Between Now and the Next Recession

”please understand that many of them will go down 75+% between now and the next recession.”

IMO, this was the statement that seemed to get most folks here a bit uptight…it is most likely wrong…but merely because the author of the statement said “between now”. Had he instead said, during a recession or bubble burst that these things could happen…there likely would be less argument to the contrary. One merely looks at prior historical precedent to realize that in that scenario, practically everything goes down…even the dividend players with the lowest P/E ratios like the Dogs of the Dow’s like EK, DD and GM dropped by 20-40%. There was a drop in the NASDAQ of 78% from the March 2000 high.

The 75+% drop was not pulled out of the hat as you can see from the above MASDAQ number…it truly happened and unless one was in cash, there was little place to hide.

There has been much talk of the new SaaS economy…so there was the same talk of the dotcom boom, the railroad boom, the industrial boom and so forth. With each of these “new economies” there were most often booms followed by busts…and the busts were bad…really bad…the main drivers of the boom (like railroads) were taken down for many many years.

In a somewhat bizzare revelation however, that which became a bust…ultimately led to the next great economic expansion…and so it was with the Y2K bust. So these boom/bust cycles repeat throughout history and the SaaS economy is very unlikely to be any different.

The founder of the NPI (Xoasurfer) wrote a great piece called the “End of Irrationality” back in 2002 (post bust)…I would suggest it should be required reading for everyone here…live through that Y2K era with the then “Saul” of those times. Not sure what happened to this wiseman but my guess is that he was creamed in the bust depite being very wise, running his own investment newsletter, etc.

That then leads me to the real question which is, since we know that there are boom/bust cycles, what will cause the bust and when?

IMO, the Black Swan event is unpredictable and therefore not worthy to discuss except as to potential insurance policies one might take with protecting gains.

But the more likely predictable event would be Recession…and that is where most here would quibble with the original statement made by Advocatus (by the way, that poster is NOT a newbie…he lived through the Y2K event as well and is the last post in the linked NPI thread above).

But the real issue is that we should be trying to predict the next recession and I believe we have pretty reliable indicators flagging caution in the next 1-2 years which I will remind you of in a moment.

But first, do we have indications that stocks are overvalued??? Absolutely!:

The money supply has skyrocketed courtesy of the FED and likely fueled the majority of the stock market gains since 2008:

The FED says they intend to rein in that liquidity…not good for the market and stocks.

The Shiller PE is at the second highest in its history:

The S&P PE is at the higher end but no where near its peak of 2000:

The Tobin Q is at an upper end but not the highest:

The Buffet Indicator is the second highest ever:…

The BMW for the S&P is 1 standard deviation above its mean:

So any reasonable person would conclude that we are dealing with a market that is overvalued. I have even heard of a few friends wanting to go into day trading…anyone else with similar friends???

All of these factors suggest the market is hyperinflated but NONE suggest quite to the degree of the Y2K bubble.

Finally, what then can we use to predict the next recession and therefore market decline?:

The inverted yield curve has been very reliable as a predictor of an upcoming recession within about a subsequent year. The data to support this has been previously posted by me on this board about a year ago…it is consistent and reproducible.

I would also point out that equities typically faulter when the FED tightens:

Were it not for President Trumps tax reform bill, we would have already dropped related to the multiple recent rate hikes and more anticipated.

You can easily see that the yield curve has flattened, many are watching this so should it invert, we could see a drop in stock values well before the ultimate recession takes hold a year later or so. But without a doubt, keep you eyes on that yield curve.

Lastly, we may see a bit of a September slump as has been the historical trend…that could be expected and barring a Black Swan, can be misconstrued as something more ominous. Watch that yield curve!

The market is overvalued, the yield curve is flat, the politics are unstable, the 3 decade trade war has heated up…complacency is not our friend.

You done good…but you are not invincible!


The BMW for the S&P is 1 standard deviation above its mean:

One gets a rather different impression looking at the 40 year chart.


I believe we have pretty reliable indicators flagging caution in the next 1-2 years which I will remind you of in a moment. Actually I would be quite surprised if this Bull lasted a full 2 years. But I try to base what I do on probabilities and facts, not on guesses about multiple unknown futures.
The indicators you mention are not good at exact timing and at this point it is still a bull market and most of the Saul/NPI companies are still growing rapidly. It will end when it ends , meanwhile I will stay invested for now but I am not adding new money. And I am ready to sell half of what I have at any time based on macro market movements. Actual yield curve inversion would be a biggie for me.

quote from the last link the more interesting observation from the past tightening cycles is the equities performance 1 year after the first rate hike, which shows a net positive gain

BTW the time to recover from a bear varies enormously, it took over 25 years to recover from the 1929 crash , a period exceeding the expected lifetimes of some of us, but less than 5 years for the nasty 2000 crash.

complacency is not our friend. Agree.


IMO, this was the statement that seemed to get most folks here a bit uptight…it is most likely wrong…but merely because the author of the statement said “between now”.

You are correct. I hadn’t really meant to put it like that.
I still think it’s probably going to happen like that, but if I had to rephrase it, I would either say something like “between now and the next recession, -50%” but I’d much rather make the very safe, very obvious statement you made - that based on historic experience, there’s a very large risk of a -75+% drop between the peak and the next recession.

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You know, funny thing is, despite all these worse case scenarios, those who stay invested and simply add month after month end up with incredible returns through Good and had and disaster and euphoria.

If it is not a bubble, and if it is not a Great Depression, all this talk succeeds in doing is scaring people into buying bonds, REITs, and defensive stocks, while ignoring the obviously frivolous and unsustainable rise of the new economy. Sounds like parents preaching against rock music :musical_score:.

I seem to remember surviving and thriving through the 2009 disaster. I recall not selling and making stupid decisions not to buy things. But in the end I hardly remember it anymore. Was just a blip.

911 turned into just a financial blip (not demeaning 911 but making example of worse case scenarios).

It is all part of the market. Those who lose (at least historically) are those too cynical or fearful to invest in what is new and scary and creating the new economy from RCA to Digital EMC MSFT Apple Amazon MDB et al.

Personal choice. No things will not always be so good, but then again things will not always remain so bad either.

My last post on this topic as it is becoming tiresome.



As a R&R musician, with a modicum of success in the business in years gone by (my plan was to be rich, famous and dead by the time I was 30 - I succeeded at none of these), I never counseled my daughter against rock music. In fact, just the opposite, I advised her to observe and pay attention (I must admit, I had a different take on rap).

In any case, I have pretty much the same advice when it comes to investing, observe and pay attention.

Some things that may seem so different are often, at the core, not really so dissimilar afterall.

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Glad your plan as a R&R musician failed, at least the third part. Got a good laugh out of your “confession”. Glad you hung on. Hope you keep contributing here for a long, long time.