While the stock market continues to rise to new all-time highs, the options markets are betting on a massive crash.
If you’re unfamiliar with options, they are securities that give you the right, (but not the requirement) to buy shares in an underlying stock or ETF at some point in the future. The pricing and trading of options is a complicated thing, so for simplicity’s sake you can think of them as bets on where you think a given stock or ETF might trade at some point.
Goldman Sachs, noting that the options markets are pricing in a market crash similar to that of 1987 or 2008.
Goldman specifically notes that the options on the
Volatility Index (VIX) that are due to expire 12 months from now are priced at
26.
Historically, the only time this contract has been priced
at this kind of level has been around the 1987 Crash, the Great Financial
Crisis of 2008 and the Coronavirus Crash of 2020.
Put another way, someone is betting and betting BIG that a crash is coming sometime in the next 12 months.
Obviously, this bubble, like all
bubbles, will eventually burst. Smart investors are preparing for this in
advance.
With that in mind, we’ve reopened our Stock Market Crash Survival Guide
to the general public.
Within
its 21 pages we outline which investments will perform best during a market
meltdown as well as how to take out “Crash insurance” on your portfolio (these
instruments returned TRIPLE digit gains during 2008).
We
are making just 100 copies available to the general public.
To
pick up your copy of this report, FREE, swing by:
Defining a bubble in stocks is
extremely difficult because stock prices are based heavily on Treasury yields,
and Treasury yields are at ridiculously low levels due to the fact that the
Fed is currently spending $960 BILLION per year buying Treasuries.
Think of it this way, if the 10-Year
U.S. Treasuries is yielding 1.36%, and that is the “risk free” rate which you
would earn lending money to Uncle Sam, what would you be willing to pay for
growth from the stock market?
18 times earnings? 20 times earnings?
22 times earnings?
You get my point.
If Treasury yields are kept low, you
can argue that stocks are “cheap” even at valuations that no one would be
willing to buy a private business for with their own money. Do you think Uncle
Bob would buy a carwash for 22 times what it makes per year? Yeah, me neither.
This is one of the key reasons why
Central Banks love Quantitative Easing (QE) so much. It doesn’t do much for the
economy or job creation, but it allows them to reflate the financial system by
pushing the risk-free rate of return (the rate against which all risk assets
including stocks are measured) to levels that the bond market wouldn’t tolerate
otherwise.
So how are we to measure a bubble?
Warren Buffett’s favorite measure for
stocks is to compare the market cap of the stock market to U.S. GDP. By that
metric, the stock market is more overvalued today than it was during the Tech
Bubble of the late 1990s (153% vs 146%).
Suffice to say, this is a bubble. And
technically it’s a bigger bubble than the Tech Bubble, which was widely
considered to be the biggest stock market bubble of all time.
Obviously, this bubble, like all
bubbles, will eventually burst. Smart investors are preparing for this in
advance.
With that in mind, we’ve reopened our Stock Market Crash Survival Guide
to the general public.
Within
its 21 pages we outline which investments will perform best during a market
meltdown as well as how to take out “Crash insurance” on your portfolio (these
instruments returned TRIPLE digit gains during 2008).
We
are making just 100 copies available to the general public.
To
pick up your copy of this report, FREE, swing by:
Deflationists argue that inflation doesn’t exist because the Treasury
market isn’t acting as if inflation is a problem. They always fail to mention
that the Treasury market is ALSO the most manipulated market on the planet. The
Fed is currently spending over $1 trillion per year buying these bonds,
effectively cornering them.
So why was yesterday a bad day for deflationists?
Because it was revealed that apartment rents are up almost 15% year
over year since June. Yes, 15%. This is the highest annual increase since 1993.
By the way, the Bureau of Labor Statistics, which compiles the
official inflation data for the U.S. claims “rents or shelter” is in fact only
up 2.6% over the same period. As Bill King notes, if CPI accurately reflected
the real jump in rent inflation, CPI would be at least 4% higher (north of 9%).
So, while the bond market continues to exist in a manipulated state of
fantasy, real people are experiencing real jumps in prices, which is causing
real economic damage.
This will eventually lead to catastrophe.
Stocks initially LOVE inflation but that love eventually turns to hate
when costs rise so much that they eat into profits.
This was the case during the last real bout of inflation in the 1970s. At that
time stocks initially rallied aggressively from mid-1970 to 1974. Then
inflation spiraled out of control and the markets crashed some 50%.
This time around will prove no different. We are already beginning to
see signs of this in individual stocks.
Consider Clorox (CLRX). The company lost over 11% of its market cap
yesterday when it revealed that the company’s cost of products as a percentage
of net sales spiked from 53% in 2Q20 to 63% in 2Q21.
The reason for this spike in costs?
Inflation.
CLRX shares erased months’ worth of gains in a single day and are now
back to where they were in early 2020, erasing the ENTIRE COVID-19 ramp.
This kind of collapse will be spreading more and more throughout the
stock market as inflation roars.
With that in mind, we’ve reopened our Stock Market Crash Survival Guide to the general public.
Within
its 21 pages we outline which investments will perform best during a market
meltdown as well as how to take out “Crash insurance” on your portfolio (these
instruments returned TRIPLE digit gains during 2008).
We
are making just 100 copies available to the general public.
To
pick up your copy of this report, FREE, swing by:
It is already
clear that inflation has entered the financial system. Those who claim that
this cannot be true because Treasury bonds aren’t showing it fail to mention
that Treasury bonds are the most manipulated asset class on the planet.
After all, it’s
rather difficult to argue that Treasury bonds can discount or measure much of
anything when the Fed is spending over $1 trillion buying them every year.
Technically, all they are reflecting is what $1 trillion worth of Fed asset
purchases can get you in terms of manipulation.
Meanwhile, we are
getting signs of inflation everywhere.
Capri,
which owns Michael Kors, Versace and other fashion brands just announced it
will be raising prices “considerably.”
Chipotle
is raising prices 4% to cover increased labor costs.
Proctor
& gamble which manufactures consumer goods like Gillette razors and Tide
detergent announced it will be raising prices in September.
General
Mills, which produces cereals like Cheerios announced inflation costs are up 7%
this year.
Whirlpool
which manufactures appliances ranging from refrigerators to dryers and washers
will raise prices by 12% to offset inflation. It says inflation could cost the
company $1 billion this year.
And on and on.
So, we know
inflation is here. The question now is whether or not the economy will continue
to strengthen or roll over creating a 1970s’-style stagflation.
It now appears it
might be the latter as three stock market sectors with close ties to the real
economy show us.
First and foremost
are Industrials (XLI). These are companies that either produce actual things
like tractors, cranes, HVAC systems, etc. or that are involved in real economic
activity (mail/shipping). As such, they represent a good gauge of how strong
the real economy is doing: during economic expansions these businesses receive
more orders.
XLI has gone
nowhere since late-April. And this is despite the prospect of a
multi-trillion infrastructure bill from the federal government and $120 billion
in QE from the Fed.
Next up are
Materials (XLB). These are companies involved in producing things like
concrete, copper, steel and the like. During economic expansions these
companies receive more orders as they are the primary suppliers of commodities
needed for construction, manufacturing and the like.
Here again the
chart is odd given the macro backdrop. The Biden administration is hoping to
sign a $1.2 trillion infrastructure bill sometime in the next few weeks, and
yet, XLB is 5% off its highs. Indeed, you could easily argue that the only
reason XLB didn’t collapse last week was the prospect of this infrastructure
bill.
Finally, we have Amazon
(AMZN).
The consumer
accounts for 75% of the U.S. economy. As the largest online retailer in the
U.S., AMZN presents a great window into consumer spending.
After
disappointing results for 2Q21, AMZN shares collapsed. They have now gone
nowhere since July of 2020. This is NOT what you would expect from a raging
economy.
So, inflation is
here… and the economy appears to be rolling over. That would mean a
stagflationary environment… which would be the absolutely WORST environment for
the massive fake bubble the Fed has created.
With that in mind, we’ve reopened our Stock Market Crash Survival Guide
to the general public.
Within
its 21 pages we outline which investments will perform best during a market
meltdown as well as how to take out “Crash insurance” on your portfolio (these
instruments returned TRIPLE digit gains during 2008).
We
are making just 100 copies available to the general public.
To
pick up your copy of this report, FREE, swing by:
It is impossible
to understand what is happening in the U.S. today from a COVID-19 policy
response.
One day Dr Fauci
says there will NOT be lockdowns, and the very next President Biden suggests
there will.
One day CDC
Director Rochelle Walensky
states that the Biden Administration will likely issue a national mandate for
the COVID-19 vaccine… and the next day she walks that back stating that “an
experimental vaccine cannot be mandated by anyone.”
One day we are
told by Biden administration officials that Delta variants are the biggest
concern in terms of spread… and the next day the White House Deputy Press Secretary admits that she doesn’t
even know if there’s a test for it.
You can draw your
own conclusions from this situation. Some people will say that COVID-19 is a
complicated situation that changes on a weekly basis, hence the confusion.
Others will say this whole mess is about politics and has nothing to do with
science. Others will say it’s a mix of the two.
For investors,
given the market impact of another round of shutdowns, the wisest move is to
ignore all the news and focus on price levels.
Put another way,
don’t try to be psychic… let the market show you what’s going on.
I’ve illustrated
the major lines of support for the S&P 500 with green lines in the chart
below. They are currently 4380 and 4265. We also have minor support at 4,370
(purple line).
The key with bull
markets is to let ride them for as long as possible. Put another way, until the
market starts to “do something wrong,” by breaking down and taking out support
lines you need to fight the urge to sell.
At some point the
stock market will break down again as the Everything Bubble finally bursts and
the financial system lurches into another crisis.
With that in mind, we’ve reopened our Stock Market Crash Survival Guide
to the general public.
Within
its 21 pages we outline which investments will perform best during a market
meltdown as well as how to take out “Crash insurance” on your portfolio (these
instruments returned TRIPLE digit gains during 2008).
We
are making just 100 copies available to the general public.
To
pick up your copy of this report, FREE, swing by: