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Will there be a 2014 stock market crash?

I’m not going to go so far as to say there will be a 2014 stock market crash this fall, but there are some concerning forces building up to where I can lay out an argument for the risk in simple bullet points. I think anyone will see from these that no serious lessons have been learned fro past failures. And this is coming from someone who has not been crying the sky is falling for some time.

  1. The stock market is at record highs. That makes investors nervous about how much higher it can go.
  2. The the amount of debt investors have taken out in order to buy stocks and leverage their investment power is at a record high. Worse than before the dot-com stock market crash; worse than before the 2008 stock market crash.
  3. We are just entering fall when investors and investment advisors — the whole Wall Street community — comes back from their summer vacations, rolls up their sleeves and gets a little more serious in the amount of energy they pore into their investments and their advice.
  4. The stock market’s greatest crashes in history have happened in the fall.
  5. The same kind of high-tech speculative buying that led up to the dot-com crash has been happening all over again. Investors have been bidding stocks into the stratesphere for companies that have never turned a dime of profit out of mere speculation someone will eventually figure out how to monetize those huge dot-com audiences or that other investors will do more of the same kind of speculation or that some larger corporation will buy that company up. All a precarious series of bets.

 

What’s does this say for a 2014 stock market crash this fall?

In short, the market is looking like it is top-heavy from speculative buying while undermined from large institutions taking out lots of credit in order to buy those stocks. If the stocks crash, the credit crashes, broadening the damage.

Consider also, that the average investor bidding up these stocks is no longer the retail individual. It’s large hedge funds and investment banks and other companies with a lot of money to invest. That leverages the potential of the crash because, when giants fall, everyone runs.

I won’t go as far as I did with the housing market by predicting a stock-market crash based on the evidence at the moment, but I will say it is looking like a significant risk this fall, should other events trigger panic in stock investors who know they are heavily leveraged and who know everyone else is, too.

 

My earlier predictions of growing risk for a 2014 stock market crash

In March of this year, I made the following observation in an article titled Strong Headwinds Face Global Economy:

My “Economic Forecast 2014″ starts with Russia. The first breezes of coming turbulence are already blowing in on the U.S. as a storm I’ll name “the Russian Rampage” hits Crimea and Russia braces for the the U.S. response. Foreign-owned U.S. bonds held in custody of the Federal Reserve took their largest drop on record last week. No one in the media seems to know who is selling out, but I would speculate the selloff is because one of the United State’s largest debt financiers is trying to get out of U.S. bonds. That would be Russia … trying to untie assets from the U.S. before the impending sanctions over Russia’s impending annexation of Crimea kick in.

 

That speculation on my part has proven itself already: 1) Not long ago, Russia was the second largest sovereign investor in U.S. treasuries. Russia has already divested itself down to tenth place. For large economies that shift at glacial speeds, that’s a massive reduction. 2) Global oil is no longer traded solely in U.S. dollars. Russian and China have opened a secondary market that avoids use of U.S. currency.

Here was another prediction I made in that article that unfolded as I said it would:

Russia wants Crimea badly and would not start down such a path if it were not committed to this course for the longterm. Clearly the Olympic Games were all about Russia’s glory days and intended to stir national pride. Putin intends to be seen as a great leader who restores that glory, and Russia’s leaders have a legacy of being willing to see their people struggle economically in order to reach an idea. So, there is not a chance in the world that Putin will make himself look weak by caving into Western demands over something as trifling as economic sanctions when he has the prize nearly in the palm of his hand.

 

As predicted, Russia did follow through with annexing Crimea and making the takeover of that part of Ukraine complete. Sanctions had no effect whatsoever in stopping that from happening. And Russia has demonstrated  in the past week that it is committed to that course for the longterm by entering and attacking parts of eastern Ukraine with its own forces, pressing Ukraine toward a cease fire and negotiations with Russia.

If you read through that article about the headwinds that would hit the global economy this fall, you’ll see that every force talked about has continued to increase along the vectors that were predicted.

It’s not a stable looking situation. If you look back through my blog for all of the year to date, you’ll see I have — unlike those who predict gloom and doom in a knee-jerk fashion — stated that a 2014 stock market crash or any other kind of crash is unlikely:

I’m not predicting economic collapse in 2014 any more than I did last year. Some well-known talking heads did for 2013, especially related to China, and I said they’d be wrong. Marc Faber, Nouriel Roubini, and Jim Rogers all predicted that 2013 would bring a great crash, and I said that I did not think that was likely. While I’m not forecasting calamity in my 2014 economic predictions, it certainly looks like a stormy fall ahead of us as these pressures start to build against the global economy.

 

I’ve bet my blog on where the economy is headed for the fall of 2014

I avoid sensationalism or market pessimism, but unlike bullish market optimists I will predict doom when doom really is on the horizon, but not before. I would move the needle on my gauge that monitors the likelihood of an economic crash this year from yellow to solidly orange where I predicted in the spring that it would be come fall … while most others are saying it has moved from yellow toward green.

The sad tale to be seen in the market today is that we have learned nothing from the economic crash of 2008 and less than nothing from the high-tech crash at the beginning of the millennium. The market is wildly speculative on dot-com stocks and highly leveraged. It has huge potential to fall rapidly if something goes wrong because the investing is so highly leveraged (built out of debt). The market looks exactly like it did before the last bust of the dot-com bubble. Because it is such an unstable situation and because the headwinds that I forecasted last March have grown, the likelihood of that market toppling in the fall has increased.

I’m still not crying in this blog that the sky is falling this year — not putting the indicator at red just yet — but you need to keep your eye on these forces as a way of predicting for yourself what will befall the global economy this fall. If you want, I’ll help you monitor that in this blog. I’ll keep an eye on these forces to see if they are building toward a greater likelihood of a market meltdown in the fall that could be worse than any we’ve seen in our lifetime.

With so many volatile forces growing to such magnitude and so much instability in the market’s own positioning, the likelihood of a crash being triggered by a single unpredictable event is also greatly increased. It’s like standing on a pop can where the forces trying to crush the can are so great that a mere touch to the sides of the can will cause it to crush. All these forces create a high base level of pressure on the market so that a single terrorist attack or something of that kind can trigger a panic response.

Every force mentioned in my March forecast has built up in the directions predicted, bringing the risk level for this fall to exactly the precarious level I predicted. Remember, I bet my blog on things taking that direction this past March, promising I’d stop making forecasts if I was wrong about the direction these headwinds were taking us. As a way to measure that, I stated that the economy would not be in better shape this fall while many thought the recovery was, at last, here.

I’ll honor that bet if I’m wrong. I maintain that bet while nearly everyone else is saying the economy has improved this year, and superficially it appears it has; but I am looking at the teetering state of the market and the growing forces of the winds that whirl around us and saying that those who think, based on statistics that the economy is recovering, are all looking in the wrong direction. They are not paying attention to the foundations of this structure, and they are not looking at the sheer forces that are ready to knock it off its wobbly foundation. The economy is, in fact, precariously weak, and the forces that could knock it over have grown increasingly strong.

If you think my line of thinking is worth monitoring by others, then share this article with friends or link to it on your own site. I’ve bet my blog on where the economy is headed. It may be fun to watch what happens to me.