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No Trigger for Correction?



January 30, 2014 – Comments (1)

Board: Macro Economics

Author: EddieLuck

It is often said that the trigger for a market downturn can only be identified after the fact. When have you ever seen someone correctly say "This news today will drive the market way down over a period of weeks or months". It never happens, and this is why.

No trigger is required for a major market downturn. The prerequisites are the factors that Mr. Hussman concentrates on so heavily. The causes of a big downturn are the market conditions that make it inevitable, and that the Hussman studies reveal always to be associated with crashes: overvaluation, overbullishness, overbought conditions, and rising interest rates, as well as various other predictive factors.

Every hour of every day in the markets prices rise and fall. Only under the above conditions do we have the level of instability where a drop can become self-reinforcing and the margin calls cascade, and the optimism has unlimited opportunity to fall, and valuations are at an extreme altitude from which to drop. It is the vulnerability of the market which enables the crash: it is not a trigger event.

Let me put it another way. On just about any day, there are both market-positive and -negative news items. Markets fluctuate according to the news, and also in response to internal factors like a big market order or subliminal factors such as the sun coming out in New york City. As a bull market progresses it moves more and more into a crash-prone condition as valuations become more extreme, margin debt approaches the limits of participants' borrowing power, bullish sentiment (and associated buying) becomes pervasive. When the underlying conditions that started the bull such as robust profit growth and falling rates and low valuations and QE cease to exist, further instability occurs until the day comes when all it takes is a random 30 point drop in the Dow to scare some nervous Nellies into selling, and then some others who were waiting for a drop in order to sell get nervous, and then some stops get triggered and pretty soon the snowball is set rolling downhill and it cannot be stopped for quite some time.

Afterwards, the gurus come up with various hypotheses and explanations and decide what was the trigger when in fact there was no trigger. What happened was that the market gun's trigger mechanism had been filed down and filed down until the hair-trigger action was so sensitive that all it took to set it off was the wing-flapping of a butterfly doing a fly-by outside the window.

I am sure that most METAR people would agree that the market action of the last five years has been strongly dominated by federal reserve policies and all their various stunning effects on corporate profitability, financial industry liquidity, relative attractiveness between equities and fixed income securities, and even to a small, perverted extent on economic growth. However, it is arguable that credit saturation throughout American life has actually advanced since 2008 despite some relief in the levels of household debt achieved through all the bankruptcies and mortgage defaults and even the debt-relief programs of the federal government which of course by their very nature add more to government debt than they reduce private debt.

The fed is still pursuing ZIRP and QE. IMO this has enabled the market to soar way, way, way higher than it otherwise would have, and this has now placed us in or near the crash-ready zone of instability where a big bad bear is possible, and may have started. The bull/bear teeter-totter now has ZIRP and QE at one end, and every predictive market measure at the other end. One thing is sure. We don't need no stinkin' trigger.

Be careful out there,


1 Comments – Post Your Own

#1) On February 01, 2014 at 3:36 PM, GirlsUnder30 (35.53) wrote:

Well said. I've been talking about the necessity of the underlying fundamentals for as long as I can remember. In todays market, an average P/E of 20 in the fortune 500 doesn't scare anyone. A yield that low is what you expect in a long bond, not a common share of stock. The only relatively safe business sector I see is in the extraction industry. I wrote about it in the link below: 

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