The Everything Bubble Bust Pt. 1: How Far Will the Stock Avalanche Fall?

Bundesarchiv, Bild 102-08803 / CC-BY-SA 3.0, CC BY-SA 3.0 DE , via Wikimedia Commons

Let me begin to describe the scale of the economic collapse that I believe has reasonable likelihood of happening without going all apocalyptic, as I could easily do if I started calling into mind geo-political crises, climate troubles and all that stuff. Let’s just stay with historic examples and forces in play right now and begin with the stock market where all interest lies at the moment.

I believe our economic crisis is turning into an economic collapse. I say that because this time we are talking about, at least, three major bubbles breaking — stocks, bonds and housing. All have risen to absurd height by many metrics, but more importantly all are tied to bonds, and bonds are where the breaking is originating. I think the break of the stock market could be as bad in scale as in 2000 and 2008. I suspect the housing crash will not be as bad as in 2008, but I am not sure of that; and I think the bond market could easily become the mother of all bubble bursts. And then we have inflation!

I am not saying all of those things will reach those levels, but all will break down in a major way, and the combination of all that will be something worse than a crisis, which is where I’d peg The Great Recession — often called the Great Financial CRISIS. This time I think we have higher bubbles in everything, and so will have a bigger train wreck. On top of that, the whole world is moving from crisis toward calamity at the same time as other central banks think they can tighten in this delicate world.

As Jeremy Grantham recently said,

What is new this time, and only comparable to Japan in the 1980s, is the extraordinary danger of adding several bubbles together, as we see today with three and a half major asset classes bubbling simultaneously for the first time in history.… Even more dangerously for all of us, the equity bubble, which last year was already accompanied by extreme low interest rates and high bond prices, has now been joined by a bubble in housing and an incipient bubble in commodities.

Seeking Alpha

Grantham also notes that all bubbles this size have broken all the way back to trend. The checklist for everything that needed to happen for each of those bubbles to break, he says, has not been completed for every bubble in the Everything Bubble.

The checklist for a superbubble running through its phases is now complete and the wild rumpus can begin at any time.

In terms of predicting the scale of this superbubble economic collapse, I am not intending any of this as the kind of certain and forceful predictions I made when I said inflation would cause the Fed to tighten rapidly, which would cause bonds to crash, which would cause stocks to crash. I think all of that is playing out spot on so far, and we will see roaring bear markets in stocks and bonds soon enough. I’ve never put an exact time on that, but have said those are the forces that will tear things apart, so expect the crash when you see inflation turning the Fed toward tapering. So, it has begun. As to the question of how wild the bear gets, though, that comes down to ranges of possibilities from least likely to worst-case.

(I throw in the word “likely,” of course, because there is always the possibility of something far worse if new black-swan events come crashing down into the picture, such as if a new COVID variant turned highly deadly or a huge war with Russia broke out over Ukraine or with China; but I don’t think those things are likely, though they are remotely possible, and we’ve seen a lot of things in the last two years we hoped we’d never see (like our move into an Orwellian world so quickly, as I wrote about on RT), so I don’t rule anything out.)

Stocks have begun their bear journey, and the NASDAQ leads the way.

The NASDAQ will be hit the worst in this crash, just as it was in 2000, because it is the epicenter where the worst speculative nonsense has found its home. I said that before stocks started to fall, and we are already seeing it lead the way down now. It shot up the fastest and highest, relative to its starting point after the Great Recession, and especially after COVID. It will come down the fastest and hardest just as it did in 2000. So, I’ll focus on it as the leader of the pack for this nasty journey.

Here are the short-term levels of support for the NASDAQ as it works through its first big crash in what will likely become a protracted event that plays out over a couple of years with recovery rallies and deeper crashes further down the road as other things around the NASDAQ slam into corporate valuations just as happened in the dot-com bust: (Red lines are my additions.)

The NASDAQ readily busted through the original blue line of major support around 14,000, which it was above when I first assembled my additions to this graph for this article, and it has since jackhammered lower. Its descent has slowed as it pushes down toward the first dotted red line of secondary support around 13,000. It attempted a climb back up early in the week, but then Powell’s very neutral, dovish speech slammed it back down toward that level. For the NASDAQ, this has been the worst start of a year in, at least, thirty years, and that includes during recessions that lasted for a good two years.

The image to the left reveals the market’s hollowed out underside, which I’ve described in various ways in other articles so I won’t go into it more here, except to note we haven’t seen anything like this since 1998. The events boxed in yellow are the market’s breakdown during Fed tightening in 2018 and the markets big crash in March 2020 and the present situation.

Says Sven Henrich of Northman Trader about his chart,

The first conclusion I draw from these charts is that this sell off in its current state is one of the worst we’ve ever seen in terms of the underlying damage inflicted on individual stocks…. On an individual component basis the carnage underneath is historic.

Northman Trader

What does it say of the market’s current fragility that the NASDAQ plummeted almost 700 points from its intraday high at the start of Powell’s speech to its lowest point near the end of his speech and then was still down 500 points from its high by the end of day, lying flat on the ground? The Dow did much worse plummeting almost 1,000 points during the day and closing down 124 points in a ditch below ground level.

Barron’s comments offer some perspective on that question:

The Dow Jones Industrial Average has taken investors on a wild ride this week—the kind that only happens when there is a crisis afoot. The question now is what kind….

The Dow’s percentage moves have been extreme, with the index averaging a 3.24 percentage-point turnaround over the past three days….

The thing is, those moves rarely occur alone—and rarely do they happen when there isn’t trouble afoot. Swings of more than 3-percentage points happened 34 times between Feb. 27 and June 16, 2020, as the market first tumbled and then rebounded from the Covid-19 pandemic. And it happened 100 times during the financial crisis from Sept. 15, 2008, through April 3, 2009….

The Dow had 13 such moves from Aug. 5 through Oct. 5, 2011, as the world wrestled with Europe’s debt crisis, the ramifications of the debt-ceiling showdown, and Standard & Poor’s downgrade of the U.S. credit rating. There were four in a row from Aug. 24 through Aug. 27, 2015, as investors fretted about the devaluation of China’s yuan and the impact it would have on global markets. Although the Dow bounced back soon after, the stock market eventually fell again and bottomed out in February 2016 amid fear of mass bankruptcies among oil companies….

The streak that looks the most like this week’s volatility might be the period at the end of 2018. That was when the market had its infamous rout, including the Christmas Eve massacre, that forced the Federal Reserve to stop tightening monetary policy and start easing. The Dow had 7 such streaks from Dec. 7 through Dec. 28 of that year.

These major gyrations, in other words, are not moves that keep company with good times, and the Fed’s taper is only halfway done while everyone claims (wrongly) “the economy is strong.” So, what is the big deal that is shaking markets at this kind of core level? All talk has been on inflation because of how it forces the Fed’s taper. I guess the taper must be devastating already, if the gurus are correct about the economy, and this “strong economy” is still running on high-octane Fed fuel that tops QE3! So, how much shakier do markets get when the Fed, again, doubles the rate at which it is tapering and then how much worse still at the end of March when all QE is down and done?

Powell’s speech that sent all indices back down was as dovish as a tightening speech gets. He really didn’t say anything that everyone I was hearing didn’t already believe was the most likely scenario — that the Fed would be done tapering by the end of March and then would start interest hikes. Look at how high the market opened on pure hope at the start to the day yesterday from the day before, than look at what happened as Powell gave one of the mildest speeches one could hope for at a time like this when surely everyone knew the Fed would most likely take the course they did:

There were no surprises in the talk. It was just hearing that the Fed’s “accommodation” really is going to wrap up the way everyone thought was most likely that sent chills down the spines of all major market indices. It just suddenly got real for those who were floating on hopium, believing by denial that the end wasn’t somehow real. Where the frightened NASDAQ will land in its first crash sequence (two charts up), I’m not sure. And then we start interest hikes for the next phase down. And if that doesn’t knock things to pieces, then we start actually sucking money out of the economy while doing interest hikes, not just reducing the rate at which we create new money (as with the taper).

I suspect the NASDAQ makes a bear-market rally off one of those lines of support, BUT I am far from sure that it will.

[Note added July, 2023: The NASDAQ did, at its bottom, bounce off the middle dotted line in the first graph at about 10,000.]

Further down the road, the following graph shows the zone where I think the more general S&P is most likely to end when the Everything Bubble finishes imploding based on the stock market’s strongest longterm trends and support levels.

The curved arrow is based on the typical shape you see for big crashes in an economic crisis, which rarely go down steeper than their rise once they have found their final resting point and even tend to fall somewhat symmetrically to their rising leg. So, it is simply the approximate symmetrical side one might expect for the time it takes for a truly big crash event (like 2000 or 2008) to fully play out. I’m aware that stocks take the escalator up and ride the elevator down, but they also get some big rallies during these protracted major crashes before they move over to the next express elevator down.

[Note added in July, 2023, well after original publication of this article: Interestingly, a symmetrical decline would take us right down to the first level of very strong support I had shown here where the market pounded its head against massive resistance on the way up for two years, ending when the Trump rally began, and it wouldn’t be expected to hit that level until sometime in 2026.]

Next you can see the downward trend in all the recent plunges shown with the straight arrow. Someplace between the typical fall from a big top to the recent downward trend of the bottoms the straight arrow follows seems a sensible resting place. That also lands right between the two strongest levels of support — the dotted lines from the one bust I predicted last time the Fed tapered (late 2014-2016), which didn’t quite plummet like I thought, but it did leave the market deeply wounded and in a correction coma for two years— and the matching tops of the too greatest busts in this century, which were also the worst since the Great Depression. Prior points of major resistance at bubble tops like those become very strong resistance on the way down; so those twin peaks should be very strong resistance, given how significant they were.

The lowest dotted line shows the minimal secular curve the market was following before any of the Fed nonsense that pumped up the dot-com bubble and bust and then the housing bubble and bust and now the Everything Bubble and bust. It’s a trend representing where the US was going based on progressive innovation and population growth without nitrous-oxide injections from the Fed. You can see how that long-term natural growth trend forms a slowly progressive curve that touches the bottom where the dot-com bust found solid support and then supports the bottoms along the choppy rise we experienced coming out of the Great Recession. I suggest it as a likely worst-case landing area with the noted caveat that the downward path of the housing bust became so steep and created such momentum toward the end of the resulting Great Recession that it busted for about a year right through that natural growth line, and that could happen short-term this time, too.

Somewhere in the green box looks like a natural resting zone for the S&P. That is, at least, back to the bottom of the 2020 implosion — the steepest on record, which fell to the level of resistance just mentioned for those two years of going nowhere — but I don’t think it will get there in one shot. I’ve never suggested that. Of course, the 2020 bust was uniquely steep compared to all prior bear markets and recovered uniquely fast. So, it’s far from essential.

In the very least, I think we are going to wipe out the absurd rocket ride since the COVID recession.

[Note added July, 2023: That best-case scenario is exactly the level the market hit at what, so far, has been its bottom; so, it did meet the least-drop scenario about nine months after I published this article; but it is far from clear, yet, that this big bear market isn’t going to take another ride down as the Fed continues to tighten, which has a minimum 6-month lag in outcome, and banks continue to bust and corporate bankruptcies keep increasing. There have been no substantive changes to his article after it was originally published outside of these bracketed notes that make clear what is being added of some substance, but just as a note.]

One of the most insane things I’ve heard recently is that this market still needs to form a blow-off top. Really? What on earth do you call that final rise compared to ALL other rises before it if that is not peak market-mania melt-up? That comment came after I shared that graph and became a self-parody, providing its own evidence of how irrationally exuberant investors have become.

The longest, steepest, and (because it is happening during a global pandemic) most insane rise the market has ever made supposedly shows no sign of a melt-up yet??? Just put my head in a vice and squeeze it. That is by far the biggest rocket ride anyone has ever seen, and it has been happening while the entire underside of the market corroded away to where more than fifty percent of NASDAQ stocks are now in their own bear markets, leaving no support to the outer skin of the market that remains inflated. (Yet, there are still idiots saying, “Buy the dip.”)

The big difference here as I’ve said many times for those dip buyers is that the Fed isn’t coming back in as easily this time. Most of those buyers have NEVER experienced a Fed that HAS to fight inflation. The dip-pumping Fed never had any significant inflation to even think about. In fact, it’s problem was always (in terms of its own goals) how to get inflation up to the level it likes. This is an entirely different playing field with different rules.

Former Dallas Fed President Richard Fisher, who likely has a little more insight into the Fed’s resolve, reinforced that in a statement this week:

“Let’s face it Joe, I want to come back to the alcohol metaphor we started with, the market has been wearing beer goggles for the longest possible time…and they just assume the Fed’s going to bail them out. I think the strike price on the Fed put has moved significantly…and unless we have a dramatic turn in the markets that indicates it can infect the real economy, I don’t believe – under this chair in particular who has a credit market background – that they will be weak in following through on what they pronounced.”

Zero Hedge
Chagai at English Wikipedia, Public domain, via Wikimedia Commons
Avalanche on Everest

The great stock avalanche and our line of descent

As I’ve long said, the NASDAQ looked like it was forming a bubble as it did in 2000 (with a vastly steeper and higher blow-off top), and I said the NASDAQ will likely lead the rest of the stock market down. This crash will also likely be protracted like that one, so let’s take a refresher on what the dot-com bust looked like, especially for any who weren’t trading back then. Notice its relatively symmetrical shape:

Adha65, CC BY-SA 3.0 <>, via Wikimedia Commons

What is particularly avalanche-dangerous on this NASDAQ mountain right now is the generals (the top leaders), which have a long way still to fall. While the bulk of NASDAQ stocks (in number) have already crashed into bear markets, the six stocks with the most value still form a mammoth cornice at the top of the mountain. In the graph below, you can see in the bright-blue line how the top five stocks in 2000 lost their position in the market and plummeted during the NASDAQ bust, and in the shadows on that graph, you can see how today’s top six have only put in their first jag down. Their overhanging weight is enormous.

Oleg Brovko, CC BY 2.0 <>, via Wikimedia Commons

The cornice in today’s NASDAQ has cracked and started to move. In 2008, the leaders broke loose, then held a bit and then plummeted, and then the avalanche continued to rumble far into the valley for fifteen years, as you can see in the graph, before those five finally lost all of their momentum and started to regain position in the market. That big crash of those five leaders, when it happens, will pull the whole market with it because they are really the only thing holding indices up because of their disproportionate value, so the indices have no other support under them.

The generals took the fall last time along with everything else. At 23% of the S&P 500 right now, the generals leave the S&P a long way to fall, too. Again, not all in one crash. But the Fed’s more-rapid-than-ever reversal from more easing than ever to full tightening mode could speed things up! The funny thing is that anyone thinks the market can survive that, and yet a great many obviously still believe the market can survive that.

A caveat and a technical win on my big prediction for last year

The biggest caveat is that I’ve been wrong in scale before. However, I did predict significant troubles to occur that correspond with each of the red plunges shown in the graph to the right, which is similar to one above but spread over a longer timeline.

Where I’ve sometimes been off is in the size of the fall. However, I’ve not so much been wrong in how big the crash would have been if left alone, but wrong in not seeing how big the Fed’s response would be to save the market during the crash. Now, you say, “How can you say you think you were right in how bad it would have been, had the Fed not rescued it?” My answer is that the sheer scale of the Fed’s responses to those incidents proves how big the FED thought the crash would be, or it wouldn’t have printed money from there back up to the mountain top and beyond to stop it from falling on us; and you know the crash would have been far worse than what played out, had the Fed not made a massive rescue effort.

We know from experience the Fed will interfere at some point in all of this and the federal government, too. Since we can be certain the Law of Diminishing Returns has not expired, we know the combined efforts of the Fed and feds have their own effectiveness expiration date, but we don’t know how close that is. I think we can safely say they will be nowhere near as effective as they were in 2020 unless they make even greater efforts, but they will likely keep us from hitting the absolute bottoms described here.

Consider the bottoms I’m describing here to be the likely final resting points if recovery efforts have zero effective interference. You can gauge how correct my general prediction here is by how much of a response it takes from Fed and feds to arrest this fall. Even with their best efforts, I think multiple knock-on-effects will keep damage coming for some time, just as we still have damage from the initial 2020 lockdown and all those that came later. Only this will likely be worse.

Finally, I’ll note a milestone in this journey that happened today. In the most minimum way, it technically saves my my blog from the risk of the bet I made when I bet that inflation and the resulting Fed tapering would “kill the bull market.” One index just passed that level: The Russel 2000, generally referred to as one of the market’s broadest indices, ended in a bear market today.

The small-cap Russell 2000 fell into bear-market territory Thursday as Lucy yanked the ol’ football away from Charlie Brown yet again. For the fourth consecutive day, what markets did in the morning looked nothing like how they finished. Today’s session started off cheerily enough on the back of a pair of positive economic releases.


Even in the face of positive news today, the broader market fell into the bear zone because of all that soft underbelly that has been crumbling away for months. So, we can ring that bell. The bear just won that fight and ate the Russell bull. While a solitary index turning into a bear market is clearly not the size of what I was and am expecting, I did define that as my MINIMUM term for my bet, and there is plenty more to come because the NASDAQ is already not far behind.

Next up for my patrons: The Everything Bubble Bust Pt. 2: The Big Bond Blowup

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