Equities and Bonds

​Why The Stock Market Is Heading For Disaster
In this presentation, Clarity Financial's economic analyst Jesse Colombo explains why the U.S. stock market is experiencing a dangerous bubble that is going to burst violently and cause serious damage to the underlying economy. Published on Oct 11, 2018

Hat tip to Jesse Colombo for the following 14 minute video that includes the following 20 long term charts:

1. S&P 500 since 1997
2. Percent equity gains since 2009
3. Interest rates since 1997
4. Real Fed Funds rate since 1990
5. U.S. corp debt since 1980
6. U.S. corp debt as a percent of GDP since 1980
7. Buybacks and dividends paid vs S&P 500 value since 2000
8. S&P 500 vs NYSE margin debt as percent of GDP since 1997
9. Retail investor allocation to stocks vs cash since 1997
10. CBOE volatility index (VIX) since 1997
11. St Louis financial stress index since 1997
12. BAML U.S. high yield spread since 1997
13. Cyclically adjusted P/E ratio since 1980
14. U.S. stock market capitalization to GDP ratio since 1971
15. Tobins Q ratio since 1902
16. U.S. net corp profits as a percent of GNP since 1947
17. FAANG stocks vs S&P 500 since 2009
18. Fed Funds rate and recessions since 1997
19. Financial banking crises and recessions since 1977
20. 10-2 year treasuries spread since 1976

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Trump Is Completely Misguided On Interest Rates

If the Fed or other central bank voluntarily abandons further credit expansion (most commonly by raising interest rates), the credit and asset bubble will experience a deflationary bust. Deflationary episodes entail credit busts, falling consumer prices, bear markets in stocks and housing prices, and falling wages. If the central bank decides to never put an end to the credit expansion (for example, if the Fed never raised rates), however, the result would be a runaway credit and asset bubble that leads to a severe decrease in the value of the currency and high rates of inflation. The latter scenario is what would occur if President Trump got his way – hardly a desirable outcome for the economy. To summarize, the Fed is crazy – they’re crazy for creating such a large bubble in the first place via loose monetary policy, but not for raising interest rates and normalizing their monetary policy.  Jesse Colombo, Oct 17, 2018 ​

​Market Bear Hussman Says Stocks Could Lose $20 Trillion

To state the obvious, bull markets do not last forever, and inevitably are followed by bear markets. Likewise, economic expansions also must end at some point, followed by recessions, and recessions typically are accompanied by bear markets. John Hussman, Oct 15, 2018 

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The table above from current stock market bears is warning about a pending major stock market correction of 20%, 30%, 40%, 50% or 60% while past major corrections came in at 83% in 1929, 34% in 1987, 49% in 2000, and 57% in 2007.

​My fantasy Plunge-O-Meter for September 2018 is showing a potential 51% average drop for Canadian housing prices for the 6 biggest markets in Canada if buyers go on strike.

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Buyers outside of Canada in other housing bubble cities are thinning in number.

​There's trouble ahead in the global housing market
Source: Business Insider July 2018 

Toronto: Prices clearly peaked in early 2017. Prices are now down 3% vs last year. (Toronto SF Detached are down 17% from the peak. See the Sept 30, 2018 Plunge-O-Meter)

Syndey: Compared to last year, prices are now down 5% and supply has ballooned 22%.

Stockholm & Vancouver: Over a recent 6-month period, prices in the luxury property market fell 9% and 7.6%, respectively.

New York City: In Q1 2018, prices were down 8% YoY and sales were down 25%. NYC's luxury properties fared even worse.

San Francisco: After hitting a record price high in January, the city has seen a rare spring decline in prices, while rents across the SF Bay Area are starting to "cool off"

Bond King Gundlach predicts yields
much higher before this move ends

"If you look at the charts and you look at the way the market's behaving and you think about the trends that are underneath the bond market, it wouldn't be surprising at all to see the 30-year [yield] go to 4 percent before this move of the breakout above 3.25 percent is over," he said on "Halftime Report" Thursday. CNBC, Oct 11, 2018

Bond King Gundlach predicts yields are headed much higher before this move ends from CNBC.

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