Friday, November 15, 2013

The Ingredients For A Massive “Crash” Are Now In Place

"...“The Schiller P/E is now 25.  The historic earnings multiple is 19.  This is a pretty weird place to start a new bull market from.  In any event, the market has been rising for 5 solid years.  This is as long as the market normally rises without some sort of correction.

But because of QE, and because Mrs. Yellen isn’t going to do anything different anytime soon, I think we just have to accept that the market is going to go higher and P/E ratios will continue to expand, making this market even more expensive.  The thing is that in bubbles you can get quite a bit more expensive than this.

The bad news is that if you normally have your 4-year setback in the 3rd year of the decade, this is like winding a spring for the 4th, 5th and 6th years of any decade to be strong.  The next time you run the risk is in the 7th year, going into the 8th year.

If you look back at the last several decades, it’s either 1987, 1997, or 2008 when you get the really nasty corrections or bear markets.  Having said that, my work says this is not the start of a new secular bull market.  You don’t start bullish secular trends from 25 times earnings, after a 5-year continuous rise.

If you look at the S&P 500, divided by the purchasing power or PPI, you will see what it buys in real dollars.  It gives the image that this really is a secular downtrend that started in the year 2000, and in ‘real money’ we are absolutely nowhere near making a new high.  For that matter, neither are any of the Western markets.

But only in devalued money are the US, German, and British stock markets on the cusp of going into new highs, and in bubbles that’s what happens.  But people should understand that the ingredients for a crash going into early 2014 are already in place.

If you look at sentiment, you normally begin a major move in despair and despondency.  You grow stock prices through climbing a ‘wall of worry‘ and cynicism.  You lose momentum when people become confident.  And when they are universally telling you, ‘We’ve got a great recovery, nothing could possibly go wrong,’ you are probably near a top.”

Griffiths added:  “The secular trend for gold is still absolutely intact.  The entire fall from $1,900 was similar to what we witnessed in the 1970s, and just a normal Fibonacci retracement in a bull market.  We will have to wait and see where the ultimate low is for gold, but the notion that the secular uptrend is dying is incorrect.  

My bet is that $1,180 will probably hold, and next year not only will gold go through $1,900, but up to about $2,500.  This will shock many market participants.  After that we go on in the next year to the $3,000 area.  We are also keeping our eye on high quality gold stocks because as soon as gold itself starts to go, these stocks will fly.  You can buy some of them at less than book value, and the share prices are typically 80% off their highs.  They also pay dividends."

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