Great analysis. I've been reading up on this lately because of all the financial market turmoil. It's hard to believe that the double-top scenario could actually play out since it’s been 8 years since the first top, and eventually, one would think today's prices would be decoupled from past prices. But on the other hand, the same money from 8 years ago is most likely involved, since everyone pulled all their money out of tech stocks and dumped it into housing, and the subsequent market realization of the housing bust is what caused top #2.
It also seems like the stock market hasn't corrected enough for all the dire news about the state of the economy. There has even been mentions of the Great Depression, yet the stock market was down 17%(?) on the first day of the crash in 1929, not the 3-4% drops we've seen so far this past week.
One last thing, I fear that all the Baby Boomers approaching retirement are close enough to say "enough with the stock market" and start pulling out in the current environment.
I hope the double-top doesn't happen, as it would mean the loss of so many people’s retirement savings, but you have to wonder if people have become too complacent with stock market risk. Most people think that if you hold stocks at least 5-years, you will be ok. However, if everyone knows this and practices this, how does this impact future returns? Hard to think about, but maybe the “buy-and-hold” strategy is no longer valid.
thanks Matt. The thing about the prices decoupling is a good point. I don't think that the current situation would be a traditional double top with price targets affecting people's behavior.
Rather, the first bubble (tech stocks) elevated the market to a dangerously overvalued level, almost a critical mass point at which no further gains could persist. In other words, all available buying—and overbuying—had been done.
Now we're at the same point, or were in 2007 when the market peaked. The housing bubble had created so much "credit wealth" that went into the stock market that again, the peak of credit-inflation in asset prices couldn't go much higher. As the reality of deflating housing prices sapped the credit-bubble, stocks had to come down too.
Whether the market falls as much as it did last time, or continues to a 75% decline as portended by the charts depends on too many factors to analyze in a monstrous and complex U.S. economy. The chart just cuts through the crap and gives an estimate that's as realistic as any, given the credit bubble we've faced for the last 25 years.
But who knows. The market might turn around from this point, right now, when things are looking their worst. The market could climb a "wall of worry" like it did during the S&L crisis. The stock market's ability to deny reality should never be questioned. Even if some day we'll have to pay the piper big time, it's impossible to tell when that time will come.
It just seems that right now, with that chart, and these conditions, to paraphrase Led Zeppelin the piper's calling us to join him as we speak.
2 comments:
Great analysis. I've been reading up on this lately because of all the financial market turmoil. It's hard to believe that the double-top scenario could actually play out since it’s been 8 years since the first top, and eventually, one would think today's prices would be decoupled from past prices. But on the other hand, the same money from 8 years ago is most likely involved, since everyone pulled all their money out of tech stocks and dumped it into housing, and the subsequent market realization of the housing bust is what caused top #2.
It also seems like the stock market hasn't corrected enough for all the dire news about the state of the economy. There has even been mentions of the Great Depression, yet the stock market was down 17%(?) on the first day of the crash in 1929, not the 3-4% drops we've seen so far this past week.
One last thing, I fear that all the Baby Boomers approaching retirement are close enough to say "enough with the stock market" and start pulling out in the current environment.
I hope the double-top doesn't happen, as it would mean the loss of so many people’s retirement savings, but you have to wonder if people have become too complacent with stock market risk. Most people think that if you hold stocks at least 5-years, you will be ok. However, if everyone knows this and practices this, how does this impact future returns? Hard to think about, but maybe the “buy-and-hold” strategy is no longer valid.
thanks Matt. The thing about the prices decoupling is a good point. I don't think that the current situation would be a traditional double top with price targets affecting people's behavior.
Rather, the first bubble (tech stocks) elevated the market to a dangerously overvalued level, almost a critical mass point at which no further gains could persist. In other words, all available buying—and overbuying—had been done.
Now we're at the same point, or were in 2007 when the market peaked. The housing bubble had created so much "credit wealth" that went into the stock market that again, the peak of credit-inflation in asset prices couldn't go much higher. As the reality of deflating housing prices sapped the credit-bubble, stocks had to come down too.
Whether the market falls as much as it did last time, or continues to a 75% decline as portended by the charts depends on too many factors to analyze in a monstrous and complex U.S. economy. The chart just cuts through the crap and gives an estimate that's as realistic as any, given the credit bubble we've faced for the last 25 years.
But who knows. The market might turn around from this point, right now, when things are looking their worst. The market could climb a "wall of worry" like it did during the S&L crisis. The stock market's ability to deny reality should never be questioned. Even if some day we'll have to pay the piper big time, it's impossible to tell when that time will come.
It just seems that right now, with that chart, and these conditions, to paraphrase Led Zeppelin the piper's calling us to join him as we speak.
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