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Credit deflation and the reflation cycle to come.


DurhamBorn

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UnconventionalWisdom
3 hours ago, sancho panza said:

jsut my views.I hope they stop QE and Zirp in time and reverse course.

 

Thanks for the reply. Everytime they have printed money it has previously led to price inflation. I would be shocked if it was different this time. As you point out, they have manipulated figures to ensure it tells their story that QE has led to a perfectly performing economy. Remove important things that have a huge impact on spending like housing from the inflation figures means the stupid policies can continue. Even rents contribute to GDP so they can continue to talk about how they are in control. 

End effect is that it's all worst for the real economy and there will be a hit that will be much bigger than if the numbers were real and issues earlier addressed. As per this thread, if we get high inflation and rates, then the high housing costs are going to cripple.

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1 minute ago, UnconventionalWisdom said:

Remove important things that have a huge impact on spending like housing from the inflation figures means the stupid policies can continue. Even rents contribute to GDP so they can continue to talk about how they are in control. 

Even worse, imputed rents are included too, so those who bought before the boom and own their home outright are treated as if they're paying the market rent for it, and this imagined rent is added to GDP.

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UnconventionalWisdom
Just now, MvR said:

Even worse, imputed rents are included too, so those who bought before the boom and own their home outright are treated as if they're paying the market rent for it, and this imagined rent is added to GDP.

Haha, that is insane!!! How have the bastards got away with it?!

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Castlevania
Just now, UnconventionalWisdom said:

Haha, that is insane!!! How have the bastards got away with it?!

There are lies, damned lies and statistics.

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Bricks & Mortar
1 hour ago, Majorpain said:

I very much doubt it, there is still far too many contractors who need work and are quoting cheap. Projects run for years so quote > negotiation > building > handover has a huge time lag.  Cheap credit this cycle also means people who should be out of business are not doing the decent thing yet, however that is starting to change this year IMO. 

I'm not really involved, having sought to insulate myself from this sort of thing.   I do have an account at my local (scotlandwide) industrial auctioneers and I'm always scanning to see what comes up.   Think the assets of about one construction business a week are coming by, (since about turn of the year).  Not making good prices for the gear either.   If I wasn't trying to hoard every penny for hard times next year, there's loads I'd love.

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11 minutes ago, MvR said:

Even worse, imputed rents are included too, so those who bought before the boom and own their home outright are treated as if they're paying the market rent for it, and this imagined rent is added to GDP.

Imagine how things could be if such ingenuity was put to worthwhile use

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I was really hoping this silver rally would hold off for a couple more weeks until I’d allocated some more to the miners... and that’s after waiting a year for it haha to start!!! Ho hum, it’s nice to see.

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leonardratso

how dare slvp go green, im totally shocked, its been red since i bought it even with averaging in every month, the dirty rotten stinker.

 

EGO was the only (non fund) goldie i held onto, i flogged hmy off as soon as it rolled green +10 or 11%, good guess i reckon since EGo is now +38% from -20 or 30% cant remember, but its sale looms large......

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Imputed rents aren't any more bonkers than hedonic adjustment, or at least the way it's used.

There's a fundamental flaw with the concept that technology goods like electronics, cars etc., despite being much more expensive, are statistically cheaper because of technological improvements, so we're paying 200% of the previous price but we get 300% of the previous car. After all it's faster, can charge 4 iPads and has a keyless entry.

To which I say bullshit, because if I treat car as a mean of transport and not as a dick extension or a movie theater on wheels, and the cheapest car doing that job is now twice as expensive as the cheapest car doing the job equally well 20 years ago then the inflation rate is 100%, full stop. All the bells and whistles are irrelevant to me because 1) I don't need them and 2) I cannot rip them out and sell to get my "hedonic" money back.

It's all part of the con designed to underreport inflation so they can justify rates suppression and keep assets inflated.

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27 minutes ago, kibuc said:

Imputed rents aren't any more bonkers than hedonic adjustment, or at least the way it's used.

There's a fundamental flaw with the concept that technology goods like electronics, cars etc., ...

The other thing they do is latch onto things that are getting cheaper, and then drop them when they reach bottom.  So, you might have walkman->diskman->mp3->streaming -- Each one is chosen, gets cheaper and is then replaced by the next expensive one.  This gives a constant downwards pressure on inflation even though the reality is the price pressure to have 'contemporary portable music' remains roughly in line with other prices.

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1 hour ago, leonardratso said:

how dare slvp go green, im totally shocked, its been red since i bought it even with averaging in every month, the dirty rotten stinker.

 

EGO was the only (non fund) goldie i held onto, i flogged hmy off as soon as it rolled green +10 or 11%, good guess i reckon since EGo is now +38% from -20 or 30% cant remember, but its sale looms large......

EGO might go a lot higher yet,Greece just elected a new government that might permit their mines in Greece.

Its ironic that i went back to work to pile into the PM sector extra capital and today they had everyone on for job losses,likely follow through next friday.Since i went back iv saved over 90% of the salary,most in a SIPP.At this stage my PMs i bought with the money are up an average of 36% and with using a SIPP etc if i sold today the day they announced the job losses iv probably made 51% more salary working there than everyone else.I would of been happy to do until xmas,or maybe even into next year.Its really hard seeing the people hoping they keep their jobs,knowing that its highly likely they are about to be hit with a massive downturn and all temporary staff lose their jobs.Luckily the company always fires quickly and hires quickly depending on demand,so the company will survive,and should be a huge winner in the next cycle.I would probably go back in 18 months if i got offered,who knows.

Velocity is low because of the amount of debt being serviced.Money is simply being destroyed too quickly.Once inflation kicks in things will change.Defaults will lower the outstanding debts,no debt wont be taken on,and money will flow to parts of the economy with more links in the chain like food.

Notice today the maker of Iron Bru warned on profits and the city never saw that coming.No doubt input costs are hitting them.

Iv enjoyed working this last 9 months,seeing old friends etc,but it really opened my eyes to the debt people have.£900 mortgage,£120 gym memberships,2 lease cars,holiday on tick,temporary worker.Car park rammed with £30k cars under 3 year old,likely lease deals.Lots of financial dislocation ahead.

2 minutes ago, dgul said:

The other thing they do is latch onto things that are getting cheaper, and then drop them when they reach bottom.  So, you might have walkman->diskman->mp3->streaming -- Each one is chosen, gets cheaper and is then replaced by the next expensive one.  This gives a constant downwards pressure on inflation even though the reality is the price pressure to have 'contemporary portable music' remains roughly in line with other prices.

Cucumbers are 65p now in Tesco,they were 50p for the last 2 years.Onions 82p from 54p,prices are going through the roof.

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leonardratso

yers, price creep and in some cases just bare faced jumps in 10's of percent,  at least im eating less these days, might even lose some lard. I see what your saying though with regards to how people think the huge debts they run up are not a problem, until of of course it is, i dont think i could sleep at night if i had that kind of overhang.

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Castlevania
48 minutes ago, DurhamBorn said:

EGO might go a lot higher yet,Greece just elected a new government that might permit their mines in Greece.

Notice today the maker of Iron Bru warned on profits and the city never saw that coming.No doubt input costs are hitting them.

Cucumbers are 65p now in Tesco,they were 50p for the last 2 years.Onions 82p from 54p,prices are going through the roof.

EGO has more than doubled in the space of 2 months. I do think they have the potential to go higher with a more business friendly government in place. Although the recent rally may be partially due to this.

I think the sugar tax has had a far bigger impact on the soft drinks makers than last year’s results suggested. The long hot Summer masked things in my opinion. Crap weather this year has bought things back into focus.

Poor weather has also probably played a part in the price of fruit and veg this year.

Best of luck with your job, but I guess you saw this coming.

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sancho panza
2 hours ago, UnconventionalWisdom said:

Thanks for the reply. Everytime they have printed money it has previously led to price inflation. I would be shocked if it was different this time. As you point out, they have manipulated figures to ensure it tells their story that QE has led to a perfectly performing economy. Remove important things that have a huge impact on spending like housing from the inflation figures means the stupid policies can continue. Even rents contribute to GDP so they can continue to talk about how they are in control. 

End effect is that it's all worst for the real economy and there will be a hit that will be much bigger than if the numbers were real and issues earlier addressed. As per this thread, if we get high inflation and rates, then the high housing costs are going to cripple.

The problem is that debt is very real.As are Forex markets.The reason so many Western govts haven't seen their currencies trashed is that most of the others are doing it and finding willing buyers of their debt issuance in tehmselves if all else fails.The JGB owns a huge chunk of Japanese isuance and has even started buying ETF's in the stock market.You couldn't make it up.

2 hours ago, MvR said:

Even worse, imputed rents are included too, so those who bought before the boom and own their home outright are treated as if they're paying the market rent for it, and this imagined rent is added to GDP.

Imputed rents are 12% of GDP near enough.Even worse,for up until the last year or two the two  rental measures used in GDP for imputed rents and CPIH(rental equivalence measure added to CPI) were based on different data.The former -according to no less a luminary than Shaun Richards-had the effect of bumping up GDP and the latter had the effect of suppressing the H in CPIH.You'd need someone with Shaun's knowledge to break down the mechanisms but there are all sorts of statistical turns of the wrist being used.

Currently,the two measures now use the same data sets

2 hours ago, UnconventionalWisdom said:

Haha, that is insane!!! How have the bastards got away with it?!

See above.So you take a flawed measure of national output(GDP),use it to set off the national debt(Debt to GDP anyone), then to make sure noone's being conned they deflate it in real terms using a flawed inflation measure.

 

Even better,with GDP they rarely focus on the population adjusted measure which could be quite important if we suffer any sort of depopulation .

 

2 hours ago, Loki said:

Imagine how things could be if such ingenuity was put to worthwhile use

Imputed taxi fares for when you use your own car,imputed restaurant meals for when you cook your own food.The ways we can create wealth are limitless.

1 hour ago, kibuc said:

Imputed rents aren't any more bonkers than hedonic adjustment, or at least the way it's used.

There's a fundamental flaw with the concept that technology goods like electronics, cars etc., despite being much more expensive, are statistically cheaper because of technological improvements, so we're paying 200% of the previous price but we get 300% of the previous car. After all it's faster, can charge 4 iPads and has a keyless entry.

To which I say bullshit, because if I treat car as a mean of transport and not as a dick extension or a movie theater on wheels, and the cheapest car doing that job is now twice as expensive as the cheapest car doing the job equally well 20 years ago then the inflation rate is 100%, full stop. All the bells and whistles are irrelevant to me because 1) I don't need them and 2) I cannot rip them out and sell to get my "hedonic" money back.

It's all part of the con designed to underreport inflation so they can justify rates suppression and keep assets inflated.

Beautifully put.

Also,little adjustment for substituion and other ways consumers work around price inflation

This will all work until it doesn't and then we'd better stand by for the show.

 

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sancho panza
1 hour ago, DurhamBorn said:

EGO might go a lot higher yet,Greece just elected a new government that might permit their mines in Greece.

Its ironic that i went back to work to pile into the PM sector extra capital and today they had everyone on for job losses,likely follow through next friday.Since i went back iv saved over 90% of the salary,most in a SIPP.At this stage my PMs i bought with the money are up an average of 36% and with using a SIPP etc if i sold today the day they announced the job losses iv probably made 51% more salary working there than everyone else.I would of been happy to do until xmas,or maybe even into next year.Its really hard seeing the people hoping they keep their jobs,knowing that its highly likely they are about to be hit with a massive downturn and all temporary staff lose their jobs.Luckily the company always fires quickly and hires quickly depending on demand,so the company will survive,and should be a huge winner in the next cycle.I would probably go back in 18 months if i got offered,who knows.

Velocity is low because of the amount of debt being serviced.Money is simply being destroyed too quickly.Once inflation kicks in things will change.Defaults will lower the outstanding debts,no debt wont be taken on,and money will flow to parts of the economy with more links in the chain like food.

Notice today the maker of Iron Bru warned on profits and the city never saw that coming.No doubt input costs are hitting them.

Iv enjoyed working this last 9 months,seeing old friends etc,but it really opened my eyes to the debt people have.£900 mortgage,£120 gym memberships,2 lease cars,holiday on tick,temporary worker.Car park rammed with £30k cars under 3 year old,likely lease deals.Lots of financial dislocation ahead.

Cucumbers are 65p now in Tesco,they were 50p for the last 2 years.Onions 82p from 54p,prices are going through the roof.

The price of food and fuel never lies.Nor does the rent.Nor does your pay packet.Food inflation is one thing you can't mask for very long.Unlike the price of sofas.

Genuinely hadn't thought of that aspect highlighted in bold.But makes perfect sense.

 

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sancho panza

https://www.hussmanfunds.com/comment/observations/obs190714/

One of the most important warnings offered by firefighters is simple: get out early. In the face of wildfires, some homeowners get the idea of staying in their homes and riding it out. As one firefighter warned “The point is to go.” But if you don’t, it’s better to stay than to panic and run in the midst of a firestorm of smoke and embers. It’s not the fire that gets you. It’s the heat. Even before the flames reach the house, it can be fatal to stand outside trying to protect what you have (h/t John Galvin).

Similarly, our “Exit Rule for Bubbles” is straightforward: You only get out if you panic before everyone else does. You have to decide whether to look like an idiot before the crash, or look like an idiot after it.

Worse, investors often capitulate into panic selling only after their losses have become extreme. By then, it’s too late. It’s not the fire that gets them. It’s the heat. Once the warning signs are flashing, get out early. Attempting to squeeze the last bit out of a vulnerable, hypervalued market is what value investor Howard Marks describes as “getting cute.”

The key is that overvaluation is not enough. Extreme overvaluation can persist for long periods of time if investors have a speculative bit in their teeth. In prior market cycles across history, an effective approach would have been to tolerate overvaluation until either a) uniformly favorable market internals gave way to dispersion and divergence, indicating that investors had shifted from a speculative mindset to a risk-averse one, or b) extreme “overvalued, overbought, overbullish” features indicated that speculation had reached a precarious limit. Once divergent internals or overextended syndromes emerged, overvaluation typically permitted steep and often immediate market losses.

Indeed, those considerations were exactly the ones that allowed us to anticipate the 2000-2002 and 2007-2009 collapses, and to shift to a constructive outlook in-between. Our value-conscious discipline was enormously effective in multiple complete market cycles into 2009.

The advancing half-cycle since 2009 has been legitimately “different” from history in one specific way. While market internals have continued to be an effective gauge of speculation even amid the Federal Reserve’s policies of quantitative easing and zero interest rates, it was detrimental, in this cycle, to act on the idea that speculation had any reliable “limit” at all. To be clear, I was wrong. As long as investors had a speculative bit in their teeth, as evidenced by uniform market internals, even the most extreme “overvalued, overbought, overbullish” syndromes had no consequence.

Recognize that the market has been in a broadening top formation since market internals deteriorated in early 2018.

The most extreme speculation actually tapped itself out by January 2018. On Friday of last week, the S&P 500 Index set a fresh record high, but that high was just 4.9% above the January 2018 pre-correction peak, and just 2.8% above the September 2018 pre-correction peak. Much of the market’s volatility in the interim has been a battle between investors excited by the prospect of fresh Federal Reserve easing, and investors concerned about extreme valuations, emerging recession risk, and the potential for steep full-cycle market losses. This has produced market action that some might label a “megaphone.”

S&P 500 megaphone pattern

Look carefully at this chart. Our measures of market internals shifted negative on February 2, 2018, and except for a brief positive whipsaw earlier this year, have been unfavorable during the recent push to fresh market highs. We’ve seen a great deal of market volatility since early 2018, but little in the way of durable market gains.

The internal divergence over the past year has been a headwind for hedged equity strategies. The price-insensitive exodus toward passive investing has favored hypervalued, large-cap S&P 500 index components and “glamour stocks” over any disciplined stock selection approach. That’s not terribly unusual for late-stage bull market advances. Still, recognize that the market has been in a broadening top formation since market internals deteriorated in early 2018.

The chart below shows the cumulative total return of the S&P 500 since 1998 (when we initially introduced our measures of market internals), along with the cumulative total return of the S&P 500 restricted to periods of favorable market internals, accruing Treasury bill returns otherwise. Note that this chart is purely historical, does not depict the returns of any investment strategy, and that there is no assurance that market internals will distinguish periods of speculation and risk-aversion similarly in the future.

Hussman market internals

Overvalued, overbought, overbullish

As I’ve detailed extensively, the Federal Reserve’s extraordinary policies of quantitative easing and zero interest rates disabled every historically reliable “overvalued, overbought, overbullish” limit to speculation. In late-2017, we finally threw up our hands and abandoned those “limits.” While sufficiently extreme conditions can encourage us to adopt a neutral outlook, we will no longer adopt nor amplify a negative market outlook except in periods where our measures of internals are unfavorable.

Given a hypervalued market with still-unfavorable internals, history suggests that a “trap door” is already open here, which is permissive of abrupt and potentially vertical declines. Yet that was also the case at the beginning of July, so why post an interim update?

The reason is this. Though we no longer adopt a bearish outlook in response to extreme “overvalued, overbought, overbullish” syndromes when market internals remain favorable, I believe that it is still important to track when those syndromes emerge in the context of negative market internals, as we see presently.

One version of these syndromes is so extreme that I’ve simply labeled it “Bubble” in our database. Prior to the current market cycle, this extreme variant has only emerged just before the worst market collapses in the past century. The list of these instances: August 1929, the week of the market peak; August 1972, after which the S&P 500 would advance about 7% by year-end, and then drop by half; August 1987, the week of the market peak; July 1999, just before an abrupt 12% market correction, with a secondary signal in March 2000, the week of the final market peak; and July 2007, within a few points of the final peak in the S&P 500, with a secondary signal in October 2007, the week of that final market peak.

We observed a few instances of this syndrome, to no effect, in late-2016 and early-2017 during post-election exuberance about corporate tax cuts. As with other “overvalued, overbought, overbullish” syndromes, this syndrome hasn’t been enough – in itself – to place a reliable “limit” on speculation in the current market cycle.

What’s notable is that we observed this “Bubble” syndrome again last week, this time in the context of negative market internals and a relatively flat yield curve (where “relatively” flat here means a 10-year Treasury bond yield less than 1% above the 3-month Treasury bill yield). From my perspective, that’s a combination worth noting, because the only time we’ve observed it in weekly data was at the exact market high of March 2000, the exact market high of October 2007, the pre-correction market high of September 2018, and today. Restrict the criteria to a yield spread of 0.5% or less, and last week’s signal joins only two other ones, which precisely identify the bull market peaks of 2000 and 2007.

Hussman bubble peak flag

The point here is not to “call a market top,” though I certainly believe that the likelihood is significant. Rather, my point is to call attention to the full-cycle implications of where the market is at present. See, whether or not this is the very last chance to avoid the firestorm, “the point is to go.” I normally encourage passive investors to adhere to their discipline, provided that they have fully examined their tolerance for the steep market losses that regularly emerge over the completion of the cycle. That’s because the very long-term prospects of maintaining a passive investment position typically exceed Treasury bill yields, even at bull market tops.

The problem here is that, as of Friday July 12, our estimate of likely 12-year total returns for a conventional portfolio mix invested 60% in the S&P 500, 30% in Treasury bonds, and 10% in Treasury bills, has dropped to just 0.5%. A passive investment strategy is now closer to “all risk and no reward” than at any moment in history outside of the three weeks surrounding the 1929 market peak.

Estimated 12-year total return of a conventional asset mix

Look, I get it. The S&P 500 just hit a new record high, and it feels like vindication that the market has completely recovered last year’s October-December loss. This hubristic level of overconfidence is clear in the churlish and even aggressive way that any remark about potential market losses is dismissed. But objectively, the index is less than 3% above its September 2018 high, with the same warning signs and more – particularly on the economic front.

Presently, we observe market conditions that have been associated almost exclusively, and in most cases precisely, with the most extreme bull market peaks across history.

Psychologically, it’s very difficult for investors to exit a bull market once stocks are even 7-8% off of their highs. Bear markets are punctuated by fast, furious, prone-to-failure rallies exactly to maintain the hope of recovering. That’s the whole point of our Exit Rule for Bubbles – you only get out if you panic before everyone else does.

Examine past bull market peaks, and you’ll invariably find that the initial decline was steep enough, usually within the first 15-30 trading sessions, to paralyze investors and keep them hoping and holding through the entire bear market that followed. Once the March 2000 peak was registered, the S&P 500 fell -11.2% over the next 15 trading sessions. Though the S&P 500 nearly recovered its peak at the beginning of September 2000, it gave back -12.6% over the next 28 sessions. Similarly rapid losses followed the 1987, 1990, and 2007 market peaks. Those initial losses are precisely what lock investors into paralysis.

They’re running toward the fire

The current market highs are dominated by a single concept: the idea that the Federal Reserve is likely to shift to an easing mode in the months ahead, most likely at its July 30-31 meeting. I don’t doubt that prospect at all. The problem, as I observed in my regular July comment, is that with the exceptions of 1967 and 1996, every initial Fed easing (ultimately amounting to a cumulative cut of 0.5% or more, following a period of tightening in excess of 0.5%), has been associated with a U.S. economic recession.

When we examine our leading measures of economic activity, based on national and regional Federal Reserve and purchasing managers surveys, we find that weakness in the broad composite tends to lead employment data by about two months. Specifically, a 10-month change in the composite measure is well-correlated with the change in non-farm payrolls over the following two months, relative to average job growth over the preceding 10 months.

Investors should allow for the distinct possibility that the jobs data will take a rather dark turn shortly.

To put some numbers around this, over the past 10 months, non-farm payrolls have grown by about 185,000 jobs per month. Yet the plunge we’ve observed in leading measures implies a shortfall of over 250,000 from that average, suggesting that we may observe negative payroll numbers in the coming months. That’s a noisy estimate, of course, and payroll numbers are often heavily revised well after economic turning points have been set, but investors should allow for the distinct possibility that the jobs data will take a rather dark turn shortly.

Hussman economic composite and subsequent employment data

It’s also notable that we’re observing a very wide dispersion between Civilian Employment (reflecting the “household” survey used to calculate the unemployment rate) and Non-Farm Payrolls (reflecting the “establishment” survey that typically makes headlines). In the first 6 months of 2019, Civilian Employment grew by only 60,000 jobs. The chart below offers some idea of that dispersion.

Civilian employment vs non-farm payrolls

Notably, if we examine points in history similar to the present, where Civilian Employment grew by less than 1.4% year-over-year (a threshold originally proposed by Martin Zweig), Non-Farm Payrolls grew by less than 0.7% over the prior 6-month period, and aggregate hours worked were flat or down over the prior 3-month period, all of the previous instances were associated with U.S. recessions.

Employment data and U.S. recessions

Put simply, while investors appear exuberant about the prospect for Fed easing, they seem largely unaware that initial Fed easings have almost invariably been associated with U.S. recessions. They’re running toward the fire.

Valuation review

Finally, as a brief update to valuations, the two charts below present the measures we find best correlated with actual subsequent S&P 500 total returns in market cycles across history, easily outperforming price/forward earnings, the Shiller CAPE, and the Fed Model, among other measures.

The first chart shows our measure of nonfinancial market capitalization to nonfinancial corporate gross value-added, including estimated foreign revenues. Notice something. The current multiple is 2.27. The highest level ever observed at the end of any market cycle in history was in October 2002, when the multiple set a trough of 1.11. Of course, that trough proved to be temporary, and both market valuations and the S&P 500 itself plunged to lower levels during the 2007-2009 collapse. Still, even a retreat in valuations to the highest level ever observed at a bear market trough would take the S&P about 51% lower. I actually view that outcome as optimistic.

Hussman MarketCap/GVA

The next chart shows our Margin-Adjusted P/E (MAPE), which behaves largely as a market-wide price/revenue ratio, and allows calculation back to the 1920’s. As of Friday, July 12, the MAPE stood at 46.02. The highest level ever observed at the end of any complete market cycle was 19.83, in October 2002. A retreat simply matching that level would imply a market loss of about -57% over the completion of the current cycle. Averaging the “optimistic” outcomes for the MAPE and MarketCap/GVA, the S&P 500 would have to lose about -54% simply to reach the highest level of valuation seen at any bear market trough. Such a loss would be enough to wipe out every bit of total return that the S&P has enjoyed, over-and-above Treasury bills, all the way back to 2000. Complete cycles matter.

Hussman Margin-Adjusted P/E

Notice that the MAPE actually exceeds the level observed at the 1929 peak. That’s not to suggest that I expect Depression-like market losses to follow. As I’ve noted before, the -89% market loss during the Depression can be thought of as two back-to-back losses, each representing two-thirds of the market’s value. The first two-thirds was a rather standard, run-of-the-mill outcome, given the hypervaluation of the market at the 1929 peak. It was the second two-thirds loss, largely the result of policy failures, that made Depression losses so severe.

One may argue, perhaps defensibly, that aggressive monetary and fiscal policy can avoid Depression-type economic outcomes, but remember that there’s really very little correlation between Federal Reserve policy changes and more general, cyclical economic fluctuations. Indeed, the trajectory of every U.S. economic expansion – including this one – has followed a very simple mean-reverting path, where the output gap (real GDP vs. potential GDP) at the recession low has narrowed at a rate of roughly 8% per quarter. That trajectory has not been affected even by the most extraordinary monetary policies.

As for the financial markets, remember that the Fed eased aggressively throughout both the 2000-2002 and 2007-2009 collapses, and that the market’s response to Fed easing is highly conditional on investor psychology and the condition of market internals. In my view, unless market internals are explicitly favorable, one shouldn’t rely on Fed easing to provide much durable support for financial assets.

I continue to expect a market loss on the order of 60-65% over the completion of the current cycle. A 50% loss is a rather optimistic scenario, given that it would not even take valuations to the level we observed in October 2002, which was the highest level of valuation ever observed at the end of a market cycle. If our measures of internals were uniformly favorable, these full-cycle risks would remain, but we would defer our immediate concerns. It will remain important to monitor those internals, regardless of how extreme market valuations have become.

Presently, we observe market conditions that have been associated almost exclusively, and in most cases precisely, with the most extreme bull market peaks across history.

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https://www.zerohedge.com/news/2019-07-16/bank-run-deutsche-bank-clients-are-pulling-1-billion-day

DB clients and counterparties are starting to worry (correctly!) that their money is far from safe, interestingly the derivative contracts have a clause that if DB ever becomes uncreditworthy then the contracts start to terminate.  Proper snowflake starting an avalanche as the world tries to digest a $42 Trillion whale at once.

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1 hour ago, Majorpain said:

https://www.zerohedge.com/news/2019-07-16/bank-run-deutsche-bank-clients-are-pulling-1-billion-day

DB clients and counterparties are starting to worry (correctly!) that their money is far from safe, interestingly the derivative contracts have a clause that if DB ever becomes uncreditworthy then the contracts start to terminate.  Proper snowflake starting an avalanche as the world tries to digest a $42 Trillion whale at once.

I want to believe this is the start of the return to sanity but I've been hurt before. :(xD

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Bricks & Mortar
7 hours ago, sancho panza said:

...our “Exit Rule for Bubbles” is straightforward: You only get out if you panic before everyone else does

This is excellent.  Tapping into exactly where my thought process is turning now.

And this is our next problem.  We're a thread full of people bought into this theory of the future.  Many of us invested, in various ways into the final 'crack-up-boom' - mostly in precious metal miners,   but also short-sellers, currency speculators and stock pickers for the next cycle.  Some of us rank amatuers at this sort of thing.
Where is the top?  What will it look like for your investment choices?  Do you need to 'get out in time?'

I'm one of these rank amatuers.  I spell it wrong to reinforce that.  It's DYOR / Pin your own tail on your own donkey. 

I fear the peak may have a precipitous drop on the other side.  I'll probably not wait for $26 silver, $40 GDX, or whatever other prediction has been made or reposted in this thread.  In most (all?) cases, I think these predictions aren't intended as trading calls, but as predictions of the top.  They're almost certainly wrong, to some degree, and no-one can tell which side they'll turn out to be wrong on.  It probably only takes a single event, like a country invading another, or surprise early QE, to change them.

But when I've got my optimistic hat on for the PM's,  I've half a thought the top might be later, or less precipitous than, say the S&P and other stock markets.  Perhaps the final gains in PM's will be investors getting out of these markets, and piling into PM's, thinking they're a place of safety?  The eventual peak being more rounded, and the downturn in PM's caused as investors gradually pull their money out of the space to cover their debts elsewhere.  This last paragraph, just a feeling, (that I only get on optimistic days), on my part, and I'll remind you again I'm a RANK AMATUER at this.  Hoping this post moves the discussion on to what the top might look like, and how we might deal with it.

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Yellow_Reduced_Sticker
On 14/07/2019 at 22:55, Harley said:

Sad to see about the only people left posting here are posting at length about a subject patently way off topic.

"London house prices FALL at Fastest rate in a decade"

https://uk.finance.yahoo.com/news/bt-agrees-210m-sale-london-090017770.html

....well i'm ON TOPIC IN THIS POST!:Old::Jumping:

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sancho panza
3 hours ago, Majorpain said:

https://www.zerohedge.com/news/2019-07-16/bank-run-deutsche-bank-clients-are-pulling-1-billion-day

DB clients and counterparties are starting to worry (correctly!) that their money is far from safe, interestingly the derivative contracts have a clause that if DB ever becomes uncreditworthy then the contracts start to terminate.  Proper snowflake starting an avalanche as the world tries to digest a $42 Trillion whale at once.

There's been the usual poo pooing of DB's gross derivatives exposure by the Banker gliteratti. However,it's worth remembering that when Lehman imploded,a team got tasked with working out their net exposure and effectively ended up guessing at it.How do I know? 'met a bloke in a pub once'.........

 

I always dislike it when people start a discussion with 'if you question this then you're dumb or scaremongering'. Lucky people took a more enlightened approach Thalidomide.

The answer must be much more nuanced than is being claimed by either the FT or the Tweet below.For a start,you need to understand the nature of DB's derivatives book and just as importantly ,how it is hedged. Hedging is only as good as the counterparty the other side of it and I'd presume there's  a reasonable chance that some Italian/Spanish/Greek banks have been active in these markets,particularly Euro swaps.

Ergo,the central issue with DB's derivatives exposure doesn't actually lie with DB itself but the counterparties that run off it.As one of the biggest books they are 'systemic'.ISDA link below shows notional outstanding of  $980 trn(IRD +OTC),ergo DB 4.6% of the market.

Also,such confidence appears to ignore  existential risk.If the Euro goes pop,will the system be able to handle it? IRD includes Euro  denomintaed interest rate derivatives, a $112trn market. If DB is a chunky player here-and I'd suspect it is,questions should be asked about it's notional outstanding exposure.

ISDA basically saying gross credit exposure of the whole derivatives market is $2.3 trillion on $544trn + $436 trn +others= £980trn++.

German taxpayers should get a second opinion as it appears some deals are being done without any margin being posted.

Would welcome our resident options traders view @MvR

https://ftalphaville.ft.com/2019/07/08/1562575972000/Deutsche-Bank-derivative-dumbness/

https://www.isda.org/a/9atME/Key-Trends-in-Size-and-Composition-of-OTC-Derivatives-Markets.pdf

OTC derivatives notional outstanding was $544.4 trillion at the end of 2018, 8.5% lower compared with mid-year 2018 and 2.3% higher compared with year-end 2017

IRD notional outstanding was $436.8 trillion at year-end 2018.

Gross credit exposure – gross market value after netting – also declined to its lowest level since 2007.

The gross credit exposure of OTC derivatives, which is a more accurate measure of counterparty credit risk, continued to decline and totaled $2.3 trillion, accounting for 0.4% of notional outstanding at year-end 2018

Following the implementation of the margin rules for noncleared derivatives from September 2016, the amount of collateral received and posted by market participants has been increasing. The ISDA margin survey for the full year 2018 found that the 20 largest market participants (phaseone firms) collected approximately $1.1 trillion of initial margin (IM) and variation margin (VM) for their non-cleared derivatives transactions at year-end 2018.

As more firms and transactions become subject to the margin requirements, ISDA expects IM and VM to continue to grow, and net credit exposure of OTC derivatives, which adjusts gross credit exposure for collateral, to continue to decline9

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sancho panza
50 minutes ago, Bricks & Mortar said:

This is excellent.  Tapping into exactly where my thought process is turning now.

And this is our next problem.  We're a thread full of people bought into this theory of the future.  Many of us invested, in various ways into the final 'crack-up-boom' - mostly in precious metal miners,   but also short-sellers, currency speculators and stock pickers for the next cycle.  Some of us rank amatuers at this sort of thing.
Where is the top?  What will it look like for your investment choices?  Do you need to 'get out in time?'

I'm one of these rank amatuers.  I spell it wrong to reinforce that.  It's DYOR / Pin your own tail on your own donkey. 

I fear the peak may have a precipitous drop on the other side.  I'll probably not wait for $26 silver, $40 GDX, or whatever other prediction has been made or reposted in this thread.  In most (all?) cases, I think these predictions aren't intended as trading calls, but as predictions of the top.  They're almost certainly wrong, to some degree, and no-one can tell which side they'll turn out to be wrong on.  It probably only takes a single event, like a country invading another, or surprise early QE, to change them.

But when I've got my optimistic hat on for the PM's,  I've half a thought the top might be later, or less precipitous than, say the S&P and other stock markets.  Perhaps the final gains in PM's will be investors getting out of these markets, and piling into PM's, thinking they're a place of safety?  The eventual peak being more rounded, and the downturn in PM's caused as investors gradually pull their money out of the space to cover their debts elsewhere.  This last paragraph, just a feeling, (that I only get on optimistic days), on my part, and I'll remind you again I'm a RANK AMATUER at this.  Hoping this post moves the discussion on to what the top might look like, and how we might deal with it.

There's more warning that you realsie.Market tops  cna be mundane affairs.FTSE 100 Dec07 to Jan 08 dropped 10% but the big falls were later that year..Peak to trough then was from Oct 07 to Feb 09 ie 16 months.Current FTSE peak was July 18,so Ftse bottom could be anywhere from Oct 19 to Dec 20.

We're already heavily cash but still sat on some utlities/oilies/goldies/telecoms.Given recent peak in the S&P we could be looking at 2020/21 for the US bottom although earlier if the Russell 2000 is the primary timing mechanism for the US that some say it should be.

I've been doing a lot of childcare last two days as Mrs P has been away but spent last night combing through the SOIL ETF for my potash picks going forward (tempted to invest alreay to be honest but will wait and see if they chuck the baby out with the bath water.

Nutrien/Yara/PhosAgro/Mosaic/Compass/Incitec/K+S/Nufarm/Interpid.Interesting times if I can get these on 5% yields.

image.png.bb097db9bc24b16bc38fafde2d299c25.png

 

 

Worth ntoing that the hosuebuilders still haven't dropped much but look to have peaked(decl short).For example BDEV peak Dec 06 bottom Nov 08

image.png.40f2c5e0e21ca3953901c113664f91e5.png

Banks look to have peaked eg Barc (decl short) which is hard to time off as it's so bombed out.Worth noting the  10 year decline from £3-51 peak post crisis for barc

image.png.ab7036ab496f2f3324ca97df729e4c25.png

 

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NogintheNog
1 hour ago, Bricks & Mortar said:

This is excellent.  Tapping into exactly where my thought process is turning now.

And this is our next problem.  We're a thread full of people bought into this theory of the future.  Many of us invested, in various ways into the final 'crack-up-boom' - mostly in precious metal miners,   but also short-sellers, currency speculators and stock pickers for the next cycle.  Some of us rank amatuers at this sort of thing.
Where is the top?  What will it look like for your investment choices?  Do you need to 'get out in time?'

I'm one of these rank amatuers.  I spell it wrong to reinforce that.  It's DYOR / Pin your own tail on your own donkey. 

I fear the peak may have a precipitous drop on the other side.  I'll probably not wait for $26 silver, $40 GDX, or whatever other prediction has been made or reposted in this thread.  In most (all?) cases, I think these predictions aren't intended as trading calls, but as predictions of the top.  They're almost certainly wrong, to some degree, and no-one can tell which side they'll turn out to be wrong on.  It probably only takes a single event, like a country invading another, or surprise early QE, to change them.

But when I've got my optimistic hat on for the PM's,  I've half a thought the top might be later, or less precipitous than, say the S&P and other stock markets.  Perhaps the final gains in PM's will be investors getting out of these markets, and piling into PM's, thinking they're a place of safety?  The eventual peak being more rounded, and the downturn in PM's caused as investors gradually pull their money out of the space to cover their debts elsewhere.  This last paragraph, just a feeling, (that I only get on optimistic days), on my part, and I'll remind you again I'm a RANK AMATUER at this.  Hoping this post moves the discussion on to what the top might look like, and how we might deal with it.

The prime PM, Gold finally got back to 2011 prices in GB pounds last week! But this was largely ignored by the MSM as the price in US dollars seems to be all that matters!

gld.png

If 2007/2008 repeats, where next?

 

 

Screenshot at 2019-07-16 09:47:47.png

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