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.

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