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June 2, 2017

The Greater the Height, the Further the Fall

By David Haggith, The Great Recession Blog

If I can show you that economists, central bankers and stock analysts are blind in the area of their expertise to the most obvious setup for disaster ever, then you’ll realize we are perfectly poised for potentially the greatest stock market crash in history. Many times in the past few months, I’ve heard these people say that the present bull market cannot crash spectacularly yet because we have not seen the kind of irrational exuberance that is required to set things up for such a crash. I shake my head in amazed disbelief as I listen to the most irrational nonsense about a stock market rally that was by far the most exuberant we have ever seen!

When the end of the financial world comes, it comes quickly. Because of the irrationality that allows such events to build up, it also comes unexpectedly to the majority of people in the financial world (and to others). The one essential ingredient for a truly massive financial crash is that almost no one sees it coming.

Simply put, the higher and steeper the rise, the more spectacular the fall; but the market and the economy it is operating in have to be rickety in order for things to go down like a house of cards. For that kind of situation to develop, market analysts have to be blind to the flaws around them (which looks completely irruption to those who can see). Otherwise, they’d be counseling everyone to get out of the market, not to keep bidding it up into the stratosphere, and so the market would never rise to such absurd heights in such a perilous situation.

Trump Rally displayed irrational exuberance with the worst possible timing

We are now exiting the longest period of central bank stimulus in the history of mankind. As that time dragged on, central banksters began to see nothing but diminishing returns for all their extravagant money printing, known as quantitative easing coupled to the lowest interest in the history of the modern world. So, the Trump Rally happened just as we are exiting a time when even central bankers know their ability to save a falling market or a failing economy is more limited than ever before. Their old tricks for recovery are ceasing to work because they are played out, and the banksters know it.

The knowledge that their usual tricks have lost potency is pressuring the governors of the Federal Reserve to get out of stimulus mode quickly now so that they have something they can throw at the next downturn that is not already in play and completely exhausted. The economy needs a rest from stimulus if the next round of stimulus is to have any shock value. It doesn’t do any good to just hold the shock paddles of the defibrillator on the patient’s chest and administer a continual shock. The defibrillator needs to recharge and then hit suddenly in order to have any shock value to a dying heart.

The law of diminishing returns, like entropy, trumps everything — even Donald Trump — and the Trump Rally has exhausted itself just as the Federal Reserve has determined that it has to remove the shock paddles and give the defibrillator time to recharge. So, stimulus is coming off just as the stock market fades out.

Not only has the rally ended, but the Federal Reserve’s recovery is going into cardiac arrest just as the board of governors are putting the defibrillator away. Figuring out whether the currently now unfolding collapse of the Federal Reserve’s “recovery” is due to the stupidity of central bankers (to have ever thought money printing would work in a world rife with examples of its catastrophic failure)) or is due to a bankster conspiracy that is plotting to force a new monetary paradigm on the world, doesn’t matter for our understanding of what is about to happen. The only difference that conspiracy adds is that it means people need to go to jail at the end of all of this. I’ll leave that for others to decide when the dust settles.

What matters right now is that I convince my readers how extraordinarily exuberant and remarkably irrational the present bull run in the stock market became during the Trump Rally. Because, if you can see that, you’ll recognize the end is here, and you might be able to exit before the rush when the exits become so jammed that no one else can get out.

Those who understand basic economics (such as diminishing returns) and who can learn from stock market history will be able to see that the Trump Rally ends in disaster and that it’s not Trump’s fault. (Though the globalists will certainly capitalize on the opportunity to say that this completely foreseeable disaster was due to Trump and his supporters.)

The truth is that the disaster was baked in long ago; that’s why I can tell you it is coming and have been saying for many months that it would show up in June or July. Whether by the sheer stupidity of banksters who have ascribed to fantasy economics or by nefarious design, the Fed’s phantom recovery is fading right as the Fed ends the life support that created the appearance of recovery. That is characteristic form for the Fed.

My position for the past decade has been that this patient (the economy) was only kept alive after the official part of the Great Recession by artificial life support and that it would die when support was removed. Clearly, the doctors of disaster are now stripping that life support away, even as the patient goes into his final paroxysms.

The Trump Rally displayed the most exuberant irrational exuberance ever seen in the stock market

That’s the amazing part that leaves me standing in utter bewilderment as the economic gurus of our time say the stock market cannot crash because we have not seen the kind of irrational exuberance that precedes such an end. The rise in the stock market that happened during the Trump Rally was far greater and far faster than any seen in history! And it is so easy to see and to prove on an historic graph.

Of course, the rise in cash (liquidity) that the Federal Reserve is determined to remove was also far greater and far faster than at any time, which is why the market has been so irrationally exuberant. The market has never been this juiced for this long, and it was all built on the Fed’s free money, now quickly fading away. Look at the worst market crashes and the bull runs that preceded them, and you’ll never see a sharper, more exuberant upturn at the end of those runs than the Trump Rally. NEVER! I’ll prove it below.

Please show me a time on any graph of the stock market where we have EVER seen an exponential rise as steep and prolonged as the Trump rally. I repeat myself because it amazes me that people can be so blind in the area of their overrated expertise. How much more euphoria can you possibly expect than what we just had, given that it exceeds ANYTHING in the history of the stock market?

Now the market is flatlining, the euphoria has ended, but that, too, is typical of all major tops before major crashes. None of them instantly blew off and crashed. The fall of the cliff has ALWAYS come after a short term of a few months during with the top flattened out, usually followed by a choppy downward turn, and FINALLY the market suddenly leaped off the cliff a few months later later. We’ve had three months now of such a top. So, the end is fully poised to happen.

Let’s prove it now. Look at the last last thirty years of the Dow in the graph below and particularly at the run-ups to the two greatest crashes during that time — the dot-com crash that unfolded slowly at the change of the millennium and the Great Recession that began at the start of 2007. They both show “exuberance,” which means the steepness of the bull market suddenly increases in a sustained manner, and they both flatten out at the top for a time after that exuberance and then tilt downward before the big crash comes. Here are the three periods of greatest irrational exuberance in history:

Periods of greatest irrational exuberance during bull markets on the Dow


Note that the sharpest increase in the pitch of any bull market happened during the last half year (the Trump Rally)and has just topped out. It is is more euphoric than any other rise on the graph. That is to say the Dow rose much more steeply during that rally than during ANY other period in history. It is the steepest rise in the entire history of the stock market, and it continued that rise for as long or longer (not in months but in height attained) than any other sharp rise in the history of the Dow. (I use the Dow because it has the longest history of any index, and you know that the history beyond the left border of the graph is minuscule in its ups and downs compared to recent history. Even the Great Depression happened within a much shorter range of highs and lows.)

Clearly, before each major crash, the pitch of the market steepened for a heroic last hurrah. The last hurrah is now in! It’s fully there. You can see it. It’s gained as much altitude as any hurrah that ever preceded it. The fact that it did so in half the time of all previous euphoric bouts only makes it ALL THE MORE EUPHORIC!

And look at all the tops after those periods of exuberance. Never did the stock market just immediately plunge over the cliff. Instead, we see it rounding off or flattening out, just as it has in the past few months. Then it trends downward for several months or even a year before it finally takes the big plunge.

Again, I repeat myself because so many experts are failing to see this, and it SO OBVIOUS! There is nothing more irrational than experts coming out of a period of the most extreme exuberance in history and not even being able to see it at all.

Since the Trump Rally was clearly the largest burst of irrational exuberance in history, there is certainly no need for another burst before the big crash and it would be unlike any previous crash if the market did put in another large burst of euphoria. It could happen, of course, but there is no need for it to happen before the next big crash because what has already happened exceeds anything we’ve ever seen. Even the ramp up to the dot-com crash, where Greenspan coined the term “irrational exuberance,” was not as steep or as protracted as the Trump Rally.

The Trump Rally displayed the most irrational irrational exuberance ever seen in the stock market

The graph above proves the exuberant part, but now let’s examine this irrational aspect. The Trump Rally — sprint to the stratosphere that it was — was clearly built on nothing but hot air. It was based entirely on the mere hope that President Trump’s big fiscal stimulus plans will come into effect, and it continued to rise even as every one of his major plans (his big campaign promises) either failed in congress or in the courts … just as I said was likely many months ago … and as continues to be the case.

If a market’s period of exuberance (any market, housing, stocks, bonds, whatever) is all based on campaign promises, we ALL KNOW such promises rarely turn out as promised. No group of people is more notorious at failing to deliver their promises than politicians. So, it is irrational to invest based on a politician’s promise, especially when you already see that politician flip-flopping on nearly everything he has said, AND you see his own party members fighting him in congress and the other party unanimously lined up against him. This rally was entirely based on the promises, not on anything that was actually happening. There was no REAL change to merit a surge in the market, and very little likelihood that the hopes would materialize.

Moreover, those promises would have to materialize in nation that is more sharply divided politically (on the streets and in congress) than it has been since the Great Society changes of LBJ. So, those promises face huge political battles, which they must overcome before they ever become reality. Nothing defines irrationality like the resolute belief in a reality that does not exist and has more than half the nation united against its ever happening! (I.e., not just Democrats, but a good number of NeverTrumper Republicans who for the first time in history voted against their own party member and voted FOR a president from the opposition party.)

That the market would rally during such unlikelihood speaks of a phenomenal level of irrationality driving its exuberant climb. This market has risen more quickly than ever into thinner atmosphere than ever based entirely on hot air. All it needs in order to crash is for the hot air (Trump’s plans) to fail, which they have every likelihood of doing and, so far, is the only thing they have done!

Add to that scenario the fact that many experts who are looking at this picture are saying, “We still need to see some sign of irrational exuberance before this bull market crashes,” and you have the most spectacular irrational blindness in the history of the stock market.

As the graph proves, exuberance has never risen higher, more quickly on such faint and unlikely hopes than it has now. Add to that the fact that fundamental economic indicators were turning downward during that rise in a way that would cause a rational market, in the very least, to hesitate, if not drop; yet it soared. (See my “List of Seven Troubles Assailing the US Economy as We Head into Summer.”) Add to that the fact that stimulus is being shut off and the Fed has just begun talking about winding down its balance sheet. Add to that the fact that even the world’s leading market analysts see no sign of irrational exuberance in that kind of scenario; then, clearly, irrationality has reached its zenith.

Folks, irrational exuberance is all in, so the stock market is poised to crash!

This market has lost any grasp or concern whatsoever about fundamentals. Thus, I was not suggesting in the article just referenced that the market would fall because of how it responds to fundamentals that are now going down, but exactly the opposite. It will crash severely because it has no grasp of fundamentals whatsoever, and is flying like a hot-air balloon into a cold storm. But fundamentals still fundamentally matter because they are reality. Those who are out of touch with reality, get slammed by it because it happens whether they believe in it or not. It doesn’t wait for their acknowledgment of its existence.

So, as auto sales tank, home sales start to slide, the promise of wage growth fails to materialize, commodity prices drop (particularly oil and copper and iron) because China cannot sustain its outlandish construction spree (see referenced article for all of that) society becomes more discordant politically, and the Fed starts subtracting cash from the market, then reality will eventually crush the exuberance out of the market by taking American corporations deep into the red. We’re seeing it now with automakers, and may be about to see it in housing (too early to know for sure if April was a change in trend or a one-off).

It is when reality becomes so crushing that it forces knowledge upon us that markets suddenly leap off a cliff as denial finally breaks. They don’t fall. They leap as panicked investors jump for their lives.

Economic fundamentals are falling apart right when I thought they would. The fact that they are collapsing immediately after the most stunning rise of irrational exuberance in market history is why I’ve predicted the economy and the stock market will crash this summer. Exactly when that breaks through market denial into the big leap, I don’t know; but I’ve predicted that happens sometime between June and January of 2018.

The economy will continue to force companies out of profit and into trouble until irrationality (economic denial) can no longer hold up to the crushing reality. In the present case, the level of denial is so much greater than we’ve ever seen that reality is going to have to crush hard in order to break through the denial.

Stock market crashes do not ever play out all at once. So, don’t expect just because I’ve predicted the crash will begin in June or July that the stock market is just going to go BOOM! off a cliff. Historically, the stock market has never fallen that way. Look again at the chart above, and you will see that the tops after the period of irrational exuberance can run horizontal for a long time or take a bumpy ride that rounds ever more steeply downward. They decline from a peak for awhile before reality overcomes investor denial and all the investors finally leap off a cliff like lemmings in what becomes that 20%-or-greater plunge that crashes become famous for (the Black Monday, Black Tuesday or October Surprise kind of event), which technically turns a bull market into a bear market.

So I don’t know exactly how and when the stock market will fall apart, but my point is that the chemistry for a crash of epoch scale is finally all in … right at the start of summer, which is when I predicted the chemistry for a crash would all be in play — peak irrationality during the market’s sharpest rate of rise in history at the market’s highest peak in history, ending against a falling economy in a time of extreme political disparity and social turbulence while the Fed is reversing stimulus and removing liquidity. It’s about the worst mojo you could ask for.

History repeats itself because we’re irrational

Fitting another historic norm, the Fed doesn’t see that its interest rate increases will help trigger the disaster that is already unfolding. It will once again unwind its stimulus into a falling economy. (That, or it wants to push things over the edge as a conspiracy to force monetary change upon the world and start a whole new tier of robbing from the middle class to stuff the bellies of the rich under a new paradigm — the old having gone as far as it can).

Even if the Trump stimulus plan happens, it’ll come far too late.. And, with or without the Fed’s help, the crash is going to play out between now and the start of next year. It’s just a question of how big and close together the chunks are by which it goes down. As you can also see in the chart above, epoch crashes take a couple years or more to play out completely.

Double steep climb combined with double irrationality for as long of a run of that kind as we’ve ever seen at the same time that the market is priced about as rich in view of actual earnings as we’ve ever seen and richer in terms of total market value than we’ve ever seen makes this the highest risk for a historic crash we’ve ever seen.

And, yet, the professional market bulls (the investment analysts) say, “Where’s the irrational exuberance? We haven’t seen any of that yet! We can’t have a huge crash without that!” So, I think, Oh my gosh, Dude’s, can you really be that dumb? You’re standing up to your eyeballs in a manure pile, and you’re so irrational you can’t smell the stuff that’s already covering your nose or see it while it laps around your eyelids. Surely, this is set to be the biggest wipe-out in history when irrationality is that severe.

I think of Ben Bernanke in 2008, standing in the middle of the second greatest recession in US history telling congress, “So far, there is not a recession anywhere in sight!” Then, after the first quarter GDP numbers for 2008 were revised and the second quarter numbers came in, we all found out that he (and we) were in the middle of a recession that had begun half a year earlier! It was something I had no doubt we were in, but the nation’s top expert couldn’t see it to save his soul, and real estate experts at the time argued with me that I was nuts!

In November or December of 2007, I was absolutely certain the housing market was entering its worst imaginable crash, yet Ben Break-the-banky was still convinced in June or July of 2008 that housing would keep rising as would the overall economy. It was all rosy in his view.

I was so certain in 2007 of an imminent housing market collapse that I told my wife to push her family to sell the small estate they had been holding on to immediately, even if it made them really angry with her — to do all she could to force their hand because they’d be REALLY THANKFUL they did within just a matter of months. (They had been holding on to it because the housing market was rising so exuberantly that just sitting on it, rather than selling it and dividing it up, was the best investment they all could hope for.)

I told her that housing was on a breaker that was going to destroy the banking industry on a global scale within months! I convinced her that it would be the worst thing WE had ever seen (having not lived through the Great Depression). Half a year later, Bear Sterns went down. Three months or so after that Lehman Bros. died, and the rest is history; but ol’ Ben Bernanke was singing of eternal glory days for housing all the way up to a month before Bear Sterns died. Fortunately, her family sold the estate before all of that went down.

We are poised now on the brink of a collapse even worse than that. Whether the big part of the crash happens this summer or doesn’t become real evident until the end of the year, I cannot say any more certainly than I did back then. I only knew then that it would be a matter of months, not years, as I do now. The situation is already perfectly poised. The irrational exuberance has taken place, and the cracks in the overall economy are already becoming evident. It is just a matter of how long it takes before everything falls.

We are sailing in a hot-air balloon into a dark storm, the likes of which we’ve never seen, and the Fed is shutting off the fuel to the burner that is the only thing that has kept us afloat in our passage over the Great Recession. They are largely out of fuel anyway; so, even if they turn it back on, we won’t get much more than a sputtering flame and couple more minor bounces on our journey down.

And, in case you just cannot bring yourself to take my word for it, here are the parting words of an old-world market analyst and economist retiring after 47 years who parts with “a scathing critique of capital markets, modern economists, central bankers, and everything else that is broken in today’s society.

Yes, folks, it really is that bad, and the ignorance (or irrationality) of economists that let us fall into the Great Recession, as Stephen Lewis rants about, remains as dim-witted now as it was then. Due to economic denial, arrogant economists learned absolutely nothing from their embarrassing and colossal failure to see the worst economic event in their lives as it was unfolding, and now they are joyfully cheering the nation into the next storm once again. Enjoy the remaining ride while you can because it will be short and downward for a long, long way.

The greater the height, the greater the fall. The greater the irrationality, the more likely the fall.

Courtesy of David Haggith, The Great Recession Blog  

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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