Bulls are smiling broadly these days, and the reason why is obvious: Stocks are popping. According to Barron’s, the first half of 2021 was the best first half year in more than 20 years. The S&P 500 gained 14.4% as it made new highs and the NASDAQ followed in step. Moreover, the upward trend continued in July and early August. Has Wall Street discovered the secret of perpetual bull markets? Should investors throw caution to the wind and enjoy the party?
Some of the most respected and influential market gurus have pondered these questions and say unequivocally that the answer to both is “Definitely not.” In fact, they say that a crash is approaching.
It takes a lot of courage to make comments like these because it’s embarrassing to be wrong, and a person stands to lose a lot of prestige. Nevertheless, they say very clearly that the ongoing bull market is not sustainable and that the market has become extremely risky. See for yourself.
*Warren Buffett, one of the most successful investors in market history, said that his favorite market indicator signals not only that stocks are very overpriced but that a crash may be coming.
*Jim Rogers, who along with George Soros co-founded both the Quantum Fund and the Soros Fund Management, has repeatedly warned that a market would crash was coming and that it would be the “worst one in my lifetime and yours.”
*Hedge fund manager Ray Dalio, who was a co-chief investment officer at the world’s largest hedge fund, has long been warning that the market was forming a huge bubble; more recently he began warning that stocks would crash.
*Billionaire investor Stanley Druckenmiller, a well-known fund manager, said that the Fed’s extreme fiscal policy, “risked blowing up the stock bubble.” He has long been warning that the market was forming the biggest bubble he has ever seen and more recently began warning about a market crash.
*Billionaire investor and former hedge fund manager Michael Burry has said, “We are witnessing the greatest speculative bubble of all time in all things ... by two orders of magnitude... The mother of all crashes is coming.”
*And Leon Cooperman, Jeremy Grantham, and Nouriel Roubini are among other market gurus who fret that the market could crash, and that it could be of “epic proportions.”
No One Is Perfect
It should be noted that some of these (and other) market experts began sounding the alarm months ago and in at least one case several years ago, when the Dow was thousands of points lower than it is today. Timing market turns may look easy but it’s not simple at all. Sometimes data and statistics clearly show that the market should head in a particular direction, yet it defies all logic and moves the opposite way.
What could precipitate a decline of such magnitude? For one thing, the market hasn’t had a five percent-pullback in seven months, an indication of how overvalued stocks are and how risky the market has become. Moreover, major economies are getting out of US dollars, the inflation rate is spiking, and the Fed may be forced to raise interest rates.
Unfortunately, there are additional worrisome issues and some of them follow.
*Iran purchases every weapons system it can and threatens literally every day to wipe Israel off the map. In addition, it is said to have the capability to hack very sensitive targets around the world. Some years ago, press reports claimed that they snuck sleeper cells into the US. On August 3, Israel’s defense minister Benny Gantz said Iran was just weeks away from becoming a nuclear power–a development Israel vowed to prevent. Two days later he said Israel was ready to attack Iran.
Iran’s newly-elected president, Ebrahim Raisi, is a hard-liner among hard-liners. According to Israel National News, Raisi recently defended his role in the execution of 5,000 political prisoners in 1988, which earned him the name of “The “Butcher of Tehran.”
Tensions in the region are increasing every day, most recently when drones attacked an Israeli-managed oil tanker on the high seas. Both Israel and the US blamed Iran and said a response would be forthcoming. Any misjudgment or even a simple error could lead to a full-blown war with terrible consequences in the region and around the world. Of course, the market would react quickly to such a development.
*To paraphrase the old saying, when China sneezes, America’s stock market gets a cold, and very recently the Chinese market has been very much under the weather. In late July, the NASDAQ Golden Dragon China Index, which tracks the 98 biggest US-listed Chinese stocks, plunged nearly 15%–in just two sessions. This was its worst two-day selloff since the 2008 financial crisis. The months before were not too much better. Since making a record high in February, the index plunged by more than 45%! According to the BBC, US-listed Chinese stocks lost approximately $770 billion of their value in the five previous months. Can the decline spill over into the US markets? So far it hasn’t, but at least one analyst is warning that it could.
China has many other issues it needs to contend with: problems with its banking system, very heavy debt, and manufacturers (at least 1,700–probably many more) fleeing. New outbreaks of the Delta variant have been reported in at least two-dozen cities, forcing the government to impose new lockdowns in some regions. China also has been suffering from numerous natural disasters that have caused extreme flooding, food shortages, and widespread animal and bird diseases. As the world’s second biggest economy tries to deal with these issues, the rest of the world is watching closely–the US included.
*Can the dollar collapse? This prospect seems unlikely, as it remains the world’s reserve currency and is recognized and accepted all over. Still, a growing number of people are wondering. In 2021, the government will spend $300 billion on interest payments on the debt, and this is based on interest rates that historically are exceptionally low. Interest payments will certainly rise because deficits are rising. And if rates rise, each additional percent would add approximately $225 billion more to interest rate payments.
But there’s a limit on how much debt a country can handle, even one as powerful as the US. “The World Bank says a country reaches a tipping point when the debt-to-GDP (gross domestic product, a measure of a country’s entire economic output) approaches or exceeds 77%. In the third quarter of 2020, the U.S. debt-to-GDP ratio was 127%,” thebalance.com reports. «When a country›s debt is close to or greater than the entire country›s production, lenders worry whether the country will repay them.» This helps explain why all the red flags are going up. In addition, city and state budgets have huge deficits, corporate pensions are underfunded, and so is Social Security. Add all of these together and it’s easy to wonder whether the dollar will retain its strength.
Savvy investors always keep track of these issues, particularly as the calendar moves closer to September, which statistically is the worst month of the year for the stock market, and October, when a disproportionate number of plunges and crashes have occurred. Hopefully, the weeks and months ahead be uneventful, but savvy investors remain on guard–just in case.
Sources: barrons.com; businessinsider.com; crfb.org; forbes.com; newsweek.com; quartz.com; zerohedge.com