Nov 21, 2017
Is the stock market bubble about to burst?
I know that I have been touching on this theme over and over and over again in recent weeks, but I can’t help it. Red flags are popping up all over the place, and the last time so many respected experts were warning about an imminent stock market crash was just before the last major financial crisis. Of course nobody can guarantee that global central banks won’t find a way to prolong this bubble just a little bit longer, but at this point they are all removing the artificial support from the markets in coordinated fashion. Without that artificial support, it is inevitable that financial markets will experience a correction, and the only real question is what the exact timing will be.
For example, Bank of America’s Michael Hartnett originally thought that the coming correction would come a bit sooner, but now he is warning of a “flash crash” during the first half of 2018…
Having predicted back in July that the “most dangerous moment for markets will come in 3 or 4 months“, i.e., now, BofA’s Michael Hartnett was – in retrospect – wrong (unless of course the S&P plunges in the next few days). However, having stuck to his underlying logic – which was as sound then as it is now – Hartnett has not given up on his “bad cop” forecast (not to be mistaken with the S&P target to be unveiled shortly by BofA’s equity team and which will probably be around 2,800), and in a note released overnight, the Chief Investment Strategist not only once again dares to time his market peak forecast, which he now thinks will take place in the first half of 2018, but goes so far as to predict that there will be a flash crash “a la 1987/1994/1998” in just a few months.
That certainly sounds quite ominous.
Just so that there is no confusion, let me give you his exact quote…
“A flash crash (à la ’87/’94/’98) in H1 2018 seems quite likely, in our view, as the major sedative of volatility, the central banks, start to withdraw liquidity.”
Hartnett is making the same point that I have made repeatedly in recent weeks. As the central banks withdraw the artificial support that has been propping up the markets ever since the last financial crisis, we will see if the markets can really maintain these absolutely ridiculous price levels on their own.
And we are not just talking about stock prices either. In fact, Bill Blain believes that the coming crash will actually originate in the bond market…
The 2008 crisis, which was about consumer debt, was triggered by mortgages. We still have consumer debt crisis problems ahead, warns Blain, adding the next financial crisis is likely to be in corporate debt.
“More immediately, the realization a crisis is coming feels very similar to June 2007 when the first mortgage-backed funds in the US started to wobble.” He said it explains why “we’re seeing the highly levered sector of the junk bond markets struggle, and companies correlated to struggling highly levered consumers (such as health and telecoms) also in trouble.”
Stock markets don’t matter, according to the strategist. “The truth is in bond markets. And that’s where I’m looking for the dam to break. The great crash of 2018 is going to start in the deeper, darker depths of the credit market,” he said.
Asset prices of all classes have been pushed to absolutely absurd levels by the central banks.
If it wasn’t for central bank manipulation, stock prices would have never gotten this high, and the bond market would have never been pushed to such irrational extremes.
And it isn’t just the Federal Reserve that has been intervening directly in U.S. markets.
For example, did you know that the Swiss National Bank is now the eighth largest public holder of U.S. stocks in the entire world?
According to John Mauldin, the Swiss central bank has poured 17 billion dollars into our stock market so far this year, and overall they now own approximately 80 billion dollars worth of our stocks…
The SNB owns about $80 billion in US stocks today (June, 2017) and a guesstimated $20 billion or so in European stocks (this guess comes from my friend Grant Williams, so I will go with it).
They have bought roughly $17 billion worth of US stocks so far this year. And they have no formula; they are just trying to manage their currency.
Think about this for a moment: They have about $10,000 in US stocks on their books for every man, woman, and child in Switzerland, not to mention who knows how much in other assorted assets, all in the effort to keep a lid on what is still one of the most expensive currencies in the world.
Switzerland is now the eighth-largest public holder of US stocks. And apparently they are concentrating on the largest of the large-cap stocks. The own 19 million shares of Apple (as of March 31).
They have made these purchases with money that they have literally created out of thin air.
If that sounds like “cheating” to you, that is because that is exactly what it is.
How in the world can stock prices possibly fall when global central banks are creating colossal mountains of money out of thin air and are using that money to buy stocks?
The central banks created this ridiculous stock market bubble, and they can also burst the bubble by pulling back on the level of artificial support, and that is precisely what we see happening right now.
So don’t buy into the hype. All that really matters is what the central banks choose to do, and if they wanted to continue to pump enormous amounts of money into the financial markets they could continue to pump up this absurd financial bubble that we are currently witnessing.
But at the moment they appear to be pulling back, and that makes a very “interesting” 2018 for the financial markets much more likely.
This article was posted: Tuesday, November 21, 2017 at 7:24 am