Is A Market Crash Coming? The WSJ Ponders...
In a unorthodox piece by the WSJ, which goes direct to discussing some of the less than pleasant possible outcomes of central planning, Brett Arends asks "could Wall Street be about to crash again? This week's bone-rattlers may be making you wonder" and says: "way too many people are way too complacent this summer. Here are 10 reasons to watch out." And without further ado...
- The market is already expensive. Stocks are about 20
times cyclically-adjusted earnings, according to data compiled by Yale
University economics professor Robert Shiller. That's well above
average, which, historically, has been about 16. This ratio has been a
powerful predictor of long-term returns. Valuation is by far the most
important issue for investors. If you're getting paid well to take
risks, they may make sense. But what if you're not?
- The Fed is getting nervous. This week it
warned that the economy had weakened, and it unveiled its latest weapon
in the war against deflation: using the proceeds from the sale of
mortgages to buy Treasury bonds. That should drive down long-term
interest rates. Great news for mortgage borrowers. But hardly something
one wants to hear when the Dow Jones Industrial Average is already north
- Too many people are too bullish.
Active money managers are expecting the market to go higher, according
to the latest survey by the National Association of Active Investment
Managers. So are financial advisers, reports the weekly survey by
Investors Intelligence. And that's reason to be cautious. The time to
buy is when everyone else is gloomy. The reverse may also be true.
- Deflation is already here. Consumer prices
have fallen for three months in a row. And, most ominously, it's
affecting wages too. The Bureau of Labor Statistics reports that, last
quarter, workers earned 0.7% less in real terms per hour than they did a
year ago. No wonder the Fed is worried. In deflation, wages, company
revenues, and the value of your home and your investments may shrink in
dollar terms. But your debts stay the same size. That makes deflation a
vicious trap, especially if people owe way too much money.
- People still owe way too much money. Households,
corporations, states, local governments and, of course, Uncle Sam. It's
the debt, stupid. According to the Federal Reserve, total U.S.
debt—even excluding the financial sector—is basically twice what it was
10 years ago: $35 trillion compared to $18 trillion. Households have
barely made a dent in their debt burden; it's fallen a mere 3% from last
year's all-time peak, leaving it twice the level of a decade ago.
- The jobs picture is much worse than they're telling you.
Forget the "official" unemployment rate of 9.5%. Alternative measures?
Try this: Just 61% of the adult population, age 20 or over, has any kind
of job right now. That's the lowest since the early 1980s—when many
women stayed at home through choice, driving the numbers down. Among men
today, it's 66.9%. Back in the '50s, incidentally, that figure was
around 85%, though allowances should be made for the higher number of
elderly people alive today. And many of those still working right now
can only find part-time work, so just 59% of men age 20 or over
currently have a full-time job. This is bullish? (Today's bonus
question: If a laid-off contractor with two kids, a mortgage and a car
loan is working three night shifts a week at his local gas station, how
many iPads can he buy for Christmas?)
- Housing remains a disaster.
Foreclosures rose again last month. Banks took over another 93,000
homes in July, says foreclosure specialist RealtyTrac. That's a rise of
9% from June and just shy of May's record. We're heading for 1 million
foreclosures this year, RealtyTrac says. And naturally the ripple
effects hurt all those homeowners not in foreclosure, by driving down
prices. See deflation (No. 4) above.
- Labor Day is approaching. Ouch.
It always seems to be in September-October when the wheels come off
Wall Street. Think 2008. Think 1987. Think 1929. Statistically, there
actually is a "September effect." The market, on average, has done worse
in that month than any other. No one really knows why. Some have even
blamed the psychological effect of shortening days. But it becomes
self-reinforcing: People fear it, so they sell.
- We're looking at gridlock in Washington.
Election season has already begun. And the Democrats are expected to
lose seats in both houses in November. (Betting at InTrade, a bookmaker
in Dublin, Ireland, gives the GOP a 62% chance of taking control of the
House.) As our political dialogue seems to have collapsed beyond all
possible hope of repair, let's not hope for any "bipartisan" agreements
on anything of substance. Do you think this is a good thing? As Davis
Rosenberg at investment firm Gluskin Sheff pointed out this week,
gridlock is only a good thing for investors "when nothing needs fixing."
Today, he notes, we need strong leadership. Not gonna happen.
- All sorts of other indicators are flashing amber. The
Institute for Supply Management's manufacturing index, while still
positive, weakened again in July. So did ISM's new-orders indicator. The
trade deficit has widened, and second-quarter GDP growth was much lower
than first thought. ECRI's Weekly Leading Index has been flashing
warning lights for weeks. Europe's industrial production in June turned
out considerably worse than expected. Even China's steamroller economy
is slowing down. Tech bellwether Cisco Systems
has signaled caution ahead. Individually, each of these might mean
little. Collectively, they make me wonder. In this environment, I might
be happy to buy shares if they were cheap. But not so much if they're
expensive. See No. 1 above.