Stock Market Crash | Next Stock Market Crash - Is It Here?

3rd Jan '19 by Jack Corsellis

15 comments 2734 reads

Have we begun the next Stock Market crash? Interesting question. My view is that there is a difference between market uncertainty that can cause corrections and volatility and fundamental reasons that cause a bubble to burst - i.e., a stock market crash.

I also do YouTube videos on all this stuff and portfolio tips/stock selection if you're interested. Click link below...

https://www.youtube.com/user/j...

Let's start with the former, the current market uncertainty and volatility. What's it being caused by? As we know when the US sneezes the rest of the old catches a cold. Therefore, and perhaps wrongly, depending on your perspective, US China Trade Wars have far wider implications on markets than Brexit. My view is that the Trade Wars are causing uncertainty and volatility in the markets. I do not think they will be the fundamental reason, or pin, that burst the bubble.

What will burst the bubble? My view, US Debt. Specifically, US Government and US Consumer Debt. Some quick stats: 1) Total US debt has risen over 1,500% since 1980; 2) Since 1980 personal debt per US citizen has risen over 700% and is over $58,000 per citizen on average, whilst the average savings of a US citizen earning between $45k - $70k is $2,200! 3) Since 1980 US GDP has risen 793% whilst US national debt has risen 2,351%.

Clearly the US expansion has been fuelled by debt.

What's the catch with debt? Oh yeah, one day you have to pay it back. The US decided to continually increase the debt ceiling, adding more fuel to the fire, rather than pay down their debt burden. The debt ceiling has been increased over 70 times since the 1940s.

OK great, but so what - won't they keep increasing the debt ceiling? Well, can someone live off a credit card forever paying low interest? I don't think so. What happens when the next recession hits, remember this is now the longest bull market in history. The 'Chinese' and other lenders to the US will want increased interest rates on their loans to offset the risk. This means the national and personal debt burden will start to increase (I've simplified this). Organisations who were overly leveraged now have to scale back operations to pay their debt, same with people, and as one persons spending is another's income the economy starts to slow.…

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eddyboots

3rd Jan '19

The US has printed plenty before without the currency collapsing and my guess is they will do so again. The only way the currency won't collapse is if enough countries don't follow suit and reject the dollar, which is unlikely. The US still has the most powerful army, control of the World Bank, SWIFT etc.

I think it's more likely the next crash will come from Europe. If there's a major European bank to trigger a crash most guesses are on Deutsche Bank.

Jack Corsellis

Eddy, I agree that the US will print money. However, the issue is the amount required to service their debt obligations. In an extreme case this could lead to hyperinflation.

Another key point is when the US enters its next overdue recession. Some might argue it already has. Then a period of stagflation will happen. Interest rates will be cut to 0% and inflation will still remain high, not helped by the fact more dollars are being printed. The US will still have to issue debt (Bonds) to service old debt (i.e., pay off the old Bond). Lenders will not be happy to lend the US money at 0%. More so, they'll want an even higher interest rate to offset the currency devaluation. This is the point things start to spiral downwards.

In the above scenario the US has two options: 1) save the dollar by increasing interest rates and default on the debt; or 2) let the dollar go by excessive currency printing to service its debt obligations. In the first event the US will not be seen as the safe haven of the world by defaulting and less will want to own US debt or dollars. In the latter event the dollar will not be the reserve currency of the world due to the devaluing. Lenders will also require a higher interest payment to offset the devaluing and risk.

Jack

mmarkkj777

I guess the US could go into a recession induced stock market crash (most are, but some are not). I guess it would cause a wider crash as all markets are interrelated these days.

However, It would not be the first time and the US always recovers and continues its upward growth (or should I say has done up to now). Its another unknown that we have to be aware of and try to mitigate the risk of.

The potential risk will not be lost on most Stocko subscribers.

Mark, what do you think the effects of taking away QE will be?
Jack

MiserableJacktPotato

4th Jan '19

I'll start with this fact: I'm a simpleton. Here to learn, I don't have the answers and I don't know if my statements below are true, they're my assumptions not facts..

What if the US says, "you know what, most of our debt is foreign, sod it, we're not paying". Whose going to make them pay? The Chinese will probably respond by seizing US assets in China, but as no-one will be buying the goods those assets are used to produce, what does it matter? They'll (the US) pump the money they save back into the domestic economy, providing lifeboats for themselves. They've got pretty much everything they need in terms of natural resources, especially oil and gas. The dollar will survive on the basis everyone else will be hit harder. Effectively, as far as I can tell, they'll be hitting "F5" on the world economy.

Fair point. I think you come to the same conclusion though... if America hits the F5 key the world will not trust them again and it will not be seen as the safe haven, therefore, likely, the dollar not the reserve currency of the world. You're right that others might be much worse off so in effect America might be better. But anyway, that doesn't mean stock market returns will be good!

QE has been bolstering the US UK and European economies for years (along with interst rates held down), assisting the long bull market we have had. Not sure what magnitude of effect stopping pumping money into the economies might have in addition to slowing of growth.

Not sure anyone is...but one thing seems likely, it won't be positive!

Vsihv

Great post Jack - plenty to think about and will certainly try and catch your Youtube channel.

I have had my own thoughts on a doomsday scenario:
The US and many developed western economies are effectively a pyramid scheme:
Interest rate lowered to prevent recession (and cause inflation), so debt is devalued.
Same debt then refinanced at lower rate, by China to pay back Japan.
Eventually people realise that what they have is worth less and earns a lower return, and therefore they would look elsewhere.
One might argue over the last 10 years this has already played out, with the multiples commanded by boring defensive companies (Unilever (LON:ULVR), $JNJ, Diageo (LON:DGE), Proctor & Gamble) gaining much higher multiples (10 year average) than they had before anyone considered such a scenario.

In 2008/09, government bailed out the banks, and the central bank bailed out the government and high savings / surpluses from the growth of China bailed out the central bank.
Next time around, who knows????
I think my conclusion at the end of this thought experiment was, if we do end up in a world where US defaults or more likely, people lose faith in the ability of US to pay back their obligations, then we have Armageddon.
In that world, currency (basically debt of issuer) is worthless and therefore we should all be stocking up on gold and ammunition (with enough guns to protect your stock of gold and ammunition).

It is not fair to isolate the US - the Euro area is basically a giant CDO (Greece being the Junk and Germany being AAA), with QE basically a mechanism to bail out Banks (French and German), that through regulation were forced to finance bankrupt governments for a negative return.

And one final point:
I think for only the 3rd time in economic history, concentration of economic power is shifting from one power (US) to another (China) (The previous times, from my recollection, would be Britain during agrarian / industrial revolution, and US after WW1 / WW2).
Personally, I think understanding the impact of this shift (winners and losers) will be profitable, although who knows whether those are measured in USD / GBP / CNY.
The last two times: Britain became a superpower (via British Empire) and the US became a superpower (providing support in exchange for military bases). Each of those country's champions (East India Tea Company / Barclays / Tate & Lyle / GE / BOEING / JPM were the winners) and of course defence stocks tend to do well in this world too!

Great points. I agree that the US defaulting, or anything of that nature, could cause Armageddon. So the question remains, will it be allowed to happen? Or will QE on steriods be unleashed? If if it unleashed this bubble will grow even bigger and one day it has to come crashing down, just from what height.

Thanks for checking out the YouTube channel, much appreciate. Let me know if there are any video topics you'd like me to cover.

Jack

7th Jan '19

Adding to this, several days ago Fed Chair Powell came out basically saying that the Fed would shift policy significantly if needed and wouldnt hesitate to tweak the Feds balance sheet reduction if it was causing problems in the financial markets. He also said the Fed had no pre-set policy and would be patient in their approach.

In other words... Fed will do everything they can to prop up financial markets by reducing balance sheet, cutting interest rates to 0%, and QE 2.0!

FreakNomad

> Armageddon

Naaah! It will sort out one way or another. Back in the 15th century, the London branch of the Medici Bank had loaned Edward IV some £10,500. English nobles had borrowed another £1,000. In 1478, the Lancastrians were in chaos and Edward couldn't pay it back. The succeeding Tudors didn't see why they should. And that was the beginning of the end for the most powerful (and degenerate) Medici family of Italy.

The entire west does look like a giant Ponzi scheme. Britain has levels of debt that can never be paid back. When you're issuing debt just to keep government operating and your austerity (hah!) means racking up even more debt, you're FUBAR'd. I don't know why anyone would want to be a politician in these days. Theresa May looks like someone rearranging deck chairs over and over again.

The obvious answer is default. After all, what are they going to do? Invade?

In 1879 the price of cotton had plummeted and the Egyptians couldn't service their debt, Gladstone, then Prime Minister, decided they needed some encouragement so sent gunboats to the Egyptian port of Alexandria and started shelling. The Egyptians were defeated by an Anglo-Indian army led by Sir Garnet Wolesley on 13th September 1882 and a vice-roy, Sir Evelyn Baring, 1st of Cromer, was appointed. Evelyn's father, Sir Francis, had founded Baring's Bank. So, if you were ever wondering where the EU got the idea of undemocratic, technocratic governments from, well....

But seriously, there is a solution to all this and that is a debt jubilee. The West, as a whole, needs to default, nationalise the banks and recapitalise them using newly issued paper, issued by the government (not the central banks).

I don't think Chinese bondholders will be sending gunboats up the Thames.

8th Jan '19

Freak, I agree the whole thing is a massive Ponzi Scheme; if you define a Ponzi Scheme as receiving new money to pay off old money (debt) you couldn't otherwise pay off. Sound familiar right?

I disagree about nationalising the banks and a new paper issued by Government. The problem is, currency that is not backed by anything, isn't backed by anything! It has no intrinsic value. Currency, new or old, needs to go back on the gold standard and for vast quantities of debt not to be issued.

Using your historical examples America thrived when it had small Government, not big Government. Making Government bigger, in my view, is not a good thing. I work in the planning sector too. Which, anyone who knows anything about planning knows it is an absolute nightmare. Why? Government and their stupid legislation and preventative measures.

Bring back small Government and a free market.

ISAallowance

"The obvious answer is default. After all, what are they going to do? Invade?"

The simpler answer is probably inflate the debt away. The big question then is can it be done in a controlled manner?

14th Jan '19

What if the Chinese (and others) no longer want to own the debt though because of the currency devaluation and the dollar is no longer the reverse currency of the world....

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Jack Corsellis

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