Mad Magazine introduced Alfred E. Neuman (What, Me Worry?) in the
1950s. He did NOT become a central banker. That is “fake news.”
Global central banks, including the Federal Reserve, created “What,
Me Worry?” markets after the 2008 crash. There has been little worry
since the November election, until now. But the market worry level may
have increased. Changes between highs and lows in two days – until time
of this writing:
Date Aug. 8 Aug. 10
DOW 22,179 21,920
Gold 1251.6 1287.2
Consider the 50+ year chart of the Dow Jones Industrial Average.
Black line: Nice move up.
Green Line: Acceleration out of the nasty 2008 crash
Red line: What, me worry? (Too far, too fast!)
In a world where markets are “managed” by “bots” or computer driven
buy and sell programs, fundamentals hardly matter. Human analysis is of
little importance, and valuations are just numbers.
What matters is liquidity – flows of digital currency units into markets.
The central banks entered markets aggressively in 2008. Stock
markets also rose because of the Rise of the Machines – High Frequency
Trading!
“Print” more dollars, euros, what-have-you, buy stocks and bonds to support the paper markets, and watch them fly to the moon. What, me worry? As
long as the central banks print currencies, increase debt, levitate the
markets and inspire confidence … the game continues. But what happens
when “the music stops?” Russian sanctions and North Korean war tweets
may puncture the confidence bubble.
We know about black swans, exponentially increasing debt, wars,
weakening confidence in currencies, government decisions, leaders, the
debt ceiling dance and so much more.
In the short term it is all about liquidity. Create enough liquidity and fundamentals and valuations become less important. But from a larger perspective valuation matters, overbought and oversold are important, and technical analysis is useful.
Where are the stock markets in early August 2017?
- Valuation: by any measure, P/E, P/Sales, P/GDP and
more, valuations are high, so high that we should expect minimal returns
for many years. Read
John Hussman, Ph.D.:
- Overbought and Oversold: The Dow has moved too far,
too fast and is overbought. More upside is always possible, but the
next big move is more likely down.
[Train wreck?]
- Technical Indicators: Consider the RSI (Relative
Strength Index), MACD (moving average convergence divergence), and TDI –
Trade Signal – another momentum indicator.
- Analysis: Use MONTHLY data so
short term manipulations are less important. Use the above three
technical indicators and look at the “danger zones” from the past:
1987, 2000, 2007, 2015.
The S&P 5oo ratio has only been higher a few times in the entire
history of the stock markets… during the dot-com bubble and just prior
to the financial crisis. The bubble could continue inflating, but those
were truly unprecedented moments in the markets. Setting those two
bubble periods aside, stocks have not been this overvalued on a
price-to-earnings ratio since 1895!
The Shiller PE ratio is the cyclically-adjusted price-to-earnings
(CAPE) ratio of a stock market. This ratio is one of the standard
metrics used to evaluate whether a market is overvalued, undervalued, or
fairly-valued. As you can see below, the Shiller PE ratio is flashing
overvalued and is currently at the same lofty reading as it was on Black
Tuesday back in 1929. This was the worst day ever for stocks and
effectively ended the Roaring ’20s and led the global economy into the
Great Depression.
Danger Zone when:
RSI: Greater than 75 (high and rolling over)
MACD: High and rolling over
TDI: High and rolling over
TDI: P/E ratio over 20
Conclusion: These conditions were met in 1987,
2000, 2007, and 2015 before the Dow took a nasty tumble. (Note: The RSI
did not reach 75 before the 2000 crash.)
Compare to 2017.
Ominous: These indicators are currently at 20 year highs, higher than in 2000 and 2007. Markets and indicators could roll over any time.
What, me worry? No
problem, this market can go up forever. Dow 36,000 here we come.
Technical indicators, shooting wars, valuations, trade wars, political
risk, debt ceilings and more – no problem! The central banks of the
world will protect the markets – that’s their job. Maybe NOT!
DOW 36,000 may occur only after hyperinflation.
DOW CONCLUSIONS:
- The DOW has moved too far, too fast.
- It may move higher, but downside risk is considerable.
- Technical indicators parallel conditions prior to the 1987, 2000 and 2007 crashes.
- Depending upon central bank created liquidity to levitate markets is dangerous. What
if the powers-that-be cash out early, crash the markets, blame a
“scapegoat,” and then buy back at a 60% – 80% discount in two years?
GOLD MARKET:
What about the gold market and gold stocks?
Did the same technical indicators show LOWS in gold prices and the
XAU at the bottom of those markets in late 2015 and early 2016?
YES! Use the RSI, MACD, and TDI. Wait until they reach extreme lows
and turn upward. That happened in gold and the XAU in 2000, 2008, and
2015. [Note: Indicator lows were not as extreme as readings at stock
market highs.]
Gold prices and the XAU have been moving upward since their bottom in
2015. Expect more rapid moves as digital fiat currencies, global bond
markets, and stock markets correct toward realistic values.
Other Commentary:
From David Stockman: “David Stockman Warns…”
“We are in the blow-off stage
of the Fed’s third and greatest bubble of this century. Yet the stock
market has narrowed drastically during the last 30 months, as is typical
of a speculative mania.”
“The combined $15 trillion
of central bank balance sheet expansion since 2007 amounts to a monetary
fraud of epic proportions. This massive injection of fiat credit has
drastically falsified prices in the debt and money markets, … the prices
of equities and all other risk assets have been falsified too.”
[Repeat: monetary fraud and equity prices falsified.]
From Mish regarding central banks: “Debunking MMT, Keynesianism, Monetarism” [He provides a breath of fresh air and plain speaking about economics.]
“It’s no mystery why central bankers
are mystified: Collectively, they are economically illiterate fools
engaged in Keynesian and Monetarist group think.”
[Highly intelligent Ph.D.’s can believe and say foolish things…]
“MMT, Keynesian, and Monetarism all suffer from the same basic flaw: They promise something for nothing…” [How well has something for nothing worked throughout history and in your own personal experience?]
“Any economic theory that
proposes paying people to do nothing, debt is not a problem because we
owe it to ourselves, and/or there is some sort of overall economic
benefit to rising prices is charlatan economics.”
“It takes years of training to get someone to believe total economic nonsense, and that is precisely what academia provides.” [Note:
high salaries, prestige, book deals, status, and speaking fees also
help economists believe total economic nonsense. Regardless, it remains
nonsense!]
From Zero Hedge: McMaster: U.S. Preparing for “Preventive War” with North Korea.
From Zero Hedge: Under Any Analysis, It’s Insanity [North Korea]
From Jeff Thomas: “The Madhouse”
From Bloomberg News: “China Bets Trump Won’t Resort to Strike Against North Korea”
From F. William Engdahl: “US Sanctions … Decline of the US as a Global Power”
What, me worry?
SUMMARY:
- The DOW and most stocks are too high.
- Economic nonsense remains nonsense regardless of academic degrees, high IQ’s, and official governmental support.
- Gold and the XAU have considerable room to move higher. Expect huge rallies. Gold will be “the last man standing.”
- Asian central banks, individuals and businesses understand and value gold. We should also!
- Gold and silver have been valuable and a store of value for
several thousand years. They will remain valuable, regardless of
disparaging comments from central bankers and politicians in the west.
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GE Christenson is the owner and writer for the popular and contrarian investment site Deviant Investor and the author of the book, “Gold Value and Gold Prices 1971 - 2021.” He is a retired accountant and business manager with 30 years of experience studying markets, investing, and trading. He writes about investing, gold, silver, the economy, and central banking. His articles are published on Deviant Investor as well as other popular sites.
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The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.
