Don’t Get Caught in a Stock Market Crash

The bottom line is that when the bottom falls out, stocks will fall around 40% and will not rebound. We are running on fumes with mass hysterical confidence and inflows from retirement savings accounts. The effects of the crash on consumer and business confidence might well be catastrophic, fueling a drop in economic activity that will drag down earnings and the price of stocks traded on the open market.

see https://www.nytimes.com/2017/09/15/business/stock-market-mass-psychology.html?_r=0

You can read the article or not. I will summarize. I admit that I was considerably off on the timing of the crash. This article is by one of the most respected economists, worldwide.  He accurately predicted prior crashes in the stock market and real estate market in 2008. His observation is that the reason for overpricing stocks is the psychology of investors who believe that others will continue buying stocks.

I think he and I both missed something.The missing component is the inflow of cash savings generated by 401k’s and other retirement programs. Nobody knows where else to put the money so they invest in stocks. This factor alone creates an excess demand that is blind to value. And it might soften the effects of a stock market crash but it won’t eliminate it

All the red flags are out. The baseline of all stock valuation is a ratio between the earnings of a company to the price of its stock. Normal for a stable market is 16. The current ratio is 30. No reasonable foundation exists to support a stock market that is based upon a price-earnings ratio of 30. This number came up in 1929 and 2000-2003.

In 1929 stocks lost 80% of their value. In the 2000’s stocks lost 50% of their value. I think the probable downside is less than 40% but when it happens it will be sudden — just like prior crashes. In both cases, confidence was high — until it wasn’t.

We are tap dancing on thin ice. The question is when, not if. I strongly recommend that you move your money into cash or short-term debt instruments (bonds) issued by either the Federal government or a Triple A rated company. You might “miss out” on further growth but you will preserve your capital and ride out the storm. While there will be a rebound after the crash, it will not return to current levels because current levels are unsustainable.

4 Responses

  1. Wall St. traders secretly used chat rooms to rig Treasury bond prices

    https://nypost.com/2017/11/16/wall-st-bankers-secretly-used-chat-rooms-to-rig-treasury-bond-trades-suit/

    Wall Street banks secretly shared client information in online chat rooms in order to rig auctions for the $14 trillion US Treasurys market, according to an explosive lawsuit filed in Manhattan federal court on Wednesday, Nov 15, 2017.

    The move wrongly fattened the banks’ profits and picked profits from clients, the suit claims.

    The new accusations, leveled by several pension funds and wealthy individual investors, are contained in an expanded class-action suit originally filed in July 2015 — and include an unusual twist: Some of the evidence came from confidential informants and one of the banks sued in the earlier action.

    That bank is now cooperating with the plaintiffs in the massive civil action, and is providing an in-depth look into how Wall Street allegedly conspired to rig Treasury bond trades.

    The revised lawsuit expands on details on how the banks conspired to set Treasury bond prices — like moves to manipulate the price of the bonds higher on days when there was a lot of demand, and vice versa, court papers claim.

    The banks worked their scam for years until The Post first reported in June 2015 of the existence of a government investigation into the alleged actions, the updated lawsuit claims.

    The funds, representing retirees and public workers, also claim the banks conspired to rig the secondary Treasury markets beginning in the 1990s through tightly controlled electronic platforms that inhibited more competitive trading — a new allegation that wasn’t in the original suit but mirrors similar complaints filed against banks in other markets, like stock loans.

    The amended suit tightens its focus on a select number of banks, naming Goldman Sachs, Morgan Stanley, the Royal Bank of Scotland, BNP Paribas, and UBS, among others, as the firms behind the rigging, which they allege occurred from Jan. 1, 2007, to mid-2015.

    Last year, the judge presiding over the class-action suit had questioned whether the claims were strong enough to proceed.

    The funds continue to allege the banks mined their own customers’ bids for Treasury bonds to get a bigger share of the auction, and sell the bonds for more profit.

    Probes on the auction practices are being conducted by the Justice Department, the Securities and Exchange Commission and other federal, state and overseas regulators, sources said. No regulator has accused any bank of wrongdoing.

    The banks named in the suit are primary dealers, which means they buy the debt directly from the Treasury and resell it to their clients at a pre-determined price.

    Typically, the Treasury holds an auction, then banks submit their bids for US debt based on how much they think those bonds are worth. The Treasury then doles out the bonds proportionately to the bidders at the same price. The bank that asked for the best price gets the most bonds.

    Traders at the Wall Street banks shared the prices that their clients had sought to buy the bonds, giving each of the banks in the alleged cartel a clearer picture of what they thought the market was, and a better chance at getting a bigger share of the bonds to sell, according to the complaint.

    Details about bid prices are supposed to be a closely held secret.

    Each bank declined to comment on the lawsuit after it was first filed.

  2. Thanks Neil; we agree; postal orders is another one;

  3. What did the Federal Reserve do about recovering the $8 Trillion of Mortgage Backed Securities and Bonds that they bought under duress using Quantitative Easing to prevent in 2008 the entire financial system from imploding?

    What financial firms are re-buying the bonds they sold to the Fed for 100% on the dollar?

    These bonds and securities are all worthless. When the traders on Wall Street figure out that Fed can not sell them for even 50 cents on the dollar, that is when the Crash will start!!!

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