Warning Signs Flash as Stock Market Soars to Records

Wall Street Journal ^ | November 3, 2013 | By Gregory Zuckerman

[Brad from Tennessee]

For some investors, it feels a lot more like 1999 than 2013.

Third-quarter earnings have not been spectacular. The U.S. isn't expected to grow at anything close to breakneck speed next year. And there are few industries experiencing huge profit expansions.

Despite all that, a number of high-profile—mostly technology—stocks are soaring. The heady advances are making shareholders of these companies big money, but they're also raising serious questions among some analysts about whether the unusual trading is a troublesome sign for the overall market.

Last week, the Dow Jones Industrial Average set a record on Tuesday, but closed up just 0.29% for the week. The Standard & Poor's 500 stock index also set a record and rose 0.11%.

So far this year, the Dow has climbed 19%, the S&P 500 24% and the Nasdaq 30%.

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. . .the recent gains in tech shares are reminiscent of the Internet-led bull market that created huge fortunes but ended in 2000 when the small group of expensive technology stocks that had powered the market higher suddenly collapsed, pulling the entire market down with it.

[CodeToad]

“In comparing 5-year charts for Gold and the DOW, stocks win. “

Same thing was said in 2007-2008...just before a massive stock collapse and many people lost everything.

Gold isn’t an investment. It is a hedge against a collapse.

The fed is propping up the markets with $1+ trillion every year. The stock market is valued at about $15 trillion. The fed has pumped in over $4 trillion, or about 25% of the market’s value. That is a massive pump, entitled to a massive dump. The fed could collapse the markets and easily own half the US economy by buying up another 25% at deflated prices once the dump happens.

Communism by the numbers.

Those who refuse to learn from history are doomed to repeat it.

[Windcatcher]

The health insurance sticker shock will kill holiday spending.

[plain talk]

For some investors, it feels a lot more like 1999 than 2013.

Obama is doing everything to hurt the economy and the fed is artificially creating a stock bubble because with interest rates at artificial ridiculously low rates there is nowhere else for money to go but stocks.

Having said that the statement above is way off. In 1999 there was a tech stock bubble with the average P/E ratio in the 40s. P/E is now 19 which is higher than average but nothing like 1999. Nonetheless the market is being artificially held up so major correction could happen at any moment

[ReaganGeneration2]

The problem is QE can’t be unwound, politically. There’s a chance at ending Maobamacare, because people understand higher premiums, bad websites, losing doctors, etc.

But tapering QE, which is necessary for a stable money supply, will cause a depression. Whoever orders that will be a one-termer. Very few will understand why tapering is needed.

So what happens next will either happen slowly or quickly: higher interest rates and much higher taxes, defaulting state/local governments, loss of reserve currency status. This is the future. Period.

[Shark24]

I think Aquila48 and Attention Surplus Disorder have the best description of reality I’ve seen.(IMHO).

[Signalman]

Once the Fed’s monopoly money stops, the markets will crash.

[Repeal The 17th]

“...Money taken out of the market will go where, real estate? Commodities? Mattresses?...”
-
I have always been pretty dense when it comes to economics,
but I have always remembered two things my daddy taught me
60 years ago when I was a young lad.

As a hobby, I would go through all of the coins I came across
looking for anything unusual, old, and potentially rare.
I would save them, collect them, and trade then at coin shows.
Your post reminded me of those days and the lessons I learned.

1-A thing is worth only what someone else is willing to pay you for it
(it’s true value or fair market value).

I can still remember telling my dad that my coin book said
a dime I found was worth ten dollars, and he said,
“Worth ten dollars to who? To me, it is only worth a dime.”

2-All money has to “sit” somewhere.
If I bought a silver coin,
it was only worth what someone else was wiling to pay me for it.
If I saved up $100 and the bank would pay me 2% interest,
then my $100 was worth $102 to the the bank.

Those two simple lessons are very inter-related
and they have stuck with me for a long time,
ans sixty years later, they still hold true.

If you own a share of stock,
it does not matter what you paid for it,
the only thing that matters is what someone else will pay YOU for it.

If your money, or my money, or anyone else’s money
does not sit in the stock market, then where does it sit?

Stocks?
Bonds?
Gold?
Silver?
Cocoa futures?
Real estate?
Certificate of deposit?
Cash?
.22 long rifle cartridges?
Toilet paper?

I try to put my money where “someone else” thinks it has value.

[Atlas Sneezed]

Even back then, the whole “buy gold” argument puzzled me. If the U.S. dollar was really so worthless, then why were all these traders so willing to accept these “soon to be worthless” dollars in exchange for their precious gold bars?

---

Same reason that Nordstrom is so willing to accept dollars for all the shoes they claim are so wonderful.

They’re retailers/traders who profit from the transaction. they’re not commodity owners for a living.

[kaehurowing]

Inflated currency.

[RetiredTexasVet]

We are already in a depression. The government has changed the way unemployment, GDP, and other measurement statistics are calculated to keep the infamous “D” word from the lips of the public. But eventually, QE tapering will begin or no one will show up one day to buy the inflated stocks. One day the whole fairy tale will crash.

[palmer]

Money taken out of the market will go where, real estate? Commodities? Mattresses?

The market can drop to zero without a dime being taken out of it. Well, that's a bit extreme, but there's no money to be taken out until there's a buyer.

[palmer]

You didn't mention precious metals but you didn't have to. In comparing 5-year charts for Gold and the DOW, stocks win.

PM's have more value than fiat. Bubble stocks have value as long as there is a greater fool around. The ups and downs don't really concern me, I accumulate PMs and generally also leave my stocks alone since I chose them for longer term value.

[palmer]

You have described the reason that the Fed's policy has been such a spectacular failure. Normally a deep recession like the one we had would be followed by an enormous boom. But the reason it hasn't is not lack of demand or deflation as the Fed believes, but lack of confidence in the soundness of the currency. More specifically, people are not investing, but speculating and waiting for the crash.

People who leave money in stocks for the longer run are usually into companies that speculate for them (that's what I try to do).

[Repeal The 17th]

“... people are not investing, but speculating...”
-
I find that to be an interesting comment, thank you.
If I buy junk morgan silver dollars am I investing or speculating?

[dfwgator]

All investment is speculation. The only difference is that some people admit it and some don’t. - Gerald Loeb

[tips up]

As long as interest rates remain near zero, the stock market looks attractive.

[southernnorthcarolina]

"Stocks have reached what looks like a permanently high plateau." -- Irving Fisher, Professor of Economics, Yale University, 1929.

[aquila48]

“Normally a deep recession like the one we had would be followed by an enormous boom. But the reason it hasn’t is not lack of demand or deflation as the Fed believes, but lack of confidence in the soundness of the currency.”

No that ain’t it. If that was it, ie if you thought your money was going to be worth less each day, you would be spending it like there’s not tomorrow. Do you really think your average joe blow (95% of the people) wake up each morning thinking “Oh the dollar is being debased, I better not buy anything”?

My own take on why the economy hasn’t picked up more is for a couple of reasons:

1. The regulatory and political environment (Tax the rich, demonize profits and entrepreneurs, Obamacare is a huge drag, uncertainty about taxes, environmental regulations, etc, etc)

2. Much more difficult to get a loan than in the good old days, due to more stringent lending criteria, thanks in large part to regulations like Dodd-Frank.

Banks have a ton of money, (like a couple trillions in excess reserves with the fed), so basically all the money that the Fed is printing is ending up back with the Fed.

As for whether the dollar is being debased, you have to ask, relative to what. Currencies are just another asset class and they go up and down relative to each other all the time. So if you consider the dollar vs gold, over the past year or so, it’s been gold that has lost significant value vs the dollar. On the other hand, real estate has gained value over the dollar and gold.

I think people make a costly mistake in expecting a currency (whether the dollar or some other) to maintain the same purchasing power over time (whatever that means). Currencies, like all other assets are constantly changing their value relative to other assets.

If you want to maintain purchasing power, your best bet is not just to save dollars but to have a well diversified portfolio that includes many different assets, including the dollar, for you see, once the Fed starts the tapering, you’re going to see stocks take a dive, bonds may dive even more and so will real estate and gold. So your so-called “debased” dollar is going to buy a lot more stocks, bonds, RE and gold. It won’t be looking so debased after all, in fact it may end up being your best “investment”.... for a while at least.

[palmer]

Junk Morgans are savings. Your money is in the mattress but it is 90% silver. They somtimes cost a bit more than junk quarters but that’s often because they are not junk but have a bit of numismatic value.

[palmer]

I agree with your reasons 1 and 2 but not your conclusion. The Fed cannot stop printing without a US default, so they won't stop. Since people know this, they are not going to tiue money up for any long periods (e.g. 5 years or more) and expect it to hold its purchasing power. A year or two of falling prices due to some overshoot is not unexpected. Farther out than that the Fed has to print so the politicans can hand out the money for more and more purchases, which is a classic driver of inflation. The handouts will be indexed and the majority of voters will get some sort of handout and the politicians will make sure the printing continues.

As for whether the dollar is being debased, you have to ask, relative to what. Currencies are just another asset class and they go up and down relative to each other all the time. So if you consider the dollar vs gold, over the past year or so, it's been gold that has lost significant value vs the dollar. On the other hand, real estate has gained value over the dollar and gold.

Apart from a smallish correction to the overheated RE market, the dollar doesn't buy more of anything. A couple years drop in PM's is an eye blink unless one is speculating, not preserving purchasing power conservatively. Ultimately the rest of the world will accept your PM's not your US fiat.