The Meaning Of Valuation

The Meaning of Valuation

  • December 3, 2019

Last week, our estimate of prospective 12-year nominal annual total returns on a conventional portfolio mix (invested 60% in the S&P 500, 30% in Treasury bonds, and 10% in Treasury bills) fell to the lowest level in U.S. history, plunging below the level previously set at the peak of the 1929 market bubble. Yes, interest rates are low, but with them, so are the discount rates and long-term returns embedded into prices.

Read More
Marks Of A Phase Transition

Marks of a Phase Transition

  • November 20, 2019

We identify phase transitions by looking for a gestalt – several features that form a coherent, recognizable whole - in this case reflecting dispersion in leadership (new highs vs new lows), participation (the % of individual stocks joining a given market advance), and breadth (advancing vs declining issues) emerging immediately near a record market high.

Read More
A Striking Collection Of Duck-Like Features

A Striking Collection of Duck-Like Features

  • November 11, 2019

If a high-risk market peak were a duck, observable market conditions presently include a striking collection of duck-like features. The key idea here isn't terribly complex. High-risk market conditions feature the simultaneous appearance of market extremes and market divergences; essentially an overextended market losing its engines.

Read More
Propositions For A Recessionary Bear Market

Propositions for a Recessionary Bear Market

  • October 9, 2019

As the financial markets enter what I expect to be a rather disruptive completion to the recent speculative half-cycle, it will be helpful for investors to consider certain propositions that are readily available from history, rather than insisting on re-learning them the hard way.

Read More
Going Nowhere In An Interesting Way

Going Nowhere in an Interesting Way

  • September 5, 2019

At extreme valuations, it’s important to remember that the completion of a hypervalued market cycle can wipe out every bit of the stock market's total return over-and-above T-bills, going back not just a few years, but for over a decade. In my view, investors are on the cusp of yet another very long period in which the stock market is likely to go “nowhere in an interesting way.”

Read More
How To Needlessly Produce Inflation

How to Needlessly Produce Inflation

  • August 4, 2019

Quantitative easing is simply an asset swap. QE doesn’t produce inflation, and whatever inflation we get will not be the result of QE. What inflation requires is public revulsion to government liabilities, and what produces public revulsion is the creation of government liabilities at a rate that destabilizes the expectation that those liabilities remain sound.

Read More
They’re Running Toward The Fire

They’re Running Toward the Fire

  • July 14, 2019

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

Read More
Warning: Federal Reserve Easing Ahead

Warning: Federal Reserve Easing Ahead

  • June 25, 2019

With the exception of 1967 and 1996, every initial easing of monetary policy by the Federal Reserve has been associated with an oncoming or ongoing recession. Investors should recognize that there is a certain amount of information content in those initial rate cuts. Specifically, when the Federal Reserve shifts from tightening (or normalizing) monetary policy and instead begins a fresh round of rate cuts, it's a clear indication that something in the economy has gone wrong. Moreover, the historical evidence is very clear that when investor psychology shifts from speculation to risk-aversion, even persistent and aggressive Federal Reserve easing does nothing to support stocks.

Read More
Vulnerable Windows And Swinging Trap Doors

Vulnerable Windows and Swinging Trap Doors

  • June 2, 2019

Imbalances aren’t resolved sooner just because the imbalances are larger. Instead, crises emerge seemingly out of nowhere, when a vulnerable window or a trap door swings open. That makes it essential to monitor those hinges.

Read More
Why A 60-65% Market Loss Would Be Run-Of-The-Mill

Why a 60-65% Market Loss Would Be Run-Of-The-Mill

  • May 3, 2019

Except for the 2000-2002 bear market, which ended at valuations that were still about 25% above historical norms, every other bear market decline in history, including the 2007-2009 decline, has taken reliable valuation measures to historical norms that presently stand between -60% and -65% below present market levels. The primary importance of internals here is to discourage fighting the market with a hard-negative near-term outlook until speculative psychology again shifts toward risk-aversion.

Read More