This past week, the Royal Bank of Scotland credit strategist Bob Janjuah warned of a full-fledged crash in global stock and credit markets. He anticipates a 300 point drop within the next three months. Janjuah has a lot of credibility because his warnings of credit troubles last year came to fruition this year.
The whole setup reminds me a bit of Elaine Garzarelli in 1987. Garzarelli was a relatively unknown quant analyst and money manager at Shearson Lehman in 1987. In the weeks before October 19th, she made brief appear on FNN, the precursor to CNBC, saying there was a high likelihood that the market could crash. That sealed her place in history.
A lot of other warning signs indicate that the Bank of Scotland isn't that crazy in predicting the unpredictable.
First, the past month generated an Hindenburg Omen. The Omen is a measure of internal divergences in the market and is signaled on June 6th. While the Omen doesn't necessarily mean the market will crash, no crash has ever occurred without a signal in the prior 40 days. For instance, an Hindenburg Omen signal occurred on September 19th, 1987 about one month before the market collapsed.
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The market is suffering extreme internal divergences, similar to the NASDAQ and Dow in 2000. During the final run higher, basically the only stocks going higher were technology and Internet related. Similarly, right now, the only stocks hitting new highs are commodity and agriculture related. The banks and financials in particular are showing an unsustainable downside divergence. The financial stocks have, in fact, already crashed. While the financials typically move in line with the broader market, they have been leading it lower in the past twelve months.
The market has worked off its oversold conditions from March and January and has built up energy to move lower. The stochastics have just started rolling over, as have the internal breadth indicators. Neither is yet at an oversold extreme. In addition, the Summation Index never made it past the 500 level on the rebound from January and March lows - that indicates the rebound lacked breadth and depth.
Finally, the Fed and politicians always have some hand in causing market panics. In 1987, Greenhorn Central Banker Alan Greenspan caused problems when he indicated that the dollar's decline would come to an end because the fundamentals were improving. Shortly after taking leadership post, Greenspan hiked rates partially to stem the greenback's decline.
Of course, the trade deficit continued to increase and the dollar plunged anew. That caused a crisis of confidence in the market and contributed to the crash in 1987. Combined with reckless comments from Secretary of State James Baker, the market was nudged over a cliff. Similar comments from Ben Bernanke's two weeks ago about raising interest rates to stem the decline in the dollar could cause a similar panic if he follows through with his threats.
So while it's difficult to predict a crash (crashes are by definition 4 standard deviation events and are therefore unpredictable), I think all the elements are in place for one to occur.
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This article has 46 comments:
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bluecat
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10 Comments
Jun 22 03:27 AM-
adan
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304 Comments
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Jun 22 08:44 AM-
adan
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304 Comments
My Website
Jun 22 08:44 AM-
User 30121
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342 Comments
Jun 22 09:46 AM-
oldman
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69 Comments
Jun 22 09:50 AM-
mms
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6 Comments
Jun 22 10:00 AM-
SW Richmond
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394 Comments
Jun 22 10:14 AMI bailed in October. No regrets. I slept fine over the weekend of March 16th. I beat the rush into Treasury MM funds, and hedge with PM's and miners. The conservative advice I am following is this: "The objective in a crisis is not to make the most but to lose the least." I will use my cash to buy stuff "on the other side."
The scenario I expect is a failed reflation leading to a dollar crisis, and possibly a paper asset crisis. It's not just me that expects this. PM's, oil and grains expect it too.
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Bear Stocks Report
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57 Comments
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Jun 22 11:01 AM-
still deciding
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5 Comments
Jun 22 01:10 PM-
ATHELSTAN
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25 Comments
Jun 22 01:19 PMNow investors and the general public sense Bush is out of touch with reality, and McCain is taking the GOP down to defeat in November. What looms in the distance is the Obama Express speeding down the track at an awesome and a terrible pace to Carterville. That is to say the town named for the former president.
Where inflation, high interest rates , "touchy feely", feel good politics , with protectionism added to it, and the prosecution of countless investment bankers and hedge fund managers will lead to financial panic. This means the real plunge comes later and after the elections.
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Zooey
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786 Comments
Jun 22 08:44 PM-
altutone
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1 Comment
Jun 22 09:22 PMcrash any more!
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ethelbert
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1 Comment
Jun 22 10:03 PMCould nything be more cathartic and cleansing to our systems.
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User 210751
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2 Comments
Jun 23 12:13 AM-
Le French
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21 Comments
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Jun 23 01:11 AMMy bet is on the table. The game is on.
Now the question is for you guys, do you want to stand on the sideline for the next six months, or do you want to grab that last rally to the summit?
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The Real Expert
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75 Comments
Jun 23 04:33 AMNotice when the market sells off the "experts" warn of a crash. Show me guys who told people to sell the market 7 weeks ago when it was 13,100. That is valuable guidance, not some guy who follows the crowd.
Seriously, if you are going to submit a piece, make sure it's worth reading.
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jdlech
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10 Comments
Jun 23 05:18 AMA crash of 300 pts may seem like a lot today, but we'll look back on it as a drop in the bucket soon enough.
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win
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39 Comments
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Jun 23 06:52 AMNot saying it's going to happen. But there is quite a bit of indecision in the market - in terms of volume indicators as well.
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Phil Anthropy
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53 Comments
Jun 23 06:54 AM-
mixter
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91 Comments
Jun 23 08:55 AM-
User 214563
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1 Comment
Jun 23 11:19 AM-
Damn Luck to Live in the USA
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1 Comment
Jun 23 12:03 PMOK so called "Real Expert", first of all, you may want to learn to spell, or as a minimum, use a spell checker. Second, though I somewhat agree with you that a 300 point drop does not constitute a collapse, it isn't the drops we need to be concerned with but the TRENDS! The effect of a net loss over a given period of time is a cumulative loss for the entire market otherwise known as a DOWNWARD TREND. Admittedly the word collapse may insinuate a single day market crash and may be a bit harsh for the current economic climate, but the reality is we are experiencing a severe decline in our global economic status. Our wages have not gone up commensurate with the cost of a gallon of gas, a gallon of milk, or a loaf of bread. Our government continues to feed us positively skewed BS statistics regarding inflation and unemployment, when in reality inflation over the past decade (or longer) has not only caused our income to effectively decrease against the cost of living, but our global standard of living has decreased as well relative to what we had during the cold war... And nobody seems to be concerned about that.
And by the way, what gives you the authority to dictate who the people are "who have no business in the market"? Last I checked we live in America and as such, I have the right, nay, the obligation to learn about and participate in the economic machinery and principles of my country. If that means I invest and lose, that's on me, but it's still my right to participate in the market. And I don't have to be a "Real Expert" to do it. How does one learn if he doesn't DO?
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Falling Knife
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1 Comment
Jun 23 12:49 PM-
sbenard
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237 Comments
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Jun 23 01:19 PM-
najdorf
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82 Comments
Jun 23 04:10 PMFurthermore, a lot of people seem to think of "the market" as a thing that exists independently from personal buy and sell decisions. The market is the sum of all buy and sell decisions. If you're patting yourself on the back for taking money out of stocks as if you're some sort of unique genius, you don't get it. Billions of dollars are flowing out of stocks; these outflows are the cause of market declines, not a symptom. Anyone can see that this is a less auspicious time to be in stocks for the short term than, say, 1996. However, the problem is that in the long term, no one is any good at timing reentry to the market. Anyone who pulled out entirely last year missed the March-May rally, and will most likely miss the eventual recovery and only reenter stocks when a new bubble is in the process of formation. You might be the type of investor who sells in 1990 and buys in 1999. More probably, you're the type of investor who buys/sells/buys/sells/... based on amateur macroeconomic forecasts, generating transaction fees, short-term capital gains, and market-trailing returns. There's a reason that the so-called experts are wrong about half the time, and it's not that you're an untutored genius who can do better. This stuff isn't predictable. If you're tempted to sell it all, ask yourself "When would Warren Buffett go 100% cash/metals?"
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jamie4419
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4 Comments
Jun 23 04:47 PMIt does no good to put your head in the sand and HOPE (the four letter word in investing) that there will be no crash.
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edit5410
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7 Comments
Jun 23 05:39 PMAnd the people who can do something about it, the CFTC and the Bush administration sit on their hands. RAISE THE MARGIN TO 50%! Corn, wheat, commodities dependent on energy for production will fall. Then we can focus on real problems, e.g. hunger, the World Series, etc. For me, it has become a moral/ethical issue for the Bush administration to leave this country on the brink of stagflation as he leaves office. He will leave that legacy, but then again, he doesn't seem to care.
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Thalamus
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3 Comments
Jun 23 05:43 PM-
Scorpio69er
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9 Comments
Jun 23 07:37 PM-
Mafeking
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35 Comments
Jun 23 10:31 PMA factor mentioned in passing by one or two postings, but not emphasized, is that the market is perhaps reflecting the growing concern that we will soon have a president named Obama with limited experience, a Chicago leftist agenda and a naive do-good worldview like Carter.
On the global scale gasoline in the US is still cheap at $4 a gallon. Have you traveled to Europe lately and seen the prices there? Oil is only one factor in the decline.
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jpbernarding
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1 Comment
Jun 23 11:46 PMMr. Bush is a not-very, bright, previously rich kid, a business failure, who rose to power on the strength of his Dad's position/connections, a likable personality, and a good sense of humor. But who's laughing now?
We financed a war with money borrowed, largely from China and Japan. We enjoyed an artificial climate of prosperity, the foundation of which was the squandering of home equities, pumped up by bad Fed Reserve policy. What happened to Liberty bonds, rationing coupons, the draft, and other hardships the nation willingly endured during past wars. Oh, that's right, Japan, China, and Germany were not offiering to supply us with cheap goods, and use the profits to finance our wars in 1941. We had to pay for the war ourselves, then! How old-fashioned! Easy credit wars are so much cooler! But, surprise!! Now the bill comes due at the gas pump and the super market.
The Fed discount rate of 2% is absurd in a world of galloping inflation. But if they raise it, financial institutions will fall under the weight of all the ARM-mortgaged properties out there, which will go into foreclosure. Because if these so-called prime mortages, which are adjustable and pegged to prime rate or US financial instruments, start to go under, then the so-called sub-prime crisis will have been just the tip of the iceberg. Our econonmy will dive like the Titanic. So we have to suffer the low interest rates and inflation, as the alternative is catastrophe.
As far as restraining speculation in oil goes, be careful what you wish for, you might just get it. The strong oil market is soaking up a tremendous amount of US dollars, a large portion of which comes from China/Japan/Gemany, and goes into the pockets of the various Arab states, who then recycle the money back into the US ecnonomy, not just by buying US debt, but by financing captial acquisitions, such as the sale of the Penn Turnpike to a Spanish-led venture, and the sale of Anheiser-Busch Belgian interests. It is only this recycling of US money that prevents the collapse of the US dollar, which would otherwise sink like a stone under the wieght of current 2% Fed reserve policy.
Raising interest rates would sink the real estate market under the weight of foreclosed properties, which would sink the banks, making foreigns investors extremely unhappy, and they would sink the markets. Banks lent money to people, who were never qualified to pay it back, and in many cases committed fraud on their loan apps, while the banks turned a blind eye to obvious fraus, in order to make a quick buck on loan fees. Now we all have to pay at the pump for the greed, fraud, and hysteria of some of us.
There is a pressure built up in the system, due to all the egregious errors of the past 7 years. The high price of oil is where the pressure is getting blown off. If Congress could force the price of oil down, the dollar would sink with it. The damage has been done. There are no easy fixes.