How long before the market crashes?

There are several indicators now that show the economy is heading south and that the stock market is substantially over extended. The question is not if the market will collapse, but when. Personally I think it will happen in the next year, what is your opinion?

jdog said:

There are several indicators now that show the economy is heading south and that the stock market is substantially over extended. The question is not if the market will collapse, but when. Personally I think it will happen in the next year, what is your opinion?

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What indicators are you seeing?

Soon... I would say within 5 years, probably within 2 years.

Based on how wealth is being rapidly sequestered and the public sector is ailing, the people who are in the know are already building their forts.

God help the rest of us. I'm happy I paid off my mortgage otherwise I'd be really nervous.

Which indicators, what sectors are over extended? Do you mean the cyclical economy is cyclical? Or are you reading too many of those sponsored adds on front pages?

EnigmaO01 said:

What indicators are you seeing?

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The most telling is the divergence between stock price and earnings. Earnings have been falling since 2014 while stock prices have been increasing. At some point they have to converge again, so either stock prices must fall or earnings must increase radically.

Margin rates are at all time highs, even higher than 2007.

Consumer credit is at all time highs.

The Fed has little or no ability to stimulate the economy with lower interest rates with rates already at 1/2%.

This expansion is overextended by normal standards and is overdue for correction.

EnigmaO01 said:

What indicators are you seeing?

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1st indicator, no Fed raise in the interest rate means Yellen isn't confident. The promised one later in the year, I doubt will happen.

If we can't raise it, then we do not have the tactic of lowering them during recessions, which means no ability to make borrowing easier without resorting to the VERY precarious practice of negative interest rates.

Lachean said:

If we can't raise it, then we do not have the tactic of lowering them during recessions, which means no ability to make borrowing easier without resorting to the VERY precarious practice of negative interest rates.

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Negative interest rates are a function of credit easing, such that it induces financial institutions to sell their notes and bonds to the central bank. It's not about making borrowing easier... it's about creating an environment where holding risk free assets (like government bonds) is less attractive. Negative rates are indicative of a supply mismatch.

jdog said:

There are several indicators now that show the economy is heading south and that the stock market is substantially over extended. The question is not if the market will collapse, but when. Personally I think it will happen in the next year, what is your opinion?

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5-7 years from a major "adjustment". It won't be a crash, but it will be a barrel roll.

Kushinator said:

Negative interest rates are a function of credit easing, such that it induces financial institutions to sell their notes and bonds to the central bank. It's not about making borrowing easier... it's about creating an environment where holding risk free assets (like government bonds) is less attractive. Negative rates are indicative of a supply mismatch.

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Negative rates are counterproductive in that they are designed to force people into risk assets, but do the opposite. In addition, they have a negative affect on the older wealthier people who lose confidence to spend when they cannot invest safely after planning to do so their entire life.
It is the older people who have all the money, but they are afraid to spend freely, because low/negative interest rates scare the hell out of them, so they hoard their money.

These damn Keynesian's are idiots. They do not understand human phycology at all.

jdog said:

Negative rates are counterproductive in that they are designed to force people into risk assets, but do the opposite. In addition, they have a negative affect on the older wealthier people who lose confidence to spend when they cannot invest safely after planning to do so their entire life.
It is the older people who have all the money, but they are afraid to spend freely, because low/negative interest rates scare the hell out of them, so they hoard their money.

These damn Keynesian's are idiots. They do not understand human phycology at all.

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:roll:

I disagree.

jdog said:

There are several indicators now that show the economy is heading south and that the stock market is substantially over extended. The question is not if the market will collapse, but when. Personally I think it will happen in the next year, what is your opinion?

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Not sure it is the economy is heading south as much as the market is over it's skis. Similar to the last two bubbles. You feel a need to participate while prices roar ahead, then wake up one day and the rug is pulled out.

Dont know, but I would guess 5% chance by the end of 2017, 50%+ by 2025.

This will be the next Great Depression, almost positive.

Kushinator said:

:roll:

I disagree.

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Not much of a rebuttal, but then you do not have much in the way of a valid position....

My uncle is a broker. The only time the stock market crashed was during the great depression. We got through it. Any other time the stock market has recovered. It's not a big deal and a self proclaimed prophecy because the crash could be the result of other factors.

washunut said:

Not sure it is the economy is heading south as much as the market is over it's skis. Similar to the last two bubbles. You feel a need to participate while prices roar ahead, then wake up one day and the rug is pulled out.

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I usually time the market cycles by the desperation indicated by lending standards. As an economic cycle gets long in the tooth, the establishment becomes nervous and lowers lending standards to prolong the cycle. This desperation ultimately ensures the end of the expansion as the sub prime credit growth ensures the credit default rate will increase at some point in the future causing chaos in the bond and pension markets. That is where we are now.

jdog said:

I usually time the market cycles by the desperation indicated by lending standards. As an economic cycle gets long in the tooth, the establishment becomes nervous and lowers lending standards to prolong the cycle. This desperation ultimately ensures the end of the expansion as the sub prime credit growth ensures the credit default rate will increase at some point in the future causing chaos in the bond and pension markets. That is where we are now.

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There are a lot more constraints on banks regarding the quality of loans they can make. I agree we are seeing more sub prime in autos. College loans are a mess but the government is probably going to pick up the tab on that one, especially is Clinton is elected. The problem may come when the Fed is forced to move because they can no longer ignore inflation. Then the trillions of dollars of government debt will crush holders, along with foreign governments and companies that hold debt in dollars. Or it could be debt held by energy companies if the price of oil heads back to the twenties.

Finance is always a game of condfinence, once the bubble bursts for whatever reason is when the markets will fall apart.

jdog said:

The most telling is the divergence between stock price and earnings. Earnings have been falling since 2014 while stock prices have been increasing. At some point they have to converge again, so either stock prices must fall or earnings must increase radically.

Margin rates are at all time highs, even higher than 2007.

Consumer credit is at all time highs.

The Fed has little or no ability to stimulate the economy with lower interest rates with rates already at 1/2%.

This expansion is overextended by normal standards and is overdue for correction.

Click to expand...

Which means that interest rates are going be going up, probably early next year, for me that is good my investments make more when they are up, someone always makes money when the economy is down, which, other than interest rates, it has been since 2008 and will not be changing any time soon.
Oh when will it crash? My guess is that we are on a path that a crash is almost certain and it will not be more than 4-5 years, maybe less.

The markets are being propped up by the central banks of the world. If you don't know that by now, you are not paying attention.

Forget fundamentals, they matter not in this debt-fuelled 'boom'. It's all about central banks...ALL OF IT.

As long as idiotic economists have faith in central banks, the market's will not properly tank...guaranteed.

washunut said:

There are a lot more constraints on banks regarding the quality of loans they can make. I agree we are seeing more sub prime in autos. College loans are a mess but the government is probably going to pick up the tab on that one, especially is Clinton is elected. The problem may come when the Fed is forced to move because they can no longer ignore inflation. Then the trillions of dollars of government debt will crush holders, along with foreign governments and companies that hold debt in dollars. Or it could be debt held by energy companies if the price of oil heads back to the twenties.

Finance is always a game of condfinence, once the bubble bursts for whatever reason is when the markets will fall apart.

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The credit standards were fairly strict in 2009-2010, they began to loosen soon after that and have reached "do you have a pulse" level today. The incidence of fraud in credit applications today is very close to what it was before the housing collapse. The reason for that is that the credit system was never fixed. The banks were rewarded for their criminality and none of the brokers who committed fraud were ever prosecuted.

The system was never reformed and the pension funds and bond funds are still buying every bad loan the brokers write because they are desperate for yield in a vain attempt to meet the pension projections that they will never meet.
Today, the credit industry is dependent upon the sub prime market and that is a recipe for failure.

•The first mortgage default rate was 1.28 percent in September, up from 1.23 percent in August.
•The second mortgage default rate was 0.69 percent in September, up from 0.57 percent in August.
•The auto loan default rate was 1.15 percent in September, up from 1.11 percent in August.
•The bank card default rate was 3.14 percent in September, up from 3.12 percent in August.

Once this begins, it feeds on itself until collapse is inevitable.

Casper said:

Which means that interest rates are going be going up, probably early next year, for me that is good my investments make more when they are up, someone always makes money when the economy is down, which, other than interest rates, it has been since 2008 and will not be changing any time soon.
Oh when will it crash? My guess is that we are on a path that a crash is almost certain and it will not be more than 4-5 years, maybe less.

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I hope you are right about interest rates, but I would not count on it. It is contrary to what we have seen from the world central banks up to this time. I would time the crash at between 3 mos. and 15 mos. Home sales and prices are already falling off, corporate profits are down, orders are down, Deutsche Bank is a hop, skip, and a jump from being Lehman Bros. Oil industry defaults are mounting, Canada, Australia, are joining Brazil, Venezuela, Russia, Japan and Greece in recession. That is a lot of risk baked into the cake...

jdog said:

I hope you are right about interest rates, but I would not count on it. It is contrary to what we have seen from the world central banks up to this time. I would time the crash at between 3 mos. and 15 mos. Home sales and prices are already falling off, corporate profits are down, orders are down, Deutsche Bank is a hop, skip, and a jump from being Lehman Bros. Oil industry defaults are mounting, Canada, Australia, are joining Brazil, Venezuela, Russia, Japan and Greece in recession. That is a lot of risk baked into the cake...

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Unfortunately, we will see.

It will be interesting to see what happens with Deutsche Bank in the next few weeks. If we begin to see panic and the collapse of Deutsche Bank, it will make Lehman look like small potatoes. News today is that the Italian government is filing charges against 6 executives of Deutsch Bank, and it appear as if the "settlement news" on Friday was fabricated.

jdog said:

It will be interesting to see what happens with Deutsche Bank in the next few weeks. If we begin to see panic and the collapse of Deutsche Bank, it will make Lehman look like small potatoes. News today is that the Italian government is filing charges against 6 executives of Deutsch Bank, and it appear as if the "settlement news" on Friday was fabricated.

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The ECB will not make the same mistake the Fed made with Lehman. Central banks are there to provide liquidity during panics. The Fed w/ Bernanke and failed for political reasons. ECB has learned from that nearly fatal mistake.

washunut said:

The ECB will not make the same mistake the Fed made with Lehman. Central banks are there to provide liquidity during panics. The Fed w/ Bernanke and failed for political reasons. ECB has learned from that nearly fatal mistake.

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If they do it will be political suicide for Merkel http://www.google.com/url?sa=t&rct=...kj1F3jHAw-gj2Pp3CiRGOg&bvm=bv.134495766,d.eWE

It would mean a 180 degree reversal of policy as well as a complete loss of credibility....

jdog said:

There are several indicators now that show the economy is heading south and that the stock market is substantially over extended. The question is not if the market will collapse, but when. Personally I think it will happen in the next year, what is your opinion?

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There are segments of the "market," such as consumer staples and utilities, that seem to be at stretched valuations, but I'm still finding value in this market. For example, earlier this year I bought shares of United Therapeutics (symbol UTHR), a well-managed orphan drug company. This company has a P/E of 5.71, P/CF of 7.47, and an ROE of 70.41. (For the financially non-savvy, the last figure represents how much the company returned on the stockholders' investment in the company, or equity. It basically returned seventy cents for every dollar of invested equity in one year. This is all the more remarkable in that this company has no debt, and thus lacked the advantage of leverage.) A couple other examples: Sanderson Farms (SAFM): P/CF of 7.44, ROE of 12.78, and no debt; AdvanSix (ASIX), a chemical company recently spun off from Honeywell. This company has a P/E of 5.85, a P/CF of 4.56, and no debt. It's suffering because it isn't sexy and institutions that hold Honeywell in, say, an index fund or ETF, are getting it out of their portfolios. That presents an opportunity for patient investors who aren't happy with what banks are paying on CDs.

So do I think there's going to be a market "crash"? No. There will be volatility and some segments will get hammered (as we saw with energy and mining stocks, which have skewed the overall market P/E), but you don't normally get crashes when people are skittish and expecting the sky to fall. Stock ownership by the broader public is well below where it was just before the last crash. Crashes occur when people are giddy, leveraged to their eyeballs, and convinced that "this time it's different."