Irrational Exuberance In Stock Market Knows No Bounds

Market Commentator & Financial Writer
February 2, 2016

SouplineJanuary was the winter of our discontented stock market. It was the worst January since 2008, when the Great Recession officially began. It was, in fact, the worst January in the history of the New York Stock Exchange. According to Citigroup, Inc., it was also the worst January ever for credit markets.

A financial professor at NYU agrees with Citigroup on that:

Altman said the correlation among stocks, bonds and energy prices has never been higher, meaning that when stock markets move, the spillover to bonds and energy prices is even more powerful. That hasn’t happened before, he said.

“I didn’t expect things to change this quickly in the last month,” Altman said. “Last Friday, we had a swing by one percent, and we almost never see a one-percent swing in a day in the fixed-income markets. It shows a huge amount of volatility.”

“Crises in the credit markets will trigger economic recessions,” Altman said. “We don’t need a 10 percent default rate to have a recession. I am not saying we will definitely go into recession, but it’s fair to say the likelihood of recession in the U.S. is much higher than just three months ago.” (“NYU’s Altman Says US Defaults to Climb, Recession More Likely“)

Some people thought that a January like this is unpredictable. That’s odd to me because I was certain it was inevitable. Now we have people — perhaps the same ones — who say this January is hardly a harbinger of a recession — that it is nothing like the Great Recession when we had massive bank failures. Oh, silly little kings of mental ineptitude! January 2008 did not have any bank failures or major events either. The first failures didn’t happen until six months later! This January, in fact, looks far worse than the January when the Great Recession began.

How soon they forget that Bear Stearns didn’t crash until the summer of ’08. How soon they forget that, in January of 2008, none of them believed we had just entered a recession because recessions are never officially declared until we have had two consecutive quarters of GDP contraction. (Let’s not even bother with calling it negative “growth.” It’s simply decline.) Then they are declared to have begun in the first month of the first of those quarters. How soon they forget that, just days before Bear Stearns collapsed and before the second quarter of GDP shrinkage was known, Ben Burn-the-Banky declared there was no recession in sight.

That explains why they think stock market crashes like the one we have been in all month are not predictable and that recessions are not predictable. Because they can’t even see a recession when they are months into it, they believe no one else can. Surely no one can be smarter than the central planners of the US economy! Never mind that some people, like those in The Big Short or like myself, said in 2007 that a complete global financial meltdown was going to happen in 2008.

The nation’s financial gurus, who turn in unison like a murmur of starlings, thought those people didn’t know a thing back then. They laughed at them … and then lost a fortune to them. Afterwards, they were certain those people who saw it coming and protected themselves from it or set themselves up to profit from it were just lucky. No one can be smarter than our central planners. Now, as history repeats itself, our pedigreed designers of economic deconstruction say again, “Well, lucky guess about that whole stock market crash thing this month.”

In spite of the fact that they don’t think recessions are predictable, I’ve read a few of them recently who don’t hesitate to make their own prognostication that the present market drop is not going to become the kind of all-out crash that goes along with a recession because one key essential for such recessionary crashes is missing — “irrational exuberance” by investors.

If that’s what they needed to believe this crash is one of the big ones, then last week should have put that requisite criteria to rest.

The broken FANG

I am writing to assure you this bitter January is a harbinger of global economic collapse. Let me make it repeatedly clear that this is far more than a stock market crash. We have entered the Epocalypse. We are standing in the dragon’s mouth as it dives into the abyss. Leaning against the dragon’s teeth, our central planners and gabby gurus look out at the spinning world around us and assure us they see no sign of anything that looks like a dragon; and, though the world appears to be spinning, it does not mean we are falling.

“Not all bad January’s are harbingers of bad years,” they have been saying, and that is true; but this one is.  The prophets of false comfort will tell you that forty percent of the time a bad January in the stock market winds up turning into a good year for stocks. It’s only about sixty percent of the time that the rest of the year matches the first bad month. True enough. However, when you consider that the number of years when the stock market goes down for the whole year are a lot less frequent than the ones where it goes up, a 60% match of bad years to bad January’s is well above the odds for correlation.

As one who is not interested in tickling your ears with half truths, let me just tell you that this January is one of the sixty percent where the year will match, and I’ll tell you why for reasons that have nothing to do with statistical averages or old-analysts’ tales of the New York exchange.

I will even turn to the preachers of non-recession for my argument. They say the permabulls must start buying the market up euphorically when it makes little sense to do so in order for a crash to become recessionary. When the bulls start trying to rally over nothing, you know they are desperate. A supporting sign is when every rally fails to hold.

Well, that is exactly what the stock market looked like through all of January but especially last week. What we see saw at the end of last week was that the bulls moved from being rosy-eyed with optimism to being rosy-eyed with inebriation. Their actions were beyond unduly optimistic in that they are now crowding into a smaller and smaller bull pen. In 2015, the bull pen consisted of only ten corporations on the New York Stock Exchange that were keeping the major indexes —  like the Dow, the S&P 500 and Nasdaq — in positive territory. Mainly there were four– the “FANG” stocks, Facebook, Amazon, Netflix, and Google — keeping the market positive.

The bulls lost one of the top-ten part way through last year when Apple started to decline, bringing the bull pen down to nine stocks that could be counted on for bullish survival. Thursday of last week, they lost one of the FANG stocks — the top four. Amazon came in with horrible earnings for 2015, so its stock tanked. (Apple came in worse, too, with iPad sales down 25%.) Amazon’s founder and CEO, Jeff Bezos lost $8 billion of his personal paper wealth overnight. Both Amazon and Apple also have poor outlooks ahead. Apple has been sliding rapidly downhill for several months, practically stumbling over a cliff at some points.

Any fool should have known the FANG stocks had to crumble soon. With an average price-earnings ratio well above 100x, they were all grotesquely overpriced due to market crowding into the best performers. Now, a market that was already crowded at the top has twenty percent less space to squeeze into in terms of the number of companies that are still rising. The bulls are running into a narrowing chute. And when bulls run into a chute, that chute usually goes into a truck headed for the slaughter house.

While some of the leading corporations in the US stock market took the worst hits, the majority of businesses that reported last week missed expectations and lowered their outlooks for 2016. Having exhausted years of the most massive economic stimulus in world history, all we have to show for it is corporations all across the industrial spectrum that are in decline … and the greatest mountains of debt ever known to mankind. Yet, the market soared on Friday

Bullheaded behavior

Let’s test the rationality of the bull’s behavior last week to see if crowding into a rapidly narrowing chute of safe stocks is “irrational exuberance.”

We left the world where bad economic news was received as good news back in December when the Federal Reserve crossed the point of no return and made its decision to end all visible stock-market stimulus. That left no more reason to think bad economic news meant the Fed might hold off on ending stimulus. That calculus should have been removed from the algorithms of robotraders and real traders because the decision is behind us now. If the Fed did go back, it would only mean everything they did failed. Repeating the same “solution” and expecting different results would fit the definition of insanity. So, market investors would have to be insane to think that the Fed’s returning to stimulus programs is cause to celebrate.

There was actually some solid economic sense to that upside-down world when the Fed was still looking forward to ending its stimulus. That sense was this: the central bank was by far the biggest player in the game when it was giving away virtually infinite amounts of free fiat money (money that is simply declared into existence with a couple of keyboard clicks). No other economic news could compare to those moves. So, what mattered more than anything to the market was how many tens of billions of new dollars were going to get dumped into the casino for free play every month.

Think of it this way: if your mama told you as a child that every time you skinned your knee by falling on the sidewalk (bad news), she’d give you a thousand dollars as a balm to the pain (good news), you’d probably go out and skin your knee on the sidewalk on purpose just to get another thousand dollars. Bad news would be received as good news — big rewards for small pains. Accidentally skinning your knee again would become a cause to celebrate. Then the day comes when your mama says there will be no more hope of the thousand-dollar balm. From that point on, a skinned knee will go back to being just bad news that hurts, and your enthusiasm for skinned knees should change instantly.

The Fed’s recovery plan produced worse unintended results than mama’s thousand-dollar balm would have created, to where it became the only game in town; but that game is now over. The market has started going down on bad news again and up on good, but last week it started to focus obsessively on trinkets of good news while ignoring a barrage of bad news. Now, there is no kind of rationality in that at all. It’s just denial.

Stocks dropped on Wednesday when the Fed made it clear that it is still strongly considering additional interest-rate hikes this year. The sad bulls said, “Shoot, I guess they really are done with their stimulus,” and they retreated to the corner of their pen to have a group cry. (Perfectly understandable; they were sad because the Fed indicated it is staying with no free money.) Then earnings reports came in on Thursday that were mostly gloomy, but stocks went up.

They didn’t go up because bad news was seen as indicating the Fed would turn the free-money tap back on. No, the bulls attempted another rally because Facebook came in with huge earnings. O.K. That’s great news — for Facebook. One Fang stock did great. However, two of the ten market leaders tanked. Overall, it was terrible news because it meant Apple and Amazon were clearly both out of the game as being saviors. That means the “safe bets” are now narrower than ever. But the market investors chose to focus on Facebook so they bid that stock and a few others up more than the flops went down.

But the news was worse than just the narrowing of the market at the top. Numerous companies reported declines last week across the full spectrum of industries. In fact, sales for companies in the S&P 500 have been in decline for four quarters now, and that’s without the US officially being in recession.

What is the prognosis for the stock market if and when the US learns it is in recession, given that stocks are already struggling and moving into an extremely narrow band of positive trades that are so ludicrously high priced that they keep the average up in an otherwise falling market? What is the prognosis when the number of stocks capable of doing that is narrowing quickly with some of those companies now becoming the stocks that are in fastest decline?

I think this all says last week was clearly a “bear market rally,” in which people are running for the last few chairs in a game of musical chairs. Trading volume in January was the highest it’s been since the nasty month of August 2011, when I also predicted a sharp market plunge. A lot more players are crowding into a lot smaller space.

That kind of feeding-frenzy, when the sharks scrap over the last few pieces of meat, is a setup for a total market meltdown where the sharks and sea monsters start eating each other, as Goldman Sachs (that “great vampire squid wrapped around the face of humanity”) did in the fabulous financial fiasco at the start of the Great Recession. That was when Goldman Sachs counseled its clients to buy a lot of mortgage-backed securities (think The Big Short) that Goldman, itself, was betting its own sachs of gold against. (Essentially, “You buy this garbage. That will make the price of garbage go up quickly so that someone will be glad to take our bet when we bet the price is going to collapse … because we know it’s all ultimately garbage.”)

Price of oil about to tank

The price of oil also jumped up last week, and the bulls slobbered all over that. Seriously? If you want to find a sign of irrational exuberance, the end of last week presented a spectacular kaleidoscope of retardation. Oil prices shot up right after Iran announced its intent to boost supply as much as it can and made its first post-sanction deal with a major French oil company to start selling crude. And stock market investors seized the day because of the rise in oil prices. Oil speculators and stock speculators alike completely ignored the Iranian risk simply because they heard a rumor that other people might start to talk sometime down the road about reducing supply sometime even further down the road.

What I see coming is a monumental collapse for oil that is only days or weeks ahead. Storage capacity for crude oil is almost completely taken up. Nearly every train tanker, truck tanker, ship tanker and tank farm is full. Is ANYONE asking the obvious question here? Apparently, no one but me; but it is so obvious and so extremely dangerous that it’s hard for me to understand why I don’t hear concern about it. Here it is:

What happens as soon as every tank is full? That’s an event that could be reached very quickly, so think carefully about what it means. What is the price of oil when absolutely all storage everywhere is full up? It’s ZERO! No on is going to pay one penny for a barrel of oil for immediate delivery because no one has anywhere to put it. No one has any ship they can ship it on. Once all storage is filled to the brim, new oil is a huge liability. If you buy it for immediate delivery, it simply means you have to create an enormous oil spill by pumping it onto the desert floor or dumping it at sea. You have nowhere else to put it.

Now, OK., it is not really quite as bad as falling to a price of zero because we constantly consume huge amounts, so we can keep topping off tanks to the extent that we are draining them; but the spot price of oil is going to seriously plummet as soon there is no buffer space left for storage because you cannot buy more until you drain some off.

The fact that Iran actively re-entered the oil market just as we near that terminal point should have sent shocks of horror through oil markets. One of the world’s largest producers, whose tanks and tankers are full to capacity because their sales have been restrained (though never stopped) by sanctions, is now actively back in the market; but, on the day of their first sale, prices of oil and stocks bounded upward.

The cause for that recovery in oil prices and stock prices was a rumor that Russia, Saudi Arabia and others are willing to talk about cutting production. Of course they are. Talk is free, and they are nearing that day when all the producers know they will be forced to cut production because there is nowhere left for excess production to go, except to flow over the snows of Siberia or spread across the sands of Saudi Arabia.

Cutting back production to avoid pumping oil onto the ground because there is nowhere to put it, isn’t going to help oil prices rise. It’s a forced cut that will simply help oil producers avoid paying people to sop up their oil because no one anywhere in the world has a place to put it.

Another major factor in the price of oil — besides oversupply — that no one seems to be talking about is that oil is priced in US dollars. The rising value of US dollars compared to almost every other currency is a big part of why oil prices are dropping. Think about it: Users of oil in all nations, except the US, have to convert their currency to dollars to buy oil (something that is changing rapidly, as China and Russia are ending their participation in the petrodollar). There is a limit to what buyers in other countries can afford. As the cost of dollars in their own currency goes up, the price they will pay for oil in dollars has to go down in order for those countries to buy oil at a price they are willing or able to pay at their currency exchange rate, or their demand goes down to what they can afford to pay or are willing to pay.

In my opinion, oil trade is about to enter its worst phase. The petrodollar is continuing to escalate in value against other currencies. Iran is entering the market with huge amounts of stored oil. Storage tanks are almost all filled everywhere. Saudi Arabia has said it will not cut production unless Iran cuts production, but Iran has promised it is going to increase production as much as it possibly can. It even took steps on Thursday to do so by hiring its French oil buyer to survey the Iranian oil infrastructure to determine where improvements need to be made. Moreover, all that crude sitting at sea in Iranian ships during the sanctions is aging, so it needs to hit the refineries fast. (Once it is out of the ground and exposed to oxygen, it does not improve with time.)

I’d have to agree with the following assessment by Abhishek Deshpande, an oil analyst who spoke at Reuters Global Oil Forum:

“There is no reason to believe why and how prices will recover by the end of 2017.” (“Oil prices stabilise but market sentiment remains bearish“)

It may not take two years for oil prices to recover, as Deshpande says, but I certainly don’t think they will recover anytime soon. Thinking they will because of a hint of a rumor is irrational exuberance — one of the surest signs that the stock market is about to crash even more than it already has. Because stock investors wish to believe the oil price war is nearing resolution, against all evidence, the price of oil surged above $35/barrel, and stocks went up with it on Friday.

It is a shift in this sentiment that has driven the ongoing rally. Hints from a Russian oil executive on Wednesday of a rapprochement with Saudi Arabia on cutting exports were apparently confirmed yesterday, as Russian energy minister Alexander Novak said the Opec cartel had floated the idea of a coordinated five per cent reduction to be discussed next month. (“Oil price: ‘rumours could move market 15 per cent’“)

They will talk about it “next month.”

Overall, analysts are warning that the heavy reliance on fragile sentiment is introducing a lot of volatility to prices that could catch traders out. “Right now, we’re entering a phase where rumours are going to move the market 15 per cent,” said Todd Gross, the chief investment officer at QERI LLC.  “You have to be really careful.”

We’re in a phase where mere rumors cause a fifteen percent move in oil prices overnight and send the stock market up. That’s desperate. It’s irrationally exuberant. It’s exactly the kind of behavior that prevails when markets crash into recessions.

In spite of the many reasons a rational person would think oil is going to remain in trouble, hedge funds leaped into oil purchases last week to the greatest degree of buying since 2010! Their speculation largely drove the price of oil up. Surely everyone remembers how hedge funds were the location of the greatest troubles in 2008. Here we go again. Their long position on oil increased 35% last week, and that is why they deserve to crash and burn in spectacular style. The oil producers did not say last week they are talking about cutting production. They said they are talking about the possibility of starting to talk about reducing production.

If you’re the kind of person who gets excited enough to gamble billions of dollars on a rising price of oil based on that wisp of a hint of hope, you deserve to flame on like a moth flying into a bug zapper. The genetic development of our species will benefit by your absence. We should create a national day to hail your flame as a way to extinguish future folly of that kind.

The volatility from this kind of sentimental buying and selling caused January to have more 1% swings in the Dow and the S&P 500 than any time since the 2008 crash. Contrary to the beliefs of these West Texan Lightheaded investors, this is looking exactly like the crash of 2008, but the circumstances we are crashing into this time are far worse. January was described by MarketWatch as one of the most harrowing months since the 2008 financial crisis.

But the irrational exuberance doesn’t even stop there.

(Article first posted at:

David Haggith

David Haggith started writing about the economy after he predicted The Great Recession half a year before it hit and was puzzled as to why no economists or stocks analysts saw it coming. In the months after the crisis broke out, he started to write humorous editorials in a series titled “Downtime,“ which chided the U.S. government and bankers who should have seen the economic collapse coming but whose cronyism, greed and ineptitude caused them to run the world into a ditch. Those articles were published in The Hudson Valley Business JournalThe Valley City Times-Record (North Dakota), and The Daily Herald in Tennessee. Haggith is dedicated to regularly criticizing the daily news — not just the content but the uncritical, unthinking nature of almost all of the reporting. He now writes his own blog, The Great Recession Blog, to break down the news as an equal-opportunity critic toward both Republicans and Democrats / Conservatives and Liberals … since neither kind of politician has done anything worthwhile to plot a better economic course. His articles are regularly carried by several economic websites.

Gold is impervious to rust.

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