Phil and Eric discuss how the FBI Clinton probe is impacting the US election and financial markets, and scenarios that can develop, following the election. The Economic Depression is rapidly developing and from this point forward, any reprieve from massive stock market losses should be considered the occasional upward motion of a bouncing ball careening down a steep and treacherous staircase. On February 24, 2015, NIA’s 100% perfect stock market crash predictor once again alerted us to an imminent stock market crash. For the next ten years, the United States was mired in a deep economic depression. We may not be able to time the next crash with any great accuracy, but we can at least be aware of when the conditions are becoming ripe for a crash, using quantitative measurements of market conditions. From an asset pricing point of view, the effect of the crash on stockholders is more interesting than the effect on other households.
The stock market is supposed to be a barometer of how well the broader U.S. economy is doing. During the 2007 financial crisis, this stock fell from $9.45 to a low of $4.14. That is a 56% drop. In 2008, the failure of some financial institutions in the United States lead to a global crisis that resulted in the failures of some European banks and sharp declines in the global stock market. Either stocks were going to collapse quickly or they were going to enter a multi-decade bear market.
It will most likely be a bumpy start since liquidity is sure to be scarce in the coming months, causing severe downside pressure on all things paper. The $2.2 trillion junk bond market (high-yield) as well as the investment grade market have seen spreads widen as outflows from Exchange Traded Funds (ETFs) and bond funds pick up steam.
There are two ways this market might go. One is further down and more sell offs. I think the current period is quite similar to the early 30’s but one needs to understand why the market fell so much back then. This tells us the probability of a crash is low, while expectation of a crash is high, which can present opportunities for well informed market participants. Recently former Federal Reserve Chairman Greenspan stated that he believed the Chinese stock market was completely overbought and it was looking for a sharp fall. But what’s relevant to this question is the way it behaves in relation to the stock market.
While corrections and volatility will assuredly happen from time to time, there is little question that stock prices still have some ways to go to catch up with the earnings growth already achieved the last few years. If you are like most, however, you may not know what the crash meant to individual property owners. While there is likely some downside left, I am phasing out of my metals position with a great profit until I see a more unfair opportunity to trade. Recall that the object of interest is the distribution of the one-year-ahead returns of the stock market as viewed by the respondent.