Stock Market Crash!


Did that title get your attention? I’d imagine that it did. There’s nothing like predictions of a crashing stock market to get the attention of readers. Well, I’m not quite willing to make any firm predictions. Rather I want to comment on a recent post over at the excellent Philosophical Economics blogspot entitled ‘Who’s Afraid of 1929?‘.

The author obviously has a sense of irony because his Twitter handle is named after the famous stock market bear Jesse Livermore. But in the post the author chastises who he calls ‘permabears’, that is people who called the 2008 stock market meltdown and who have, ever since then, been saying that there would be no upswing in the financial markets.

I think I know who Livermore — or whatever his real name is — is talking about. He is likely referring to Austrian types like Peter Schiff who flog gold to their suckers… I mean, customers. Others that called the 2008 crash were not at all surprised that the stock market took off like a rocket afterwards. This is because they understood the dynamics of the easy money policies initiated by central banks around the world after the crash.

The fact of the matter is though that the stock market, and indeed most other financial markets, are very likely overvalued. Livermore himself seems to hint at this when he writes:

As for the future, the speculative spoils from here forward will go to whoever manages to correctly anticipate–or at least quickly react to–the forces that might reverse the trend of strong earnings and historically easy monetary policy, if or when they finally arrive.

I sort of agree. There is a chance that either of these two events might reign in the stock market. But there is another possible event on the cards that might do the trick: namely, the melting down of the global housing bubble that the IMF has recently identified. I wrote an article on this for Al Jazeera recently and there I said:

According to World Bank figures, together the nine bubble economies made up just under 15.5 percent of world GDP in 2012. By contrast, the United States accounted for a little less than 22.4 percent of global GDP that year. We should add Ireland and Spain to the latter figure because those countries also had substantial housing bubbles that burst in 2006 and ’07 and may have contributed to the worldwide downturn; so the bubble economies that crashed the world economy in 2006 and ’07 accounted for almost a quarter of world GDP.

Clearly the countries that the IMF thinks might be bubble economies are not as important to the global economy as are the U.S., Ireland and Spain. That said, the IMF’s bubble economies still account for a substantial slice of world GDP, and if they take as big a hit as the three countries that did in 2006 and ’07, this could spell bad news for the global economy. This is especially true if we consider the weakness of the current global recovery. A simultaneous bursting of housing bubbles in countries that account for over 15 percent of world GDP could have ripple effects and knock the global economy off balance.

I stand by this analysis to which I would add: if such an event occurred there is a possibility that it could pull the chair from under the market. Of course, this could lead once again to post-2008 dynamics taking place once more. A collapse of a global housing bubble could result in more central banks ramping up asset purchases and emulating the Fed, the BoE and the BoJ by engaging in easy money policies.

If this played out we would expect to see the stock market take an initial hit but then, after it hit rock bottom, would rally once more as easy money poured in from all around the world. Those that were previously speculating in the global property market might turn to the stock market to play with their money. This could prove to be an enormous opportunity for any clever investor able to call the bottom and buck the trend.

Anyway, enough crystal ball-gazing for now. But if I were managing money I would watch this space… very carefully.


About pilkingtonphil

Philip Pilkington is a macroeconomist and investment professional. Writing about all things macro and investment. Views my own.You can follow him on Twitter at @philippilk.
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14 Responses to Stock Market Crash!

  1. pontus says:

    Beautiful. Let’s compare the following statements:

    “There’s nothing like predictions of a crashing stock market to get the attention of readers. Well, I’m not quite willing to make any firm predictions.”


    “A Stock Market Bubble in the Works? I’ve alluded to it a few times before on this blog, but always gently – I’ve also, in the past few months, been telling my nearest and dearest to be very careful about plowing their money into the stock market… but now I think that I can make this point definitively.”

    Now, this latter is from November 2010 ( I’m sure you have excluded your “nearest and dearest” from an at least 50% increase in their net-worth. They must be really happy with you!

    “Anyway, enough crystal ball-gazing for now. But if I were managing money I would watch this space… very carefully.”

    Let’s add one more sentence to your final remark: “And stay well clear of any advice given”.

    By the way, how is that “probably be working for a macro hedge fund” working out for ya?

    • I’m not saying that you should rush out and sell all your stocks tomorrow. This process could take a long time. But if I’m correct what we will see is the stock market climb ever higher, while the real economy seems perpetually mired in the swamp of recession and unemployment. Watch this space!

      Hahaha! Pontus Rendahl of Cambridge University, you silly old troll, you!

      • pontus says:

        Classy, Phil, classy. I hope your nearest and dearest were as generous in their interpretations of your crystal ball-gazing as you are to yourself and actually plowed their money into the S&P500 … as I did.

      • I just Googled you. I think if I did a post documenting your antics on here complete with photo and profile it would probably make it to Google’s first page. What do you think? Time to come out of the closet, Mr. Rendahl?

  2. pontus says:


    Apart from acting like bunny-boiling woman who’s just been dumped you’re also quite stupid.

    Suppose that the email address associated with my signature (which — mind you — you have agreed with wordpress not to make public) actually wasn’t fool-proof evidence of my true identity? That someone else, an impostor, could have picked an email address available online and used it as his’ or her’s? Then what kind of trouble do you think you could put yourself in? You’re already treading that line quite finely, and I’d advise you to stop.

    But sure, if you have the balls, go ahead. But rest assured, you will be in a big legal mess.

    • Think an IP address would stand up in court? Because your’s has registered. I’ve studied defamation law. I used to be a journalist. Don’t worry your lirtle head about me. 😉

      • pontus says:

        Yep, an IP can tell you that this comment was written by someone under some ISP who might, and just might, give you the precious information that the account holder is

        So good luck, what have you got to lose? Go ahead!

      • pontus says:

        By the way, the whole “photo and profile” thing is a bit creepy. Have some dignity for christ’s sake.

      • Have you ever felt like you’ve made a terrible mistake? 😀

      • pontus says:

        I think you misunderstood. The creepiness was referring to your behaviour and obsession, not to the actual implications. I’m also not sure you understand that if someone does not hold an account with an ISP yet has access to a the internet, that person is behind a firewall.

        So go ahead then. My prediction is that your reputation, already low, will fall as fast as your nearest and dearest portfolios.

      • You seem rather more comfortable with making firm predictions on such delicate issues than I would be. I personally think that you’re quite scared of having exposed what you do on the internet in your spare time. Who knows? Someone might use the information to build a Wikipedia page. The possibilities are endless. Of course, if you’d like to discuss discontinuing your behavior I’m open to dialogue. I think you’ll find that I’m quite a reasonable person.

        There’s a few IPs registering here. Some in the UK (in a big university town at that!), some in Sweden. I wonder if they’re all dead-ends. Are you enjoying your time back in Sweden, by the way? Are you on a short break or are you back for the holidays? I’ve never been to the Baltic Sea. I’d imagine its desperate cold.

        Anyway, tell me more about my reputation. Why do you think its low? It surely isn’t a reflection on my professional capacity or my personal character, is it?

        Also tell me more about how you think that I damage my family’s finances. How do you think that this happened? What evidence do you have?

      • Also, the ‘bunny boiler’ reference was very interesting. You might not want to reflect on that too much… you know, psychologically. What would Monsieur de Clerambault make of it I wonder?

  3. Mark says:

    Suppose that stock markets do crash (say, a loss of 50% in value in one year). Would this pose any real danger to the real economy? In 1987 stock markets around the world crashed hard, but the crash wasn’t followed by a recession anywhere, as far as I know. But maybe “this time it’s different”?

    • I get the impression that it would pose a real danger. I think that a lot of high-end consumption is being driven by stock market ‘wealth effects’. But if the global housing market hits the wall and this drags down the stock market it will be difficult to tell which one is having the key impact.

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