Maybe It's Time To Dispense With the Trope of "Market Fundamentals".

Jim Paulsen, market expert with the Leuthold Group LLC, believes the turbulence in the market isn't over by a long shot (WSJ, 'Business & Finance', 2/11). Those starting to breathe easier after last week's volatility had better buckle themselves in for more - and also reconsider the somber reality that this market is supported by "fundamentals" - an  ambiguous catchall term designed to baffle with bullshit.

Charlie Farrell – CEO of Northstar Investment Advisors LLC – put the current stock market behavior and its basis in perspective in his recent Denver Post Business column (p. 1K, Feb. 11):

“What makes bull markets so dangerous is they are not supported by fundamental growth, they are supported primarily by investor enthusiasm. When something causes this enthusiasm to wane, as it did last week, markets decline. The important point is that they eventually decline to the fundamental valuation supported by earnings”

And so, in the biggest bull market ever -  lasting from 1980 through 1999 - we saw “70 percent of the price gains from investor enthusiasm”. This set the stage for fifty percent of those gain to be given up in the ensuing bear market. That the current market is overvalued beyond its alleged fundamentals is well known which is why Farrell delivers this advice (ibid.):

“If you need funds any time in the next five years, consider keeping those funds out of the stock market . You can instead do something simple like a savings account, a CD or high quality bonds.”

That advice is not intended to help you get rich but to ensure you don't end up a relative pauper, i.e. dumpster diving after half your disposable income is left in the crapper or having to work 10- 15 more years – eating sardines and fried dandelions each day - to reach a nominal retirement.

A popular trope about the stock market peddled by assorted finance pundits- such as CBS'  favorites Melanie Hobson and Jill Schlesinger – is that you can remain in the market with confidence, 'cause the “fundamentals” are still at work. Don't believe it for a nanosecond. The only “fundamentals” at work in the current Bull (or what I call “bull shit”) market are: ridiculous leverage, and flash trading to game ordinary investors. In the right conditions both have contributed to the volatility we've seen in the past week.

In another Sunday D. Post piece, 'Robots Have Hijacked The Market', p. 1D), Steven Pearlstein informs us:

“Pay no attention to the volatility these financial wizards assure us. It's just a little technical correction. The fundamentals of our otherwise sound economy will soon reassert themselves. The truth is that the market is as irrational and divorced from fundamentals on the way up as it is on the way down. More so today as a result of the high frequency trading strategies of the Wall Street wise guys. What we've watched this week is “herd” behavior on steroids.”

Pearlstein goes on to point out that only “10 percent of trades are made by real live humans”, with 40 percent originating out of index funds or exchange traded funds (ETFs) and the remainder – 50 percent flash trades.

In such a “robot to robot” environment of “circular logic”, he argues, “fundamentals are as irrelevant as the volumes are enormous”. Worse, the multiple trades – often in the millions and lasting microseconds each take only minutes – and are done with borrowed money. This is where the leverage aspect enters.

This is as a result of the Fed's cheap money, low interest policy - which means the same flash trade investors (mainly hedge funds) are emboldened to borrow most of what they need to buy shares. According to Pearlstein:

“the low interest rates allow hedge funds to borrow $4 or $5 for every one they put at their own risk.”

He goes on:

“When prices start to fall rapidly the funds are forced to sell their positions to pay back the banks and brokerage houses, driving down the price even further. Selling begets yet more selling. Investors rushing to cover short positions, or to sell underwater options before they expire run into a similar dynamic.”

Worse, what happens in one asset class can affect all others, as I warned about in an earlier post (Feb. 6th), e.g. with asset classes moving in lockstep setting the stage for a multiplier effect.

Another aspect of flash trading that bears scrutiny concerns the tiny time advantage- called a “latency” - enjoyed by the flash traders. In this latency (see e.g. WSJ:   'CME Defect Aids Speedy Traders', Feb. 13^th, p. B1) a firm receives private confirmation of its trade before it is reported over the public feed. This applies to the CME Group Inc. for which a system defect is “yielding rich profits for ultrafast firms at the expense of ordinary investors.."

Though a CME spokeswoman claimed (ibid.)  it had “dramatically decreased the latency” she also admitted that “private confirmations were still arriving first in some cases”

This ought to be disturbing for anyone plowing money into Maul Street, especially after author Michael Lewis' book “Flash Boys”,  where he exposed the workings of flash trades and how they benefit the flash traders.

In the case of the CME Group latency defect, the typical delays to its public data feed are “measured in microseconds or millionths of a second ….much smaller than they were five years ago” But still (WSJ, ibid.): “the flaw can yield hundreds of millions of dollars in profit a year in profit to flash traders.” This according to Quantlab Financial LLC, an electronic trading firm.

The WSJ piece goes on (p. B2) to note there are various ways to exploit this latency flaw. One concerns so-called “canary orders”, which are small buy or sell orders- say for one or two contracts. In other words not large at all in scale but which nonetheless can be used to detect large trade that can move the market. (Think of the "canary in the coal mine" - when it croaks you know methane gas is around.)

How would this advantage work in practice? The WSJ piece gives this example (ibid.):

“If oil futures can be bought for $60.01 and sold for $60, a trader could place a small order to buy at $60 which would join a queue of similar buy orders at CME. If the trader gets a message saying his or her buy order was filled, that could signal that a large seller is at work and the price is about to tick down to $59.99. The trader could then quickly sell at $60 to take advantage of the expected move.”

So let's get our perspective straight: Here you are faithfully putting money into your 401(k) each month,  expecting to earn a bit for your retirement security, and just microseconds before your fund or funds tank the flash traders learn about it and get to dump the component stocks before you can get to a phone. Fair? No, but that's the only fundamental now at work in this overvalued, over leveraged market.  As WSJ columnist James Mackintosh (Business & Finance) poses the quandary for all investors ('A Historical Tie Breaks, But Trouble Still Lurks', p. B1, Feb. 10):

"The question facing investors is whether they should dismiss the 10 percent drop in the S&P from its  high hit in January, or whether it's indicative of deeper troubles ahead?"

Perhaps the more germane question to ask is: If you are an ordinary, e..g. little guy investor, do you believe the possible trouble ahead is tied to flash traders in large hedge funds betting on volatility, or simply the downstream risk of potential inflation?

My best advice? If you plan to remain in this volatile market and buy "on the dips" like the gurus advise,  just be sure you have enough disposable income to sustain deep losses over time, especially in case of a crash.  Bear in mind that a mutual fund that drops in share price from $20 to $10 has suffered a 50% loss. But for that $10 stock or fund share price to return to $20 it must gain 100%, or double. This may take not just two or three years, but more than TWENTY! 

The Biggest Stock Market Crash "In Our Lifetime"? The Indicators Are All Blinking Red

Look, I get that the species of investor governed by irrational exuberance  doesn't want to hear it, but the sky high gains of the DOW aren't going to continue. There will be no DOW 30,000, the market will crash first.  Already the rampaging Bull has lasted longer than all but one other, and in the midst of the gains too many are checking their brains and critical thinking at the assorted investment house doors.  The smart ones understand inflated Bulls always take a dive and the current iteration - with its stratospheric P/E ratios- is already in dangerous bubble territory based on Nate Silver's stats on what precedes crashes.

Silver, in his book, The Signal and the Noise- Why So Many Predictions Fail But Some Don’t  warned (p. 347):

"Of the eight times in which the S&P 500 has increased at a rate much faster than its historical average over a 5-year period , five cases were followed by a severe and notorious crash, such as the Great Depression and the Black Monday crash of 1987”.

Interestingly, two of the largest stock market dives have followed two of the biggest bubbles: the first of 37.85 percent and on the heels of the bubble that formed from Jan. 14, 2000 to Oct. 9, 2002, and the second of 58.78 percent that formed (mainly due to the housing bubble) from Oct. 9, 2007 to March 9, 2009.

More recently, Charlie Farrell, the CEO of Northstar Investment Advisors LLC, wrote a year ago in The Denver Post Business pages  ('Do You Have The Stomach For The Next Stock Crash?') :

"For the past eight years, investors have enjoyed a steadily increasing stock market. Memories of the 2008 crisis have largely faded and many investors have forgotten that sinking feeling. But if you want to avoid the mistakes investors made during the last crisis, you should start thinking bad thoughts. Yes., bad thoughts. Start training your brain and your guts for the next stock market decline. Why? Because big stock market crashes and declines happen and they pose a big threat to your wealth."

One indicator of a bubble is the rate of stock share increase. But another is the rate of inflation related to the trailing P/E ratio.  This is the classic price to earnings which looks at the current price divided by the company's total earnings the past 12 months. .  This is perhaps the most common metric used by investors to value publicly traded companies. While it does not account for growth rates by default, it represents a simple metric that can be compared over long periods of time. 

The  most recent issue of The Utility Forecaster  has tracked this metric up to now and for good reason expresses alarm. We see that the immediate factors have also appeared in 'the biggest dips in recent years" including the 2008 crash. These contributing factors include the Fed policy of cheap money infusion (via low interest rates coupled with quantitative easing or "QE"), along with the Fed subsequently halting QE by no longer buying bonds (from Oct. 29, 2014.) Add to that the Trump- GOP tax cuts which will create enormous deficits and debt and you have the makings of a large potential crash.

For reference, three years ago (in September)  the P/E ratio was about 18.5. Today the P/E for stock in the S& P 500 index is just over 25.  That is, investors are paying $25 for each $1 in corporate earnings. Just before the 2008 crash and 2009 financial meltdown it hit 27. 

What gives?   What gives is that there is no genuine support for the share increases or higher P/E ratio.  In other words, people are basically being hosed. Let's also note the long term average P/E ratio is about 16 and markets tend to revert to that average at some point.

The Utility Forecaster points out that only one other developed  economy adopted a stimulus plan like  ours, and that met with disaster. This was Japan between 2001 and 2006. After the Bank of Japan pulled the plug Japanese stocks fell by 50 percent. What is preventing the current market from crashing now? Mainly corporate stock buybacks which are providing a false cushion.  As long as these corporations keep sustaining their buybacks the DOW (as well as S & P) will continue upward, but there is a limit. Once the debt impact is felt - and it will be, when investors see they are only playing with "Monopoly money", then the roof caves in.

As The Forecaster puts it:

"As reported by Business Insider, a report from the global head of Société Générale's asset allocation team projected that the unwinding of easy money policies and broken politics in Washington will cause  today's market to unravel."

The 'broken politics' refers to an inability to resolve issues like the debt ceiling and out of control spending, especially with inadequate revenue coming in.  The next debt ceiling increase is likely to exceed $21 trillion, and the money still to be unwound from the Fed's QE program is nearly $4 trillion. Put the two together and you are looking at a major catastrophe ready to happen, never mind the current irrational exuberance.

The Utility Forecaster goes on to note that other sources forecast an even more dire end to this Bull, viz.:

"Legendary investor Jim Rogers says we're about to suffer the biggest stock market crash in our lifetime. And he believes it could happen later this year."

The UF goes on:

" Why should we listen to him?  The 74 year old not only helped found one of the most successful hedge funds of all time, he's made a number of market calls including the last housing crash. As Rogers observed, the debt that fueled the last downturn is nothing compared to the debt we've piled up since then. Over the last 10 years our national debt has more than doubled. His advice, 'Be worried!'

He cites a debt of $19.8 trillion but that is before the Republicans effectively added at least another $1.5 trillion with their idiotic tax cuts - the last thing we need now as even Rogers agrees. The most proximate warning metric we have right now? It is the Shiller P/E ratio, which uses inflation adjusted earnings over a trailing 10-year period.

This is "now at its highest level since the dot.com bust and even higher than before Black Monday in October, 1987".  We're now at 31.1  by this measure or 85 percent higher than the historical mean of 16.8.  Further, as the Utility Forecaster points out, "the  current total market cap is about 138.2% of the last reported GDP implying that the market is significantly overvalued."

Seth Klarman of the Baupost Group adds this attention getter (ibid.):

"The U.S. financial system is poised to collapse at any time."

In so far as any sensible person knows the national debt doubling in ten years portends a "Potemkin" market,  Klarman is correct.   But I am convinced that "any time" will be this fall, most likely in October, or about 3 weeks before the midterm elections. By then the total uselessness of the GOP tax cuts and their addition to the debt should be realized, and investors will finally see - as the UT puts it -  that their wondrous DOW is based on a straw foundation - now ready to go up in flames.


See also:

http://brane-space.blogspot.com/2017/11/has-stock-market-dodged-bullet-in.html


Take note, you've been warned.

Has The Stock Market Dodged A "Bullet" In The "Unlucky Sevens" Streak? NOT If The Reep Tax Cuts Are Passed!

Graph showing the stock crashes for years ending in '7'. (From The Wall Street Journal, p. B18, Oct. 18)

Many headlines have been generated in the past nine months or so warning of an imminent stock market correction or even crash.  Such headlines have included:

'A Case For The Bulls Is Hard To Warrant' - James Mackintosh

E'verything Is Awesome! Now Is The Time To Sell Your Stock' - James Mackintosh

'Warning Signs Mount As Stocks Stumble'   WSJ,  'Business & Finance', Aug.. 21

'Crashes Are Inevitable But That Doesn't Mean Now'  (WSJ, Oct. 9)

Perhaps the pithiest advice offered in these assorted stories was by Mackintosh in his 'time to sell your stocks' piece, noting:

"Investors believe that bear markets only come with recessions, and so reassure themselves that there is no sign a recession is imminent, repeating the mantra that 'economic cycles don't die of old age'. Unfortunately, this is both wrong and useless.

First, 20 percent drops happen outside recessions, as in 1987 and 1966. Second, economic cycles can be killed by a financial crash, and as the late Hyman Minsky pointed out, the longer a financial cycle goes on, the more likely it is to turn to excess and end badly. Worse, there is no reliable method of forecasting a recession, so even if it were true that only a recession can end a bull market, that isn't a lot of use to investors."

Adding:

"When everything is awesome it is best to prepare for things being a little less awesome in the future, even at the cost of missing out on some of the gains."

A few months earlier, Mackintosh's column was preceded by one  ('Do You Have The Stomach For The Next Stock Crash? ) in The Denver Post Business Section, written by Charlie Farrell, the CEO of Northstar Investment Advisors LLC,  wherein he writes:

"For the past eight years, investors have enjoyed a steadily increasing stock market. Memories of the 2008 crisis have largely faded and many investors have forgotten that sinking feeling. But if you want to avoid the mistakes investors made during the last crisis, you should start thinking bad thoughts. Yes., bad thoughts. Start training your brain and your guts for the next stock market decline. Why? Because big stock market crashes and declines happen and they pose a big threat to your wealth."

Of course, Farrell is quite correct and it's been literally known since the birth of the stock market that  all bull markets end in veritable crashes, the purpose of which is a massive transfer of wealth to the upper crust . (See e.g. George P. Brockway,  'The End Of Economic Man'). 

SO there have been endless warnings, some of which have come to pass, i.e. such as those who were correct about the October, 1987 stock crash.   But what about the more recent one in 2008? Too many members of the "dismal science" missed it, perhaps because they didn't put 2 + 2 together to grasp that years of the Bush tax cuts - taking place during de facto 'war time' - preceded it.  Add to that the fact that a bubble had been created and you had all the elements necessary for a crash. All that was needed was a 'trigger' and that was provided by the infusion of financial toxic waste known as credit default swaps. These unstable instruments (buried in bonds) found their way into everything from collateralized mortgage obligations to pension fund investments and most were classified as 'AAA' despite the fact there was no basis to do so.

The failure of the credit agencies themselves to be onto the junk bond nature of CMOs and allowing the presence of fractions of  toxic  CDS bonds in each – then designating the whole AAA - led directly to the collapse of the credit markets in 2008. The realization of their presence across the financial spectrum triggered a credit freeze then crash. (See e.g. http://brane-space.blogspot.com/2008/12/financial-black-hole.html )

Fast forward now to the latest take: that the current market may well be on its way to defying a nasty "unlucky -sevens" trend (WSJ, 'Market's Unlucky -Sevens Streak In Danger', p. B18, Oct. 18). What ate we talking about? Basically, a pattern that has held for U.S. blue chip stocks for at least the last 130 years.

Specifically (ibid.):

"For the past 13 times that a year has ended in seven, going back to 1887, the Dow Jones Industrial Average or its predecessor has suffered a sharp downturn at some point between August and November. The average downturn has been a little over 13 percent according to the research firm Leuthold Group."

The piece by Spencer Jakab goes on to note:

"The most memorable of those drops was 30 years ago. The 1987 stock market crash sent the Dow tumbling 22.6 %, its worst single day percentage loss ever, including a selloff that began earlier and wiped 36 percent off the Dow's value."

So the gist of Jakab's piece is this unlucky streak is "in jeopardy".  But is it really?

The problem with all pattern -based reasoning or templates is that there is no bearing on actual causes, and causal relations. Theodore Moois, the author of the monograph 'Predictions', for example, (p. 156), observes that the factors that most impacted the 1987 crash were the energy oscillations at that time in terms of energy prices, relation to consumption, and lack of investment in new jobs. In particular "stock market plunges manifest themselves during the downward trend of the energy oscillation and hence correspond to a downturn in the economic cycle".

Let us also note in conjunction with this that the 1987 crash occurred after a major tax cut was enacted via the Economic Recovery Tax Act in 1981.  Included in the act was an across-the-board decrease in the marginal income tax rates in the United States by 25% over three years, with the top rate falling from 70% to 50% and the bottom rate dropping from 14% to 11%.  The cut itself may not have been as toxic, but Reagan also launched a $2.2 trillion defense spending spree - effectively burning the fiscal candle at both ends.  This, I believe, set the stage for the 1987 crash.

The 2008 crash occurred after years of the Bush tax cuts which drove the deficit even higher and also:  "The 2000s- that is the period immediately following the Bush tax cuts – were the weakest decade in U.S. postwar history for real, non-residential capital investment. Not only were the 2000s by far the weakest period but the tax cuts did not even curtail the secular slowdown in the growth of business structures."  (Financial Times analysis, in 9/15/10)

What one must conclude is that while the credit meltdown with CDS infusion was the proximate trigger for the 2008 crash, the Bush tax cuts were the effective distal cause - specifically on account of the lack of investment, which itself created an "energy sink" in terms of the transactions between workers-consumers and employers.  Because many workers barely benefitted from the cuts , millions had to go into credit card and other debt to make up for the dearth in earnings. Much of this was needed for health care, and utilities. The narrow vision of these tax cuts -  like the current ones on offer (giving those making over $5m /year a $200k cut) left the jobs-energy landscape as a wasteland. Also, the bubble created - including by selling millions of sub-prime mortgages to borrowers who couldn't really afford them, paved the way to a crash.

For reference, the top marginal tax rate during the Bush years (for income tax) was reduced to 36% from the 39.5% during the 1990s Clinton Years. Over the 1950s and into the 1960s (until about 1964) the top marginal rate was at 91%, going down to 65% by the mid -60s. The low level of 50 % wasn’t reached until Reagan arrived and passed his tax cuts in 1981. (And we note here that the debt as a percentage of GDP rose to nearly 30% during the Reagan years, caused by his tax cuts in conjunction with mind boggling military spending.)

Another telling statistic from the FT study is the growth rate for investment in equipment and software for business. They note that this ranged from 5.7% a year to 9.9% in earlier decades but was reduced to 1.9% during the 2000s.  Meanwhile, “average growth in non-residential structures ranged from 1.3% to 5.7% from the 1950s through the 1990s but declined 0.8% during the 2000s.”
A fair and timely question must be asked at this point:

Why do Republican tax cuts lead, counter-intuitively, to industrial decline, stagnant wages, and finally financial collapse? The fact is that high marginal tax rates strongly correlate with economic growth.  In December 2010 Mike Kimel examined the effects of cutting the top marginal tax rate:

….real GDP also grew faster under Bill Clinton, who raised taxes, than it did under Ronald Reagan. In fact, from 1981 to the present, the period in which Reagan’s philosophies have reigned triumphant, the correlation between the top marginal tax rate and the annual growth in real GDP has been positive. That is to say, higher top marginal tax rates have been associated with faster, not slower real economic growth. Conversely, lower top marginal tax rates have coincided with less economic growth.

The positive relationship between the top [higher] marginal tax rate and the growth in real GDP is very nearly bullet-proof. For instance, it extends all the way back to 1929, the first year for which the government computed GDP data. Additionally, higher marginal tax rates are not only correlated with faster increases in real GDP from one year to the next, but also with increases in real GDP over the subsequent two, three, or four years. This is as true going back to 1929 as it is for the period since Reagan became president. In fact, since the Reagan Revolution took hold, similar relationships have existed between the top marginal rate and several other important variables, like real median income, real private investment, consumer sentiment, the value of the dollar relative to other major currencies, and the S&P 500.  

Lower tax rates in any given year are associated with slower growth rates for each of these variables, whether those growth rates are measured over periods of one, two, three or four years.

What is the takeaway here? Although Treasury guy Steve Mnuchin predicts a stock market crash if the Reepo tax bill isn't passed, e.g.

http://www.businessinsider.com/stock-market-news-mnuchin-says-crash-if-no-trump-tax-reform-plan-2017-10

The fact is that all the historical evidence points to the opposite. I already referenced the lack of investment during the Reagan and Bush tax cut years, but less well known was what transpired before the 1929 stock market crash.  Calvin Coolidge signed into law the Revenue Act of 1924, which lowered personal income tax rates on the highest incomes from 73 percent to 46 percent.  Two years later, the Revenue Act of 1926 law further reduced inheritance and personal income taxes; eliminated  many excise imposts (luxury or nuisance taxes); and ended public access to federal income tax returns. The tax rate on the highest incomes was reduced to 25 percent.

The result was a speculative frenzy in the stock markets, especially the application of structured leverage in what were called at the time "investment trusts." In September 1929, this edifice of false prosperity began to wobble, and finally crashed spectacularly in October,  1929.

Again, I submit that energy oscillations - usually as liabilities  -are also tied to these tax cuts and lower tax rates. It takes energy, after all, to build new plant for labor or even less carbon -generating  energy infrastructure,  e.g. solar collectors, wind turbines.. But if corporations merely use the money to buy back shares as a form of tax avoidance, the energy goes nowhere useful. (As Joseph Stiglitz noted this morning on 'Morning Joe').  Lower tax rates  encourage taking wealth out of industrial companies; the wealth taken out must then be "put to work." That means more money chasing "investment opportunities" (instead of real investment in capital goods and employees), leading to price increases in financial capital or real estate or some other asset.  The end result? An energy use distortion in an environment of low aggregate demand and high deficits (set to get much higher) setting the stage for a deleterious energy oscillation leading to a crash later next year.

I predict that if this Repuke tax "reform" bill passes, then we will see a monster crash (up to 40 %)  by October  of next year.  You can make book on it.

See also:

http://www.smirkingchimp.com/thread/richard-eskow/76434/orrin-hatch-s-bullcrap-on-taxes-is-exactly-that

And:

http://www.smirkingchimp.com/thread/jack-lessenberry/76454/how-the-gop-tax-bill-would-ruin-michigan

And:

http://www.smirkingchimp.com/thread/steven-rosenfeld/76431/why-arent-dems-in-congress-raising-more-hell-to-oppose-the-worst-gop-tax-bill-ever

Are You Ready For The Trump-Driven Stock Market Crash?

"Goddamn! I didn't think it'd crash that soon!  The end of the year?"

The headlines in yesterday's Financial Times were uncompromising and ought to have sent a signal to any sane investor- whether invested in a 401k, or IRA or just ordinary mutual funds, and even stocks.  That is, the testimony of Fed Chair Janet Yellen that the economy faces an "uncertain path" under the Donald Trump administration, which will also affect fiscal policy. She also warned against raising interest rates "too slowly" in her appearance before Congress Tuesday.

Is she right? Or is this scare mongering? First, let me remind readers as I've posted about before, Trump's fiscal plans are inherently unstable.   The reason is that the plans as they are include virtually NO new revenue and monstrous spending including on increasing the military proportion of the GDP. He also wants an "across the board" tax cut starting with increasing the current standard deduction of $12,600 (for joint filers) now, to $30,000.  These deductions, by the way, are what you use when you don't itemize.   At the same time, Trump would dump the $ 4, 050 write off claim for each member of a household, e.g. the "personal exemption". He also wants to simplify the tax code by changing from the current seven brackets - ranging from 10 percent to 39.6 % to just three brackets.

In addition, if he gets the help needed from congress, he will scrap in turn: 1) the AMT or alternative minimum tax, 2) the estate tax and 3) the 3.8% surtax on investment income - as part of abolishing Obamacare.  As regards the corporate tax rate he would lower it from the current 35 % (actually few businesses pay that rate, most are effectively 5%) and replace it with a 15 percent rate.  He has also floated the idea of applying this not only to big corporations but small business owners and the self-employed, including dentists, law partners, and Trump himself.

While all this sounds terrific in theory it carries a steep price tag, which you can get an idea of by studying the graphic below. That is, the national debt as a percentage of GDP would explode through the roof - exceeding the size of the entire U.S. economy within ten years. See e.g.


But long before that staggering event to come, latent fiscal instabilities are bound to play havoc in a stock bubble environment. This includes not only Trump's spending plans but the enormous  uncertainty to do with the ACA and its repeal, and what to replace it with. As I posted on December 23rd, the two main hospital lobbies - the American Hospital Association and the Federation of American Hospitals-- have released dovetailing studies that their members will suffer more than $200 billion in potential losses if the health care law is repealed without restoring funding cuts that were used to finance coverage expansion.

In other words, the GOP and Trumpsters are in a real hammerlock. You can't just dismiss $200b in losses to one market sector and not create serious stock market instability. You can't just take away the coverage of 20 million people and not expect political blowback. In the first case, there is the potential for a major correction or crash given the bubble that exists in the DOW and S&P 500.

In addition, and definitely not to be discounted, there is a sobering assessment is from the American Academy of Actuaries. The organization said that delaying the effective date of a repeal while developing a replacement would trigger a crisis for the individual health care market.  This is where millions who don't have job-based coverage (including many unemployed Trump voters) can buy policies. This includes more than 10 million with current access to Healthcare.gov.

Factor into this that the current market is way overvalued with P/E ratios through the stratosphere, and you have the earmarks for a crash and even major recession. (This is what actually prompted George Soros for taking a "bear position" after Trump's election for which he is being mocked by the "smartypants" now with the DOW at 20,000 or higher. But what will this lot do when the DOW crashes to 10,000?)

This wasn't merely an abstract exercise for Charlie Farrell, the CEO of Northstar Investment Advisors LLC, writing in The Denver Post Business pages three weeks ago. ('Do You Have The Stomach For The Next Stock Crash?')  He wrote:

"For the past eight years, investors have enjoyed a steadily increasing stock market. Memories of the 2008 crisis have largely faded and many investors have forgotten that sinking feeling. But if you want to avoid the mistakes investors made during the last crisis, you should start thinking bad thoughts. Yes., bad thoughts. Start training your brain and your guts for the next stock market decline. Why? Because big stock market crashes and declines happen and they pose a big threat to your wealth."

Does he know something about the Trump agenda others don't. Hardly! Well informed investors would already have processed the Trumpies want to roll back the Dodd-Frank protections that were implemented after the 2008 crash and banking crisis. They'd also know how the fiduciary rule to protect investors has been diluted and some Trumpies want it gutted entirely. As finance columnist Jill Schlesinger put it in her recent column ('Vital Fiduciary Rule Under Fire', D. Post, Feb. 5):

"I thought of the word 'shame' when news emerged that the Republicans in Congress were launching an effort to delay and perhaps kill portions of the Department of Labor's fiduciary rule, which is scheduled to begin implementation on April 10. The potential about face is a slap in the face to anyone who cares about investor protections."

So those two changes alone, to banking regs and the fiduciary rule, could wreak havoc with many. NOw add in the fact the stock market is 250% beyond what it was in late 2009 and you have the makings for real worry. Why?  Because a market that has increased 25% or more a year is in dangerous territory.

Arch-forecaster Nate Silver, in his book, The Signal and the Noise- Why So Many Predictions Fail But Some Don’t  warns (p. 347):

"Of the eight times in which the S&P 500 has increased at a rate much faster than its historical average over a 5-year period , five cases were followed by a severe and notorious crash, such as the Great Depression and the Black Monday crash of 1987”.

Interestingly, two of the largest stock market dives have followed two of the biggest bubbles: the first of 37.85 percent and on the heels of the bubble that formed from Jan. 14, 2000 to Oct. 9, 2002, and the second of 58.78 percent that formed (mainly due to the housing bubble) from Oct. 9, 2007 to March 9, 2009. People should also be leery of the S&P increasing beyond the range Silver notes over a 5-year period, and the DOW is also a proxy of that. In other words,   red alarms ought to have sounded after if it hits 20,000 - and especially if it rises further.  Are we in a "bubble"?  Check out some of the more current stats using Google and then you decide.  But bear in mind when most offerings are over-priced it is likely bubble territory.

All like now, specially with Trump's daffy economic plans in the pipeline (once he settles down,  if he ever does) and potential repeal of the ACA, people ought to be re-assessing their risk tolerance. Can you really afford to lose 75 percent of your 401k  if the market came a crapper again?

Author Farrell himself is blunt about how you will know if you're ready for stomach churning crash. He asks:

"Do you have the guts to see your stocks decline by 50 percent and stick with them? Most people don't".

He adds that if you are in the market - say with a 401k - and near retirement, you need to have at least three months of cash reserves. Some advisors like Schlesinger say six months is more like it.  She also insists those planning on hiring financial advisors need to grill them thoroughly about the investments being proposed and especially how they are being paid. If it is via commissions on sales, they may not have your best interests at heart.

See also:

http://smirkingchimp.com/thread/chuck-collins/71355/wall-street-hopes-you-ve-forgotten-the-crash-already