By The Burning Platform

Last year ended with a whimper on Wall Street. The S&P 500 was down 1% for the y
ear, 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 mouth
pieces declare 2016 to be a rebound year, with stocks again delivering double di
git returns. When haven t they touted great future returns. They touted them in 20
00 and 2007 too. No one earning their paycheck on Wall Street or on CNBC will po
int out the most obvious speculative bubble in history. John Hussman has been po
inting it out for the last two years as the Fed created bubble has grown ever la
rger. Those still embracing the bubble will sit down to a banquet of consequence
s in 2016.
At the peak of every speculative bubble, there are always those who have persist
ently 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, t
he future inevitably belongs to somebody else. By the completion of the market c
ycle, 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 classi
c This Time is Different. Every boom and bust have the same qualities. The hubri
s 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 dif
ferent due to some new technology or reason why valuations don t matter. The issua
nce 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, ec
onomists Carmen Reinhart and Kenneth Rogoff detailed the perennial claim that fe
eds these episodes in their book, This Time is Different:
Our immersion in the details of crises that have arisen over the past eight centu
ries 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 financ
ial crisis stems from the perception that this time is different. That advice, tha
t 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 pa
st mistakes. Each time, society convinces itself that the current boom, unlike t
he many booms that preceded catastrophic collapses in the past, is built on soun
d 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 peo
ple in other countries at other times; crises do not happen, here and now to us I
f 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, corporatio
ns, 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 i
diocy is about to become a the third bust in the last fifteen years. The unwashe
d masses who believe what they are told by CNBC are going to be pretty pissed of
f 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 ye
ars, but that is their fate. The numbers don t 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 f
ully retained that correlation even across recent market cycles), current extrem
es imply 40-55% market losses over the completion of the current market cycle, w
ith 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 coll

apse, 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 Reserve s insistence on holding interest rates down aft
er the tech bubble crashed, starving investors of safe Treasury returns, and dri
ving them to seek higher yields elsewhere.
See, the Fed reacted to the collapse of the tech bubble and the accompanying rec
ession holding short-term rates to just 1%, provoking yield-seeking by income-st
arved investors. They found that extra yield in seemingly safe mortgage securities
. But as the demand outstripped the available supply, Wall Street rushed to crea
te 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 ad
s on TV and radio hawking No income documentation needed! We ll get you approved fa
st! ; 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 resul
ting mortgage bonds appear safer than the underlying credits were. The housing b
ubble was essentially a massive, poorly regulated speculative response to Federa
l Reserve actions
And now the Fed has done it again. The stock market on most valuation measures i
s the most overvalued in world history. The rolling tsunami is about to wipe awa
y 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 r
esulted when the housing bubble collapsed, which was driven by excessively activ
ist Federal Reserve policy, which followed the collapse of the tech bubble. As m
y wife Terri put it It s like a rolling tsunami.
The pompous professionals inhabiting the gleaming skyscrapers in the NYC financi
al district are still arrogantly ignoring the imminent bust headed their way. Th
e Fed juiced gains over the last six years will evaporate just as they did in 20
07-2009. Cheerleading for and denying the existence of the bubble is a common th
em among those whose paycheck depends upon them doing so.
One had to suffer fools parroting things like being early is the same thing as be
ing wrong until the collapse demonstrated that, actually no, it s really not. The 2
007-2009 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 weren t enough to teach the lesson, here we are again, at what s l
ikely 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 la
te-2014.
And now for the bad news. At current market valuations, a run of the mill bust w
ill result in a 50% decline. A bust that puts valuations back to 1982 bear marke
t 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 non-existent. This is not good news for Boomers or GenX entering or approachi
ng retirement.
For the S&P 500 to lose half of its value over the completion of the current mar
ket cycle would merely be a run-of-the-mill outcome given current extremes. A tr
uly worst-case scenario, at least by post-war standards, would be for the S&P 50
0 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 c
urrent cycle is to entirely dismiss market history.At present, investors should
expect a 12-year total return from the S&P 500 of essentially zero.
The reckless herd has been in control for the last few years, but their reckless
ness is going to get them slaughtered. Corporate profits are plunging. Labor par
ticipation continues to fall. A global recession is in progress. The strong U.S.
dollar is crushing exports and profits of international corporations. Real hous
ehold income remains stagnant, while healthcare, rent, home prices, education, a
nd a myriad of other daily living expenses relentlessly rises. The world is a po
wder 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.
There s no question that at speculative extremes, recent history always temporaril
y belongs to the reckless herd that has ignored concerns about valuation and ris
k at every turn. Fortunately, the future has always belonged to those who take d
iscipline, analysis, and the lessons of history seriously. Decide which investor
you want to be.