25th Annual Hyman P. Minsky Conference on the State of the US and World Economies! Will the Global Economic Environment Constrain US Growth and Employment?

The Echo Echo Bubble Path To Financial Perdition ! April 12–13, 2016!

Frank Veneroso

Organized by the Levy Economics Institute of Bard College with support from the Ford Foundation Levy Economics Institute of Bard College Blithewood Annandale-on-Hudson, New York 12504! “Nobel economics laureate Vernon Smith has demonstrated in classroom experiments how momentum traders can push share prices away from fair value. Smith found that one crash was not sufficient to change behavior. Traders become prudent only after a second market collapse. The motto of the broken speculator might read “Twice bitten, thrice shy.”

Edward Chancellor “’s Echo Bubble”, September 2009 “A survey of 12 such events – from the British of the 1830s to the Saudi Tadawul bubble of 2005 – shows that echo bubbles have common characteristics. The typical one lasts longer than a bear market rally but not as long as the bubble that preceded it. On average, echo bubbles climb for ten months from trough to peak. Furthermore, the echo is proportionate in size to the earlier boom, averaging roughly one third of its size.”

Edward Chancellor “China’s Echo Bubble”, September 2009 Market Cap To GDP

The U.S. Stock Market Is Back In Bubble Terrain. This Is A Rare Echo Echo Bubble.

Shanghai Stock Index 2005-2016

Here Is History’s Other Rare Echo Echo Bubble The Chinese market took off amidst heavy public buying

Despite a weak economy and disappointing earnings What Caused The China Echo Echo Bubble?

Money Grew More And More Relative To Income China’s Ratio Of M2 To GDP Went “Off The Charts” China: M2 To GDP

This Ratio Rose To 205% In 2014 Meanwhile The Stock Market Cap To GDP Fell To Pre Bubble Lows

The Excess Money In The Hands Of The Public Set Off A Portfolio Allocation To Equities Which Re-ignited Bubble Behavior

S&P – 2014-2016

In 2015 The U.S. Echo Echo Bubble Topped Out U.S. Evolution Of Earnings Expectations - 2015

Disappointing Corporate Earnings Created Bearish Stock Market Sentiment Evolution Of U.S. GDP Growth Expectations

U.S. Growth Expectations Added To Bearish Sentiment

Evolution Of Global Growth

This Too Added To Bearish Stock Market Sentiment Evolution Of Global Growth

This Too Added To Bearish Stock Market Sentiment U.S. Stock Market - 2016

Now – A Rebound Into Resistance U.S. Economic Surprise Index

First, Signs Of Stabilization, No Though The S&P Fell Only 15%

Cash Balances Went To a Decade And A Half High Though The S&P Fell Only 15%

A Composite Measure Of Bearish Positioning And Trend Exhaustion Went To A Rare Deep Bear Market Low Though The S&P Fell Only 15%

Another Composite Measure Of Bearish Positioning And Trend Exhaustion Went To A Rare Deep Bear Market Low

A Sky High Short Position That Won’t Come Down

CFTC Position Of Traders, Equities

Vernon Smith’s Herding Speculators Are “Out On A Limb” Bearish

In The First Years Of The U.S. Echo Echo Bubble The Public Sold

And Then Went Dormant And Then Sold Big Time Again In 2015

But In 2016 Their Selling Abated And Then Sold Big Time Again In 2015

But In 2016 Their Selling Abated Why Has The Selling Of The Public Abated?

Because The Public Is “Sold Out” Meanwhile The Corporate Bid For U.S. Equities Soars

Here Are M&A Volumes Meanwhile The Corporate Bid For U.S. Equities Soars

Here Are The Buyback Volumes For The S&P 500 Companies Here Are M&A Plus Buy Back Volumes

Six Percent Of GDP !!!! The mega corporate bid is financed with debt, creating a corporate debt bubble this time around

This will get worse, but any crisis is down the road Meanwhile Draghi And Kuroda Debase Long-Term Debt Instruments

As With M2 In China, Super Low Yields Force An Asset Allocation Into Equities Low Bund And JGB Yields Pull U.S. Bond Yields Down

As With M2 In China, Super Low Bond Yields Force An Asset Allocation Into Equities In The U.S. (And Globally) Productivity Gains Have Collapsed

Compounded Growth Rates in Productivity

2.6

2.2 2.1

1.8 1.8

1.6

0.5

0.3

1980-1990 1990-2000 2000-2010 2010-2015

Nonfarm Business Total Economy In The U.S. (And Globally) Productivity Gains Have Collapsed

No Growth In Real Incomes Force Central Banks To Persist With Debt Debasement • Under Public Pressure Debt Debasement Will Persist

• Long-Term Investors Will Allocate To Equities

• The Sold Out Public May Come Back To The Market

• Right Now Herding Speculators Remain Short

• At Super Low Long Rates, The Mega Corporate Bid Should Persist

• We are Set Up For An Echo Echo Bubble Breakout To New Highs

Some Day A Greater Echo Echo Bubble In Stocks Will Crash

When That Happens The Corporate Debt Bubble Will Become A Debt Crisis

But Thanks To Mega Ease That Is All “Down The Road”