The Stock Market in Nine Scary Pictures

Greed is pushing markets in the U.S. stock CBLI market to new heights. Fear will take over greed. I offer 9 reasons why you should be scared. If something isn’t able to continue for a long time and it is over, it will be. The question is not whether but when and how bad.

The Dow Jones Industrial Index reached 30000 at the time of its first record on the 23rd of November and in 2020. The Nasdaq as well as the S&P 500 indexes both achieved new heights shortly thereafter.

The constant rise in situation of a pandemic seems insane. There are a variety of explanations:

  • Fear of not being able to enjoy (FOMO) can be described as the reason for greed.
  • Hopium can be described as the “drug” that enables investors to look beyond the pandemic and an imagined promising future.
  • Federal Reserve support is a blessing that will continue to boost markets. What happens when the Fed purchase stocks? What is the maximum amount it can buy?
  • Low interest rates are advantageous for the market due to various reasons one of which is that the discounted the cash flow in future is greater. In addition, it forces investors to take on more risk to make dividends.

9 reasons why you should be fearful

Greed can be an effective motivator, however, in extreme cases, it can the reason to be afraid. In this article I present nine reasons for being fearful. There are probably many more. Watch the video I made about this subject for more details. There are many opportunities for the Bulls and Bears however, not the Pigs.

  1. The market for stocks is in an oversold condition.

There is no way to know for certain whether we’re in a bubble before it explodes, however there are reliable indicators that predict bursting bubbles. The question is whether the price is too excessive.

It is the Buffett bubble barometer as shown in the following is an effective indicator.

The Buffett indicator measures an indicator of how much the value of the market to its gross domestic product (GDP). The ratio is around 80 percent during non-bubble times, but has never been so high as it is at 275 percent from “normal.” This is, in the sense of an overprice that is close to 3X. It’ll require a correction of 60% to bring the indicator back to normal. There are additional indicators such as the ratio of price to earnings which are also at peak.

Some critics argue they believe that “It’s new this time” since interest rates are never this low. Further information on this is within the Zero Interest Rate Policy (ZIRP) review below.

2. COVID-19 is getting worse, not better

In the summer, there was a decrease on the amount of individuals affected by the virus. However, the situation changed when we entered the fall. The virus has evolved to make it more contagious but it is not as deadly. The outbreak we’ve seen has slowed the economy in particular industries such as restaurants and theaters.

Certain industries are profiting from the epidemic, for instance pharmaceutical companies that have come up with a viable cure but it’s that the FAANG (Facebook, Apple, Amazon, Netflix and Google) stocks that drive the market. What is the value of Apple truly worth more than 1 trillion dollars? It’s more than the total value of the Canadian market. The vaccines are significant and will help save many lives and help bring the economy back to normal however, economists expect the recovery taking years, not just months.

3. A global crisis of debt

The world is buried in debt. One could argue that it’s bankrupt, if countries could print money, which they do. The issue lies in the fact that money printed on paper is paper, which is the reason it’s referred to as “fiat money.” The value of fiat currencies is based on the ability of our society to offer goods and services for a piece of paper. This is why the U.S. dollar enjoys a particular status due to its status as one of the most important currencies in the world however that doesn’t protect it from being devalued.

World debt per capita has risen to $200k which is the root of the issues that are evident by the graphic above. The final result is likely be painful, even though it may take quite a while to come to a conclusion. Political leaders hope that the issue will disappear. A solution is not always political suicide. American religious theologian James Freeman Clarke said, “A politician has a vision of an election to come. A statesman thinks of the future generation.” This is the reason there’s no resistance against the ongoing large deficits across the globe.

4. Zero interest rate policy (ZIRP)

Anyone who takes out loans would love to be able to take out loans with no interest however, that’s a unique benefit reserved for central banks who have the ability of manipulate markets for bonds to insanely low rates of interest. They are even forcing lenders to pay them back by dropping interest rates to zero. Are you as amazed by this as me? It is a good idea to be scared.

There are those who believe that the low the demand for credit has lowered the interest rates, however that does not meet the requirements of lenders. The lenders should be demanding interest rates which are higher than inflation in order to pay for letting people use their money. However, this isn’t happening since central banks are refusing to allow it. Do lenders have a revolt?

The decrease in interest rates over the last decade has seen prices for stocks to increase by 50%. This accounts for about one fifth of the 250% growth in the stock market over the same time. This is a fascinating symmetry. If interest rates rise to their normal levels the bond prices will decrease as is an established fact. However, the price of stocks will fall due to discount rates rising.

5. Its economy has gone into disarray

All economies around the globe suffer from COVID-19‘s effects. The recovery process is taking place but it’s not complete. The unemployment rate is high in the U.S. at 7% is much higher than the average of 4% as well as many have quit the workforce, which has reduced the percentage of workers in the workforce.

The majority of economists believe that they will take several years for the body to completely recover from pandemic.

6. A wide wealth gap has caused social tensions

Quantitative QE (QE) has increased the wealth of the wealthy by making them pay a handsome sum to buy bonds which were in later put into stocks. This has led to an increase in security prices an inflation type that isn’t reflected in CPI, the index of consumer prices (CPI). A large portion all the riches of wealthy people is stored in bonds and stocks.

Although it is true that the U.S. remains one of the top countries in the world but the less wealthy would like to have more of its prosperity. They don’t get what they consider to be an adequate share. Top 10% of the population of the population owns 68 percent in the total wealth. In the aftermath, rioters swarm into stores to buy free items and socialism is sought-after by many. How would capital markets function under a system of socialism? Would it work?

Must read “what dinosaur has 500 teeth

7. Nuclear dangers

The world has been battling nuclear dangers since the first bomb went off in 1945. It is only a matter of time before “nuclear deterrents” which could destroy the entire globe are not used however dirty bombs pose real dangers. They could infect the entire world with lethal chemical or radiation. Some conspiracy theorists believe that COVID-19 was China’s attempt to attack the entire world. The effects from a dirty weapon could be catastrophic for the world as well as the capital markets. This is a danger which we believe is not that significant however the consequences are massive.

8. Social Security and Medicare will soon be insolvent.

70 percent of baby boomers – around 55 million people depend extensively upon Social Security however the tax revenue has not been enough to pay for benefits since the year. The projected cost in the case of Social Security is $29 trillion that’s 2 trillion more than the $27 trillion official amount.

More troubling, 60 million people are covered by Medicare and that number will likely to rise up to 90 million in 2030. The current estimate of the future Medicare cost is $47 trillion.

In total all, total U.S. debt is $103 trillion, which is close to 5-times GDP. It’s enormous.

Some people believe that Social Security or Medicare won’t be broke since we have”the “printing presses.” It’s important to know how money is “printed.” It is the Treasury issues bonds to ensure that it can use the money to spend. For instance, recently COVID check relief was issued by Treasury. In times of economic prosperity, U.S. and foreign citizens have been enthused to purchase these bonds however, they don’t pay interest. The majority of recently released Treasury bonds are purchased through the Federal Reserve. The money will be “printed” through Federal Reserve Treasury issuing bonds which are purchased by the Federal Reserve buys. This leads us to the next danger.

9. A significant increase in inflation has taken place and it is expected to increase.

Quantitative ease (QE) which is worth $4 trillion has not caused inflation in the prices of consumer goods however it helped to solve the 2008 financial crisis, in which our economy was at a standstill and QE was declared a huge success. However, QE has increased prices for bonds and stocks which has made the recent gains appear to be a gimmick and a great magic trick known as”the Cantillion Effect. Do you feel more wealthy?

However, COVID’s reduction of 3 trillion is likely to raise prices for consumers because the money is used to purchase food items and to pay for mortgages/rents. A further $3 trillion or more is expected. The humanitarian aid is desperately required but it will not be completely free. There are consequences.

The influx of money could tip the inflation-deflation scale towards inflation. A confluence of factors has brought us disinflation/deflation for a decade, as shown in the picture above, but they can’t permanently ward off the effects of too many dollars chasing too few goods.

Beware of allocations to assets

To summarise the initial nine dangers The first nine threats are that neither bonds nor stocks are secure, however some are more susceptible to damage than others, especially when the value of equity falls. If the next correction happens the people nearing retirement are most affected because they’re in what’s known as”the “Risk” Zone. Risky investments within the Risk Zone could ruin retirements. One group of investors is in danger who are nearing their goal date and have substantial equity allocations, including those who have funds with target dates.

In the case of $2.5 trillion of target-date funds (TDFs) Many people believe that their lifelong savings are safe However, they’re not. The following chart shows that typically, the target date fund has 78% high-risk assets as of the time of its target, and the definition of “risky” as equities as well as bonds that are long-term. There are a few secure TDFs with glidepaths similar to those depicted in the photo however they do not have a lot invested in them. It’s an unfortunate situation.

Of of course, there are other people close to retirement who’re at risk However, they’re likely to are aware of the risk. In general, people who are in TDFs do not realize they’re in danger. They believe that their employer will protect them. They would know this the truth if they studied their TDF however, no one does. They simply believe. Their employers should definitely conduct this however, that’s an entirely different issue.

For 2008, the TDFs for people retirement near 2010 suffered a loss of 35% of their value and the beneficiaries were stunned. This was the cause of the first and sole joint hearings by both the SEC along with the DOL during June of 2009. Unfortunately, the hearings did not change little of any significance. There was a total of $200 billion invested in TDFs in the year 2008. In the present, there’s more than 10 times the amount and there are many more investors. The next market crash is likely to ruin the retirement-aged who have involved in TDFs. The majority of them are in TDFs as they do not know how to choose their investments. They are not financially educated and require security.

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