If there is anything that strikes fear into the hearts of stock market investors, it is a major stock market crash. Simple, behavioral economists have long been telling us that investors will either choose to stay in denial till it’s too late, never having learned the lessons of history when the market collapsed in 2008, 2000 or 1929, when they collectively lost trillions.
The big run-up in the stock market and home prices and in auto sales was enabled by $4.5 trillion in printed money from the Fed and the enabling of an insane amount of credit creation, including derivatives which are nothing more than another form of credit.
The answer to this could end up being worth at least $2.2 trillion, which is how much money would essentially be wiped out of the stock market if we finally get the much-discussed 10% correction in the overall market (the total U.S. stock market capitalization was $22.5 trillion as of June 30, according to the Center for Research in Security Prices).
The period spanning from November 1987 thorugh December 1991 begins with the continuation of the crash that began on 19 October 1987 However, there was no erosion in stable component of corporate earnings, which we represent as trailing year dividends per share, so order in the stock market re-emerged quickly at a new, but lower, level.
Research at the Massachusetts Institute of Technology shows that there is evidence that the frequency of stock market crashes follow an inverse cubic power law.24 This and other studies suggest that stock market crashes are a sign of self-organized criticality in financial markets.