In The
Money Bubble: What To Do Before It Pops, James Turk and I climb
out on some long, skinny limbs with a series of extreme predictions. Now
it's time to start tracking the ones that are (or seem to be) working out,
beginning with increasingly wild swings in US equities:
Chapter 26, page 294:
For a sense of how an over-indebted financial system enters a catastrophic
collapse, imagine a spinning top. For a while after being set in motion,
the top stays in one place, spinning smoothly. But then a slight wobble creeps
into its rotation, gradually becoming more pronounced until it turns violent.
The unstable top then shoots off in a random direction to crash against whatever
is nearby. That's how the financial markets will behave when the Money Bubble
bursts.
As this is written in late 2013, our imagined top is spinning smoothly again
after a huge, near-catastrophic wobble in 2008. With US stock prices at record
highs, interest rates still historically low and daily fluctuations in major
markets reasonably muted, all looks well. But soon, probably in 2014 but
almost certainly by 2015, the fluctuations will begin to increase until the
system spins out of control.
Now consider the US stock market over the past two weeks. The following table
lists the daily fluctuations of the Dow Jones Industrial Average, which in
the space of ten trading days has seen seven triple-digit moves, for an average
swing of 132 points. Mr. Market is looking increasingly bi-polar.
More from The
Money Bubble:
A useful indicator of where the markets are in this process is the VIX index
of volatility in the S&P 500 options market, which predicts month-ahead
fluctuations in the stock market. Figure 26.3 shows how placid the US stock
market, as depicted by its low volatility, was while the housing bubble was
inflating in the mid-2000s. But notice what happened in 2007 and early 2008:
First came some wobbles, as the early indications of a bursting housing bubble
hit the markets. Then in 2008 the bubble burst and the banking system began
to implode. The markets were terrified and capital was pouring in and out
(mostly out) of stocks and pretty much every other financial asset class,
causing wild fluctuations. The VIX soared from 20 to 80 in a matter of months.
In late 2013 the top was once again spinning smoothly. But under the surface,
all the imbalances that nearly destroyed the global financial system in 2008
were not only still resent, they were being amplified by governments around
the world borrowing aggressively, printing, and intervening. By late 2013
the system was once again primed to start wobbling. Which means a spectacular
trade is just waiting to be placed.
