These 23 Charts Prove That Stocks Are Heading For A

Devastating Crash
By: Jesse Colombo
Following the bull market pattern of the past five years, the U.S. stock market continues to
climb to new highs while shaking off all reasons for pessimism as well as the warnings of
skeptics. Stock market bulls are becoming increasingly brazen as they drive the market to
nosebleed heights, which is convincing a greater number of people into believing in the
economic recovery. Unfortunately, the public is being fooled because the U.S. stock market and
economy is experiencing another classic central bank-driven bubble that will end in a calamity,
erasing trillions of dollars of wealth.
As you will see from the charts in this article, there is so much proof that the bull market is
actually a dangerous speculative bubble that it is simply undeniable. Despite what the cold,
hard facts show, legions of pundits, economists, and investors are coming out of the woodwork
to deny the existence of what is one of the most obvious bubbles in history. This widespread
denial is what happens when emotions trump logic and reasoning.
1) Since the current bull run started in early-2009, the stock market has tripled in value while
barely experiencing any pullbacks aside from brief corrections in 2010 and 2011, when the
Global Financial Crisis was still in full swing. The lack of meaningful pullbacks has emboldened
bullish investors as market volatility and risk becomes a distant memory.




2) The latest bubbles in the U.S. stock market and economy are driven by record low interest
rates that are a product of the Federal Reserves aggressive monetary stimulus policies since
the financial crisis. Ultra-low interest rates lead to bubbles because borrowing costs are
dramatically reduced, while saving is discouraged by the paltry returns on savings accounts and
less risky fixed-income investments, which essentially forces otherwise conservative savers and
investors into riskier and more volatile investments such as stocks. The disastrous U.S. housing
and credit bubble inflated as a direct result of the last low interest rate period from 2002 to
2007; the situation is even more precarious now that the Fed Funds Rate has remained at
virtually zero percent for over five years:

3) Longer-term interest rates such as the 10-year U.S. Treasury Note yield have also been at
record lows since the financial crisis, which has greatly reduced mortgage borrowing costs and
is driving another housing bubble in some locations and market segments, as well as
encouraging a corporate bond borrowing binge. Todays extremely low bond yields are pushing
investors into the stock market to earn returns that they would normally have earned from
bonds.

4) Bond yields have been pushed to record lows by the Federal Reserves quantitative easing
programs that are intended to pump liquidity into the financial system to boost the hard-hit
U.S. economy. When running quantitative easing (QE) programs, the Fed creates new money
out of thin air and uses it to purchase Treasury and mortgage bonds, which reduces the yields
on those bonds. The chart below shows that the Federal Reserve has purchased nearly $3.6
trillion worth of bonds in the past half-decade. Each of the Feds three QE programs caused the
stock market to surge as more liquidity was pumped into the financial system.

5) Record low borrowing costs and the soaring stock market has encouraged traders to
aggressively use margin to finance their stock purchases, which is exactly what occurred during
the Dot-com Bubble and the U.S. housing and credit bubble:

Source: Doug Short


6) The Federal Reserves monetary stimulus policies of the past five years have reinflated the
stock bubble, which is why nearly every valuation indicator shows that stocks are quite
overvalued once again. When stock market valuations hit generational highs, secular bear
markets or long periods of stagnation typically ensue. Note: the market valuation peaks of the
early-1900s and late-1960s actually led to powerful bear markets when adjusted for inflation,
even though the nominal value of the stock market remained stable for long periods of time.
For example, the raging inflation of the 1970s eroded the value of stocks as the market
stagnated for nearly fifteen years.
The chart below shows a valuation measure called the Shiller P/E Ratio, which is the price-to-
earnings ratio based on average inflation-adjusted earnings from the previous 10 years:

Source: VectorGrader.com






7) The total market capitalization to GDP ratio, which Warren Buffet described as probably the
best single measure of where valuations stand at any given moment, also confirms that stocks
are in bubble territory:

Source: VectorGrader.com










8) Another valuation indicator, Tobins Q Ratio (the ratio of the markets price to replacement
costs), shows that U.S. stocks are overvalued:

Source: VectorGrader.com

9) Stock markets become overvalued when stock prices rise at a much faster rate than earnings,
which is what has occurred for the past several years:

Source: Citi Research/Business Insider

10) The markets ultra-low dividend yield is even more proof that stocks have been in a longer-
term Bubble Era since the late-1990s that never truly ended. The current low interest rate
environment helps to suppress dividend yields by forcing investors out of once high-yielding
investments (such as bonds) and into dividend-paying stocks, thereby inflating their values.
Most mainstream analysts believe that dividend yields have plunged since the 1990s primarily
because of companies greater preference for reinvesting earnings instead of paying dividends,
which is partly true, but it doesnt fully explain why dividend yields are so low, especially when
so many valuation measures show that the stock market is very inflated.

Source: VectorGrader.com







11) An indicator called the Financial Stress Index shows that investors are becoming downright
euphoric and complacent just like they did during last decades bubble. Read my recent article
to learn more about the record low Financial Stress Index reading and its bearish implications.


12) Like the Financial Stress Index, an indicator called the Volatility Index or VIX shows that
stock market investors have become euphoric and complacent like they did from 2004 to 2007:


13) Citigroups Panic/Euphoria sentiment indicator also confirms that investors are excessively
optimistic, as they typically are during bubbles:

Source: Citi

14) A sentiment indicator that combines the Volatility Index and Investors Intelligence survey
data shows that bearish market sentiment is at a multi-decade low, which also occurred during
last decades bubble:

Source: @Not_Jim_Cramer

15) Money-losing stock IPOs (courtesy of the current social media and tech bubble) are near the
highs hit at the peak of the Dot-com Bubble in 2000:

Source: SentimenTrader.com

16) CNN Moneys Fear & Greed Index shows that extreme greed is the dominant emotion
that is currently driving the stock market:

Source: CNN Money

17) The stock price of luxury broker and auction company Sothebys tends to spike during
bubbles, as it has in the past several years:

Source: Jim Chanos/CNBC

18) Contrary to popular belief, the U.S. economy has not deleveraged or paid down debt after
the financial crisis; total outstanding credit is actually hitting new highs, which is helping to
drive our ersatz economic recovery:

Source: BofA Merrill Lynch Global Investment Strategy, Haver

19) Thanks to record low interest rates, total U.S. corporate borrowing is approaching 4 percent
of the GDP a level that marked the peaks of the last several bubbles, including the housing
bubble and the Dot-com Bubble:

Source: Cyniconomics

20) U.S. private sector leverage has continued to even higher levels after the financial crisis:

Source: FiveThirtyEight.com


21) Ultra-low interest rates and inflated asset prices have greatly boosted the profits of the U.S.
financial sector since the year 2000, which has become the countrys dominant industry like
manufacturing was in the middle of the twentieth century. Record financial sector profits,
outsourcing, and other forms of labor cost-cutting have boosted U.S. corporate profitability to
an all-time high (as the chart below shows). This record level of profitability is not sustainable
because it is predicated on the continued inflation of asset prices and the growth of the
financial sector, which will both experience pain when the current bubble ends.

22) As mentioned earlier, record-low corporate borrowing costs (thanks to the Feds QE and the
bond bubble) has led to a corporate borrowing binge that has financed approximately $1.9
trillion worth of stock buybacks from Q1-2009 through Q1-2014, which has been a significant
driver of the U.S. stock bubble. The last time corporate stock buybacks hit this level was right
before the stock market crash of 2008:

Source: Dr. Ed Yardeni

23) The Federal Reserve has actually admitted that U.S. stocks would be 50 percent lower if it
was not for their aggressive stimulation (using a 1994 to 2011 sample period, which is pre-QE3):

Conclusion
At this point, it should be clear that the U.S. stock market is experiencing another bubble that
will end in a severe crisis. Please ignore the voices in your mind that may be tempting you to
believe that this time is different or that weve learned our lesson in 2008, so it cant happen
again. If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a
duck.
The only question that matters now is when will the U.S. stock bubble burst. There are two
primary scenarios that I foresee leading to the popping of the U.S. stock bubble, but both
involve rising interest rates:
Scenario #1: After several more years of the bubble-driven economic recovery, the Federal
Reserve has a Mission Accomplished moment and eventually increases the Fed Funds rate
(after it ends its QE3 program this year), which pops the post-2009 bubbles that were created
by stimulative monetary conditions in the first place. Rising interest rates are what ended the
2003-2007 bubble, which led to the Global Financial Crisis.
Scenario #2: The Fed loses control of longer-term interest rates after investors sell their
Treasury bond holdings en masse in fear of a sharp decline in the U.S. dollars value after years
of money printing.