2015 is also likely the end of a surprisingly regular 7 year cycle.
- 1973: Oil Shock/Stocks Crash
- 1980: US Recession
- 1987: Stock Market Crash
- 1994: Bond Market Crash
- 2001: 9-11 / Stocks Crash
- 2008: Subprime / Stocks Crash
- 2015 EM / Stock Crash???
Do you notice the seven year pattern?
The fact that the economy goes in cycles in not surprising, so any stock market cycle such as this won't be that surprising.
The Great Unwind and False Prosperity?
Regarding this most recent cycle, the case can be made that as a way to recover from the 2008 Stock Market Crash, the Fed started lowering rates to virtually zero and started printing money like crazy with many Quantitative Easing programs (QE). Yet for around 7 years, the Fed didn't raise rates, and only recently stopped the QE programs.
For seven years, "Follow the Fed" was profitable, and going long in housing and stocks was profitable, as the Fed's policies boosted those asset classes. However, recently, the Fed stopped the Quantitative Easing programs and may be on the verge of raising rates.
But what happens when the Fed starts to unwind its positions? Will we start to see the effects of The Great Unwind?
Over the last seven years, the Fed induced asset boosting policies create a form of an artificial prosperity that will eventually be undone. All the imbalances that have been accumulated will finally end, and in order to correct, a Stock Market Crash, or a even a multi-year time correction (sideways for many years) might be needed.
The risks are high for some sort of event or a multi-year time frame where imbalances will be corrected. Future stock market annual returns for many years are likely going to be below long term averages.
Housing Market Bubble?
Over the last seven years, we have gone from housing recovery to a potential housing bubble. The median income to buy a home in the Bay Area, Northern California is $142,448.33.
Public and Private Debt and too much spending:
Both government and consumer debt is increasing. Government Debt as a ratio of GDP is now 80% (and the total debt is around $18 Trillion). Private debt (including consumer debt and education loans) is approximating 260% of GDP.
China is also experiencing a stock market crash.
Also, China is holding a large amount of U.S. treasuries. There might be evidence that China is already dumping some of these?
Oil and commodities have been crashing, and some people have said that commodities and oil are leading indicators of an economy and the stock market.
CNBC's Ron Insana says:
"We already have evidence that the commodity crash has ominous portents for the rest of the world:
* Japan’s recession is deeper than previously thought.
* China’s demand for basic materials, amid a glut of uneconomic construction projects, appears to be plummeting.
* Russia’s ruble has collapsed and the country is on the brink, if not already in, a recession.
* India’s economic recovery is beginning to look shaky.
* Europe’s growth rate and inflation rate, for the next two years, were just revised downward by the European Central Bank, suggesting that Europe’s economic crisis is far from over. In fact, at least one former European leader with whom I recently spoke, believes the crisis in Europe may just be in its early stages.
* Brazil and other emerging market nations are struggling with a variety of issues, from recessions at home, to the rising value of the dollar, which is complicating how emerging markets conduct economic policies at home, given how closely their currencies are tied to the greenback."
Former Advisor to Britain's Gordon Brown even warns of a Stock Crash and to be prepared for Civil Unrest and bank problems.
“We were close enough in 2008 (if the bank bailout hadn't worked),” he said. “and what's coming is on 20 times that scale”.
Does this former adviser know something we don't?
Time to sell stocks?
Risk is definitely high now. Seriously consider your asset allocation and your goals. Consider taking some profits, and sell some equities if possible. Build up cash reserves. Use any potential rallies to sell.
The future down cycle will eventually end, and there will be great investing opportunities at that time.