Tuesday, April 7, 2015

Are we heading for a crash of the stock market?

The key takeaway is that overvalued financial markets are not sustainable and must eventually experience a correction that returns them back to their fundamental value. In a free market (unlike what we have now), stock valuations move in waves, alternating from undervaluation to fair valuation to overvaluation, and back again. The Federal Reserve, by trying to keep the bubble constantly inflated, has distorted this natural process. Regardless, U.S. stocks will come back to earth when the Fed finally loses control of the situation, and the final comedown will be far more painful than would occur in a free market.
How The Stock Bubble Will End
I believe that the longer-term U.S. stock bubble will end when the very fuel behind it is removed, which is record low interest rates. As I discussed in my last stock bubble report, I foresee two ways that rates will rise and pop the stock bubble: 
Scenario #1: After several more years of the Bubblecovery or bubble-driven economic recovery, the Federal Reserve has a “Mission Accomplished” moment and eventually increases the Fed Funds rate too high, creating a hard landing that pops the post-2009 bubbles that were created by stimulative monetary conditions in the first place. Rising interest rates are what ended the 2003-2007 bubble, which led to the Global Financial Crisis. 
Scenario #2: The ballooning and unsustainable amount of government and corporate bond market debt eventually causes investors to jettison bonds en masse, which leads to much higher interest rates.

Misconceptions about bubble markets

1 comment:

  1. I've been saying this for at least 20 years.


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