John P. Hussman, Ph.D.
Our expectations for a global economic downturn, including a U.S. recession, have hardened considerably in the past few weeks, with a continued expectation of a retreat in equity prices on the order of 40-55% over the completion of the current cycle as a base case.
The immediacy of both concerns would be significantly reduced if we were to observe a shift to uniformly favorable market internals. Last week, market conditions moved further away from that supportive possibility. As I’ve regularly emphasized since mid-2014, market internals are the hinge between an overvalued market that tends to continue higher from an overvalued market that collapses; the hinge between Fed easing that supports the market and Fed easing that does nothing to stem a market plunge; and the hinge between weak leading economic data that subsequently recovers and weak leading economic data that devolves into a recession.
The immediate conclusion that one might draw is that the Federal Reserve made a “policy mistake” by raising interest rates in December. But that would far understate the actual damage contributed by the Fed.
"No, the real policy mistake was to provoke years of yield-seeking speculation through Ben Bernanke’s deranged policy of quantitative easing, which propagated like a virus to central banks across the globe."
The extreme and extended nature of the recent speculative episode means that we do not simply have to worry about a run-of-the-mill recession or an ordinary bear market. We instead have to be concerned about the potential for another global financial crisis, born of years of capital misallocation and expansion of low-quality debt both here in the U.S. and in the emerging economies. For a review of these concerns, see The Next Big Short: The Third Crest of a Rolling Tsunami.
Sell everything ahead of stock market crash, say RBS economists
Investors face a “cataclysmic year” where stock markets could fall by up to 20% and oil could slump to $16 a barrel, economists at the Royal Bank of Scotland have warned.DYI Quick Comment: 20%??? 20%; world markets will easily crack by 50%! However, their possible scenario for Brent North Sea Oil could very well happen as the seeds of an economic deflationary smash is lining up. Be prepared! If oil prices become a teenager then lump summing into the closed end Adams Natural Resource Fund symbol PEO.
This will set you up very nicely as the world recovers from its deflationary slump.
China is really fading from the global scene as a prime mover. [DYI along with all commodity prices!].
A lot of investors really thought China was independently growing and didn’t acknowledge the reality that its economy was still export led.
China won’t disappear, but as far as being the center of attention on the global stage, that is probably over.
The international shock and awe resulting from globalization and the shift of manufacturing from North America and Europe to China as well as other emerging economies is essentially finished.DYI Continues: DYI's weighted averaging formula has "kick us out" of the market and rightfully so! Stocks are massively overvalued only held up in price by sub atomic low rates, world wide Baby Boomers savings, and lastly geopolitics induced low oil prices. Stocks are highly correlated to prosperity(economic growth) as long as there is some growth they can continue to advance despite being massively overvalued. Now the economy is long in the tooth, interest rates declines no longer effect stock prices, and oil producers are at max production. What has changed is a world wide basis economic misallocation of resources planting the seeds for a deflationary smash. From now on lower oil prices will shift from geopolitics to world wide economics. When will this occur? The best answer I can give is sooner rather than later....Determining the next world wide recession is a very tough business and most get it wrong. DYI will use valuations as our guide and leave the reading of the tea leafs to others.
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