A Freaky Index Says 2014 Will See Economic Crash

I wanted to write this post earlier today, so you’d all think I’m really smart. But I had to work until 10:00 tonight. I never go to it.

Now, things are happening that might make this post less prescient. I’m writing it anyway.

The Weirdest Index #

The financial world has a lot of weird indexes. They’re all correlation, no causation. And many of them fail under scrutiny.

But one freaky index even has banks worried. And it’s pointing to economic doom in 2014.

Before I get to that, I want to tell you about something I found in a book a couple of years ago.

The book is called “Denial” by Richard S. Tedlow. (I recommend it.) It’s about business executives who ignore the writing on the wall, pursue stupid strategies, listen only to “yes” men, and destroy great companies. (Been in a Sears lately?)

Here’s what the author noticed about companies about to decline:

Gordon Metcalf became CEO of Sears in 1967. Odds are he had never read Shelley’s poem. “Being the largest retailer in the world,” he said, “we thought we should have the largest headquarters in the world.” So, just as cracks began to appear in the armor of Sears, Metcalf decreed that Sears would construct the world’s tallest building. The 110-story Sears Tower, renamed Willis Tower in 2009, came to be known as “Gordon Metcalf ’s last erection,” a witticism that would have been inconceivable in the days of Wood.

The towered opened just as Sears began it’s epic fall. It had been, since just after WWII, the world’s largest retailer. Tedlow goes on:

Building monuments deserves a file drawer along with trash-talking when you are looking for companies in denial.

It Happens to Economies, Too #

Today I read that 2013 ranks second in history for skyscraper building.

According to the Council’s report, 2013 was the second-best year on record in terms of completed super-tall buildings. 73 buildings more than 200 meters (656 feet) tall were completed in 2013, second only to 2011, when 81 such buildings were completed.

The skyscraper index has a remarkable track record of predicting financial crashes. This from CNN:

According to the Skyscraper Index, the opening of every single “world’s tallest” building in the past century has coincided with an economic downturn in that country.

In the United States, builders installed the spire on New York’s Chrysler Building on October 23,1929 making it the tallest building in the world at 319 meters. Five days later, the Wall Street Crash wiped nearly 13% off the stock market and precipitated the country’s Great Depression.

In March 1996, Malaysia’s Petronas Towers were completed making it the world’s tallest building at 452 meters. Just sixteen months later, the Asian financial crisis hit the country and region. Malaysia’s stock market lost half of its value by the end of 1997.

And in Dubai, the 828-meter Burj Khalifa received its spire in October 2009. Two months later, a massive debt crisis slammed the Middle Eastern metropolis as the global financial crisis roiled world markets.

Even some bank analysts insist that the erection of grand towers signals “sell.”

But This Time Is Different #

If you follow my tweets, you know that my index involves near-universal expert opinion. When all the energy analysts agree that gasoline prices will only go up, they soon go down. When all the financial analysts agree that the Dow’s on a straight path to 20,000, the Dow’s as likely to go straight to 8,000.

Lately, even traditional bears have given up and said “buy.”

But there are voices in the wilderness. Henry Blodget of Business Insider, for one.

Here’s a chart from Mr. Hussman that lists many of the reasons why he (and I) are bracing for a crash. And, below that chart is an excerpt from Mr. Hussman’s latest note, in which he explains the valuation concern in more detail.