"The Stock Market Won't Crash, Yet" - The Barron's Cover Strikes Again
Submitted by Tyler Durden on 05/28/2016 10:41 -0400
When it comes to Wall Street superstitions, few things - even fading the most recent Dennis Gartman call - beats the Barron's front page article jinx: just when you think something will never happen, Barron's confirms it on the cover, virtually assuring that it does.
In which case, be afraid bulls, be very afraid, because if past is prologue Barron's just green-lit the next crash.
The Barron's argument:
The current period of gain has lasted more than seven years and propelled the stock market averages to new highs. But since the peak of last May, the market has faltered, briefly touching double-digit lows early this year. Bears have begun to wonder whether the crash to which the market is always headed is just ahead.
Well, not anymore. In the article, author Gene Epstein unveils such quantitative pearls as:
[T]here has been just one market crash over the past 35 years that wasn’t accompanied by a recession: the 12-month decline of more than 20% from August 1987 through August 1988. Arithmetically, this crash would not have happened were it not for the largest one-day plunge in U.S. history: Black Monday, Oct. 19, 1987, when the market tumbled more than 20% in a single day, the only one-day bear market on record. The previous crash on a single day that was at all comparable ran in the low-double digits and occurred 58 years earlier, in October 1929.
if a one-day crash does strike every 58 years,the next one is due 58 years from 1987, or in 2045. So if we treat the Black Monday–induced crash as an outlier, we are left with just three market crashes over the past 36 years plus one near crash, all four coinciding with the past four recessions.
So smooth sailing for the next 30 or so years then? He then presents what he believes are various reasons why there will be no crash this time. Among these are: stocks valuations are "not too exuberant"; that the inflation-adjusted house price is not above previous peak; that the yield curve is not flat or inverted; and that the price of oil is not surging.
One can, of course, debunk each one of these reasons simplistically with the following rebuttals:
- According to Goldman the median stock has never been more overvalued;
- The average house price is not above the previous peak simple because the vast majority of Americans can no longer afford to purchase a house in the US (just ask the Millennials) whether due to lack of demand or due to tight credit conditions; instead potential young buyers are forced to rent, leading to an explosion in asking rents; or live with their parents (see "More Young Americans Live With Their Parents Than At Any Time Since The Great Depression"). Finally, when it comes to wealthy investors (mostly from abroad) lapping up $1+ million houses, the housing bubble has never been bigger;
- If one strips away the impact of the constant for the past 8 years Fed interventions, the yield curve, as visualized by the 3m5s OIS adjusted curve, is already inverted.
- As for oil, the argument is even simpler: the collapse in the prices was the result of a recession, one which hit China in 2015 when its actual, real GDPdipped negative. The only reason oil has rebounded according to many is as a result of China's unprecedented injection of $1 trillion in new loans in the economy in the first quarter (in addition to the Saudi strategy of flooding the market with excess oil). And now comes the hangover.
Whether it is the "Shanghai Accord", or the BOJ's attempts at creative monetary policy a la NIRP (which ended up being a huge mistake), or constant Fed president jawboning, or hints of helicopter money, the fact simply is that there is no market left: there is simply frontrunning of central bank intentions to either push stocks higher or lower.
That's it, and with every "policy failure" intervention, central banker credibility gets shorter and shorter, to the point where even the G-7 has to step in and say fiscal stimulus will be critical as monetary policy has lost power to push growth higher.
As such, in a "market" like this one, any attempts to predict future prices are not only naive and silly, but futile. It is, in fact, the same as saying that the market will crash just because Barron's cover page says it won't.