Happy New Year hi this is Mike Maloney and in this video we’re going to be taking a look at things to come not the 1936 film which was a great film by the way but we’re going to take a look at what might happen in the coming year and beyond in the financial markets and in the economy and when you’re trying to look into the future to predict what’s going to happen it’s best to do that by looking through the lens of history if you can find a similar set up to what is happening today and when that set up result if you can find something in the past and find how it resolved itself what the outcome was then the outcome is probably going to be pretty similar in the future as Mark Twain famously said history doesn’t repeat itself but it often rhymes and there will be a twist it will be a little bit different than last time around but it’s going to be quite similar and so this is the S&P 500 we’re going to be taking a look at this and there’s this great article that I was reading and I want to show you just how important this is it’s titled why a toxic mix of low volatility passive strategies and high levels of leverage is reason for caution in the US equity markets now I’m going to try and make this more understandable for everybody because one of the things they don’t do here is define things so they’re speaking to other people in the financial sector you know we want to know what volatility is we want to know what passive strategies are and we want to know what the leverage is that they’re taking and you know some people don’t know what equity markets are our equity markets that’s the stock market equities are stocks so could low volatility be the quiet before the storm if we go down here to the text low volatility could be the quiet before the storm so says dr.

Robert Shiller the Nobel prize-winning economist at Yale University adding I lie awake worrying over the past 20 years the volatility index has closed below 10 on only 21 days 13 of which have been in the past 2 months so that means only in in the whole 20 year period there there were only 8 other days that closed outside this window of 13 days being in the last two months and now I’m going to share something with you I’m updating an old article this is 5 months old and there was already something extraordinary happening five months ago and now we’ve got another it’s been a hundred and fifty days five months since he said all of this so where are we at today well let’s take a look at the volatility index now the volatility index is basically a measurement of greed and fear it’s a measurement measurement of investors being too worried when it spikes up at these really high figures when everybody thinks that there’s a crisis that’s gonna go on forever and to complacent where they think that tomorrow is going to be the same as today everything is going to be rosy and the stock market is going to rise forever now if you look at this minimum here but what how they derive this is this spread between options puts and calls on the S&P 500 and so they it closed eight of those days that he’s talking about we’re back in this 2006-2007 period and if you look at where the stock market was in late 2006 early 2007 it was just before this thing that’s called a distribution dome this is where you know Wall Street was invested going up here and then they start placing risky assets in the hands of the public and so the strong smart money moves all of the risky assets off of their books and sells them to the weak dumb money the average retail investor and then it’s that retail investor that gets slaughtered going for the ride down here and then that retail investor will panic and sell and the professionals buy it back and take the you know they start the next ride and so if you take a look at what happened with the volatility index here it went way up and it peaked in late 2008 here and so that corresponds with this dip right here so investors were really worried and they were over pricing the risk into the market thinking that the markets were going to continue falling to zero and this is exactly when that when that volatility index was peaking is when they should have been going long investing back in stocks and not selling and so the volatility index is a negatively correlated indicator this is when you should when everybody is is complacent and sure that things are going to go on perfectly forever that’s when you should be worried and when everybody is really worried that’s when you need to be bold and take some steps now I made the the as far as making a lot in a very very short period of time I positioned myself so that I would do well during this period of time and every single day I was doing very very well so it was as far as a short time period goes this was the densest accumulation of wealth that I’ve had so far was during that crash now you take a look at what’s happening today and this is just going up and up and up and there is no part of volatility is the markets going up and down there isn’t any volatility here and that shows in this dropping now when he wrote the article which was August 3rd that only encompasses a few days here so let’s take a look at a close-up of the volatility index so this just goes back to May when it first dipped below 10 so it’s the first time since 2007 that the volatility index had been below 10 and I’m gonna look at an area chart here because it’s a little easier to see he’s talking about the days that fall in the white area inside this rectangle that I’ve drawn so there were 13 days but what about all of this over here that’s what I want to count now how many days have been added to that 13 days and to do that I’m going to turn this into a dot chart which is incredibly difficult to read it’s a awful looking chart but I’m gonna zoom up on this area since September and what this allows me to do I’m gonna ignore this one dot that’s almost on the 10 line and just count the dots in here and what we end up with is there’s 33 more of them so now there are 54 days that the volatility index has been below 10 in the last 20 years and 46 of those days or 85 percent of them have been since May they’ve been this year and that is something that that can’t last it’s completely unsustainable and this trajectory of the markets is also completely unsustainable so let’s go back to this letter here the current streak of 270 plus days without a 5% drawdown in any of the major US indices is the longest since 1996 well there have been another 150 days so now it’s 420 days when this article was written the Dow Jones was just at 2500 so there’s all of this that has been added and you can see that there’s no pull backs there none it just goes up and up and up and it’s like total insanity and so back to the article meanwhile US equity values continued to diverge from earnings so Schiller’s cyclically adjusted p\/e ratio or cyclically adjusted P Cape has only been higher two times in the in market history 1929 and 2000 well he they don’t define for people what p\/e ratios are and that’s basically the price of a stock a share of the stock in the company divided by the earnings per share of that company and so how what kind of profits is that company having compared to the cost of each share of stock and it’s a very very good indicator and typically there is a fair value range and that is somewhere around twelve to fifteen times whatever the earnings are is what the price of the stock should be to be fairly valued so let’s go over here and take a look at it and this is dr. Robert Schiller’s data and what you see here is you know fair value being in this area right here and things have been out of whack for a long time but that’s even higher than twelve to fifteen but so this is an area where you can expect to do well on your stocks and if you buy them when they’re the p\/e ratios are very low stocks are very undervalued at these points and they do incredibly well if you purchase stocks in from nineteen eighty to eighty two and then took that ride to the year 2000 you did incredibly well that’s the type of bull market that you know with gold and silver I’m trying to invest in one of these long term bull markets and the bull market in precious metals is not over with and so in that article they said that it only been hired two times in history 1929 and 2000 well now we’re up at 29 levels or higher and so let me see here yeah we’re just past the 1929 levels or maybe just a little bit you know same or a little bit higher and there was only one other time the dot-com tech bubble the Nasdaq bubble of the year 2000 when stocks were more insanely valued than they are right now and just to point this out this is 2007 and this is the global financial crisis of 2008 the crash that just brought it back into fair value range but not into undervalued and so you know that this cycle is not done yet we haven’t visited undervalued whenever you go into a bubble you have to visit undervalue before a brand new bull market starts bubble undervalued bubble undervalued and it’s like that every single time except this past two decades and the Fed just keeps blowing us back up into these bubbles that’s going to end soon and I don’t think we’re going to have to wait very long evidence is beginning to mount that US equity markets may be near a volatility driven tipping point buoyed by the lowest interest rates in 5000 years now I got a stop here and let everybody know that 5000 years is all of financial history we don’t have measurements of interest rates before that the measurements we do have are very accurate going back a few hundred years but then they sort of get spotty here in their what they’re talking about the lowest interest rates in forever is what they’re saying that they’ve never been this low right now we have countries that represent one quarter of the world’s GDP the gross domestic output so all of the goods and services created in in the world countries that represent 25 percent of the world’s output have negative interest rates which was not even a concept until the year 2008 and the reason that it’s a concept and a tool that they’re using now is because we have these insane Keynesian economists running the global financial system they run all the world’s central banks and they think that this is a logical tool that they can use these negative interest rates to get an outcome that they want and it isn’t it’s it’s an insane thing to actually charge people for the privilege of loaning them currency for a period of time and had taken on the risk that that currency is going to be paid back and depreciated inflated currency or not paid back at all or they take a haircut or something like that where you get paid back less so you’re you’re taking on risk and when you buy bonds you know in the United States we don’t have negative interest rates but in a lot of countries they do right now and investors in those countries have to pay for the privilege of loaning somebody currency for a period of time that is insanity and that means that there’s still an extreme emergency going on and you know the outcome of this isn’t going to be pretty investors have taken on more and riskier leverage in search of yield now these low interest rates push everybody into riskier and riskier investments because you can’t buy a safe investment that’s going to pay you some sort of yield but here they’re talking about leveraged riskier leverage and low volatility would not be a problem if not for strategies that increase leverage when volatility declines so as that volatility goes down more and more certain funds and types of investments people have taken on more and more leverage to a greater you know when Bear Stearns failed their mortgage-backed securities were leveraged to where they had 3% equity so they were leveraged it was just enormous leverage if passive strategies have a bias to buy then they can also have a bias to sell now what are passive strategies passive strategies for investing is investing in indexed funds for instance an index fund like the diamonds or the spiders or the Q’s the diamonds are a fund that mimics the Dow Jones Industrial Average the spiders mimic the S&P 500 so if you buy a spider the spiders indexed funds you’re going to get performance that looks almost identical to this but there are lots of ones that are double long and triple long and even quadruple long so when this goes up ten percent say your fund that you’re invested in is going to go up twenty thirty forty percent depending on which one but when this drops ten percent your fund is also going to go down forty percent and these are run by black box trading that’s you know it’s it’s all computer driven and so with hundreds of billions of dollars of investments now linked to volatility a spike in the volatility index could trigger a devastating algorithmic sell cascade algorithmic they’re talking about black box trading that manages these funds that hundreds of billions of dollars are invested in and so as when the market turns and it starts to go down what they’re worried about here is black box trading triggering sell cascade so this is devastating algorithmic sell cascade means it’s a waterfall event the market goes down a little it triggers more selling which then is going to cause margin call when you have leverage you know investors that go out on margin when they leverage stocks you put 20% down and you get to buy five times more stock than you’re paying for and what happens is if that stock goes up 10 percent you make 50 percent profit if it goes down 10 percent you lose 50 percent but what’s going to happen long before you can lose 50 percent is that your brokerage house will come in and you will get what’s called margin call and you have to cough up the they’ll typically at around 12% or something like that they won’t allow the equity to go below that because now they’re beginning to take on risk and so you have to cough up extra cash for them to not sell your position you get it like 24 hours and if you don’t cough up that cash your position gets sold and so what happens is when people get margin call they will sell this stock or that stock on their trading platform and try and cover their position and bring their equity up to where it needs to be and when they sell that causes the markets to go down further which cause which causes more of these black boxes to sell yet even more so this devastating algorithmic sell cascade is what an investor in stocks should be worried about it’s better to turn cautious too soon then too late after the downslide has begun the lower the volatility the more risk investors are willing to or in some cases required to incur now when they where they say required that’s because the world’s central banks have created these this ultra low interest rate environment and there is if you want to be invested there’s no place that is actually safe the only things that I can see that are safe that are definitely undervalued are gold and silver and during a crisis like this investors are also going to run to other safe haven alternative investments you’re going to see bonds get a last pop that’s a standard safe haven but the alternative safe havens would be crypto currencies and precious metals so they’re going to do very well assets whose performance is linked to volatility include a huge amount of money any spike in volatility even to historic average levels has the potential to drive a significant amount of equity selling much of it automated that’s that black box selling that I was talking about such selling would in turn further increase volatility which would call for more deleveraging and yet more selling so that’s that waterfall cascade refusal to acknowledge the existence of risk has become a pandemic that is the VIX staying the low ten for so long it is just it’s there’s something really wrong with the markets and this is the amount of margin that investors have gone out on so this is an non commercial investors their net positioning and they’re way way out on margin right now at historic levels and when the stocks go down they have to cover meaning they’ve got to sell some of the stocks to come up with the currency to repay the brokerage house and so we’re gonna skip down to the end here seemingly every day for the past two weeks the VIX has set new records well those records go for another five months now as Goldman Sachs pointed out recently there have been 14 low volatility regimes since 1928 and all have required a large shock namely a war or recession to end them however quantitative easing and the rise of passive strategies means history may tell us nothing about what’s to come now are they saying here that that this time it’s going to be different that this time everything will be fine what they are saying here is that history that this has made things so much worse that this is going to be bigger than anything that history can teach us and the because the next sentence and the longer volatility remains suppressed the bigger the leverage bubble grows and the more costly the correction will be once the passive herd is spooked you know I’ve been expecting four years now and I’m usually early I mean I was early I’ll show you something here this is the Robert Schiller’s home price index and I started warning back in 2005 when it was up here the real estate was in a bubble and that investors needed to get out and it went all the way to 2007 so I was a couple years early before that bubble popped but here we are again real estate is also one of it back into a bubble and so you’ve got the everything bubble with stocks bonds and real estate and so this time you know in the year 2000 stocks crashed in 2007 it was stocks and real estate this time it’s going to be stocks real estate and bonds so it’s it’s this is the currency crisis that I have said is going to be coming before the end of this decade and we’re just about there I don’t know how long how much longer this can go because if you take a look at what’s happening now with the tax cuts and everything the markets are just in love with this so it could go a few more months but I have a feeling that before the end of this year that’s going to be a happy new year for precious metals investors because things like this always end in tears this look at the trajectory of this thing it cannot go on forever and the correction that’s going to happen this time with all the leverage that’s built into the system with all of these passive funds just tracking this is going to be pretty horrific for the average stock investor as Hyman Minsky once said the more stable things become and the longer things are stable the more unstable they will be when the crisis hits and that crisis is somewhere on the road in front of us it’s part of the things to come in 2018 could go out to 2019 but I doubt it very much it’s going to be a happy new year for precious metals investors and potentially cryptocurrency investors so if you’ve got anything from this video please like it share it with everybody that you can subscribe to our channel if you already are subscribed click that little bell next to the subscription button because that tells YouTube that you definitely want to hear whenever we’ve got another video that comes out you want to be updated on that and if you aren’t getting notification of new videos then go to our website goldsilver com scroll to the bottom and there’s a place to sign up for our 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