Tag Archives: Market crashes

Risk Was Never Low, It Was Only Hidden, by Charles Hugh Smith

Posted on October 5, 2021 | Leave a comment

“Sure things” are the riskiest investments ever. From Charles Hugh Smith at oftwominds.com:

The vast majority of market participants are about as ready for a semi-random “volatility event” as the dinosaurs were for the meteor strike that doomed them to oblivion.

Judging by euphoric gambler–oops I mean “investor”–sentiment and measures of volatility, risk of a market drop has been near-zero for the past 18 months. But risk was never actually low, it was only hidden. When it emerges, it’s a surprise only to those who mistakenly thought risk had vanished.

As Benoit Mandelbrot explained in his book The (Mis)behavior of Markets, crashes are an intrinsic feature of systems like stock markets. These risks are not generated by specific human actions or sentiment but by the system itself.

Just as humans make subconscious decisions and then conjure up quasi-rational justifications for their choice after the fact, market participants always conjure up some event or decision as the cause of the crash. Favorites include central bank policy error, black swan events (“bolts from the blue”), earnings surprises, technical levels were breached, and so on.

Mandelbrot’s insights reveal why markets crash without any policy error or other fabricated- after-the-fact justification: as those who witnessed the collapse of Japan’s massive credit-asset bubble in 1989-1990 observed, markets just stopped going up and started falling.

Risk is a reflection of many dynamics, but the key dynamic few participants seem to understand is the inherent instability of complex systems: surface tranquility is not an accurate reflection of the actual state of stability or risk, no mater how long the period of tranquility stretches.

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The Smart Money Has Already Sold, by Charles Hugh Smith

Posted on August 19, 2021 | Leave a comment

A crash is way past due. From Charles Hugh Smith at oftwominds.com:

Generations of punters have learned the hard way that their unwary greed is the tool the ‘Smart Money’ uses to separate them from their cash and capital.

The game is as old as the stock market: the Smart Money recognizes the top is in, and in order to sell all their shares, they need to recruit bagholders to buy their shares and hold them all the way down. Once the catastrophic losses have been taken by the bagholders, then the Smart Money slowly builds up positions amidst the wreckage.

It’s easy to become a bagholder; all you need is greed. Been there, done that, for the siren songs luring bagholders to their ruin are compelling and numerous. The Smart Money doesn’t have to mislead anyone; all they do is let the strident super-Bulls talk up the riches to be had by all those who buy today and hold indefinitely, and human greed does the rest.

Siren songs to lure the unwary greedy include these classics:

1. The Fed has our back, i.e. the Fed will never let stocks go down, so there’s no risk in buying more shares today.

2. Innovation stocks can only go higher as they create new industries that are the future of the economy.

3. Institutional buyers are coming in, and that means prices can only go higher.

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Posted in Capitalism, Financial markets, Investing, Propaganda

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Anatomy of a Bubble and Crash, by Charles Hugh Smith

Posted on February 23, 2021 | Leave a comment

Bubble markets generally crash back to their point of lift off, which can mean an over 90 percent drop. From Charles Hugh Smith at oftwominds.com:

Needless to say, few are expecting bubble symmetry to manifest now, because, well, of course, “this time it’s different.” Indeed. It’s always different and yet always the same, too.

Let’s indulge in some basic logic:

1. All speculative bubbles pop, regardless of source, time or place. (100% of all historical evidence supports this.)

2. The current “Everything Bubble” is a speculative bubble.

3. Therefore the current speculative bubble will pop.

Now that we got that out of the way, the question becomes: how will the crash play out? There is no way to forecast precisely when or how the current speculative bubble will crash, but history offers a few potential templates.

The dot-com bubble offers a classic example of bubble symmetry and scale invariance. (See chart below.) Note how the bubble arose in two legs of X duration and it crashed in two symmetrical legs of X duration. In both legs, the crash returned to the same levels from which the bubble took off.

Scale invariance: this same symmetry is visible in bubbles that soar and crash in 6 days, 6 months or 6 years. The symmetry also holds whether the instrument soars from $1 to $5 or $100 to $500, or whether it is in index, commodity or equity. (See charts of Cisco Systems (CSCO) in 2000 and Tesla (TSLA) in 2020 below.)

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Posted in Business, Collapse, Currencies, Debt, Economics, Financial markets

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The Fascinating Psychology of Blowoff Tops, by Charles Hugh Smith

Posted on January 14, 2018 | Leave a comment

Parabolic market runs are fun to watch, but not the inevitable crashes that follow. From Charles Hugh Smith at oftwominds.com:

Central banks have guaranteed a bubble collapse is the only possible output of the system they’ve created.
The psychology of blowoff tops in asset bubbles is fascinating: let’s start with the first requirement of a move qualifying as a blowoff top, which is the vast majority of participants deny the move is a blowoff top.
Exhibit 1: a chart of the Dow Jones Industrial Average (DJ-30):
Is there any other description of this parabolic ascent other than “blowoff top” that isn’t absurdly misleading? Can anyone claim this is just a typical Bull market? There is nothing even remotely typical about the record RSI (relative strength index), record Bull-Bear ratio, and so on, especially after a near-record run of 9 years.
The few who do grudgingly acknowledge this parabolic move might be a blowoff top are positive that it has many more months to run. This is the second requirement of qualifying as a blowoff top: the widespread confidence that the Bull advance has years more to run, and if not years, then many months.
In the 1999 dot-com blowoff top, participants believed the Internet would grow at phenomenal rates for years to come, and thus the parabolic move higher was fully rational.
In the housing bubble’s 2006-07 blowoff top, a variety of justifications of soaring valuations and frantic flipping were accepted as self-evident.
In the present blowoff top, the received wisdom holds that global growth is just getting started, and corporate profits will soar in 2018. Therefore current sky-high valuations are not just rational, they clearly have plenty of room to rise much higher.
Skeptics are derided as perma-bears who’ve been wrong for 9 long years. This is the third requirement of qualifying as a blowoff top: Bears and other skeptics are mocked and/or dismissed as irrelevant.

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If This is 1929… by Michael Batnick

Posted on August 8, 2017 | 3 comments

The market is richly valued, only in 2000 and 1929 has it been more expensive, and we know how those years turned out. From Michael Batnick at theirrelevantinvestor.com:

Eight days before the market bottomed in July 1932, Ben Graham wrote an article in Forbes, Should Rich But Losing Corporations Be Liquidated? In it he wrote, “More than one industrial company in three selling for less than its net current assets, with a large number quoted at less than their unencumbered cash.” At a time when the CAPE ratio was just above 5, many businesses were worth more dead than alive.

In the ten-years leading up to the crash in 1929, the CAPE ratio went from a low of 5.02 up to 32.56. Today, it’s as close to the 1929 peak as it’s ever been, with the exception of the late 1990s. “The CAPE ratio in the United States has never gotten above 30 without a subsequent market crash” would be a true statement. Perhaps misleading, with a sample size of two, but true nonetheless. So is it possible that today is 1929 redux?

What would have to happen for companies to be selling for less than their net current assets? I don’t have the slightest idea. An asset bubble built on the back of artificially low rates seems like the obvious answer, so that can’t be right, but if it is, I warned ya. But honestly, for the market to fall 90%, I’m thinking aliens, an asteroid, or another world war seem the most likely culprits.

hoover-2

The aftermath of the depression was a gold mine for value investors. Well, really for any investors, but for those that measured intrinsic value, it was nearly impossible to miss. From The White Sharks of Wall Street:

Here was a company being offered for sale for less than the cash in its pocket! All a fellow had to do was borrow the purchase price, buy the company, and use the company’s own cash to pay off the loan- it was like getting the company for free. Why wasn’t everyone lining up to bid against him? The answer lies partly in the psychological baggage that American industry carried out of the Depression. Despite the almost unprecedented prosperity brought by government wartime contracts, many American business leaders believed that the nation would slide promptly back into a depression the moment the war was over. A gamble on the scale that Evans was prepared to take was simply unthinkable for most of them. The engine for the deal, after all, was debt. And going into debt to finance a speculative venture- well, wasn’t that what the 1920s had been about? And didn’t it end very badly?

To continue reading: If This is 1929…

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Posted in Collapse, Financial markets, Investing

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He Said That? 8/24/15

Posted on August 24, 2015 | Leave a comment

From Charles P. Kindleberger (1910-2003), economic historian:

It happens that crashes and panics often are precipitated by the revelation of some misfeasance, malfeasance, or malversation (the corruption of officials) engendered during the mania. It seems clear from the historical record that swindles are a response to the greedy appetite for wealth stimulated by the boom. And as the monetary system gets stretched, institutions lose liquidity, and unsuccessful swindles are about to be revealed, the temptation to take the money and run becomes virtually irresistible. It is difficult to write on this subject without permitting the typewriter to drip with irony. An attempt will be made.

Manias, Panics, and Crashes: A History of Financial Crises (Macmillan, 1978)

It’s only a matter of time before the swindles at the rotten core of our financial system are revealed, although we already know the two biggest swindles: government debt and central banking.

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