stock market Archives - Independent Investment Advice Blog | Investment Planning

Dramatic Stock Crash: What Next?

This week's stock market crash of over 10% is one of the four worst weeks since WWII for stocks. The others were Black Monday 1987, Dot-com bubble in 2000, and the GFC crash of 2008, which was the worst. The 2000 bubble was mainly in tech stocks while the low tech companies were not that badly overpriced, so that crash was less of a comprehensive crisis. The 1987 crash occurred when debt levels were much lower and demographics more favorable. The 2008 banking crash was mainly about financial companies that were stuck with a negative net worth because they made bubble-like loans to the housing bubble, so they were able to respond to central bank QE stimulus and suspension

Don Martin2020-02-28T16:41:24-08:00February 28th, 2020|mayflowercapital blog|Comments Off

Grantham’s Forecast: Is A Crash About To Start?

Jeremy Grantham of GMO published a document at gmo.com on Jan. 3, 2018 that the SP needs to go to 3,400 to 3,700 to be high enough to have a crash. First a melt-up (where stocks go up far too fast) is needed to lead to a crash. The big stock price increase of 2019 implies that a melt-up has occurred. The idea would be a 60% increase from the 2,100 level in mid-2017 until it reached 3,400 in 21 months. In actuality it took over 30 months to climb nearly 60%. If a bubble is too modest and gentle then apparently it is less likely to crash. Recently the SP reached 3338. It dropped 1% today. Grantham mentioned

Don Martin2020-01-24T17:44:02-08:00January 24th, 2020|mayflowercapital blog|Comments Off

30 year Anniversary of Nikkei Crash

The Nikkei index in Tokyo peaked 12-29-89 at 38,915. Now it’s 23,837 (a 38% loss) despite massive stimulus, gigantic government debt of 600% of GDP (double the US percentage), Quantitative Easing, negative interest rates, and outright purchase of equities by the central bank. Much of the last 30 years it traded near 10,000, a 75% drop. Some real estate in Japan dropped 90% after the 1989 crash and some Japanese mortgages were sold with a 95% drop in price below par. It seems a lot of bubbles result in a long term drop of 75%. The U.S. NiftyFifty stocks of the 1970’s dropped about that much (and never fully recovered when adjusting for inflation, despite the huge 1999 boom).

Don Martin2019-12-30T18:17:55-08:00December 30th, 2019|mayflowercapital blog|Comments Off

Why Recession Has Been Delayed

Several years ago people worried that recession would soon come and make stock prices plummet. Instead the economy kept growing and is now the longest expansion in U.S. history. Reasons why recession was delayed: 1. Aggressive use of junk bond investing (by yield-starved investors) has provided extra funds for poor quality business; in previous cycles these businesses would have failed sooner thus triggering a recession. 2. Migratory capital from the EU and Japan, where desperate savers hurt by negative interest rates, have sent capital to the U.S. junk finance markets. (Junk finance can be junk bonds, Bank Loan Funds, Peer-to-Peer loans, BDCs, put option writing, and some Venture Capital funds that foolishly invest in over-hyped non-technical so-called “tech”

Don Martin2019-10-18T16:28:37-07:00October 18th, 2019|mayflowercapital blog|Comments Off

Complex Theories May Confuse You About The Stock Market’s Hidden Risk

In the 1997-2007 mortgage housing bubble the enablers of the bubble tried to rationalize using the Gaussian Copula theory that a Mortgage Backed Security holding mortgages from different states would act diversify the risk of a default. But that rationale was wrong because it was assumed that the successful borrowers would offset the damage caused by the losers. Instead the winners, who are borrowers, are not obligated to bail out the loser or to pay extra to the lender to make up for the loss caused by the defaulting borrower, so the “diversification” was bogus. A similar phenomenon is happening where financial experts assume the central banks can bail out the economy by cutting rates deeply. The problem is

Don Martin2019-06-19T17:06:19-07:00June 19th, 2019|mayflowercapital blog|Comments Off

If Stocks Crash Can The Federal Reserve Repair The Damage?

When the recession comes, stocks will go down. The Fed can’t cut rates enough to prevent or heal a crash. Typically the Fed needs to cut rates by 5% in a crash; since they are now at 2.4% they would have to go to negative 2.6% which can’t be done without destroying the economy, and thus it won’t be cut to a negative rate. The intrinsic value of the SP is 1,800 (the peak was 2,954); the intrinsic value of the SP could even be as low as 1,100. If the Fed can only provide about half of the rate cuts needed to heal the next crash then perhaps stocks would get stuck at halfway between intrinsic value and

Don Martin2019-05-16T13:33:54-07:00May 16th, 2019|mayflowercapital blog|Comments Off

Can The Federal Reserve Prevent A Deep Stock Crash?

The current stock market is a repeat of the irrational NiftyFifty stock market of 1973 with very high Price/Earnings ratios in the 1970’s which had nothing to do with low yields, bailouts, implied promises of Fed put options, corporate buybacks, QE, etc. – it was plain and simple irrational investor emotions in 1973 that created a stock bubble that lead to a crash. OK so the Fed did overstimulate in 1972 election but in those days it was a broadly dispersed benefit instead of today’s QE benefiting only stocks. It is tempting to feel a new era of permanently high PE’s has occurred but leaping to that conclusion is wrong as it is motivated by a desire to conform

Don Martin2019-04-29T18:42:34-07:00April 29th, 2019|mayflowercapital blog|Comments Off

Incorrect GDP Fools Investors

Today the GDP quarterly data was released showing a surprisingly strong 3.18% increase. Yet bond yields declined, implying the bond market thinks the economy is slowing down. Harald Malmgren on Twitter said the BEA used an inflation rate of 0.64% to calculate a “real” GDP of 3.18%. If the BEA used the CPI (done by the BLS) of 2.27% the GDP would be 1.56%. In my opinion one should use the PCE inflation index of 1.3%, less a 0.25% downward adjustment for errors in the contrived “Owner’s Equivalent Rent” housing cost index, making inflation 1.05%, some 0.4% higher than what was used to calculate GDP. If my method was used then real GDP would be 2.78%, lower than some of

Don Martin2019-04-26T15:19:59-07:00April 26th, 2019|mayflowercapital blog|Comments Off

Stocks Hit New Highs: Should You Buy?

Today the SP index closed 2 points higher, (now at 2933) than the previous all-time high, which was in September, 2018. With the PE10 ratio at 31 this ratio shows stocks are priced at double fair value, implying that eventually stocks will crash 50% and stay down for a long time. It may be tempting to short sell stocks but as Keynes said, “stocks can go up longer than you can remain solvent”, so shorting is too risky. Since stocks are mostly bought by the affluent top 10% of society and these people are doing quite well in their careers then they can take their lucrative earnings and invest in stocks, thus fueling the bubble. But is it right to

Don Martin2019-04-23T15:42:25-07:00April 23rd, 2019|mayflowercapital blog|Comments Off

Stocks Very High: When Will They Crash?

Today the SP index of stocks closed at 2907, very close to the all-time high of 2940. It is tempting to wrongly leap to the conclusion that the ten year old economic cycle will never go into a recession and thus stock prices will grow infinitely upward. Junk bonds and similar junk quality loan assets continue to rise in price, implying the market thinks no crash is coming. As junk bond prices rise this makes their interest rate lower and thus attracts more borrowers, thus stimulating the economy. I have for a long time advocated that the tipping point in flipping over into a recession is the reduction of the availability of cheap, plentiful junk financing. If the supply

Don Martin2019-04-12T16:44:34-07:00April 12th, 2019|mayflowercapital blog|Comments Off