The BIS Issues a Dire Stock Market Crash Warning
The Bank for International Settlements (BIS), often called the “central bank for central banks,” has sent a dire warning. It expects a recession, which could strike the global economy “with a vengeance.” The BIS suggests that the conditions for a major stock market crash are brewing in China and other emerging economies. (Source: “Great recession fears as bankers warn next global crash could arrive ‘with a vengeance’,” The Independent, June 26, 2017.)
The collapse of these markets would inevitably have a domino effect, awakening a famished bear on Wall Street. That’s because, and there is no other way to say it, the stock market is pure folly now. Valuations, led by the tech companies that Goldman Sachs Group Inc (NYSE:GS) has named FAANG (Facebook Inc (NASDAQ:FB), Apple Inc. (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX), and Alphabet Inc (NASDAQ:GOOGL), the parent company of Google) have reached unprecedented levels of a spectacle that can best be identified as folly.
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Bearish stock market crash predictions are still in short supply, given the prevailing exuberance. When the pundits and investors finally realize that the bulls on Wall Street and other exchanges have run out of hay, it will be too late. The simple numbers are staggering. The alleged economic recovery has lasted 96 months. It is the longest in history. But it is a recovery only because the media and the politicians, who have run out of ideas, like to present it as such.
The recovery is probably the weakest in the history of recoveries. The problem is that the performance of the stock markets, with Wall Street leading the charge, has hidden economic reality from view. The S&P price-to-earnings ratio average is about 19. But tech stocks are trading, on average, at 24 times earnings.
Some tech stocks like Yelp Inc (NYSE:YELP) are trading at over 800 times earnings. Tesla Inc (NASDAQ:TSLA) might be the poster child for the P/E ratio insanity, given that it continues to climb without earnings (or with negative earnings). Indeed, Tesla is rumored to post earnings or, rather, losses of $0.66/share on August 2. (Source: “EPS for Tesla (TSLA) Expected At $-0.66; Tyler Technologies (TYL)’s Sentiment Is 1.03,” Flint Daily, June 29, 2017.)
This is but one of the components that are encouraging the bull market. The real economy, or what we might call “Main Street,” is not performing anywhere near the levels of the stock market.
The Market Performance Promises Nirvana, But It’s Far Off the Mark
The market seems to suggest that we have reached some sort of economic nirvana of everlasting and full employment. It would be easy for investors to believe that there will never be another recession, let alone a depression. Economic encounters of the negative kind and market shocks are all out of fashion. But, that of course, makes as much sense as the idea that Donald Trump won the election because of Russian influence.
The fact is that the real economy is a bedridden patient. The fact that Wall Street appears to be reaching for the peaks of Everest is like the makeup they used to put on people suffering from chronic diseases in the 18th century. The Department of Commerce recently reported that GDP growth for the first quarter was only 0.7%. That was the slowest quarter of household spending since 2009.
It’s true that GDP growth has been revised to 1.4% for the first quarter of 2017. But it’s still way off the growth rate that Trump had envisaged before being elected. He said that three-percent growth in 2017 was likely. Three percent is the average growth rate of the U.S. economy during the 1990’s.
In 2016, the U.S. economy grew at a rate of 1.6%. That’s the lowest rate in five years and higher than the supposedly “better-than-expected” recent numbers. (Source: “U.S. first-quarter GDP growth revised up to 1.4 percent,” Reuters, June 29, 2017.)
As some aerospace-inspired economists might describe it, the economy is flying, but it’s approaching stall speed. That’s the speed that an airplane achieves just before it crashes if the pilot has made the mistake of pulling the nose up too early. After almost 100 months of tepid recovery—that is, if we want to call it as such—it’s clear there’s no other way to describe the stock market performance than as madness.
The Economy Is Dominated by Bubbles
Meanwhile, the bubble has swelled the world economy beyond any sustainable level. There is the risk of a massive deflation of stock valuations. The American economy is at a point where it has never been before: almost zero-percent interest rates but slow growth. Europe has repeated this phenomenon, growing even slower with equally low rates.
We have never experienced eight years of interest rates in the money market at all, even at the lowest point of depression in the 1930s. Thus, there is a credit bubble—the abrupt end of which could cause what little growth there is to a screeching halt—and a stock bubble. There are bubbles everywhere; the economy is like a glass of carbonated mineral water. But it’s hardly as refreshing.
Then there’s the psychological aspect that analysts and investors too often overlook. There’s the odd sense that being successful with investments is a matter of skill—or skill only. It’s not. Luck plays a big role.
Usually luck has a bad reputation, and in fact is not a very trusted friend. However, it should be noted that almost always the most important successes require an important component. It has nothing to do with hard work, it’s luck—or chance. The role of chance is probably the most underrated criterion in terms of investment performance.
Only Time Can Judge Performance
Only judge investment performance over the long run. In the span of a few months or years, favorable chance or luck can make any amateur feel like Warren Buffett. Good luck can mask reality in such a way as to allow the most hapless investor—the kind that follows no logic whatsoever, whether technical or qualitative analysis—to become a successful trader.
The rookies are generally focused on short-term gains. Thus, they have few ways of testing the validity of their logic or analysis. They get a few lucky breaks and they find encouragement to pursue their strategy. They become prone to trusting their sensation or gut—confusing it for an educated intuition.
Some investors manage to ride the wave of a major crash like the one that occurred after the Lehman Brothers Holdings, Inc. collapse in 2008. They come out scratched, but alive. Thus, they become cocky or overly exuberant. It’s no wonder that these are the same investors that will end up losing out when the stock market crash happens.
But the proof of the pudding is in the long run. The good luck rarely lasts. Eventually periods of bad luck follow and investing becomes just another way of playing the lottery. The difference between the periods of good and bad fortune is what determines an investor’s ability. If that difference is positive, he or she will have done well.
By way of example, consider a rookie football team in the NFL. It may happen that the rookies beat the previous Super Bowl winners once, maybe twice due to distraction, poorly or overly inflated balls or jet lag. Regardless, the champions will eventually recuperate and, over the course of twenty matches, get the best of the rookies.
Now, how does this apply to predictions of a stock market crash? Rather directly is the answer. The stock market lately has been acting in the same way as the lucky trader. It’s just that the lucky traders are a few in a million. Yet, the fundamentals in the true sense of the word—that is, the actual ability of companies to deliver the profits their Wall Street valuations are promising—are not likely to materialize.
Therefore, sooner or later, many high-flying stocks will find more concrete reasons to drop than to keep going up. The bull market will turn into a bear market. Consider that optimism is already in short supply. The Chinese economy has worsened, while the effects of the new tighter U.S. monetary policy on growth amid collapsing oil prices are just three macro level factors that could trigger a recession individually. Imagine, when all three act in aggregate.
Some Investors Feel the Tremors of Financial Earthquake
Many investors, meanwhile, seem to be ignoring important signals of the coming financial earthquake. The BIS, as mentioned above, has become concerned, because the markets have been continuing their fantasy-driven fest of tax cuts and infrastructure-driven growth even in the face of serious structural risks.
The Russiagate pantomime has prevented Trump from actuating any of the better aspects of his economic plan, leaving only the worst side effects. It’s as if the “Tylenol” you took to get rid of a headache left the headache but added nausea to the list of litanies. One might resort to the McCarthyism era to find similar FBI obsession-driven witch hunts, yet nobody has a clue what the investigation is all about.
Trump may have understood one thing. He has appears to have given up on running a more isolationist foreign policy as many of his voters had hoped and for which they voted. Trump has realized that the one industrial sector in America that could become great again is: defense. Thus, gone are the policies of working along with Russia. More tensions between Moscow and Washington are good for the defense sector business.
It was in Ohio, Pennsylvania, and Michigan that Trump earned the votes to win the White House. These were once the states where blue-collar workers in mines and factories voted Democrats. Trump will have disappointed some of these voters, as the jobs they wanted will not return. Meanwhile, America will have to face off with “resistance summer.”
The Resistance Summer program for the summer of 2017 shall include demonstrations and town hall invasions across America. During the weekend leading up to July 4, there were dozens of “Impeachment Marches” throughout the country, demanding Trump be held accountable for the alleged Russiagate. They should protest to find out what became of Trump’s campaign promises. In all probability, Trump knows that a war is inevitable, that the armed forces will come to America’s rescue. But who will rescue investors from the stock market crash?
What’s best for an unemployed student or a student forced to abandon college over high fees? As Donald Trump has made the Pentagon the main recipient of federal expense spending, the goal is clear and it shows the president fears an imminent recession. Boosting the military is what little he can do to avoid feeling pointless. In times of imminent recession and social division, you can do worse than to launch a war.
