Volatile market behavior has increased speculation over whether or not we're headed for "stock market crash 2013" – or even 2012.
With the Dow Jones down more than 200 points in the first 20 minutes of trading today (Monday), there's certainly reason to believe wild market moves are in our future.
Even without market plunges, we may just be due for an economic growth slowdown and a stock market pullback.
In a recent interview with NewsMax TV, legendary investor Jim Rogers stated that "Every four to six years since the beginning of the Republic, we've had economic slowdowns, we've had recessions. Always. It's coming again. You can add as well as I can – in 2013 or 2014, we're going to have another slowdown, whether it's caused by Europe or who knows what's going to cause it, but it's coming."
Individual investors are already fleeing the stock market on these predictions. Stock mutual funds lost $3.1 billion during the week ended July 3, according to the Investment Company Institute. Investors have now withdrawn money from the stock market for 19 of the past 20 weeks.
Eventually, enough investors will withdraw from stocks and trigger our next big market crash.
The Fed's Role in Stock Market Crash 2013
Contributing to the market mayhem are the monetary policies of the U.S. central bank.
Since 2007, U.S. Federal Reserve Chairman Ben Bernanke has greatly expanded his role and that of his institution.
That is evidenced by the increase in the amount of assets on the Fed's balance sheet, which rose from about $700 billion to around $3 trillion during the past five years.To purchase these assets, all of the needed funds were not appropriated by Congress. Instead the balance sheet was inflated by an accounting mechanism.
This cannot go on forever.
Traditionally, liquidity has always been the answer. But record liquidity, in the form of historically low interest rates, has not accomplished the most important objective of restoring economic health in the United States.
That's because low interest rates, like sub-prime mortgages and credit default swaps, are the proper financial instrument in very limited circumstances. Used too often, and disaster is inevitable.
This will happen with the U.S. Treasury bond market, as such low rates will attract fewer and fewer buyers. When the Treasury bubble eventually pops – as Warren Buffett and others have predicted – that's when the stock market will tank. Higher interest rates will have to be paid, which will lure investment capital away from stocks and into bonds.
In a recent interview with The Wall Street Journal, former Secretary of the Treasury and Secretary of State George Schultz noted that, "It's startling that in the last year, three-quarters of the debt that's been issued has been bought by the Fed and the balance has been bought by other countries, so U.S. citizens and institutions are not on net buying U.S. debt…The Fed doesn't have an unlimited capacity because when it buys the debt what it's doing is monetizing the debt. Sooner or later that has to get out into the economy. Can't be held forever."
That's why you need to prepare for a stock market crash in 2013.
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