An “Extreme Warning” From Our Doom Index, by Bill Bonner

Here’s another bearish prognostication, from Bill Bonner at bonnerandpartners.com:

BALTIMORE – When we left you yesterday, we were describing why the situation is getting dangerous for investors, and how the lessons learned over the last 30 years may backfire in the next crisis.

“Dow over 26,000… bitcoin under $10,000,” reports this morning’s news… “but could crypto panic spill over into stocks?”

Investors are accustomed to depending on the Greenspan-Bernanke-Yellen Put… which is to say, they are pretty sure that the feds will come in with more booze when the party starts to flag.

“Buy the dip,” they tell each other, confident that the feds can be counted on in a pinch.

Many think the recently passed tax bill is 80-proof, too – sure to rev things up by putting more money in the hands of shareholders and consumers.

Maybe it will raise stock prices. Or maybe it won’t. What it won’t do is make the next crisis disappear.

Bad Tidings

We hate to be the bearer of bad tidings, but bad tidings are all we have to bear.

Corporate America is already pretty flush. The price-to-earnings (P/E) ratio for the S&P 500 is now 70% above its long-term average.

In fact, the price of stocks relative to earnings has only been near this high three times in the last 118 years… each time caused by the aforementioned Fed party favors.

And if stocks go higher, it merely gives them further to fall.

In order to get back to more traditional levels, notes Martin Feldstein in yesterday’s Wall Street Journal, the next bear market would have to wipe out some $10 trillion of stock market wealth.

This, he says, would take 2% off annual GDP… tipping the country into recession.

Extreme Warning

How close is this crisis?

We turn to our Doom Index, put together by our ace researcher, Joe Withrow:

The Doom Index spiked back up to “7” this month – our extreme warning level.

After a surprisingly expansive third quarter in 2017, credit growth fell back to 1.6% in the fourth quarter. Paraphrasing your friend and economist Richard Duncan, bad things happen when credit growth falls below 2%.

Looking at the credit markets, corporate bond downgrades continued to come in at an elevated level last quarter. And junk bonds are starting to show some cracks, falling more than 1% on the quarter. That said, junk bonds still closed out 2017 in positive territory.

To continue reading: An “Extreme Warning” From Our Doom Index

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