Author Topic: Stock Markets Set To Fall Soon  (Read 7591 times)

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The Prophet

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Stock Markets Set To Fall Soon
« on: August 23, 2014, 06:21:45 am »
Stock market crash is now long overdue - Share prices could halve in the next market correction.
It is not nice being Contrarian. 
People say you are grumpy, miserable, negative, pessimistic and those are just some of the nicer words!  Why, they say, do you think the stock markets will fall?  You’ve been saying that for months and they are still going up!   Whilst history tells us that over the long term, stock markets give greater returns, they often fall before they rise again further.

We have just witnessed one of the most unprecedented stock market recoveries of a generation - albeit from a low starting base after the financial crisis.  It certainly makes fund managers look like they know what they are doing, especially when you look at their 5-year performance.  But share prices do not currently reflect the true value of companies.  They are not being based on future potential growth.  No. 
This time the bull market has been created by central banks and government policy.

The trouble is, people believe what they want to believe for as long as they want to believe it.
They are happy when they see that the share prices in companies they have bought have gone up 20% in a year, so they buy more in the hope of making another 20% next year.  This is what has been happening during the last two years.  People are investing their money foolishly, reacting to today's distorted asset prices.  Does this sound like good investing to you?

The shares in a country's businesses are unlikely to grow more than the overall economy itself. 
Since 2008, real growth in the US averaged 0.6% a year whilst share prices have risen 130%. 
How can this be? 
True, in the early stages of the recovery, earnings rose as companies cut costs following the financial crisis.  Expensive labour was shown the door and new projects were axed, both giving a boost to profit margins.  As interest rates were cut to virtually zero on both sides of the Atlantic, companies were able to reduce interest payments by rolling over their debt with lower interest rate loans.  Finally all the money created by Quantitative Easing (QE) needed a place to go.  Consumers didn't want it, they were still cutting debts and wages were going down, so it all ended up in the financial sector, pushing up share prices well ahead of GDP.

So what next?  I hear you ask. 
The current all-time-high stock market share prices are based on two factors that cannot possibly continue forever: cost cutting and zero interest rate policies.  There is no scope for further cost cutting and interest rates are set to rise soon. 
The result could well be that share prices could halve in the next market correction. 
Those that have been foolish will be left without a chair to sit on when the music stops. 
They will take a bath and lose most of their money (having bought high and sold low). 
Those in the know will be on their lifeboats long before the iceberg sinks the ship, taking their profits ready to buy low after the market has been corrected.

And the wheels on the bus go round and round!

The big question is When?  It may not be too soon.  We have an election in May next year so government will want everything looking rosy until after the election as evidenced by BoE Mark Carney's recent shifting sands interest rate so called "forward guidance".  Then the rate rise will take time to take effect.  So I am anticipating the next stock market crash around July to October 2016, but it could be much earlier.   You heard it here first.