Below are some comments on the future of markets. First, here are some points about why should you care what I expect:
a) several published forecasts of the 2006-2009 financial crisis (detailing why it would happen, plus the sequence of how it would happen, plus updates as it was developing)
b) published forecast of the March 2009 rebound in global markets… several days prior to the actual bottom of prices in the US stock market (S&P 500)
c) numerous other published forecasts, like the mid-2019 credit market panic in the US (just prior to the emergency interventions by the Fed) and the early 2000 stock market plunge (prior to any publicity for covid and with no reliance on that issue).
d) a recent string of 80 weeks with a total profit of over 100% across that time
e) a recent 8 week-period of over 40% profits
Here is my brief commentary in 3 points.
a) people react to daily news, but daily news does not create long-term trends. Patterns of buying and selling (and lending and borrowing) are what creates long-term trends.
b) perhaps the most important market in the world (and one of the largest) is the US treasury market… not especially exciting, but hugely important.
My long-term forecast is soaring interest rates in the US. Why?
c) then I will address other markets of much less importance (featuring the US stock market in particular).
As for US bond markets, when looking back across 28 years of data (which is the entire history of this particular data set), we are currently in the midst of a certain market condition that is more extreme than anything in the prior few decades. The next most extreme instance was 2016-09-06 which was close to the lowest interest rate in the modern history of 20 year US treasury bonds. Bond rates soared for the next 25 months, resulting in a 17% decline in bond prices, which eventually extended into a 25% decline across the next 85 months. In other words, the current reversal in US bond markets goes back to that point in 2016 (with a brief dip beyond the extreme prices of 2016 happening in early 2020).
There has been a 40 year trend of falling interest rates in the US from 1980 to 2020 (shown below as rising prices of bonds). If people ask me when I expect interest rates to go back to 2016 or 2020 levels, my answer is:
“that might not happen in our lifetimes. The recent data corresponds to a long and lasting rise in rates, like for many decades.”
So, now if I said that the data in 2016 suggested a potential for a long and lasting decline in bond prices (as in a rise in rates), then what would you see if you look back at the chart above? Do you notice anything unusual happening in the months and years after 2016 relative to the rest of the time shown? Would you agree with this description: “The peak in 2016 was the beginning of the final stages of the trend that started in 1980?”
Clearly, the decline since 2020 is quite unlike anything in the past 50 years, right? We might agree to call that a significant divergence from the prior trend.
One other period that is notable in the chart above is late 1998, which led first to a sharp dip in bond prices and then years of rather “stable prices.” You might also notice a relatively big dip after a peak in 2012.
So, wouldn’t it be interesting if the 4 most extreme times for this data set that correlates to long and lasting rises in interest rates (and declines in bond prices) were…. just recently (the most extreme case), then mid-2016 (next most extreme) and then 1998 and 2012? Well, that is the reality. Note the red dots below.
In the prior 3 cases, you can see what came next. Further, things have getting extreme for several months. I posted this alert in July 2024 on almost the same topic: https://cad4.net/index.php/2024/07/16/interest-rates-up-or-down/
Next, to put it in terms of standard deviations, if we take the 4 last times this condition has been present, it is 3.4 standard deviations from the norm in terms of result for the next 24 months, with bond prices falling 7, 8, 10, and 15 percent. That means a big increase in interest rates.
If we stretch the time horizon to 8 years (86 months) the results are 8.6 standard deviations from the norm. In other words, these results are highly unlikely to be random. The drops in bond prices were 24%, 11%, 10%, and 3%.
So, 8.6 standard deviations from the normal range is very rare. Across those recent decades, the norm was that bond prices were steadily INCREASING, which is exactly the opposite of what manifested in the cases noted above).
In other words, this correlation has been quite reliable (even with a small sample size). Also I think that a 2-8 year time horizon is reasonable for speculating on the near future (as in the next 24-86 months).
I think the US economy (and the global economy) have some very challenging / unusual developments coming across that period (including in relation to $36 trillion of debt, but also a huge pending shortage in energy supply, like not enough plants to refine the lithium needed for the next waves of EVs and iPhones and AI data centers). But my opinion is just my opinion. My method is to look at the data… although which data I explore and also how I interpret it is of course related to my prior opinions.
So, before we explore the historically extreme overvaluations created by US stock market investors, what about the near future of the US bond market and interest rates? There is shorter-term data that corresponds to a potential drop in bond prices within the next 10-12 months.
In the last 23 years, there have been 12 groups of data like the current data. 9 of the 12 resulted in rising bond prices (and falling interest rates) within 6 months. However 2 of the 3 exceptions were “big failures.”
So, with the long-term data “firmly pointing toward a long-term rise in interest rates,” my immediate outlook is that until bond prices more severely break down (sharply lower) enough to drive down bond market sentiment to historic short-term extremes, only then would I expect a lasting rebound (like 3-6 months). Sentiment is low enough now for a multi-week rebound at least, but the tide of falling bond prices may not allow much of a rebound within the next few weeks, even a brief one.
Considering that tide, rebounds should be brief and relatively small (as in opportunities to position for a continuing decline across the next 2-8 years). Maybe bond markets will even recover now for a few months, but the data is not extreme enough to interest me much in investing in such a potential rally. The reaction today to the Fed’s announcement may trigger the start of a brief reversal in rising bond prices (away from the reaction to the announcement), but I expect that to just be a small wave within a tide that has already turned (by 2020 if not 2016).
Note again that 2020 was not the beginning of the next “really bad period” in which I am forecasting a historic rise in interest rates. The trigger date just manifested recently as of late 2024… as in about to START.
Again, the extremes in sentiment of July 2024 have grown more and more extreme month after month… even as bond prices have weakened across several months. What was already an extreme rating in July is now far more extreme…. the most in recent decades, even 4 years after a rather obvious reversal in trend. The mainstream public and financial institutions perhaps do not want to see the clear and obvious data right there to see: interest rates stopped falling several years ago. The tide is not turning now. The tide turned years ago. The sentiment data showing how much people are “invested” in the idea of falling interest rates is… precisely the signal that there is barely anyone left to invest in that potential (to take actions with their money to move markets in a particular direction).
The exhaustion stage that is present now is more extreme than 2016. When there are no investors left
almost to keep taking the actions that push interest rates down, then interest rates tend to rise… and for a long time and by a large amount.
So, for people deeply in debt with real estate mortgages, what should you do? Well, if you are waiting for a decline in interest rates, maybe you should stop waiting.
To be brief and vague, whatever risks that you associate with a huge increase in interest rates (as in the late 1970s in the US), adjust your positions and investments for that type of trend. If you do not know what that would mean (or want assistance from someone with expertise in planning and implementing those changes), let me know. (You can leave a comment to this post if you do not know any other way to reach me.)
Or, if you think that interest rates are not important to financial markets and economic trends, so be it. You might be very wrong.
Moving on to other markets, for US stocks, I will focus below on a single piece of short-term data. However, I interpret it naturally within the context of a longer-term bias.
The optimism of US stock investors is still at a historic extreme that corresponds to “buying the dip.” I am not convinced that the big price decline of today will mark “the extreme.” The historic surge of multi-month trends of bond market sentiment is NOT present in the stock market.
There is a lot of long-term data that is “terrible,” but I tend to favor shorter-term indicators like sentiment and momentum and breadth. However, we do have some data (shown below) that are similar to 2000 or other notable “highs” in US stocks. With the extreme in bond market data, I think we could see interest rates push to new highs that eventually (as in probably not yet) spark a “return to reality” for US stock market investors.
Maybe as I see more data in coming days and weeks, I will withdraw my mid-term bias for many months (or even a few years) before a final spiking peak (like in 2000). Lately, I keep seeing lots of data that correlates to a continuing rally of more “mindless” pouring of money into stocks as “safe” and “likely to soar.” So, the self-fulfilling prophecy of people believing that the market trend is stable leads to the continuing actions of a buying mania, which leads to rising prices. So, for now, I continue to be biased to “another new all-time high” for weeks and months on end.
However, did I already mention that I could be wrong? So I will want to keep watching a wide variety of data. If I am wrong, not only do I want to know it, but as quickly as possible.
The decline today (which was a reaction to a Fed announcement that to me had nothing surprising within it) was the biggest 1-day decline since 9/13/2022 (in the US S&P 500). That led to a dip of about 1 month and then new waves of buying.
How good (or bad) of a value is the US stock market (in historical terms)
For putting today’s decline into context, one thing to review is whether the data on US stocks shows that they are are currently undervalued, overvalued, or “within the normal range of valuations.”
In the long run, the US stock market is currently one of the worst “values” in the history of US stocks…when measuring with almost any version of valuation data that I have ever seen. That means that I will want to be relatively biased toward a possible long and lasting decline in US stocks potentially starting… several hours ago. For those unfamiliar with valuation in general or the current extremes, I will show quite a bit of valuation data a bit later.
First, my opinion is that the big long-term opportunity with stock markets is to watch for the “inevitable collapse” (as in an overwhelmingly likely blow-out across several decades… probably far worse than the 1989-current downturn in Japan or the 1999-current decline in much of Europe). How is that an opportunity?
As I documented across early 2020, one alternative is that most anyone can ride that decline down with instruments like UVXY, SQQQ, and put options on SPY. I show some charts below of UVXY, which manifested gains of a few hundred percent in a few days twice in the last few years.
So, although a lasting downturn may not happen for a year or a few, eventually I expect for there to be a harsh penalty for the vast majority of investors. Big losses are the penalty for (or natural consequence of) the optimistic complacency of people pouring money into 401Ks (and also into markets like bitcoin that did very well from 2009-2016 but are only now reaching mainstream headlines… such that either they become the next “beanie baby” bubble… or they catch a new wave of mainstream stability).
I expect bitcoin to not just plunge 80% rapidly as it has often down, but to collapse as another burst bubble. Maybe bitcoin will soar for months or years. I would not be surprised for it to make a few more new highs along with the US stock market.
For now, I think bitcoin is still “mostly just hype” in the long run. Further, so is the US stock market… even though there are sectors of US stocks that are FAR more better “long-term risks” than bitcoin according to the data I am watching (as in how I am interpreting it).
What about taxes and the $36 trillion debt?
One problem for bitcoin (and other markets) is that there is no inherent demand for it whatsoever. It is not a physical substance like silver or lithium or uranium or bread.
It’s just a “fake” currency. Real currencies have governments behind them. And the biggest debtor in known history is the US government today, with over $36 trillion of delayed promises to pay. They have delayed demand for $36 trillion dollars that they do not have accumulated. They need to accumulate it. Who has it from whom the government would take it?
I don’t really need to directly answer that, do I? The answer is in the next statement, if you have the eyes to see it.
As long as governments across the world are taxing business and people, they will be forcing demand for their approved currencies that are required to pay those taxes. Yes there may be one or two small countries that allow taxes to be paid in bitcoin. Those policies may eventually be remembered as “idiocy” (but that is a different topic).
$36 trillion of delayed demand by the government for cash dollars predictably would mean new taxes (or old taxes at higher rates). If they raise tax rates, that sucks cash out of the economy (and away from market bubbles in stocks or crypto or real estate). If the US government starts treating their delayed demand for massive amounts of cash… like a near future demand for a lot of cash…. like a present demand for a lot of cash, then that would rip or ripple through the whole global economy. Eventually, corporations and households might suddenly raise the priority of accumulating cash (like to pay new or higher taxes… or to pay down debts). That shift of demand toward cash means a shift away from things like stocks.
So, while new taxes could be a big part of devastating the current euphoria of the US stock market, I expect bitcoin to be a footnote in history within a decade or two. A challenge with forecasting a downturn in US stocks is that valuation have historically awful not just for a few years, but decades. Depending on which data one is reviewing, the price bottoms in 2020, 2009, and 2002 were either good buying opportunities… or just modest dents in the historic extremes of over-valuation. (We’ll look at several charts of valuation below.)
First, as for blockchain technology, there is plenty of value in that. But just because cassette tapes were hugely popular for a time, and then CDs for music, that is no guarantee of how many decades they will be prominent. A primary risk with technological advances is… that the next technological advance will generally wipe out the prior one, rendering it quickly obsolete. Pagers were also hugely popular… until they were simply replaced.
Charts of stock valuation
So exactly how do we measure valuation in a stock market? One way is the ratio of the stock price to the earnings of that company. The best value in the last 100 years in US stocks was in 1949. Current prices are about 4 times as “expensive.”
Further, the recent downturns in price (2020, 2008. 2001) actually were collapses in earnings. So, the “overvaluation” was even more extreme during the stock declines. With little regard or perhaps even no regard for the financial health (like the earnings or dividend payments) of the US companies in which they are investing, US investors just dump money paycheck after paycheck into 401Ks and other “blindly managed” funds such as the SPY ticker.
A better way to display relative valuation is in terms of standard deviations. This chart shows 1982 and 2009 as notably good times to buy stocks.
source: https://www.currentmarketvaluation.com/models/buffett-indicator.php
You can also clearly see the worst times to own stocks according to that data: now, 2021, 2000, and 1969.
This next chart also shows valuations in terms of standard deviations. The 4 times in the last 125 years when US stocks when were a truly appealing value were 1920, 1932, 1949, and 1982. Current valuations are the worst in at least 125 years according to this data (more than 3 standard deviations from the normal range).
source: https://www.advisorperspectives.com/dshort/updates/2024/12/05/market-valuation-is-the-market-still-overvalued
This measure shows that stocks are about 3 times as expensive as at the bottom of 2009
Comparing stock prices to real estate prices shows that stock are now relatively 18 times more expensive than in 1932. Note the peaks of this data set: 1929, 1969, 2000, 2021, and now. If you know the history of stock prices in the US, those are some of the most notable peaks (as in the beginning of big and long declines in stock prices).
Stocks are 83 times as expensive as in 1920 in terms of this ratio (which also is showing that typical prices of commodities are VERY low, so one possible adjustment for investors would be to target “boring commodities” like perhaps natural gas, corn, cotton, copper, and hogs).
So, today (12/18/2024), there was a reactive selling to a Fed announcement. There is data that directly measures the amount of worry that would lead to future selling or at least a hesitance to buy. Of course, immediate worry also led today to the immediate selling (and a modest surge in volatility). But we can measure the presence or absence of worry which correlates to future action. That future correlation is important.
I am looking at leading indicators. In other words, I am looking at the data that has a very well-established record of correlating to the future selling and buying that move prices.
In the long run, there is almost a total absence of worry of long-term decline in the US economy or stock market (like at least as bad as Europe in the last 25 years or in Japan for the last 35 years). But in the short run, there was a sudden surge of worry today… but mainly just an small shift in the worry that was already present in recent weeks… even with markets at an all-time high.
So people report short-term worry or caution, but their actions display almost a total absence of long-term worry or caution. There is almost no concern at all for the historic overvaluation or long-term risk. There is a habitual or addictive buying mania (a bubble) still solidly present.
Should I withdraw completely from trading US stocks at all because of the incredibly high valuations? Well, in 2021, the valuations soared for months. A surge to a certain level of valuation does not strongly correlate to immediate selling… given that “high valuation” actually has two tendencies: it keeps rising like for a few months at least or it plunges for a couple of years. But which one?
My bias for the short-term future is based on looking at data that has strong short-term correlations. So here is some.
In the Russell 2000 index, there is an unusually high amount of short term worry. Levels like now have been present 7 times in the last 4 years which led in 5 cases to a rally within 3-4 weeks of about 4 percent typically (both the mean and median of the 7 cases). Also, right now is the early segment of the only part of the year in which the Russell 2000 regularly outperforms the S&P 500.
So that was for the last 4 years, 7 cases. However, if we expand the window to 25 years, then we see this condition a few times also in 2008 and 2020 that led to some rough times in 3-12 months. But overall, with 64 cases in 25 years, 78% of the time stock prices were up within 12 months… and by a lot. The average change was up 27% and the median change was up 23%. But… long-term data in 2008 and 2020 were so bad that the short-term worry did not reverse… but instead basically accelerated or extended.
Next, today the US Dow Jones Industrial Average of 30 stocks reached a similar extreme (94 times in last 25 years). Usually, that has led to rising prices within a year. Again the exceptions include 2020 and 2008.
Brazilian stocks have reached a greater extreme. In the last 25 years, only 31 times (about 1 time per year) have markets been so likely to rally. It is 18.6 standard deviations from the norm.
So what will happen this time? I would not be surprised to see a rapid rally in stocks. Long-term overvaluation extremes like are present now could easily persist for weeks (certainly) and even for close to a year (like in 2021).
So what am I doing short-term? I actually bought the dip today. However, I will dump my positions (and take my losses) if markets dip much further tomorrow morning. We will see how Asia and Europe react tomorrow prior to markets opening again in New York. If global markets weaken, I will likely exit my “long positions” and then start to target entry points in relation to a potential acceleration of selling.
Again there is no opportunity that I know of which compares to the profits available from a stock market panic. Here is a chart showing an opportunity from just a few months ago across a few days:
Here is a few weeks in early 2020:
