A recent article by Paul B. Farrell of MarketWatch said that there is a 98% risk of a stock market crash before the end of 2014.
He said in the article "bubbles are everywhere. . .ready to blow."
That's quite a statement. One key reason Farrell expects a crash? Federal Reserve policies.
He believes that the three major bubbles that have blown up in the past two decades were caused in large part by the Fed's loose monetary policies.
The three bubbles are: the Asian financial bubble that resulted in the Asian Financial Crisis of 1997, the Dot-Com bubble of the late '90s and early '00s, and the credit/housing bubble that resulted in the 2008 financial crisis.
For readers unfamiliar with the term bubble, it simply means a financial asset whose price has been driven far beyond any rational analysis of its true worth. And although they look like they will rise forever, since there is little substantial basis for the valuation, these asset prices will eventually pop just like a soap bubble.
The pop results in a substantial drop in price – in other words, a crash.
Farrell quotes SocGen's global strategist Kit Juckes as saying all these bubbles were "fueled by the Fed keeping policy rates below the nominal growth rate of the economy far too long." Juckes went on to call current conditions the "bubble with no name."
He may be on to something. Even members of the Federal Reserve are worried.
In the mid-May meeting of the Fed's Advisory Council, some members expressed "strong concerns" over the Fed's low interest rate policies and its bond purchase program, which some members said could result in an "unsustainable bubble" in the stock and bond markets.
Thus, we've had the talk in recent weeks about 'tapering' the Fed's purchases of bonds.
The most recent Fed meeting minutes released today (Wednesday) revealed nearly half of the FOMC members were in favor of starting to end QE this year.
But, Farrell could be a bit ahead of schedule. Money Morning Global Investing Strategist Martin Hutchinson thinks the Fed-induced bubble won't pop until 2014.
But it will pop – and the effect will ripple through the stock market. History tells us that the Federal Reserve can and often does play a role in causing a major stock market pullback, or crash.
How the Fed Causes a Stock Market Crash
Many historians believe that the Fed was a major catalyst in the 1929 stock market crash and subsequent Great Depression.
PLAY WITH FIRE AND YOU WILL GET BURNED
Keith's advice is not too good for most individuals. For one thing, how are people going to know when the stock or credit "bubble" is about too burst or is bursting? Can they hope to successfully time the market by withdrawing their money at just the right time ( the top of the market)??
Keith has quoted his own studies which say that 85% of investors can not successfully time the market. In addition, Vanguard Fund founder John Bogle says attempting to call the top or time the market is "not a productive use of one's time", given the odds of market timing are slim to none. So, most individuals will probably not get out in time to avoid losing all their gains and then alot of their capital in a market crash if we ever get a 1929 repeat.
PEAK EXUBERANCE
Market crashes are by definition often caused by unforeseen or unrecognized factors which eventually overwhelm the entire stock market. Since today's global markets are highly interrelated and correlated, everything (including gold) moves in tandem during panics. The unnoticed just quietly creeps-in, unnoticed as termites, and begins eating-away at the market's fundamentals.
Naturally, investor sentiment is at its peak exuberance while this process is going on. Often, peak exuberance is also accompanied by new all time highs in the stock market indexes, at least. Subsequent crashes are always a big surprise to the mass of investors.
Look at stock margin debt and other economic factors, a correction in the market is inevitable… and a crash possible. If it is a crash, people will jump ship like crazy this time, and make a run on other things, only there will not be enough of them to go around. Sound familiar? However, this deflation will be worse than '30s due to debt ( as QE whatever won't be able to prop it up any longer ), unfunded liabilities and a convenience, consumption addicted society. Question is, how does the country change during it?
The Stock Market will never crash again the Fed will never allow it QE Will continue forever and ever the US Dollar will remain supreme The US Dollar is strong a dollar today will buy what a dollar bought back 100 years ago Stock prices can only go UP Over time its a proven fact