Royal Bank of Scotland to investors: 'Sell everything'

Tops are processes, not events. You are watching the mother of all equity bubbles right now. Here is what you have for valuations: You have a price to book on the stock market above 3X (which has precipitated every crash -- although in the dot com bubble it got quite a bit higher than this). You have a market P/E ratio on a trailing basis of 27 times. Normal is closer to 15 or 16 times.

And this is all being done on no volume -- for the last several years. At this point, technically I actually wouldn't be surprised if it goes completely parabolic, because you will get some money managers chasing. They will be the last in. It is difficult to explain to your investors why you haven't owned Apple stock.

But I will GLADLY sit on the sidelines during this. No second thoughts, even if I was way early (better early than late). Thankfully, I have also had no trouble making money in other ways, and it doesn't involve playing in a casino.

I just wonder what the catalyst will be that starts what is going to be a very a nasty bear market. It WILL be credit related. A multidecade bond market rally is at its end, whether you realize it or not. Most traders don't even have a handle on it, because they haven't lived through a bear market in debt. But this last melt up in equities. ... is on the back of the last vestiges of artificially cheap money being disastrously misallocated.

We have the overnight rate rigged at 50 basis points, when it easily would be 4 percent -- if there was price discovery being allowed. And you have the central bank having destroyed the debt markets by buying up $4 trillion of agency and treasury debt, and with no plan for unwinding its balance sheet. There is no price discovery -- which is why this is more fucked up as what you saw in the run up to 2008. It is all artificial.

This isn't just an equity market thing -- most people who got fubared in 2008 don't have money to get caught up in stock market gambling. Stock ownership is at decade lows, which isn't surprising because people are broke and in debt. But the shithole that has been created will have nasty effects for most people, unfortunately, which is why you you are cheerleading the Titanic and don't realize it. The NY Fed released its consumer debt levels the other day. They have managed to completely relever households -- to where they were in prior to the financial crisis. People aren't doing well, economically. Our economy has been sluggish for a decade (we are getting quarterly GDP prints that are sub 2 percent, year after year). Wages have stagnated. But . ..... we DO have rigged debt markets designed to promulgate debt (without any regard for how that money gets disastrously allocated), so people have loaded themselves up with debt to buy SUVs and pay their living expenses. It is the SAME exactly thing that you saw in 2005, 2006, 2007, even if mortgages aren't as front and center this time.

Household debt is dangerously close to 2008 levels

Student loan debt levels are ridiculous and defaults are rising. Subprime auto loan default rates have ticked up to the financial crisis levels, too.

Auto Delinquency Rates Near 2008 Highs

AND Then there is the rest of the world, which is just even MORE overleveraged than the US is, on the back of central bank idiocy. So it can be China or Europe that is the black swan that puts an end to it.

It *is* inevitable, though. As for equities. ... The S&P 500 might run up to 2400 or 2450, at this point. But you are an idiot if you buy into it, in my opinion. It is all leverage and stock buybacks (on the back of company's borrowing without being able to gauge risk anymore) -- symptomatic of the same thing driving the consumer debt levels that are going to end poorly. Rigged debt markets and misallocation of capital. It was NEVER a proxy for actual economic activity, though.

And fundamentally? It is all leverage on the back of debt markets that have been rigged to the point of lunacy. When it comes down, it is going to be like an elevator plummeting in its shaft.

Good luck to anyone playing that game. As a trader, thankfully I am pretty good at doing it in managed way -- mostly swing trading the currency and bond markets that are driving equities higher. To the extent I invest (which has always just been some retirement money), I will sit in cash, because there is going to be a great buying opportunity up ahead and my retirement account will benefit from it. I never would have imagined they could stoke it this far before causing a credit crisis. But they have. Curious that you revived this thread again on a relatively down day after a weeklong short squeeze was driving equities higher day after day.

 

Stocks aren't just very expensive. They have been driven up by manipulation of our debt markets to destroy any semblance of price discovery.

As I said, the massive misallocations of capital they have spurred go way beyond what you are seeing in equities and high-yield bonds -- consumer debt levels are right back to where they were in 2008. I never would have imagined they would be that reckless. But I overestimated their stupidity.

With regard to equity markets this goes way beyond, "stocks go up, stocks go down." Which is why I am having a conversation with someone not interested in even trying to understand what I post -- (didn't read it, but I'll comment anyhow).

In an actual market, stocks are driven by earnings. When earnings are rising, stocks typically go up to reflect the company making money.

You have had nothing like that happening in the era or quantatitive easing (to drive leverage) and rigged interest rates (to drive leverage). Earnings have been measly, actually, which is why P/E multiples keep expanding during this rally. If there was any rationality behind it, the multiples wouldn't NEED to keep expanding.

Conservatively, the last 1200+ points on the S&P 500 have been on the back of leverage that was created artificially by price administrators who are fucking us. That isn't "stocks go up, stocks go down." That is "They destroyed the fundamental landscape behind the stock market in their zeal to prop up the economy with more and more debt."

That mess exists, whether someone reads my posts or even tries to understand what I am saying. Same as it did prior to the dot com bubble popping (which was built on interest rate manipulation) and the housing bubble popping (which was built on interest rate manipulation).

This time. ... what they did was much worse. The debt levels worldwide are MUCH greater. The asset buying was more of the same, but on steroids.

 

Look, I don't wish any ill on anyone. If you are making money, I am HAPPY. But if you are a buy-and-hold investors, and just think, "Bull market! I am doing great!" .... you should at least have an awareness of what is behind it.

This is graph of what they have done to the money supply over the last 30+ years.



Notice how much they ramped it prior to the financial crisis in 2008. ... and how much more they ramped it up in the wake of the financial crisis. This isn't a correlation thing. It is direct cause and effect -- that monetary inflation has driven up asset prices. It is phoniness.

I'd suggest that unless you think we can keep increasing the money supply at a greater and greater rate, without destroying the currency, what you have gotten is 1) artificial, and 2) when the rate of growth of the money supply slows down, that bull market is going to come crashing down on you.

If you are trading equity markets, congrats. Just buy the dip. Doesn't matter WHAT you buy -- stocks without earnings that are living on more and more debt have doubled in price. I am glad you have made money.

As a trader. ... well, a lot of stock market geniuses are going to end up getting run over. I'll assume you aren't really a trader.

If you are a buy and hold investor. ... those gains you are celebrating. ...they aren't gains until you book them. And just know those can go away VERY quickly -- they were artificially created. And they likely will go away in one sweep, because there is no way we don't suffer the consequences of that much currency creation and the debt it has given us on the back of it. Look back earlier in that graph -- when the rate of M2 growth was quaint compared to what they have dug themselves into. A much lower rate of M2 growth created a series of escalating credit crises that all ended with asset bubbles popping (because those bubbles were all built on the leverage they created with the expansion of the money supply).

You can sit there and think, "the stock market always comes back." And I'd suggest that is the right attitude if you have a 15 or 20 year time horizon. But if you are thinking, "Well, shit, I'll wait it out and within 2 years we'll be right back where we were, just like last time." ....

I'd point out two things: 1) The debt levels this time are MUCH greater. Which means a nastier deleveraging is going to have to happen. 2) The only thing that brought us back after 2008 was trillions of dollars of asset buying by central banks to try to keep credit flowing, and a giant decade-long price ceiling that has been put on interest rates by that same price administrator.

That kind of price fixing has driven up asset prices. But there has never been an instance in which a price administrator has been able to sustain that kind of phoniness indefinitely. And when it ends, it is always messy.

I'd also strongly suspect that next time around markets don't give them the leeway to price fix the cost of money again. They blew their wad this time.