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The Depression hasn’t gone away you know I know all of us on this side of the Atlantic are terribly excited about the latest Brexit/leadership crisis but – unbelievable as it may sound – there are even bigger fish to fry. A stock market crash is looming. Yes, I know I have said that every year since the 2008 financial crisis but this time it really, really, really might actually happen.
In this presentation – which sadly includes a little bit of advertising – Jesse Colombo outlines why he thinks a crash is imminent.
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$20 trillion in free money has to go somewhere.
Every time the temperature goes down here, I tell everyone who’ll listen that it’ll go back up. And I’m always right, eventually.
A bubble was fought with a bigger bubble. Now if there is growth to cover the bubble(s) nothing bad happens, but if there isn’t…
Patrick, thanks ever so for the link. I’m a know-nuttink in this area, but even I figure the stock market is in la-la land. Which is unfortunate, from my personal POV — better to have never had imaginary money than to have it and lose it. :>(
I’d be very interested in PdH’s and Johnathan’s opinions on the issue and on Mr. Colombo’s piece and presentation. And the opinions of other financial professionals (which I gather Perry is) who infest Samizdata.
What staghounds said.
The money has to go somewhere, I can‘t imagine a big stock market crash in this environment. How on earth could a substantial interest irate rise be possible, with this level of state debt?
I inherited a (very very small) shareholding in a FTSE 100 Company in mid-2016, by April 2018, it had increased in value by around 50%, with no evident dramatic new products, cost-savings or startling innovations, but a risky acquisition of buying a ‘brand’ off a film star for around 5% of the firm’s market capitalisation. The rise in share price appeared to be wholly unrelated to the underlying economic reality, never mind the performance of the business, and ultimately, this Ponzi scheme in all-but-name will have to end. The joy is of course, that pension schemes are often mandated to buy FTSE 100 shares simply because they are in the top 100, e.g. if tracking or if looking for a ‘safe’ investment.
We are now waiting for the music to stop, the last scams QE in the UK, WARP in the US (Worthless Assets Recovery Program) have done their bit and disguised the underlying reality for over a decade.
I am astonished, utterly astonished, that the whole Credit Bubble farce has not already bust – indeed I am astonished that it did not bust YEARS AGO.
It must be admitted (and I do admitted) that the establishment elite have done a remarkable thing in keeping their demented system rolling for so long – but it can not last for ever, and Patrick is quite correct the bust is coming.
Of course the bust will be blamed on Donald Trump and British independence – but these things will have had nothing whatever to do with it.
Paul,
You and I were discussing the credit boom in these terms in the early 1990s. Look at how long the Soviet Union blundered on.
Julie, much of the central bank QE splurge has pushed up asset prices such as real estate and equities. I actually sat next to an economist the other day expounding on why the central bank money printing saved us from a global depression, and the cost of this has been a big rise in inequality of wealth, and the political results of that. At least even defenders of massive central bank action admit there are costs, and that those costs aren’t trivial.
I worry about a number of things (my hair is getting greyer, although my wife says I get even more handsome in middle age): most obviously, the enormous debt burdens of the West. The fact that the stock of debt in the US is pushing towards $22 trillion, (not necessarily including off-balance sheet liabilities from unfunded pensions) while the US economy is booming (so we are told) begs the question of what happens if there is – as there will be – a recession. And sure, one can blame politicians for this, right across the spectrum. The public awareness of, and understanding about, the dangers such debt causes is pitiful. Paul Marks regularly points out the damage done by years of bad ideas in our universities when it comes to understanding finance and economics, and he is right to do so. The rot goes very deep. I worry that, if there is a serious crunch, those in government, such as from a Democrat or populist/nationalist GOP side, might for example try and loot 401(k) plans and other pools of capital. Don’t say it cannot happen: FDR nationalised private holdings of gold in the 1930s.
The failure to think about these matters is the great financial and moral crime of our time, in my view. When Paul Ryan, back in his more radical days, suggested a reform package for Social Security, Medicare and Medicaid, and proposed solutions on how to cut spending, he was crucified for it. (His plan was quite bold, but hardly a return to laissez faire capitalism). This is the problem: when even a politician dares to talk more honestly about such things, he or she is destroyed. So as a result, no-one talks about it when cameras are rolling.
China holds a large amount of Western debt, and some of that falls due to be rolled over in the coming years. Which is why hitting China with tariffs at such a period is risky, to say the least, even if the Chinese take the piss over Western intellectual property rights (a legitimate complaint).
I’m not worried in the same way you seem to be worried – as in, thinking there might be some risk of this happening.
I’m worried about WHEN this will happen. It’s inevitable. There is simply too much money tied up in those accounts for government to forgo taking another share of it. And it will be politically easy, because they will justify it as taking from the “haves” to help the “have nots.”
I started dropping between 5% and 10% of gross into qualified accounts when I was 21. I’m . . . well, let’s say I’m now substantially older, and the money that I barely missed over the years has added up nicely, and the incredible disassociation of equity prices from EPS didn’t hurt, leaving me free to end the worry about working for a living somewhere in my fifties.
But this bubble – or this “malinvestment”, as Columbo terms it – has allowed me, and many many others, to benefit from fortuity and some discipline far in excess of the value that we added to the community, and has created a class of “unmerited rich folk” who are going to be easy pickings for the socialist-minded. In this environment, if you had excess money available for investment into equities, you outstripped all of those folks who could not do the same. The gap between “haves” and “have nots” was widened considerably.
And so it’s only a matter of some small amount of time before qualified accounts will be raided. The justification, and the desire, are both too great to allow otherwise.
Johnathan, thanks for your reply. Yes, Paul has been worried about this for as long as I’ve known him (online that is). And so have I — been worried about economic collapse, I mean, so I’ve laid in a bunch of canned food, though nowhere near enough to see us through any serious shortage.
But I didn’t understand it as a credit bubble until I began hanging out here, and I’m grateful to you and Paul and the others for helping me to see the situation more clearly.
Mr. Colombo and his graphs — I guess I’m not quite clear on whether he’s using them to describe the history or to make predictions.
‘Yes, I know I have said that every year since the 2008 financial crisis but this time it really, really, really might actually happen.’
Since we have economic cycles because of Governments’ intervention in economies, keep saying it and eventually you must be right.
The stock market boom merely reflects government theft of savings from those who insist on high returns from supposedly low risk investments like bonds, especially government bonds.
Anyone buying debt instruments such as bonds is crazy, all world currencies are losing real value at a great rate and only investments in actual money making businesses, directly, via shares or partnerships, or income producing real estate, will protect value – not all of it but some. A lot of people see this and are refusing to buy bonds.
I have no real problem with looting money from people who want high returns and no risks. They are fools, lazy suckers, and it is immoral to let a sucker keep his money.
Also, all stocks are not created equal. Anything with a P/E over 15 is trash and indeed, that eliminates much of the stock market too.
The next crash is more likely to be another sub-prime crisis, probably in car finance.
Keep an eye on student debt, too. Approx. $1.7 trillion outstanding, compared to auto subprime at around $250 billion. Double the entire US credit card debt. Several bills are being designed to remove the bankruptcy protections from those loans, and, given the vast number of dollars at issue, and the rather staggering percentage of borrowers in some form of default, this would dwarf the risks in subprime.
The looting and raiding of pension funds will be done the old fashioned way- monetisation of the debt.
Keep an eye on what happens when the first State employee pension fund can’t pay its obligations.
I agree that the US stock market is ripe for a fall, and the startup market is completely over valued, but people should be looking at the Eurozone for the trigger. The Eurozone has been doing more money printing for longer than either the US or UK, and now the ECB is deliberately trying to use monetary policy in order to force Italy back into their flock, even at the danger of pushing a stagnating economy into a recession. They did this before in order to get rid of Berlusconi when he started musing about taking Italy out of the Eurozone. But it will not be so easy this time, as the Lega/MS5 government have more popular support thanks to doing what the EU establishment said was impossible and stopping the illegal immigration from Africa to Italy.
Quite so Mr Ed – quite so.
“There is a great deal of ruin in a great power”.
The Roman Empire made no sense after the “reforms” of Diocletian – which made the state (state employment and so on) far bigger than Civil Society (with the technology of the time) could reasonably support. Yet the Roman Empire staggered on (as a declining civilisation) for a very long time indeed after Diocletian.
Of course the Romans did not have a Credit Bubble financial system – and an “unreasonable” number of state dependents was still tiny by modern standards.
I still believe that the decline and fall of the West will take much less time than the decline and fall of the Roman Empire.