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What Event Will Sink the Stock Market? Yields? Tariffs? Trump?

The answer is not yields, tariffs, war, famine, or Trump; although any of those could contribute to the selloff.

Here is a Tweet discussion leading up to the correct answer which will likely surprise many.

Gaga Over Real Estate

Thinking back to 2005, I recall this magazine cover.​

Gaga Over Real Estate

Things do not get any better than Time Magazine going "gaga" over real estate, right on the cover.

The media reflects the mood.

I wrote about it at the time and accurately called the top even though sentiment is extremely hard to judge.

Gaga Over Tax Cuts

In January 2018, nearly everyone was giddy over Trump tax cuts and business investments that are not likely to happen.

In February, investors were so convinced stocks could not drop that they were shorting the VIX more and more every time the VIX rose.

Things finally snapped.

Inflation Sentiment

With nearly everyone so hell-fire convinced inflation is on the way, I propose Inflation is in the Rear-View Mirror.

Before anyone shouts that I have lost my mind, please read the discussion about what inflation really is and how things work in the real economy.

If the Fed reverses course will it be as bullish as before or will investors react as if the curtain was pulled on the Wizard of Oz?

Peak Equity Sentiment?

Have we seen peak sentiment in equities this cycle?

I do not know the answers to those questions, nor does anyone else, but valuation speaks for itself, as noted in Sucker Traps and the Arithmetic of Risk.

The VIX

In regards to the VIX massacre, what happened? Inflation fears? Rate hikes? Anything?

You can conjure up a catalyst, but what really happened is there was a sudden sentiment sentiment change regarding the notion that being short volatility was a guaranteed smart thing to do.

Junk Bond Whales

Junk bonds and equities are correlated. They both represent risk assets.

​Four days ago I noted that a Mutual Fund Whale Goes "All In" On Junk Bonds.

Just like the VIX speculators, the junk bond whales have no concerns about valuation.

How does BST do market timing? The fund uses a computer program.

Bear in mind, many of the securities in the ETF are extremely illiquid. A credit manager informed me that "up to 90% of the bonds in HYG don’t trade on a daily basis."

What can possibly go wrong?

Buy the Dip!

With "buy the dip" so overwhelmingly pervasive, there does not have to be any catalyst for a sustained decline.

I strongly suspect there will not be one.

  1. Does anyone recall a catalyst in November of 2007, one month ahead of the Great Recession? If there was one, what was it?
  2. Does anyone recall Bernanke's denial on the housing bust?
  3. Does anyone recall Greenspan's worry the economy was overheating in summer of 2000, right before the dotcom bust?

Regarding question three, the FOMC minutes show Greenspan was concerned about overheating right before the dotcom crash.

hmmm.

What will change this time?

Sentiment.

The same thing that changed in 2007 with equities, 2006 with housing, and 2000 with dotcom stocks.

The pool of greaters fools will eventually run out, and it won't take a recession or a drop in earnings (although both are coming).

Here's something to think about: Perhaps the pool of greater fools has already run out. If it has, when will you know?

Mike "Mish" Shedlock

I feel we are in uncharted waters and should take nothing for nothing for granted. To assume we will move forward without a glitch is extremely optimistic. With the passage of time, things change and evolve. This transformation can be seen in both society and the economy. A question we must ask is just how relevant today's comparisons are with prior economic cycles?

The situation today is in many ways "historically unique" due to the rampant expansion of credit in recent decades. Recently I found myself pondering the line, "outwit and outlast" that is often used during the popular hit television show Survivor. It occurred to me the winners in both life and investing often reflect these qualities and that this game is far from over. More on this train of thought in the article below.

"What Event Will Sink the Stock Market?" That would be when the pool of US-centric fools, that think the current situation is the same as 2000 or 2007, finally throw in the towel when the DOW breaches 40-50K. The private wave doesn't end until 2032. Who believes the smart money will be investing in govt bonds anytime soon?

What causes the crisis? A rising dollar and rates. What causes the dollar and rates to rise? That would be the anticipation of sovereign defaults, which will lead to a G20 meeting to jigger the system and replace the dollar as the reserve. Until then, stocks can't crash because govt bonds aren't an option.

“Have we seen peak sentiment in equities this cycle?” ~ Mish

Sentiment is extremely high for stocks. All-time high inflows just reported today :
Investors just pumped the most money ever into stock funds for a single week

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