The Stock Market Is On The Verge of Another Historic Collapse: Things Keeping Stocks From Corrections Are Also The Ingredients For A Stock Market Crash

3 Things Investors Are Telling Themselves To Explain The Divergence Between Stocks And The Economy

“Four months into the year, we are confronted by two indisputable facts,” says BofA Merrill Lynch rates guru David Woo. “One, U.S. data is weak. Two, markets are no longer troubled by weak U.S. data.”

The question Woo poses in his latest note to clients is simple: “Does anyone still care about weak data?”

Woo says no, citing three things clients are saying to rationalize this apparent disconnect:

Clients who believe we pay too much attention to weak data have laid out three reasons why we are wrong.

One, data points to slow growth ahead but there are no signs yet for a very sharp slowdown (“bad news is not bad enough“).

Two, weak data means the Fed will be on hold for longer (“bad news is good news“).

Three, the impact of US fiscal tightening is ultimately transitory and when it starts to fade, the US economy will roar (“good news will follow bad news“).

Woo concedes that these are all actually good points in that they coincide with the BAML house view on the outlook for markets and the economy.

Why the Next Stock Market Crash Will Happen Any Day Now

There is overwhelming evidence that the next stock market crash could strike any day now, and a growing number of investors  are turning to a noted economist to prepare for the “unthinkable.”

The message is clear: Despite the Dow hitting pre-crash highs, companies reporting positive earnings, and the financial media saying we are looking at the “beginning of a new bull market,” thestock market is on the verge of another historic collapse.

The evidence is in a group of charts released by some of the biggest names on Wall Street.
Individually, these charts may not mean much. But taken collectively, they are simply too much for any investor to ignore.

The first chart shows that the annual S&P 500 consensus earnings-per-share is expected to come in much lower than originally thought. Estimates started out near $125 in January 2012, and have now fallen 10% to only $112. Despite the warning sign of falling earnings, the S&P continues to climb.

…

Paul B. Farrell: Flip houses to get rich, retire before next crash

….In 2006, new predictions of housing collapse, ‘full-scale rout’

Former Goldman Sachs investment banker John Talbott’s book: “Sell Now! The End of the Housing Bubble.” His statistics covered America’s top 130 metropolitan areas. The top 40 were facing an average 47.2% decline.

Economist Gary Shilling wrote: “The current housing weakness will develop into a full-scale rout … It’s clearly a bubble and is nationwide … The house price collapse will induce a painful recession that will send U.S. stocks into a tailspin … weakness in the U.S. and China will spread worldwide.”

“Correction Time is Here!” was economist Marc Faber’s newsletter headline: “If we combine the overbought condition of the stock market, investors’ sentiment high optimism, equity mutual funds’ low cash positions, and also heavy foreign buying, we have all the ingredients for a stock market correction in the U.S. getting underway very shortly.”

Two years before the 2008 meltdown a Fortune headline: “Can the Economy Survive the Housing Bust?” The NAHB confidence index had “plummeted 54%.”

Harper’s magazine published Michael Hudson’s fascinating “Guide to the Coming Real Estate Collapse.” Hudson analyzed 20 trends: The crash “will further shrink the ‘real’ economy, drive down those already declining real wages, and push our debt-ridden economy into Japan-style stagflation or worse.”

Even Countrywide’s notorious CEO Angelo Mozilo was warning Journal readers: “I’ve never seen a ‘soft-landing’ in 53 years … I have to prepare the company for the worst that can happen.” But he did little.

Neither did the new Treasury Secretary Hank Paulson … Bloomberg Markets later reported that right after becoming secretary in 2006 he told the White House staff: “Over-the-counter derivatives are an example of financial innovation that could, under certain circumstances, blow up in Wall Street’s face and affect the whole economy.” But he never warned the investing public.

By 2007, warnings that a global crash will ‘rival anything in history’

Jeremy Grantham wrote in his GMO quarterly newsletter: “The First Truly Global Bubble: From Indian antiquities to modern Chinese art; from land in Panama to Mayfair; from forestry, infrastructure, and the junkiest bonds to mundane blue chips; it’s bubble time. … Everyone, everywhere is reinforcing one another. … The bursting of the bubble will be across all countries and all assets … no similar global event has occurred before.”

In a mid-2007 Wall Street Journal op-ed piece, former SEC Chairman Arthur Levitt wrote: “In terms of market meltdowns and the degree of pain inflicted on the financial system, the subprime mortgage crisis has the potential to rival just about anything in recent financial history, from the savings and loan crisis of the late 1980s to the post-Enron turndown in the beginning of this decade.”

Forbes columnist Gary Shilling also warned that “just as the U.S. housing bubble is bursting, speculation elsewhere will come to a violent end if history is any guide. … Richard Bookstaber, who designed various derivative-laden strategies over the years, now fears that financial derivatives and hedge funds, focal points of today’s huge leverage, will trigger a financial meltdown.”

Global bank group warns over too much liquidity

An influential group of leading world banks warned Thursday that central banks are pumping out too much easy money and markets risk becoming dangerously addicted to ultra-low interest rates.

The Institute of International Finance, which groups 450 banks, said that if central banks continue to flood money into the global economy, then any future bid to get it under control could itself destabilize the financial system.

“Much of the recovery so far has… been heavily reliant on ‘easy money’ conditions fostered by central banks,” the IIF said in a statement,

“These conditions — quantitative easing, very low interest rates — cannot last forever, but the risk is that financial markets have become addicted to them,” it warned.

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