Epocalypse When? When markets crash upward.

By Neuroxic (Own work) [CC BY 4.0 (http://creativecommons.org/licenses/by/4.0)], via Wikimedia Commons

The Fed’s rise in rates has turned my counterintuitive predictions true by resulting in a rapid rise in the stock market. Trading only had about an hour and half left after the Fed put out its word; so, the Dow only rose about 200 points. I wouldn’t be surprised to see the euphoria kick in full force today and push the market even higher.

How do soaring stocks square with my predictions of an economic apocalypse?

US stocks are rising on pure adrenaline. Nothing changed in a positive direction economically because of the Fed’s announcement. A rise in rates isn’t economic stimulus. Companies didn’t start making more money. Global recession didn’t slow down. Customers didn’t start buying more Christmas toys or all run out and buy a car. Employment didn’t jump upward.

In fact, the main data that came out on Wednesday was all about growing recession in the US:

Industrial production came in at the Econoday low forecast, down a very sharp 0.6 percent in November. This is the biggest drop in 3-1/2 years. Utility output fell a monthly 4.3 percent after falling 2.8 percent in October. Mining, reflecting low commodity prices and contraction in energy extraction, has also been week [sic.], down 1.1 percent for a third straight decline. (Bloomberg)

And I’ll let NewsMax summarize the main economic news of the previous two days:

Oil prices plunged, junk bonds hit a two-and-a-half-year low, stocks took a nearly 4 percent hit, a junk bond fund halted withdrawals, the country’s biggest pipeline operator cut its dividend by 75 percent and two of the biggest mining companies in the world suspended theirs completely.

With no good economic news topping the headlines on Wednesday, this rise was just an emotional sigh of relief that the much-feared event is behind us. The rate at which the market goes up now is a measurement of pure euphoria. It’s the big kick of adrenaline I said we could expect as the long years of wondering if the Fed will end zero interest are finally behind us.

In the minds of the bulls, it also says the economy must be exactly as sound as the Fed believes, or they wouldn’t have made this move. So, I would expect euphoria to build on itself, rising simply because its rising. Call it a euphoric bubble.

There is one reality-based reason behind it, too — a new source of fuel (money) now that the Fed’s free money is winding down. Investors who are now leaping out of high-yield bond funds need somewhere soft to land. However, movement from bond funds to stocks will accelerate the bond implosion, wiping out billions in paper wealth on the high-yield bond side. Unfortunately for the market bulls, such mega-bond crashes almost always lead directly into stock-market crashes.

Awareness that a bond implosion has become a full-on reaction will cool the euphoria, and the people who are celebrating over in the stock market will take a breath and look out their Wall St. windows and say, “Whoa! Look what’s happening over there to the bond guys. Oh my gosh, their whole building is on fire!” Suddenly all the stock-market bulls will run to the windows to stare at the bond fire. The euphoria ends.

Of course, the end of emotional stock buying could happen before the bond implosion is recognized if other negative forces crushing against the US economy burst the bubble first. Safety net gone now that free loans are gone, bad news is always just bad news now. (And don’t think the Fed can just whip the safety net out again if things start to slide quickly. That could have a real chilling psychological effect on the whole economy: “Whoa! We really are going back down the rabbit hole. Even the Fed knows we’re going down if it’s willing to take out its old magic again.” If the Fed thinks about what that kind of move indicates, it will be very reluctant to move.)

That is what changed on D-day. Reality is now here. There is no more cushion from the Wonderland effect where down was up because bad economic news meant the Fed would keep the free-money tap open. For the past several years, bad economic news almost always caused the stock market to rise as it stirred visions of Fed sugar plums in the dreams of investors.

Now we are back to a world where bad news is just bad news. It’s just a cold, rainy day. Bad news has no buoyancy safe to buy ambien online effect at all (and it never should have had such an effect, but it did). That means things go down, down, down from yesterday on (once the euphoria cools off) because there has been a swale of bad economic news that was helping the stock market back in its Wonderland daze, but we left Wonderland yesterday. Young investors have never experienced Reality World because we have lived in the Fed’s Fantasia for so long now. So, there is some real adjusting to do.

Am I playing fair?

You’d have a right to cry fowl over my calling the market rise the first phase of a crash if I hadn’t said prior to the Fed’s decision that, the crash would be upward at first if the Fed raised rates — counterintuitive and self-contradictory as that may seem.

Many contrarians and permabears are, I’m sure, scratching their heads this morning, wondering what went wrong with their predictions. Why did the market go up, instead of down; but if you read my D-day article yesterday morning, you already understand. If you didn’t read it …

After the Fed’s announcement, the market bulls looked to see if things immediately crashed and then started to party, throwing champagne into the air, ecstatic that their market didn’t immediately crash. Their party could last for days or end tomorrow. They don’t read this blog, so they don’t realize that, when you leave Wonderland, the only way out of Upside-down World is up the rabbit hole — a manic crash up. And manic rises, from what I have observed in human behavior, are nearly always followed by depressive crashes.

To use a simpler simile. Think of it as being like the cliché boiling pot after you’ve turned the burner off. You take the lid off, and it boils over even though the source of heat is gone; but then it cools down and boils no more.

Getting back to the motif of leaving Wonderland, there was a big updraft through the rabbit hole the instant the Fed ended its magic, and that’s likely to grow fierce from the chimney effect, but once it launches the bulls out the top of the hole, you know what happens next? The updraft effect from any chimney ends after you shoot out of the tube back into Reality Land. Particularly watch out, however, if the euphoria cools quickly because, after more than a year of concern over what would happen when stimulus ended, there is a lot of relief the bulls would like to celebrate. If the euphoria cools quickly, it’s likely to mean things are ready to go down hard and fast.

The metaphor I used yesterday was that the gas runs out on the bull’s hot air balloon as soon as the Fed ends zero interest, but their balloon would hit an updraft that would give it one last lift, even as it starts to deflate. Regardless of what they feel in the upward rush, the greater reality is that the gas is out, and their balloon won’t stay inflated without that fire. There will still be some bounces on the way down — as there has been in every market crash — but the trend will be all down.

How to Survive Anything: A Visual Guide to Laughing in the Face of Adversity

Today, you can expect the talking-head fools in the clown balloon to get out their cell phones and call the bears and prattle, “Yay, the Fed’s fire is out, and we’re still rising! See, we didn’t need the gas any more. Bet you wish you had stayed in here with us!”

No, I don’t. I think they’ve been breathing the gas, and I wouldn’t want to be in the buffoon balloon for anything. Let them have their last days in the setting sun, reveling in their fireless flight. It is all as expected here, so I’ll watch from my lawn chair on terra firma.

By Neuroxic (Own work) [CC BY 4.0 (http://creativecommons.org/licenses/by/4.0)], via Wikimedia Commons

Then, as the skies darken into the winter of our discontent, I’ll walk back into my warm little farmhouse and let the bulls fall from the cold night sky. Inside, where I’ve already marked December 16 on my calendar as the day that ended the bull’s balloonish dreams, my grandson will ask, “Daido (Irish for grandfather), what is that faraway screaming?”

“That,” I’ll answer, “is the sound of a lot of bull … finally going away when all the hot air has ended.”


  1. Ping from Delving Eye:

    Dave, here’s a like-minded thinker: http://www.marketwatch.com/story/stock-market-crash-of-2016-the-countdown-begins-2015-02-25

    Not exactly enjoyable reading, but proves your point.

    • Ping from Knave_Dave:

      Thanks for sharing a related story. I’m sure that the party in the White House will try desperately to hold the economy together until after the 2016 election as this guy thinks, but I’m not sure they can. At the same time, the Republican might love to see the economy crash because no incumbent president’s party stays in the White House when the economy is crashing. I think it will cave in around them before we get there. We’ll start to get a good sense of which way things are going over the next two weeks.

  2. Ping from jakartaman:

    As is everything timing is the key.
    I believe gold and silver will go down a lot more.
    The question is how low and when to jump in?
    I am also not sure wether the world economic collapse will not bring on world wide social unrest that could easily spiral out of control – with martial law and complete social and economic collapse?

    • Ping from Knave_Dave:

      I’m not sure what will happen with gold and silver, but I agree that a significant increase in social unrest seem likely. I hope not, but with the rise in anarchy we’ve seen, increase of police strength, increase of rage against police, it seems likely. During the Great Depression, great losses caused people to pull together more to help each other out. Like you, i’m not sure which way it will go — maybe some of both.

      Let’s hope that better side of human nature plays out or, at least, be those people who do respond that way. Todays world doesn’t seem to have the same sense of common values that led people to help each other, and I’ve suggested in other writings that things appear to be moving in the direction you describe. Nevertheless, bad times still sometimes cause people to rise to the occasion as we saw on and shortly after 9/11.

  3. Ping from Delving Eye:

    But wait, Dave, there’s more! Have you seen the market since you posted? Caving … http://www.nytimes.com/2015/12/18/business/daily-stock-market-activity.html

    • Ping from Knave_Dave:

      Oh, how fascinating. I had to go to my other job all day and wasn’t around a radio. So, this is my first chance to check back in. For all the years pent-up angst in the market over what would happen with the Fed’s first raise, I would have expected euphoria to carry us for a few days or even a week; but look at that: it didn’t even last a day! We got an emotional bounce that lasted for about two hours of actual trading time, since things started to go below yesterday’s close half an hour into today. That’s about the shortest bounce on such a major milestone ever seen.

      When the market starts going up and then goes up at opening the next day but quickly drops as far as it rose the day before, that is a pretty bad sign. The optimism of the bulls lasted all of two hours. I think that says fear is already gripping people, and the downward pressure being felt from all economic events must be huge.

      The party was over as soon as they woke up the next morning with hangover!

      • Ping from Delving Eye:

        Here’s another indicator (link, below) that’s telling me to wait until this glut of new housing isn’t selling before I hire somebody to redo my siding at a fraction of what it would cost me today. Sort of like 2009 all over again.

        I figure the time is late next summer. But who knows? Maybe as early as this spring, the s**t will be hitting the fan. What say you, Dave?

        Also, how low do you think the market will go this time? 6600 again?


        • Ping from Knave_Dave:

          Hi, Eye.

          I think you are right on both the housing market and where the stock market is eventually headed. I think the housing market will NOT lead the crash in the US this time, but will follow it. I think the commodities market has already crashed but will go down further, and the bond market is now taking the lead in that fall because of the impact of the commodities crash. Stocks will slide next now that bad news is only bad news, and I think we are already seeing that fall begin — a little quickly than I thought it would, though I was sure it would begin this year. Banks will likely follow that, even though they are strengthened by the Fed’s interest hike, since they are heavily involved in both. They are also interconnected with banks in other countries that will likely fall first. There fall will come later, though. As housing loans, shoddy auto loans student loans fail, banks will also fail; but that is all likely to trail the crashing cascade of stocks and bonds.

          Housing in many areas has returned to being as overpriced as ever, and those prices cannot be supported by present incomes without people taking on debt they really cannot safely afford. We’ve repeated most of our housing mistakes, including all those junk-bond derivatives; but the main failure in junk bonds isn’t coming from housing this time, but from commodities. I suspect you are right that housing will hold solid, at least, until summer (with its natural winter slump, of course), and I’m not sure it will come down quickly; but there is a lot of hot air that needs to come back out of housing, which was artificially kept on life support.

          I think the stock market could come down to the numbers you suggest. That’s about where it would be if you took out the past twenty years of artificial inflation by the Fed. Erasing twenty years would be pretty drastic, but the Epocalypse will be big enough that it could do that. In terms of labor, you’re probably right on.

          How it will affect the timing for residing your house, I don’t know. We need to reroof our barn (which blew off in the wind), and we’re glad that it times out when steel is priced low, as it will be a lot less expensive now than the metal roof we put on our machine and wood shop a year and a half ago. But siding prices, I don’t know.

          I would anticipate that it would take a couple of years for so much stuff to fall apart, though who know. The part I am certain of is that recovery has only been supported by the Fed’s artificial life support, and that the return now to the real world is going to be a long, cold winter. I am certain that the end of life support means vital signs will decline, and there will be many dramatic points along the way; but exactly how something so tremendously complex and large falls apart, is not possible to say. There are so many variables. What I do know that makes me sure of the destruction is that the fundamentals supporting recovery were weak and flawed, and now even they have ended; so the monumental structure of debt above all of that is going to start cracking up.


          • Ping from Delving Eye:

            Cripes, Dave. I know you’re right, but reading it in black and white is, gulp, still frightening.

            I’m mainly concerned about cash I’ve got at BofA. It’s parceled into $250k or less, so it’s FDIC-insured. I know I’ve asked you before, but should I worry? Move it under the mattress?

            • Ping from Knave_Dave:

              I’ve got most of our retirement plans tied up in cash in the banks. I think banks will be near the last to go this time. I don’t think it’s likely will not lead the way, and they may even see their own stocks rise for awhile; but they will eventually go, too. US government bonds (where you actually own the bond and not just a bond fund that people can flee from and cause liquidity problems) are the safest if you have money you want to store long-term. Reason being: if the US government collapses (if things get THAT big), all bets are off for everything. No one knows what that kind of pile-up looks like. The end of the world’s largest economy in one fell swoop has never been seen before, and I don’t know that it will go that bad, though it could, given our enormous debt and apparent inability in congress to lay out a sound course.

              BofA, as you know, I personally hate; but that’s another matter. I think your FDIC-insured cash in banks is realistically as safe as gold, which the banks can manipulate anyway. So, outside of US treasuries, US banks are are about as safe as you can find right now. If you’re spread between a number of banks, you’re in fairly good shape for now. There will come a time when you may want to change that; but I don’t think that time is now. We never know when any specific bank will fail as banks can hide their flaws until the last minute. We saw that last time around; and we saw it at the start of the Great Depression. In spite of regulators, they seem to fail by surprise; but there is only so much you can do, and you’ve done it.

              So, enjoy life, knowing you’ve done what you can, and the rest isn’t up to you. Don’t let economic concerns sap any joy out of life because this is your life to live and make the most of while you can. When times get worse, we’ll do the best we can with that, too. I think all one can do is take the most prudent steps available and then focus on life and relationships.


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