U.S. Treasury Drops a Bombshell Yesterday: “Quicksilver Markets”

by Pam Martens, Wall Street on Parade Yesterday, an agency of the Federal government, the U.S. Treasury’s Office of Financial Research (OFR), released a study warning that by three separate measures the U.S. stock market is approaching dangerous “two-sigma thresholds” which can lead to “quicksilver markets.” Translation: we could be heading for a big crash. A two-sigma threshold is when market valuation metrics move at least two standard deviations above the historical mean. The study notes that “valuations approached or surpassed two-sigma in each major stock market bubble of the past century.” Think 1929, 2000 and 2007. A quicksilver market, as defined by the study, is when stable markets turn on a dime and “change rapidly and unpredictably.” The study was authored by Theodore (Ted) Berg and notes that it may not necessarily reflect the official position or policy of the OFR or Treasury. Berg is a Chartered Financial Analyst with the OFR, an agency created under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The three measures that are flashing warning signals are the CAPE ratio, the Q-ratio, and the Buffett Indicator. Berg is looking at these measures because of the potential for today’s historically high profit margins to be distorting the outlook of other analysts who are predicting that trend to continue, when, in reality, profit margins “revert toward a longer-term average over a business cycle.” The CAPE ratio was devised by economist Robert Shiller. It’s the ratio of the S&P 500 index to trailing 10-year average earnings, capturing a more realistic trend over one or two business cycles and thus eliminating the bias of one year of aberrational profits. Margin Debt Continue Reading>>>

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