2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

[Woodsman]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

Why the long silence?

My views remain unchanged since early 2013.

No reason to test your patience by repeating myself.

Why am I not concerned about the asset market correction since Yellen's predictable politically motivated .25% rate hike?

I can sum it up this way:

Fake markets. Fake crash.

I'll let you know when I think a real crash is coming as I did in 2000 and 2007.

Funny you drop in now, EJ, right as I was reviewing your last report. Only at the time you were forecasting a 56% drop in the DJIA:

Forecast is for the inflation-adjusted Real DJIA to rise to slightly over 100 until the end of 2013.

A Dec. 30, 2013 update to the April 2011 chart, below.

The Real DJIA reached just over 100 before starting to correct in Jan. 2014.

CI: This may be more than a correction, then? I mean, really? A 56% decline?
EJ: In mid-2011 I projected what I called the Extended Asset Price Inflation Case. That's the green line. The Real DJIA was to climb from 83 at the time to just over 100 by the end of 2013. Early in 2014 it begins to price-in a mid-gap recession later in the year. The first chart was published April 2011 as the watermark indicates. The update was generated from the same excel file. The DJIA data are from the Dow Jones & Co. and the inflation adjustments updated using the latest data from the Real DJIA web site that we've been using since 2006.

CI: So the crash you forecast in mid-2011 for early 2014 is happening? Wish you'd reminded me of this chart sooner!
EJ: That would appear to be the case. However, a crash of the full extent of 56% shown spells complete disaster for the U.S. economy. I seriously doubt that the Yellen Fed will stand by, or at least I hope they understand the danger. The correction is a delayed reaction to the beginning of the end of the Fed's bond price fixing operation, which ending I have warned for years was to produce chaos in the bond market as market participants thrashed around trying to figure out what the market price of a long bond is without the Fed's interference in the market.

So I'm a little unclear about the "fake markets, fake crash" aphorism. The last report didn't characterize it as a fake out:

CI: Have you tried to build the case for that, for the market to correct, the "healthy correction" that everyone has been hoping for, followed by more gains as the economy picks up?
EJ: Yes but it's just not credible. The markets are far more precarious now than at any time since I started iTulip in 1998. At time of the peaks of the two speculative bubbles in 2000 and 2007, the over-priced assets at risk were confined to narrow classes of assets, the macro-economy was less fragile, inflation was higher, and so on, as I cover in the next part. Additionally the Fed has already used up interest rate policy as a anti-deflation policy tool. The Fed is now limited Zero Interest Rate Policy (ZIRP) options, namely, loading securities onto its balance sheet.

You referenced the "Real DJIA" data. Look how close it lines up with your chart at the time:

The Real DJIA was to climb from 83 at the time to just over 100 by the end of 2013. Early in 2014 it begins to price-in a mid-gap recession later in the year.

It's popped way over 110. If 100 was toppy in 2014 why is 112 not in 2016? Compare and contrast.

You had mentioned Yellen raising rates, China weakness, as potential triggers:

CI: You think we're at a market top and a crash process is underway that you forecast last year. You think the global economy is too iffy to take another hit because the starting point is too low. The Fed doesn't have enough juice to keep this post-bubble economy afloat.
EJ: I did a careful comparison of crash preconditions in 2014 at the current market top versus the preconditions I saw in March 2000 and November 2007. Yes, the picture this paints is alarming.

CI: Why do markets crash?
EJ: They crash after a threshold of accumulated market risk is exceeded while simultaneously the central bank is putting pressure on markets via rate hikes are being executed for macro-economic reasons not to slow the market, and then a trigger strips the wire the crash process begins. We saw this happen in equity markets from 1992 to 2000, then in mortgage credit market from 2003 to 2007. In each case the Fed applied the pressure and an external event supplied the trigger. In the case of the NASDAQ bubble the Fed's rate hikes in 1999 supplied the pressure and tax loss selling in April 2000 was the trigger. Rate hikes from 2004 to 2007 supplied the pressure for the 2008 crash and the Q1 2008 oil price spike was the trigger. This time I see the Fed's taper as supplying the pressure and a financial crisis in China providing the trigger.

And when you wrote this, you pointed to a credit balance/margin debt ratio of just under 5 as "fearless" with one just under 3.5 as "almost fearless."

In this re-re-reflation of the original 1995 to 2000 bubble we have had two anxiety induced corrections followed by

a year-long period of complacency when margin debt has reached near fearless levels.

Margin debt bravery peaks before crashes. Margin debt de-leveraging propels the crash.

And where are we now? Looks like it's tracking pretty close, in terms of fearlessness and getting deja vu all over again.

It's great to hear from you, but not so fast! How is it a fake if it seems like the data are lining up with the views you say have remained unchanged since early 2013?

[EJ]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

Interesting. Clearly you know something that I don't. So do you think the S&P500 will recover all of its lost ground from here or does it have a little further to fall before rebounding? Thing is, I've been short the market since the 1st of Jan. and my expectation was that it would go down at least another 20%. If that's not the case, then I'll probably take my winnings now and sit in cash or ride the S&P back up for a while

I shorted in Q2 2000 and Q4 2007, as readers know. Those decisions to short were based on observation of asset bubble dynamics. An asset bubble is a perverse market phenomenon but it can at least be said to be a market-based phenomenon. What we have today, under the control of central banks with their hands on the liquidity spigot, directing asset prices as a tool of monetary policy, can hardly be called markets. Shorting them is exceedingly risky.

Unless I was confident that short sellers can continue to push down oil prices, I would not want to be short when markets open next week.

[verdo]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

Unless I was confident that short sellers can continue to push down oil prices, I would not want to be short when markets open next week

Ah, fair enough then. Thanks. One thing im confused about though is over why low oil prices caused such a sharp market drop in the first place. I can understand oil producers taking a hit, but the whole market? Honestly, i chalked up what was happening in equities to be due to China, and oil prices were simply a symptom of what was happening (along with the over-supply issues). It seems counter-intuitive to me that low oil prices is what caused this "fake crash" (assuming I'm understanding you right) because you would think lower oil prices would act like a tax break, giving people more disposable income to put into the economy, as well as lowering some input costs for certain companies.

[EJ]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

Ah, fair enough then. Thanks. One thing im confused about though is over why low oil prices caused such a sharp market drop in the first place. I can understand oil producers taking a hit, but the whole market? Honestly, i chalked up what was happening in equities to be due to China, and oil prices were simply a symptom of what was happening (along with the over-supply issues). It seems counter-intuitive to me that low oil prices is what caused this "fake crash" (assuming I'm understanding you right) because you would think lower oil prices would act like a tax break, giving people more disposable income to put into the economy, as well as lowering some input costs for certain companies.

The low oil prices did not cause the stock market to correct. The rate hike, even a mere 1/4 point, sent both oil and stock prices down.

My article from early 2013 forecasts exactly this result if the Fed went ahead and raised rates before the output gap closed. Yellen went ahead and raised them based 1) on market expectations she set at the Boston Economics Club meeting where I met her June 2010, and 2) Fed concerns that asset markets were over-heating.

Finance-based economy + Output Gap + Rate Hike = Fed policy induced Recession

Story from 2002. I'm at a small dinner put on by Thomas Weisel partners. Tom's there lecturing us about how the telco crash as no big deal because all of the swell infrastructure that got left behind was going to be the foundation for the recovery. A Boston Fed board member is seated next to me. I asked him what prompted the Fed to raise interest rates when it did. Was the intent to pop the dot com bubble. He answer: "Yes. We said, "Geez. Look what they're doing with our money!"

Their money, not ours. That's how they see the world. It's similar to the Hollywood mentality. My sister's in the business. A director at a party at her house once used the term "civilians" to refer to the rest of us who are not in the movie and TV business. I got exactly the same vibe talking to Yellen.

They don't care if they crash the economy up and down. Did Greenspan get indicted for his role in the housing bubble and crash?

The Fed's modus operandi is a lethal combination of arrogance, cluelessness, and lack of accountability.

I think they saw "their money" being used in ways they didn't like, such as financing of Unicorns, and decided to take asset markets down a notch.

Credit risk contagion is still fresh in the minds of market participants, so the reaction to the hike may be more than the Fed bargained for.

Lousy credits started to roll over mid-2014 but good credits have not been effected, at least not yet.
Lacking tools to contain a credit crisis if one occurred today the Fed will be forced to reverse direction at the hint of credit market spill-over.

I do not see another run-away train like I did on late 2007. In fact, I will not be surprised to see markets recover starting next week.

[astonas]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

It's great to hear from you, but not so fast! How is it a fake if it seems like the data are lining up with the views you say have remained unchanged since early 2013?

I certainly don't claim to speak for EJ, and your questions and his response are interesting to me as well. (Thanks for asking.) However, I read EJ as saying that the "markets" are in this case better modeled as a money cartel, than a neutral finding of a "fair" value through market forces. (I could certainly be projecting my own thoughts onto EJ, though.)
The problem is that this reading does not necessarily preclude a further decline. If the "market value" of anything is set in a manner similar to a cartel, the real question is why would those players necessarily benefit more from a drop-and-rebound, than some other dynamic. One could imagine a sustained drop, with a subsequent slow buildup as well. Is a temporary manipulation the only market deviation they are capable of? Is there insufficient market volume in the longer-term speculative contracts to make the second scenario viable?

I could certainly imagine a scenario wherein very deep swings (down, but then also quickly up) could make a pile of money for anyone with the cash to move markets off steady-state values. But one could also imagine a large variety of other patterns that could benefit insiders. I'm wondering why it is most reasonable to assume that one of these scenarios might be better for market manipulators than another.

Of course, I could be mis-reading EJ completely, so please take all this in the speculative and conversational tone it is intended.

[ProdigyofZen]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

I do not see another run-away train like I did on late 2007. In fact, I will not be surprised to see markets recover starting next week.

If the past two days mark a recovering market and it continues into March it will only embolden the Fed to raise rates again and that will be very bad for global liquidity.

We are already in a global liquidity crisis brought on by QE ending and the Fed tightening cycle. The Fed does seem hell bent on continuing their policy path this year based exactly on what you stated above:

lethal combination of arrogance, cluelessness, and lack of accountability.

Coupled with China's already in tow devaluation process that is enough to knock over the global economy.

Absent another round of QE there is zero source of dollar liquidity in the world. ECB doubling down of QE won't produce the much needed dollars that are being eviscerated worldwide.

When China implements a one time devaluation of up to 30% like they accomplished in 1994 it most likely will cause global assets to crash.

Alternatively, perhaps the markets see a devaluation from China as a positive for Chinese competitiveness globally but that is a remote scenario.

[ProdigyofZen]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

My article from early 2013 forecasts exactly this result if the Fed went ahead and raised rates before the output gap closed. Yellen went ahead and raised them based 1) on market expectations she set at the Boston Economics Club meeting where I met her June 2010, and 2) Fed concerns that asset markets were over-heating.

Finance-based economy + Output Gap + Rate Hike = Fed policy induced Recession

http://www.federalreserve.gov/moneta...et_archive.htm

The Fed Output Gap model predicted the output gap would be closed by Dec 2015.
Fed Output Gap Model Closed Dec 2015.png

Due to smoothing the time series of potential GDP of the Output Gap the Fed states in their model the gap closed in December. This gave them the all clear signal to raise rates.

The Output Gap closing combined with Core CPI hitting 2% gives the Fed the all clear signal to raise rates regardless of what is actually occurring in the economy.

It really does look like Yellen has moved back to model based monetary policy and away from the Bernanke doctrine.

It is a critical mistake on their part. If they back track now they will be seen as being disastrously wrong in their model based approach but if they continue raising rates 4 times in 2016 it will in fact crash the markets coupled with China devaluation.

They are in a no win situation, might as well get as high off of ZIRP as possible before going back to ZIRP and QE.

I also believe it is a grave mistake for Fund managers and market participants to believe that the Fed can never exit ZIRP. They are the same ones who said the Fed couldn't end QE and couldn't raise rates at all.

[verdo]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

The low oil prices did not cause the stock market to correct. The rate hike, even a mere 1/4 point, sent both oil and stock prices down.

Right, well that's why i decided to short the stock market at the beginning of the year. I was just confused by your comment about oil speculators being unable to push the oil price down any further which would lead to a market recovery next week, as i didn't think the two were related in that way. But thanks for clarifying

My article from early 2013 forecasts exactly this result if the Fed went ahead and raised rates before the output gap closed. Yellen went ahead and raised them based 1) on market expectations she set at the Boston Economics Club meeting where I met her June 2010, and 2) Fed concerns that asset markets were over-heating.

Finance-based economy + Output Gap + Rate Hike = Fed policy induced Recession

So with that being said, i suppose we can expect the Fed to continue raising rates as promised this year, especially if the market recovers from the last hike. They don't seem like the type of people to turn their policies around on a dime once they've set out to doing something. And if they do continue hiking, i'm guessing we will we continue to see a series of these "head fake" corrections throughout the year until something in China finally gives way and unravels the whole thing.

Story from 2002. I'm at a small dinner put on by Thomas Weisel partners. Tom's there lecturing us about how the telco crash as no big deal because all of the swell infrastructure that got left behind was going to be the foundation for the recovery. A Boston Fed board member is seated next to me. I asked him what prompted the Fed to raise interest rates when it did. Was the intent to pop the dot com bubble. He answer: "Yes. We said, "Geez. Look what they're doing with our money!"

Their money, not ours. That's how they see the world. It's similar to the Hollywood mentality. My sister's in the business. A director at a party at her house once used the term "civilians" to refer to the rest of us who are not in the movie and TV business. I got exactly the same vibe talking to Yellen.

They don't care if they crash the economy up and down. Did Greenspan get indicted for his role in the housing bubble and crash?

The Fed's modus operandi is a lethal combination of arrogance, cluelessness, and lack of accountability.

I think they saw "their money" being used in ways they didn't like, such as financing of Unicorns, and decided to take asset markets down a notch.

Credit risk contagion is still fresh in the minds of market participants, so the reaction to the hike may be more than the Fed bargained for.

Now that right there is quite interesting to me. They may be clueless, but perhaps not as clueless as a lot of people think. I know many people who still believe that the Fed just continues to get blind-sighted by these bubbles, but my opinion since I started looking into this stuff was that the Fed actually does see these bubbles, but they choose to lie about their existence publicly, while simultaneously raising interest rates to pop the bubbles that supposedly do not exist.

Greenspan did it:

Mr. Greenspan's conclusions are evident in his recent words and actions. He has backed away from suggesting the market is overvalued, yet feels that monetary policy should reflect the market's impact on the economy. The bull market's surprising endurance has driven the Fed into its first sustained drive to raise interest rates in six years. Friday's report that unemployment fell to a 30-year low of 3.9% means that campaign will continue, as the Fed is expected to raise rates again -- possibly by half a point -- at its May 16 meeting.

Bernanke did it


And now Janet Yellen:

Of course, Richard Fisher doesn't quite agree with her nowadays

But with what you're telling us, my opinion of the Federal Reserve has dropped even lower. I knew they were lying about a lot, but i still genuinely thought they were trying to help the general public...we just disagreed on philosophy and how that help should come about. But if its true that these people see it as "their" money, I'm very skeptical of how far their willingness goes to actually fix things. I do still think they're clueless though, in the sense that they do not fully grasp what the end result of all this market manipulation from their end will be. I don't think they see a bond market crisis in their future at all, and if they don't see it, i can guarantee that most politicians and average investors don't see it either. Triple A government bonds is the only market left in which people still believe its more or less infallible. Since 2000, people have been burned on real estate at least once, stocks up to two times (going on three), and Commodities since 2011. But these high grade government bonds have still maintained themselves as being the safest asset there is. I see a situation going forward where if we have a sharp deflationary episode, people will pile into these bonds like never before, and given what you've stated here, i'm more convinced now that the people at the Fed, in their hubris, will cause a bond market crisis if they reflate the markets as much as you think they will after this next crash because they think they've got everything contained and under control. I'm quite happy that I'll be alive to witness history unfold, because i think the end result of this will have several pages dedicated to it in the history books

[vt]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

I see it a little deeper. The Fed does not want to be accused of forming yet another bubble so, like Richard Fisher states, they let the air out of the bubble a bit.

But the Fed can't afford a collapse into a deflationary recession either. There is a fine balance with a very small plateau between allowing the bubble to get too big on one end and prevent falling into deflation at the other end.

I recall EJ saying that we may not see these larger 40% to 50% declines this time; the Fed would try to make sure they would stop at no more than 20%.

We're still dealing with a global demographic slowdown that won't get better until 2020 We still have four more years of this uncertainty. I remember EJ saying the possibility of a recession by maybe 2018.

That's my best memory of EJ's posts, and he can correct this conjecture.

[Polish_Silver]

Rates vs. oil prices

The low oil prices did not cause the stock market to correct. The rate hike, even a mere 1/4 point, sent both oil and stock prices down.

Somebody please explain why a rate hike causes lower oil prices.

The argument two years ago was that cheap credit caused shale startups and reduced oil prices.

[EJ]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

I see it a little deeper. The Fed does not want to be accused of forming yet another bubble so, like Richard Fisher states, they let the air out of the bubble a bit.

But the Fed can't afford a collapse into a deflationary recession either. There is a fine balance with a very small plateau between allowing the bubble to get too big on one end and prevent falling into deflation at the other end.

I recall EJ saying that we may not see these larger 40% to 50% declines this time; the Fed would try to make sure they would stop at no more than 20%.

We're still dealing with a global demographic slowdown that won't get better until 2020 We still have four more years of this uncertainty. I remember EJ saying the possibility of a recession by maybe 2018.

That's my best memory of EJ's posts, and he can correct this conjecture.

Yes, that is correct. 20% is the "right level" of correction for managed markets.

[icm63]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

ESF is in the house. Everything under control, Look away!

[davidstvz]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

I paid for a two year subscription a year and a half ago and I don't feel like I've gotten much out of it. I feel like a bit of a fool actually as I probably shouldn't be here. I have only a limited understanding of finance and have no assets to protect (I own a house and a mortgage and have retirement funds locked up in the Teacher's Retirement System of Louisiana). I'm mainly here to read the interesting things EJ says and the discussions it starts. I guess I shouldn't renew in June.

[icm63]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

..."I paid for a two year subscription a year and a half ago and I don't feel like I've gotten much out of it."...

DUDE... In a life time you only need to be correct a few times with your wealth. One great call in 5 years or 10 years is all you need. It takes years to learn how the markets are played. Itulp.com is a must have! EJ rocks !

What happens when you win the local lottery, and you have a need to know how to handle your wealth! ha!

Start here!

[verdo]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

I paid for a two year subscription a year and a half ago and I don't feel like I've gotten much out of it. I feel like a bit of a fool actually as I probably shouldn't be here. I have only a limited understanding of finance and have no assets to protect (I own a house and a mortgage and have retirement funds locked up in the Teacher's Retirement System of Louisiana). I'm mainly here to read the interesting things EJ says and the discussions it starts. I guess I shouldn't renew in June.

..."I paid for a two year subscription a year and a half ago and I don't feel like I've gotten much out of it."...

DUDE... In a life time you only need to be correct a few times with your wealth. One great call in 5 years or 10 years is all you need. It takes years to learn how the markets are played. Itulp.com is a must have! EJ rocks !

What happens when you win the local lottery, and you have a need to know how to handle your wealth! ha!

Start here!

Icm63 is quite right david. You're looking at things all wrong. We're near the cusp of one of those very important decisions happening. Making money in the markets isn't about being a good day trader. It's about making those few very important calls when it matters.

Take a look at this. Below, I've posted a presentation made by an investor named Grant Williams a few years ago which i believe is quite well done. He basically outlines how one could have turned $35 dollars into $220 000 dollars by simply making 4 decisions over the last 40 years. Literally. No tricks, no schemes. It's done simply by buying an asset class while its undervalued, then selling it when it becomes over-valued, then taking those profits and buying the next undervalued asset. Investing isn't that complicated. The reason some of these banksters, money managers and financiers try to make it look super complicated is because complexity promotes dependency...dependency on them that is. And when you become dependent on these people to manage your money, they can justify charging you exorbitant fees to "manage" your money.

What's funny too is that most of these guys (over 80%) can't even outperform the S&P500 according to the statistics. So not only do they charge you a ton in fees, they don't even do the job of making you money. You literally would do better than the vast majority of them as a non-expert by simply putting your money in the S&P500 (and no, im not endorsing buying stocks at their current levels, but you get my point). The only real complex part is figuring out exactly when the best time is to short markets, or pivot in and out of asset classes. But this is what itulip.com is for.

In my opinion, Itulip is not only the cheapest place to get the information you need to do well (which is important for young 20-something year olds like me), its also the best information you'll get (based on itulip's track record). I've been following this stuff for several years now, and i have yet to find a person more skilled at market timing and investing than Eric, or a community filled with as much expertise amongst its userbase than the itulip community. I mean you have experienced market watchers and industry insiders like ProdigyofZen, GRG55 and others here who you probably would never be able to meet in real life, but on itulip they are all just a message away. So all in all, i think you should spend your time reading Eric's investment philosophy for the next five years from some of his other articles, and stick around...because things are soon to get quite rocky

Anyways, here's the presentation by Grant Williams (its two parts). This is a good primer not only into how investing works, but where we currently are headed.

Part 1

Part 2

P.S. Icm63, that ESF presentation was an interesting watch