also done serious collateral damage. The banks that get the money just put it in interest-bearing Federal Reserve accounts or buy foreign debt or speculate with it; and the profits go back to the 1%, who park it offshore to avoid taxes. Worse, any increase in the money supply from increased borrowing increases the overall debt burden and compounding finance costs, which are already a major constraint on economic growth.

DYI Comment:  Sky high market for stocks and bonds with an economy doing so poorly that the very influential Council on Foreign Relations has jumped in with their recommendations.   Whether this idea of direct transfers bears fruit or not it does show the the level of frustration and desperation.  A shifting sands economy holding up an overblown bond and stock market.

DYI