Monday was one of the most volatile days in Wall Street history, with high-volume wild swings. The DJIA fell almost 1100 points within minutes after the opening, and then recovered most of the loss, finally ending down 588 points, or almost 4%.
The selloff was global. In Europe, stock exchanges in Britain, Germany and France fell around 5%, and in Asia, stock markets in Japan, Hong Kong and Australia fell 4-5%.
So let's start with where we are.
Generational Dynamics predicts that we're headed for a global financial panic and crisis. According to Friday's Wall Street Journal, the S&P 500 Price/Earnings index (stock valuations index) on Friday morning (August 21) was at an astronomically high 21.63. This is far above the historical average of 14, indicating that the stock market is in a huge bubble that could burst at any time. Generational Dynamics predicts that the P/E ratio will fall to the 5-6 range or lower, which is where it was as recently as 1982, resulting in a Dow Jones Industrial Average of 3000 or lower.
I've been pointing out for years that the Wall St bubble had to burst at some point, with 100% certainty. It's impossible to predict the exact time. It's worth noting that we still don't know to this day why the stock market crashed on that particular day, Black Monday, October 28, 1929, instead of a few weeks earlier or later.
So it's quite possible that when the crash comes, we'll never know why it occurred on precisely that day.
Most of the commentators and analysts on Monday were their usual glib selves, saying things like, "This is a healthy correction," and "This is a buying opportunity, and "China has too small economy to affect the rest of the world."
I listened to a number of analysts on CNBC and Bloomberg TV on Monday, and I did notice a change. Normally, mentioning the price/earnings ratio (stock valuations) is always strictly forbidden, or if it's mentioned, then the analysts simply lie, saying "it's low," which is ridiculous. But on Monday, I actually heard two or three analysts mention, however briefly, that stock valuations were unsustainably high.
"This is quite remarkable, as if some secret code were being violated."
There's was one particular exchange that was especially interesting. Mohamed El-Arian is quite possibly the most glib analyst on TV, always taking a professorial tone, and answering every question by intoning something like, "There are three reasons: one ... two ... three...." On Monday, he was specifically asked if stock valuations were high. He said, almost under his breath, that they were, and then quickly changed the subject to something completely different. Apparently he is not ready yet to break the secret code by saying clearly that valuations are unsustainably high, though he evidently is aware of it. It was one of the many weird things on a weird day.
Some analysts are calling this Monday the new "Black Monday," but it's not.
From the point of view of generational theory, October 28, 1929, is a very special day because it was a day of total panic, and it traumatized the nation, and it's remembered to this day. But this day was nothing like that, not a day of total panic. It was a bad day, but it will be soon forgotten. This was no new "Black Monday."
What this Monday seemed like was a prelude to the real day of panic. And with stock markets plunging globally, the panic may not begin on Wall Street at all -- it may begin elsewhere and spread to Wall Street. As I wrote yesterday ( "24-Aug-15 World View -- Asian stock markets in freefall, with China in full-scale panic"), it may be that China already appears to be in full-scale panic, though it's hard for me to judge for sure from this distance.
If I were to guess what's going to happen in the next few days it would be this: I would expect Wall Street stocks to bounce back up on Tuesday. Expect to see a lot more volatility, with stocks rebounding one day, and plunging the next.
"Then, one day, a real panic will occur, and that will be the day that will be remembered for years."
That day has to come, with 100% certainty. We just don't know exactly when. AP and ZeroHedge
African currencies crashing, along with commodities and ChinaStock markets usually get most of the attention, but in fact the global selloff is applying to currencies and commodities as well.As we wrote last week ( "21-Aug-15 World View -- Kazakhstan joins the 'currency wars' as global stocks plummet"), a number of currencies are falling against the dollar, following in the lead of China's surprise devaluation of its yuan currency.
African economies, and African currencies, are being hit hard China's devaluation and economic slowdown. More than one-quarter of Africa's exports go to China, and countries like South Africa, Kenya and Zambia are being hit hard. Zambia derives almost 70% of its export earnings from copper, and with copper prices falling, Zambia's currency fell 4.6%. The price of oil keeps falling, and oil-exporting countries Nigeria and Angola are losing substantial portions of their income.
The price of oil is falling dramatically, reaching as low as $38 per barrel on Monday. Countries outside Africa, such as Venezuela, Russia and Saudi Arabia, are suffering because their income depends on oil being closer to $100 per barrel.
What makes the global financial situation so precarious is that there doesn't seem to be any good news anywhere. Economic growth is tepid in the the U.S. and slowing, while there's no growth to speak of in China, Europe, or any of the developing countries with the possible exception of India.
Another bizarre twist in today's world is that investors are very concerned when the US Federal Reserve is going to raise interest rates, with the base Fed Funds Rate currently almost zero (0.13%). With all of these currencies weakening and devaluing against the dollar, the dollar is getting stronger, which will make America less competitive in the world, and affect the US economy.
However, there's another angle to this. With near-zero interest rates in the U.S., it's been possible for countries and businesses around the world to borrow a lot of money, and go deeply into debt. If the Fed Funds Rate goes up, then the interest rates on those debts will also grow, causing further problems for these borrowers. Bloomberg and BBC and Zero Hedge
Why one economist isn’t running with the bulls: Dow 5,000 remains closer than you think
But don’t get accustomed to that, warns Chapman University professor Terry Burnham. The former Harvard economics professor, author of “Mean Genes” and “Mean Markets and Lizard Brains,” Burnham argued on this page last summer that we would see Dow 5,000 before Dow 20,000. Ten months later, and a lot closer to an eventual end to the Federal Reserve’s stimulus program, the Dow has crept closer to 20,000. But Burnham’s sticking by his prediction, suggesting that U.S. macroeconomic policy is about to look a lot less fair to people who failed to recognize it as foul.DYI Comment: The next few paragraphs are from his Dow 5,000 before Dow 20,000 article his reason are shorter and more concrete. Despite the flamboyant titles I agree with the basic premise for a secular decline of this magnitude.
But I’m not predicting a Dow of 5,000 just because it hit 15,000 so rapidly. I’ve been saying since well before the Crash of ’08 that the U.S. economy was headed for disaster. Here, then, are three rational economic reasons I think we should all be terrified.
Americans should be saving close to 50 percent of our income. Instead, we are saving zero percent.
Why should we be saving so much more than we are? First, we have saved too little for too long. The median person approaching retirement has approximately $100,000 saved. As Paul has pointed out repeatedly, and most recently in the NewsHour online retirement page “New Adventures for Older Workers,” that is far too little, especially given the rates of return the stock and bond markets both suggest given their high valuations. In fact, the Treasury Inflation-Protected Securities (U.S. TIPS) that Boston University economist
"Zvi Bodie and Paul Solman have so long written about on the Making Sen$e Business Desk are actually suggesting negative returns in the future."
My personal suggestion is that people assume zero return on investments. That’s right: zero percent. While this could be too pessimistic, it could also be too optimistic if markets tumble, as I expect them to, following the pattern of a few weeks ago. (I’m not predicting that this is the beginning of the end however — though I suppose it could be — just that we’ll see Dow 5,000 sooner than we’ll see Dow 20,000 — a lot sooner.)
Stocks right now are terrible investments.
As noted above, the vast majority of individuals are absolutely horrible at market timing. Investors tend to get scared in declines and excited in rallies. They buy high and sell low. In early 2009, for example, when stocks were the best buy in decades, individuals were selling stocks in record amounts. Only after stocks had doubled did individuals begin buying stocks again. Just in time, I predict, for investors to get slaughtered again.
Conventional wisdom is to buy and hold stocks. In this case it is wisdom because people have almost always been — and will be — rewarded for hanging tight. However, lizard brain wisdom says individuals should only own stocks when the expected returns are extraordinarily high. In normal or negative times, individuals will not be able to capture equity market returns.
Most people should not own stocks today — none. Yet individuals have been getting back into the stock market with a vengeance, and they have far more of their meager savings in stocks than they should.DYI Comments: I completely agree with Chapman University professor Terry Burnham the best time to own stocks or at least a high percentage of your portfolio is when the expected return is high. High is defined by a return higher than the long term average going back to 1926.
100% stocks
| Historical Risk/Return (1926–2014) | |
|---|---|
| Average annual return | 10.2% |
| Best year (1933) | 54.2% |
| Worst year (1931) | –43.1% |
| Years with a loss | 25 of 89 |
DYI's four asset categories which are diametrically different (uncorrelated assets) that at least one will be in a undervalued bull market. As sad as it is the most undervalued of our four asset (stocks, long term bonds, gold miners, cash[short term bonds]) cash is the decisive winner with gold at a distanced 2nd place.
Unfortunately today due to massive world wide money printing markets for traditional stocks and bonds have been priced to the moon. Returns at best will be zero and at worst negative for the next 10 years using today as a starting point. The Great Wait may be ending sooner than later if this is the beginning of a multi-month long roller coaster slide. How far down? No one knows for sure; however, don't rule out the possibility for a market smash of -45% to -60%. Stock prices and the general economy are that disconnected.
When everyone is losing their heads don't go and lose yours. Patience is the friend of the value player.
DYI
No comments:
Post a Comment