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View Diary: Timing the next crash (35 comments)

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  •  Are you predicting a high likelihood of recession? (2+ / 0-)
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    plumbobb, greenearth

    Or just a stock market correction?  You have given some factors that might be indicators of a coming stock market correction but really nothing to cause concern about a coming recession.  While bull markets do end, there may be no corresponding recession-- see 1987, for example.  In fact, if stocks are truly overvalued and the stock market corrects to reflect more reasonable valuations, the effect on the economy will likely be pretty small-- the effect of even the historic tech bubble burst of 2000 on the economy was relatively small.

    Now, as far as reasons why a stock market "crash" may not be very likely:

    1.) There is no IPO "frenzy" comparable to 2000.  The number of IPOs this year would have been an average year in the 1980s and far below average in the 1990s.   See here.  

    2.) Your own chart shows that the Fed has taken its foot off the accelerator as far as QE twice since 2008.  Yet there has been no stock market crash during those times.

    3.) At any rate, the Fed is under no evident constraint that would cause it to have to continue with any policy that was causing a stock market crash.  The likely next Fed chair is seen as someone who will not be reluctant to continue easing if there is weakness in the economy.

    4.) Stock valuations may not be cheap but are reasonable if interest rates will remain low... and the Fed is likely to keep interest rates low for several more years. In a low yield environment, P/E will generally be high.  

    5.) There is still a lot of slack in the economy-- high unemployment, etc.-- which can be seen as room to grow.  There is little reason to view the recovery as long in the tooth when we haven't even fully recovered yet.

    6.) Your own source points out that wealthy people are keeping a historically high percentage of their wealth in cash.  So while it is true that high margin debt could force people out of stocks, it is certainly not the case that everybody is "all in"; there are other sources of money that could go into stocks.

    •  Both (3+ / 0-)
      Recommended by:
      Roger Fox, Sandino, greenearth

      My diary was for both the economy in general and stock market. Both of which are following the same trends, so I put them together.

      #1) Your IPO chart is from the summer of 2011. That isn't very useful now, especially since 2013 is the Year of the IPO, again.

      #2) That wasn't really my point. It was more for background about why the stock market is still going up.

      #4) Stock valuations aren't cheap under any scenario (see my first chart). The only reason people are buying stocks right now is because bonds are extremely overvalued. That doesn't make stocks cheap.
         Plus, bonds really only have one way to go - down.

      #5) Your thinking is common, but it is flawed. Economies don't obey the rules of convenience. They don't wait until things are OK, or meet the previous baseline, to go into recessions.  And if you think relative high unemployment means you can't go into recession, then I suggest you look at Europe or Latin America for alternative examples.

      #6) That other source of money is called "dumb money".

      None are so hopelessly enslaved, as those who falsely believe they are free. The truth has been kept from the depth of their minds by masters who rule them with lies. -Johann von Goethe

      by gjohnsit on Tue Nov 12, 2013 at 02:26:57 PM PST

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