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Stockman: Beware! Stocks & Bond Market Crash Imminent
Aspire, Thought Leaders | 10 June 2015
By: Lim Si Jie
Articles (169) Profile

“Stocks and bonds are on the verge of a catastrophic collapse”, as David Stockman warns the world to prepare for the worst in the upcoming months. David Stockman feels that the current market is like a “coiled spring” that will snap very soon and will end disastrously.

The former Office of Management and Budget (OMB) director thinks that the vigorous Quantitative Easing (QE) policies have barely improved economic growth. In his opinion, the Feds are just buying time for the inevitable to happen. So what will this mean for the US economy?

Historical Crashes

Standard & Poor 500 (S&P 500) Source: Google Finance

If history is a good indication of what will happen to the current economy, David Stockman is positive that a crash is about to occur. He mentioned that market crashes seem to have a tendency of occurring “every eight years”.

The Standard & Poor 500 (S&P 500) peaked in 2000 before a massive catastrophic decline. Eight years later, the same thing happened and resulted in the 2008 financial crisis.

Despite this being US’s weakest recovery since post-war, major market indices have surged past peaks in 2000 and 2008. According to David Stockman, “the Fed has simply reflated the bubble to an even more gigantic proportion”.

Fed Fueling Bubble

The Federal Reserve announced reduction in quantitative easing during the Fed’s most recent policy statement. But according to David Stockman, the Fed’s reduction in accommodative policies came far too late. The Fed has now inflated the greatest and third bubble yet of this century due to its stimulative policies. For example, the Russell 2000 is trading at 80 times trailing earnings, i.e. 80 times Price/Earnings (PE) ratio.

Excessive monetary policy has forced central banks all over the world into a corner. David Stockman believes that as investors begin to realise that the current market is inflated to a ridiculous size, the markets are going to be in for a huge, nasty turnaround.

Economy Too Dependent On Fed?

David Stockman is rather sceptical of the real strength of the US economy. With U.S. in the midst of one of the “longest expansion or recovery periods since post-war period”, interest rates have been hovering slightly above the zero level for the past 78 months. In other words, the market is becoming too dependent on the Fed to stimulate the economy rather than taking the initiative to help in a healthy economic recovery.

The market edged higher on suggestions that the Fed won’t raise interest rates after all. And after Fed minutes revealed that a rate hike in the next month is off the table, the S&P 500 hit an all-time intraday high.

Bonds Also In Trouble

And it’s not just stocks that are in trouble. David Stockman observes worrying signs in the bond market as well. David Stockman believes that the ten-year U.S. Treasury’s should not be trading at such a low level of two percent when there are taxes and inflation.

It is also not possible that the interest rate on the ten-year German bond should be 70 basis points when it was five basis points just a few weeks ago.

Await For Valuations To Return To Normal

David Stockman suggests that investors should await for the Fed to get out of the picture and return interest rates to normal. He believes it is important to let the financial market normalise to rid of the constant panic speculations.

That being said, David Stockman has made similar calls in the past, which have yet to come to fruition.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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