Economist Blake LeBaron has discovered an important cause of stock market crashes:
During the run-up to a crash, population diversity falls. Agents begin using very similar trading strategies as their common good performance is reinforced. This makes the population very brittle…
In other words, when everyone is making the same trade, it will likely lead to a crash.
Tyler Durden summarizes this idea even more succinctly:
When everyone is on the same side of the boat, it always inevitably capsizes.
A related concept is that – if your waitress or cabbie is telling you to buy something – that probably means that the market is overbought, and you might want to consider selling.
Some times in history, investors feel so confident about the future of stocks, they actually use up all their available cash and then borrow money to invest in the stock market. Now is one of those times!!!
The chart below was created by Doug Short, see his outstanding work here.
CLICK ON CHART TO ENLARGE
Positive net worth takes place when.….Investors have little money borrowed and plenty of cash in their brokerage accounts. (2003 & 2009)
Negative net worth takes place when.…Investors have large amounts of money borrowed (on margin) and little cash in there brokerage accounts. (2000, 2007, 2011 & now)
The above chart reflects that only one other time in history has negative net worth been this low, which was the tech bubble back in 2000. The prior two times that negative net worth were this low was 2007 (50% S&P 500 decline) and 2011 (17% S&P 500 decline).
As we watch the market climb to new highs in the face of lackluster and deteriorating fundamentals, we have the feeling that we’ve seen this movie before in 2000 and 2007, when we were a lone voice of caution in the wilderness. A rise that was fueled by the perception of never-ending Fed liquidity injections has now morphed into a trend that is feeding on itself as investors are afraid of missing out on further gains. As a result, any news, no matter how negative, is being given a positive spin in the media and on “the street”.
For instance, take last Friday’s payroll employment report for April, which touched off a euphoric rise in stocks. While that was a positive surprise over the expected rise of 140,000 jobs, the reported increase of 165,000 for the month was nothing to write home about. It was well below the 1st quarter average of 206,000 per month as well as the 4th quarter average of 209,000. If anything, it looks as if employment increases are decelerating, certainly not a reason for celebration.
In addition to the mediocre employment report there was a lot of other evidence that an already lackluster economy was slowing down further as we headed into the spring. The ISM manufacturing index fell for two consecutive months to its lowest level since December. The ISM non-manufacturing index also declined for two straight months and is now below its 1st quarter average. April vehicle sales slipped to under 15 million units for the first time since October. First quarter GDP grew at a disappointing 2.5% following only 0.3% in the prior quarter. Average GDP growth for the last four quarters has averaged only 1.8%. Real consumer spending has increased only 2% over the past year, and this was accomplished on an exceedingly weak 0.9% rise in real disposable income over the period. Only a sharp drop in the savings rate enabled consumers to reach even that disappointing level.
- Bad loans at Italy banks grow at highest rate since Dec 2011
- IMF Warns on Rush for African Debt
- Central Banks Keep Easing After Cuts Fail to Spur Growth
- Policy patience seen wearing thin as yen drops
- Top banks weighed down by overdue loans (China)
Global central bankers are poised to ease monetary policy even further after a wave of interest-rate cuts from India to Poland.
As Group of Seven finance chiefs gather in the U.K. today with monetary policy on their agenda, economists at Morgan Stanley and Credit Suisse Group AG are among those predicting policy makers will keep deploying stimulus amid weak global growth, slowing inflation and the need to thwart currency gains.
“Most central banks in our coverage universe still have a bias to ease,” Morgan Stanley economists led by London-based Joachim Fels said in a report to clients yesterday. “Given this disposition, it doesn’t take much in terms of downside surprises in growth or inflation to tip the balance for more central banks to pull the trigger for more easing.”
South Korea’s rate cut yesterday was the 511th reduction worldwide since June 2007, according to Bank of America Corp.’s tally, done before Vietnam and Sri Lanka today said they’re lowering their policy rates. While the liquidity has sent stock markets surging, it has yet to prove as effective in generating economic growth….
Giddy “buy the dip, the Fed’s got our back” participants tend to forget that major players profit from going short when all the other shorts have been terminated with extreme prejudice.
A funny thing happened on the way to the next Bull market: the price-earnings (P/E) ratio has entered bubble territory–again. Courtesy of frequent contributor B.C., here is a chart of the average P/E for the S&P 500 (SPX). Note the P/E soared to bubble heights in the early 2000s, which set up the epic collapse of stock valuations in 2008-09.
This is what happens when the world’s central bankers – incapable of seeing the bubbles forming in front of their own eyes – are let loose on global markets… Where ever you look, markets are in turmoil this morning with even the precious equity indices trading like penny stocks… The bottom line is that significant Treasury weakness, gold weakness, and stocks actually in the red suggest an increasing feeling that the QE juice has run its course.
Things are getting out of hand…
- Rex Nutting: It’s not just stocks; everything is overvalued
- Are retail investors piling on too late? Few regret selling near new highs
- Entire Commodity Complex Unraveling Today – Oil, Gold, And Coffee Down Big
- Here’s Evidence That The Fed Is Inflating A Stock Market Bubble
#1 The price of copper has traditionally been one of the very best indicators of the future performance of the U.S. economy. The fact that it is down nearly 20 percent so far this year has many analysts extremely concerned…
Copper’s downward trend foreshadows a stock market collapse, according to Societe Generale’s famously bearish strategist Albert Edwards, who said equity markets will riot “Japan-style.”
“Copper is acting exactly as it did when I wrote about the impotence of liquidity in the face of the (then imminent) 2007 recession. Once again it is giving us an early warning that liquidity will not save risk assets: time to get out of equities,” Edwards wrote in his latest research note, on Thursday.
Retail sales of clothing is growing at the slowest pace since 2010; but while major store sales are about to drop negative YoY for the first time in over 3 years, the utter collapse in general merchandise sales is worse that at the peak of the last recession at -5%. It seems tough to see how a nation with an economy built on 70% consumption is not in a recessionary environment. And while this alone is a dismal signal for the discretionary upside of the US economy/consumer; as Gluskin Sheff’s David Rosenberg points out real personal income net of transfer receipts plunged at a stunning 5.8% annual rate in Q1. The other seven times we have seen such a collapse, the economy was either in recession of just coming out of one.
The Thomson Reuters/University of Michigan preliminary index of consumer sentiment declined to 72.3 in April from 78.6 a month earlier. This month’s reading was lower than all 69 estimates in a Bloomberg survey that called for no change from the March number.
#000000;”>For starters, China’s recent economic data, as massaged as it is to the upside, is downright awful. China’s PMI numbers were the worst in two years. Staffing levels in the Chinese service sector decreased for the first time since January 2009 (remember that year).
#000000;”>China’s LEI also shows no sign of recovery. If anything, it indicates China is heading towards an economic slowdown on par with that of 2008. And if you account for the rampant debt fueling China’s economy you could easily argue that China is posting 0% GDP growth today.
#9 Things just continue to get even worse over in Europe. Unemployment in both Greece and Spain is now about 27 percent, and the unemployment rate in the eurozone as a whole has just set a brand new all-time record high.
#11 Casino spending is usually a strong indicator of the overall health of the U.S. economy. That is why it is so noteworthy that casino spending is now back to levels that we have not seen since the last recession.
Below is a quick roundup of the damage.
- WTI crude oil -2.7%
- Brent crude -2.3%
- NYMEX gasoline futures -2.0%
- NYMEX heating oil -2.5%
- Gold -2.4%
- Silver -1.8%
- Platinum -2.2%
- Palladium -1.1%
- Corn -1.9%
- Wheat -2.0%
- Soybeans +0.4%
- Coffee -2.4%