Our 'Crash Alert' flag goes back up the pole...
October is almost half over. Will we get through the month without a major sell-off?
Dear reader, if you think we know the answer to that you've got us mixed up with someone else. Someone who is crazy.
No one with his wits about him thinks he knows what the stock market is going to do.
Still, here at The Daily Reckoning, we have our hunches. We think it's time for a major pull back. Frankly, we'll be disappointed if we don't get one soon. Because, once again stocks are too expensive.
Too expensive for what? Too expensive for the circumstances.
The Dow rose another 20 points yesterday to a new bounce record. Oil rose to over $73. Gold didn't budge.
Of course, everyone now knows that the recession is over. NABE interviewed 44 economic forecasters. Four-fifths of them said the recession was over.
But we don't care what they said. These are the same seers who missed the biggest single event in financial history. There are many banking crises, recessions, panics and defaults in the record books. But none were as great as the one that hit September a year ago. Most economists didn't see it coming; why should we trust them to tell us when it is going?
Besides they've got the whole thing wrong. It isn't a recession; it's a depression. There is no recovery from a depression; instead, the economy has to re-invent itself in another form. Things aren't going 'back to normal,' in other words. Because the period leading up to the crisis was not 'normal;' it was a bubble. After a bubble explodes, you have a lot of debris to clean up. The bigger the bubble, the more damage it does when it blows up.
"The force of a correction is equal and opposite to the deception that preceded it."
You've heard our dictum before. In fact, you've heard our explanations for all these points before.
We just lived through the biggest bubble in history. Get ready for the biggest bust. Not just two years of falling stock prices and news- making bailouts. Not just 10% unemployment. Not just 100 bank failures and 30% off housing prices.
Noooo... We're talking about a worthy correction...a real correction...a noble and distinguished correction...a correction that can hold its head up in public.
This is a correction that will take many years...one that will knock housing prices down for at least five years...and stock prices down to the point where people no longer want to buy them. It's a correction that goes deep enough and continues long enough to do its work - wiping out the bad investments and mistakes of the Bubble Era, while allowing the survivors to pay down their debts and build up their savings.
Now, here's a confusing little item. Yesterday's news tells us that consumer spending as a percentage of the entire economy has edged up to 71%. Now wait just one cotton-pickin' minute. How could consumer spending be going up?
Hold on, cupcake. It's not going up. It's going down. It's just that the other components of the economy are going down even more.
In the second quarter consumers spent $195 billion less than they did the year before - a 1.9% drop. In the 20 years before that, consumer spending increased at an average rate of 3.3%. So, you do the math... that's an about-face of more than 5% of GDP - a loss to the economy of about $700 billion!
Consumer credit is going down (we reported the figures earlier in the week)...unemployment is going up...consumer spending is going down...
..those are not the circumstances in which stocks sell for 27 times earnings...and move higher. Those are the circumstances in which stocks crash.
David Rosenberg:
"By some measures, the S&P 500 is already trading at valuation levels that would ordinarily be consistent with an economic expansion that is five-years old as opposed to a recovery that, at best, is in its infancy stages.
"On an operating ('scrubbed') basis, the trailing P/E multiple on the S&P 500 has expanded a massive 10 points from the March lows, to stand at 27.6x. Historically, when the economy is taking the turn away from contraction towards expansion, which indeed was the case in Q3, the trailing P/E multiple is 15x or half what it is... While we will not belabor the point, when all the write-downs are included, the trailing P/E on 'reported' earnings just widened to its highest levels in recorded history of nearly 140x, which is three times the levels prevailing during the height of the tech bubble."
So, here goes...yes...today, we are officially running our "Crash Alert" flag up the pole here at the London headquarters of The Daily Reckoning. Cross Blackfriars Bridge and you might see if flapping in the wind, between the two huge gold balls on the roof.
Our Crash Alert flag is out because stocks have become too expensive...and because this bounce should be reaching its apogee by now. Already, central banks are talking about cutting back on their efforts to sustain the bounce with easy credit. Australia led the way last week with a rate hike.
It is also becoming clearer and clearer that the feds' efforts aren't really working. They can give money to their friends in the banking industry. They can give money to speculators who then make bets on the stock market, among other things. They can bailout major companies. But they can't really get much money into the real economy.
Au contraire; they take money OUT of the real economy. The feds will absorb $700 billion of private savings this year alone...to finance their deficit. They expect $1 trillion deficits at least for another 10 years. That won't leave much money for the private sector.
Naturally, Washington, DC, is doing well. While unemployment is near 10% in the rest of the nation, it's only about 6% in the Washington area.
But let's face it... What's good for Washington is bad for the rest of the nation. The feds have used this correction to increase their power...and add to their wealth. The average federal employee now earns twice as much as his counterpart in the private sector - if the fellow in the private sector has a job at all.
A news item tells us that TARP recipients spent $114 million lobbying for their bailout money - most of it going into Washington, of course.
And the feds now own major stakes in what used to be the private sector - insurance, automobiles, and banking industries.
This has been a great period for government. Money, power...it is all floating down the Potomac like raw sewage...and coming to rest in the capitol city.
Our advice to the feds: enjoy it while you can. When stocks fall again...and people figure out what a mess you've made of the economy...you'll be lucky if you aren't tarred, feathered and run out of town on a rail.
Bill Bonner
for The Daily Reckoning Australia
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Related Articles:
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- Expect the Great Correction to Wipe Out this Bounce
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About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.