By The Burning Platform

Last year ended with a whimper on Wall Street. The S&P 500 was down 1% for the
year, down 4% from its all-time high in May, and no higher than it was 13 months
ago at the end of QE3. The Wall Street shysters and their mainstream media
mouthpieces declare 2016 to be a rebound year, with stocks again delivering double
digit returns. When havent they touted great future returns. They touted them in
2000 and 2007 too. No one earning their paycheck on Wall Street or on CNBC will
point out the most obvious speculative bubble in history. John Hussman has been
pointing it out for the last two years as the Fed created bubble has grown ever
larger. Those still embracing the bubble will sit down to a banquet of consequences
in 2016.
At the peak of every speculative bubble, there are always those who have
persistently embraced the story that gave the bubble its impetus in the first place.
As a result, the recent past always belongs to them, if only temporarily. Still, the
future inevitably belongs to somebody else. By the completion of the market cycle,
no less than half (and often all) of the preceding speculative advance is typically
wiped out.
Hussman referenced the work of Reinhart & Rogoff when they produced their classic
This Time is Different. Every boom and bust have the same qualities. The hubris and
arrogance of financial experts and government apparatchiks makes them think
they are smarter than those before them. They always declare this time to be
different due to some new technology or reason why valuations dont matter. The
issuance of speculative debt and seeking of yield due to Federal Reserve
suppression of interest rates always fuels the boom and acts as the fuse for the
inevitable explosive bust.
In 2009, during the depths of the last crisis that followed such speculation,
economists Carmen Reinhart and Kenneth Rogoff detailed the perennial claim that
feeds these episodes in their book, This Time is Different:
Our immersion in the details of crises that have arisen over the past eight
centuries and in data on them has led us to conclude that the most commonly
repeated and most expensive investment advice ever given in the boom just before
a financial crisis stems from the perception that this time is different. That advice,
that the old rules of valuation no longer apply, is usually followed up with vigor.
Financial professionals and, all too often, government leaders explain that we are
doing things better than before, we are smarter, and we have learned from past
mistakes. Each time, society convinces itself that the current boom, unlike the many
booms that preceded catastrophic collapses in the past, is built on sound
fundamentals, structural reforms, technological innovation, and good policy.
The essence of the this-time-is-different syndrome is simple. It is rooted in the
firmly held belief that financial crises are something that happen to other people in

other countries at other times; crises do not happen, here and now to us If there is
one common theme to the vast range of crises we consider, it is that, excessive
debt accumulation, whether it be by the government, banks, corporations, or
consumers, often poses greater systemic risks than it seems during a boom.
The third speculative boom in the last fifteen years fueled by Federal Reserve idiocy
is about to become a the third bust in the last fifteen years. The unwashed masses
who believe what they are told by CNBC are going to be pretty pissed off when they
lose half their retirement savings again. None of their highly paid financial advisors
are telling them to expect 0% returns over the next twelve years, but that is their
fate. The numbers dont lie over the long haul.
My view on this time is clear. I remain convinced that the U.S. financial markets,
particularly equities and low-grade debt, are in a late-stage top formation of the
third speculative bubble in 15 years. On the basis of the valuation measures most
strongly correlated with actual subsequent market returns (and that have fully
retained that correlation even across recent market cycles), current extremes imply
40-55% market losses over the completion of the current market cycle, with zero
nominal and negative real total returns for the S&P 500 on a 10-12 year horizon.
These are not worst-case scenarios, but run-of-the-mill expectations.
The answer is straightforward: as the bubble expanded toward its inevitable
collapse, the role of Wall Street was to create a massive supply of new product in
the form of sketchy mortgage-backed securities, but the demand for that product
was the result of the Federal Reserves insistence on holding interest rates down
after the tech bubble crashed, starving investors of safe Treasury returns, and
driving them to seek higher yields elsewhere.
See, the Fed reacted to the collapse of the tech bubble and the accompanying
recession holding short-term rates to just 1%, provoking yield-seeking by incomestarved investors. They found that extra yield in seemingly safe mortgage
securities. But as the demand outstripped the available supply, Wall Street rushed
to create more product, and generate associated fees, by lending to anyone with a
pulse (hence teaser loans offering zero interest payments for the first 2 years,
and ads on TV and radio hawking No income documentation needed! Well get you
approved fast!; No credit? No problem! You have a loan!; Own millions of dollars
in real estate with no money down!). The loans were then financially engineered
to make the resulting mortgage bonds appear safer than the underlying credits
were. The housing bubble was essentially a massive, poorly regulated speculative
response to Federal Reserve actions
And now the Fed has done it again. The stock market on most valuation measures is
the most overvalued in world history. The rolling tsunami is about to wipe away the
life savings of millions for the third time in fifteen years.

The current, obscenely overvalued QE-bubble is simply the next reckless response
to Federal Reserve actions, which followed the global financial crisis, which resulted
when the housing bubble collapsed, which was driven by excessively activist
Federal Reserve policy, which followed the collapse of the tech bubble. As my wife
Terri put it Its like a rolling tsunami.
The pompous professionals inhabiting the gleaming skyscrapers in the NYC financial
district are still arrogantly ignoring the imminent bust headed their way. The Fed
juiced gains over the last six years will evaporate just as they did in 2007-2009.
Cheerleading for and denying the existence of the bubble is a common them among
those whose paycheck depends upon them doing so.
One had to suffer fools parroting things like being early is the same thing as being
wrong until the collapse demonstrated that, actually no, its really not. The 20072009 collapse wiped out the entire total return of the S&P 500, in excess of risk-free
Treasury bills, all the way back to June 1995.
Since two crashes werent enough to teach the lesson, here we are again, at whats
likely to be seen in hindsight as the last gasp of the extended top formation of the
third speculative bubble in 15 years. The median stock actually peaked in late-2014.
And now for the bad news. At current market valuations, a run of the mill bust will
result in a 50% decline. A bust that puts valuations back to 1982 bear market lows
would result in a decline exceeding 75%. Whether it is a violent collapse or long
slow decline, there is no doubt that returns over the next decade will be nonexistent. This is not good news for Boomers or GenX entering or approaching
retirement.
For the S&P 500 to lose half of its value over the completion of the current market
cycle would merely be a run-of-the-mill outcome given current extremes. A truly
worst-case scenario, at least by post-war standards, would be for the S&P 500 to
first lose half of its value, and then to lose another 55% from there, for a 78%
cumulative loss, which is what would have to occur in order to reach the 0.45
multiple we observed in 1982. We do not expect that sort of outcome. But to rule
out a completely pedestrian 40-55% market loss over the completion of the current
cycle is to entirely dismiss market history.At present, investors should expect a 12year total return from the S&P 500 of essentially zero.
The reckless herd has been in control for the last few years, but their recklessness is
going to get them slaughtered. Corporate profits are plunging. Labor participation
continues to fall. A global recession is in progress. The strong U.S. dollar is crushing
exports and profits of international corporations. Real household income remains
stagnant, while healthcare, rent, home prices, education, and a myriad of other
daily living expenses relentlessly rises. The world is a powder keg, with tensions
rising ever higher in the Middle East, Ukraine, Europe, and China. The lessons of

history scream for caution at this moment in time, not recklessness. 2016 will be a
year of reckoning for the reckless herd.
Theres no question that at speculative extremes, recent history always temporarily
belongs to the reckless herd that has ignored concerns about valuation and risk at
every turn. Fortunately, the future has always belonged to those who take
discipline, analysis, and the lessons of history seriously. Decide which investor you
want to be.