When Markets Crash: What’s Another Thousand Points, Either Way?

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by David Stockman

“One of the good things about running as a populist firebrand is that if the present doesn’t offer you enough disasters to exploit, you can always invite your supporters to live in the imaginary disasters of the future.

– Chris Stirewalt, “Every Man a King: 

A Short, Colorful History of American Populists” (2018)

“Oh, boy… here we go again… again! It was minus 600 for the Dow Futures this morning less than 45 minutes ahead of the open, and we’re off quadruple digits on the Dow Jones Industrial Average at a quarter after one. I’m sure, though, that some monetary central planner somewhere has their liquidity at the ready to spray all over the situation…

So, we’ll see another bounce, another big one, and then another huge selloff. Alas, each selloff seems to get huger than the last. When’s it simply going to break, like it did less than a century ago? Had what happened in 2008-09 played out based on the tenets of American capitalism, we wouldn’t be having this conversation. The leveraged would have been liquidated. The strong would have survived. The weak would have been consumed.

We’re talking about Wall Street here. The Welfare State is still there for Main Street. The trouble is, we’ve extended the same sort of succor to speculators, traders, and straight-up grifters we do to single moms, struggling dads, and vulnerable families. That’s why so many “feel the Bern.”

Sleepy Joe Biden offers restoration of Imperial Washington’s ossified 20th century consensus. The Tweeter-in-Chief always threatens to do things like “drain the swamp,” but, really, he’s just grifting off it. Our institutions are crumbling, and this is the choice they’re foisting on the American electorate… God bless us all.

In the meantime, here’s Michael Coolbaugh with some prescient words, again…

By Michael Coolbaugh

“This past October, I gave a presentation at the Irrational Economic Summit in Washington, D.C. During my time on stage, I talked a lot about making bets on really big shifts and how we can try to identify these moments of change. At the heart of my presentation was this concept of “acceleration.” It’s a very important tool that I use to guide investment recommendations through my research firm, Element Macro Research, as well as a core factor for my Delta Profit Trader subscribers.

I use “acceleration” because I firmly believe that it is a reliable market signal that there has been a dramatic shift in sentiment. But don’t just take my word for it… Here are a few excerpts from the legendary value investor Benjamin Graham’s testimony to the U.S. Senate Committee on Banking and Currency in 1955: “In my view, the fundamental reason for the rise was the swing from doubt to confidence – from emphasis on the risks in common stocks to the emphasis on the opportunities in common stocks. This change in sentiment produced a change in the public’s valuation of stocks, especially in what it considered suitable multipliers of current earnings. My studies have led to the conclusion that sentiment alone, not supported by any visible change in value, will produce a swing on the order of 100 to 250 or 100 to 300 in price.”

That’s right. The mentor to Warren Buffett, everybody’s go-to rational investor, acknowledges that swings in value are solely the result of shifts in sentiment. So, why do I bring this up?

I mention it because, while most people seem to suggest that the recent dip – and believe me, that’s all it was in the grand scheme of things – should be bought as we race to ever newer heights, there’s a distinct possibility that this recent period of price acceleration was a market signal that sentiment was beginning to shift.

But I don’t just mean a temporary shift in sentiment… As I’ve touched on consistently over the past few weeks, something big has been rumbling beneath the surface, and a lot of it has to do with the vulnerabilities within the financial system. Here’s a look at the popular “Buffett Indicator”:

Besides telling us that stocks are wildly overvalued relative to the goods and service produced here in the United States, this graphic tells us something about the vulnerabilities of financial assets. It suggests that, even if we were to experience a mild recession – which is a big “IF” considering the amount of debt in the current system – equity prices could get clobbered. It’s exactly what happened in 2000, with about half the debt load we see today.

But it’s not just the one instance in 2000. It’s also what happened in Japan back in the early 1990s. Here’s what legendary macro trader Paul Tudor Jones, had to say about his bet against the Japanese Nikkei in January 1989: “The Japanese market right now is 127% of GNP. And if there is going to be a problem – if there is going to be an external shock that creates a problem here – it is going to come from Japan. But every time it breaks 5%, I will sell it. And it will probably cost me 4% to 6%. But it is going to break. I will catch it and I will get paid 25% or 30% or 35%.”

For those of you who don’t follow Japanese equities, here’s what happened next…

But what was Paul Tudor Jones talking about when he said, “But every time it breaks 5%, I will sell it…”? That was acceleration. That was his way of looking for a market signal to suggest when there may be a dramatic shift to market sentiment underway.

Now, I remind you, today this ratio sits at 145% in the United States.And – wouldn’t you know it – my acceleration model generated a ‘sell’ signal for the S&P 500 Index on February 24? To be fair, we’ve seen such “sell” signals from my model on a handful of occasions since October 2018 without a cataclysmic decline. But ask yourself, since our signal on October 4, 2018, have you really missed out on a whole lot? I’d argue “no,” seeing as short-term Treasuries have given you just about the same return with less than half the volatility over this same time period…

So, with everyone clamoring that we should simply “buy the dip” and carry on our merry way after a 10% correction… Let’s not forget that such a rapid drop is a sign of acceleration. And let’s remind ourselves of what happened to all those Nikkei dip-buyers in the early ’90s. With hidden vulnerabilities around every corner, this recent downwards acceleration could be just the beginning of something much bigger. To common sense…”

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