"The Clusterf#ck of Woe"
Rising inflation, teetering markets and the looming Big Loss...
by Bill Bonner
Youghal, Ireland - "John Hussman runs an investment shop north of Baltimore. He is very analytical…mathematical…historical and statistical. That is to say, he takes his analysis seriously and believes that you can hear a little of the future in the echoes of the past. Here’s his latest: "Based on dozens of measures that include valuations, internals, overextension syndromes, and numerous technical, fundamental, and cyclical gauges we’ve developed over time, we estimate that current market conditions now ‘cluster’ among the worst 0.1% instances in history – more similar to major market peaks and dissimilar to major market lows than 99.9% of all post-war periods."
Not to put too fine a point on it, but at market tops prices go down. At market bottoms, they go up. Our goal is to avoid the Big Loss. And Big Losses are what you get at market tops. At market bottoms, you get Big Opportunities. So, Hussman is telling us that we were right. The Big Loss threat today is in the stock market…and specifically, in the Magnificent 7 that dominate the top of the performance listings. By all his measures, only in 0.1% of cases does today’s stock market look like a bottom. In the other 99.9% instances, today’s metrics signal a top.
How big is the loss likely to be? Hussman helps us there too. “I call this the ‘Cluster of Woe’ because the handful of similarly extreme instances (most notably in 1972, 1987, 1998, 2000, 2018, 2020, and 2022) were typically followed by abrupt market losses of 10%-30% over the next 6-10 weeks (average -12.5%), with losses at the smaller end of that range often seeing deeper follow-through later.”
Time to Topple: The surprising thing, to us, is that the losses are not that BIG after all. The woe…is not so woeful. In his figures, is an average loss of just 12.5%. Dear readers might well say to themselves: “Eh…is that all? I can live with that. Especially if I get a chance to double or triple my money in Nvidia.”
The stock market is extremely top-heavy. Three stocks – Meta, Microsoft and Nvidia – account for half the gains this year. Nvidia traded at $8 a share when Donald Trump was elected. Now, it is $730. That’s a dream-maker, turning a $10,000 investment into nearly $1 million. This year alone Nvidia has jumped 50%. But what were the odds of identifying Nvidia 8 years ago? And what are the odds that Nvidia…the rest of the super techs…and the entire stock market…topple over now? According to Hussman, the risk is 99.9%.
But where we think Hussman may have erred is not on his calculation of the odds, but his measure of the damage. It could be much greater than Hussman’s figures suppose. What we face – possibly – is not just a ‘cluster of woe,’ but a clusterf*ck of woe – with falling asset prices, rising inflation, political corruption and incompetence never before seen in the US, and a sharp decline in America’s power, influence and wealth.
Unrepeatable: Let’s begin with the period of time described by Hussman’s ‘Cluster of Woe.’ It was unique in market history. It began in 1972 – a single year after the US introduced its new money system. After that, it was off to the races for all financial assets – stocks, bonds, real estate and baseball cards. Why? Because the new money was based on credit, not assets. Each new dollar was an IOU from the US Treasury…and it entered the financial system through the banks…borrowed into existence either by consumers, business, or the federal government itself.
Taking 1972 as a base, some amazing things happened. First, the federal budget was never again balanced (except for three years during which tax receipts outstripped spending…not counting Social Security ‘contributions’.) 1975 was also the last year the US recorded a positive trade balance. After that, the next 49 years, it was in deficit…with the biggest deficit ever recorded in 2022 of $951 billion. The new, fake money caused everything to go bafouey. Real hourly wages topped out in 1972. The price of Campbell’s soup went up 10 times. The US debt/GDP ratio rose three times.
Yes, it was a strange time. China, Indonesia, Vietnam, Mexico, India and many other ‘developing’ nations, were trying to improve their lots by exporting cheap products – both commodities and finished products – helping to hold prices down in ‘the West.’
And the strangest thing about it was the money itself. In the late ‘70s, Paul Volcker got the drop on inflation and ushered in the greatest stock market boom of all time. That is the period that Hussman is using for his base. And it was a period in which stock prices were seriously distorted by fake money and the Fed. By the 1990s, each time the stock market tried to correct, the Fed lowered interest rates to encourage more borrowing…more liquidity…and higher stock prices. But that period is over. The Fed cannot repeat the trick. Or so we believe.
Here to Stay: Now we face inflation – persistent, entrenched, not-going-away inflation. Breitbart: "January was not an aberration, a fluke, or a detour from a disinflationary trend. It was the third month of the consumer price index (CPI) rising on a month-to-month basis.
That’s a rarer phenomenon than you might think. We ran the numbers going back to 1947 and found that there have only been 36 periods in which inflation rose for three straight months. The typical pattern, even in periods of high inflation, is one of push and shove, up and down. Since November, inflation has only gone up. What this means is that the Fed can no longer goose up the economy or the stock market, not without risking higher inflation. And higher prices will undermine sales and profits, and ultimately undermine the stock market itself.
Meanwhile, the empire is slip-sliding into desperation, the press and the universities have become propaganda arms of the elite, immigration is out-of-control, Alaskans and Texans are ready to secede, and US debt is quickly approaching the largest debt crisis in world history. Stay tuned..."
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