Why would the stock market crash ?
Considering this macro-economic backdrop, the greedometer sm is more likely to be helpful in identifying secular stock market peaks than troughs in the near term (as of early 2012).
- 2012 finds us in what is likely year 13 of a 14 year bear market for stocks (year 2000 – 2013). We are not in a business cycle recession, but instead a rare and painful balance sheet recession.
- 44M Americans use food stamps.
- 1 in 6 Americans receive financial support from the federal government.
- 1 in 4 American children lives in poverty.
- The US economy will stall in 2012 and fall back into recession.
- Europe’s economy is worse, and entered recession in 4Q 2011.
- Japan’s is worse still.
- 16% of the US labor force (25M Americans) are unemployed or underemployed or have given up looking for work (as of early 2012).
- Fewer Americans have jobs now (early 2012) than January 2000, but the country has grown by 30M.
- The worst domestic climate for real estate since the great depression. There is an over-supply of residential real estate that won’t be cleared / stabilized until 2015.
- Several hundred small banks have failed since the financial crisis of 2008, and another few hundred more will. Potentially 500-600 small banks will fail (out of roughly 8000 banks in the country).
- Short term interest rates are at zero because the Federal Reserve is trying to create asset inflation (stocks, real estate).
- The Fed’s QE2 ended in June 2011. QE is a last-ditch desperate move to stimulate the economy. The Fed is running out of monetary policy tools to stimulate economic growth. Note how the economy almost immediately began to collapse shortly after QE1 and QE2 ended. The economy is addicted to monetary steroids.
- QE is causing global food & fuel inflation. For this reason, there won’t be a QE3. We’re in enough wars in Muslim countries already.
- Historically low interest rates provide very low returns for investors. It also risks re-inflating (in an uncontrolled sense) stock and real estate bubbles.
- Consumer debt levels have dropped from 130% to 115% of disposable income. This took 4 years and was largely because of banks writing off mortgage loans. Any debt / income figure over 80% is unsustainable and represents a financial basket case. This is likely where US consumers are headed: paying down debt to 80% of income –or lower. This is a deflationary force (read as not good for economic growth). Look for several/many more years of consumer de-leveraging until the 80% level is seen.
- Acknowledgement (finally) from the Federal government that it has a ticking time bomb with Social Security, Medical costs, trade deficits, annual budget deficits, and national debt. Yet it continues to operate from the premise the US can grow its way out of the problem without employing the obvious and politically undesirable solution: broad budget cutting and tax increases (the sort of policy that won’t get you re-elected).
- Downward pressure on the US dollar due to fears raised by the concerns listed above.
- A need for international bond owners to diversify out of their exposure to US debt. China, Japan, and the mid-east oil countries are holding trillions of dollars in US bonds. When they start buying less – or worse- start selling their bonds, there will be a weak market for the US Treasury to sell bonds. This will force interest rates up. Higher interest rates will entrench and prolong the recession.
- (as of November 2011) House prices have fallen on a national level and are roughly 33% below their bubble-induced peak in early 2006. They have fallen back through the 2009 lows as of May 2011. Prices will stabilize each summer, then dip 5-10% each winter until 2015.
- 27 – 28% of home owners with mortgages will be under water by March 2012. As home prices drop further (until 2015), the proportion of under-water home owners will rise considerably (to 40 or 45%). Under-water home owners are walking away from their homes, and the rate with which this occurs will increase. Given that $10.0T in residential mortgage loans are owed to large US banks, and given that a considerable portion of home owners will be under water, it is likely that banks will face $1T+ in write-downs.
- Commercial real estate continues to be valued at prices far below 3 – 4 years ago. Since many small banks have large exposure to commercial real estate loans that are worth more than the securing property, small banks and property developers are playing a game called extend and pretend. This involves the bank continuing to extend loan terms even though they know the property is not worth the value on the note. But small banks don’t have sufficient capital on their balance sheet to accept a loss that would be triggered if they called-in the loan. Hence extend and pretend. If commercial real estate prices do not rebound soon, this strategy will backfire, and will lead to several hundred more small banks failing.
- Japan’s economy has been stalled for 21 years. It remains a very large economy (recently passed by China to be relegated to the 3rd largest economy). But very soon (2013?) its aging population will begin reducing their purchases in Japanese government bonds to cash them in for retirement cash flow needs. This will gradually force Japan to fund its annual budget deficits from foreign bond buyers (as the US does). This in turn will drive Japan’s bond interest rates higher and cause an economic calamity because Japan’s federal budget will be consumed by interest payments.
- PIIGS: Portugal Ireland Italy Greece and Spain define the PIIGS countries. These countries are over-burdened in debt. These countries face several years of recession and a gradually lowered standard of living (& wages) to become competitive with the rest of Europe.
- North Africa & the Middle East: Widespread civil unrest. The range of outcomes for the myriad of conflicts in the Middle East is vast and as troublesome as at any point since WWII.
Also: see the blog article — Which type of history will repeat — from August 15 2011.
NAPFA