Is Bitcoin Strength Foreshadowing A Major Stock Market Correction?

My gut is telling me that it’s the latter.

Once we hit 21 million bitcoins, there won’t be anymore “mined” (i.e. — created).

As I write, 15.5 million bitcoins have been created.

So the supply is nearly set — for life, that is.

However, you’ll notice that another possible justification for Bitcoin’s rise is missing from my list.

It’s a big one, too.

I’m concerned that Bitcoin’s strength is foreshadowing a major stock market correction.

So I asked my senior analyst, Martin Hutchinson, to handicap the odds of a market crash.

Of course, I was hoping Martin would declare such a crash as a 50:1 long shot.

Question: Hi, there. I have with me today Wall Street Daily’s distinguished senior analyst Martin Hutchinson. Martin is a former U.S. Treasury adviser and Citibank VP. Martin is Wall Street Daily’s go-to analyst on geomacro issues too, and how they impact markets. Today Martin has a big one. I asked Martin to handicap a possibility of a major market correction over the next few weeks. With so much uncertainty hanging over the world, I thought it was prudent to understand the risks.

What are you seeing out there, Martin?

Martin Hutchinson: We have to start by looking at the valuation of the market, and it’s pretty high right now. The Standard & Poor’s 500 price-earnings ratio is at 25.7. That’s not quite an all-time high. It got higher than that during the depression of ’08–’09, when all the earnings disappeared. But it’s pretty close for a nondepression. And then the Robert Shiller cyclically adjusted price-earnings ratio is even higher, at 28.4. That’s Yale Professor Robert Shiller’s measure that looks at the earnings adjusted over the business cycle.

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I like to take a long-term view of the market and look at its price compared with February 1995, which is where monetary policy changed: It became much looser. The Dow Jones Industrial Index then was at 4,000, which was not a trough. It was 45% above the 1987 peak. Now, if you inflate that 4,000 Dow by the rise in nominal GDPs since 1995 — nominal GDPs have gone from 7,400 to 18,900. If you inflate the Dow by that, it should now be at 10,100, and of course, it’s twice that equilibrium level at the present.

Question: Martin, are you suggesting that the Dow could potentially be valued at twice the level it should be?

Martin Hutchinson: I think that’s right. It’s been very inflated because of this long, long period of ultra-low interest rates. We’ve got one bull factor for the market, which is that policy’s a bit better now, at least as far as the market’s concerned. Deregulation under President Trump should help a bit and get productivity growth going faster, but there are a lot of factors that make it much more negative and make one more worried about a potential drop.

Question: If you don’t mind, Martin, could you share some of those key factors with our readers today?

Martin Hutchinson: Yes. The first is the possibility of a rise in interest rates. Janet Yellen looks keener on raising interest rates than she was before the election. I think if she just does what she said she was going to do, she’s going to go from a 0.5% federal funds rate to 1.25% percent this year — three interest rate rises. That’s more than doubling the short-term interest rate. The market’s been inflated by very low rates, so raising like that is liable to cause it to drop, and probably drop pretty sharply.

The second one is a possibility of an international crisis. We’ve got a number of areas that are simmering pretty close to crisis. The most dangerous, I think, is probably the South China Sea, and so that would, obviously, cause the market to drop. The third area is the excessive budget deficits, which are likely to be caused by President Trump, because he wants to do a big infrastructure spend, and we’ve already got budget deficits of $500 billion a year and we’re pretty well at the top of the cycle. If we get budget deficits higher than that, it’s quite likely that they would crowd out the bond market and push long-term interest rates up themselves. That in itself would damage the stock market.

Question: Martin, if you don’t mind, I asked you at the top if you would be willing to stick your neck out on this and handicap the possibility of a major market correction. Are you still willing to do that with us today?

Martin Hutchinson: I think so, yes. The cyclical recession is likely, because the longest expansion is 10 years — 1991–2001. And we get to that from a June 2009 trough to June 2019, I think a recession before then is very, very likely. I put a chance of a big stock market drop before the end of 2018 as being more than 2:1.

Question: More than 2:1? That’s enough that it sounds like our readers out there should be taking action, or some type of protective measures. What do you suggest?

Martin Hutchinson: The way I like to protect against big stock market drops is long-dated puts on the Standard & Poor’s Chicago Board auctions exchange, SPX. For example, the December 2019 1,300 series of puts are currently trading at $38.50, and that would mean that $3,850 (you buy 100 times the index with each put) would get you the right profit until December 2019 if the SPX goes below 1,300.

That looks a long way down. The SPX is currently at 2,293, but in 2009, it bottomed at 676, so it’s very likely if we get a big bear market, it’ll go way through 1,300, and then, of course, those puts will become extremely valuable.

Question: Thanks for your time today, Martin.

Martin Hutchinson: Great. Pleasure being with you.

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Written By: Wall Street Daily