Bubbles -> Risk -> Complacency -> Greed -> Downturn -> Crises -> Crash
We’ve had years upon years of this Bubble-Blowing Bull Market (and which we positioned ourselves for with our many Revolution Investing stocks). Every sell-off has turned out to be a buying opportunity. Every panic about geopolitical concerns, or about peak earnings, or about anything else has turned out to be foolish.
So people start taking more risks and those risks work out ok for the near-term when there’s this continued Steady Betty Bubble-Blowing Bull Market which makes them complacent.
But they wonder why they can’t make more money when there’s all this Bubble-Blowing Bull Market action all around them. So they get greedy and start using leverage and options and reach for ever higher returns.
Then eventually there’s a downturn in stock or bond or currency or commodity market here or there. And with all that leverage and those options betting that there wouldn’t be a downturn, suddenly there’s a financial crises.
And all those downturns and crises can feed across the markets until you have, yes, a crash.
And look, while I’m not sitting here telling you that I think the markets and economy are in big trouble like I did in 2007 when I traded my hedge fund for a TV show on Fox Business, I want to remind you once again that…
That you should, right now, focus and try to remember how much pain you were in at each of those panicky bottoms over the past eight years. And more importantly, how much pain you were in the last time the markets did crash like they did back in 2008.
It’s always possible that we get a 20% decline in the major indices even if the US economy and corporate earnings remain strong.
What might cause a 20% decline in the US stock markets?
- Emerging markets I – The developing economies’ stock markets can be high-beta versions of our own stock markets and have indeed been volatile as they’ve fallen 10-15% over the last six months. Another 10-15% down is certainly possible and would likely expose some naked-swimming banks.
- Emerging markets II – There are corrupt regimes draining the public coffers on every continent and there will be a sovereign country or five that are likely to report a “shocking” lack of funds to service debt.
- Currency fluctuations – The developed world’s fiat currencies, like the dollar and the EU and the Yen, seem like they could be coiled and ready to make some drastic sudden moves.
- Trade War – The escalating trade wars will have unintended consequences, friendly fire casualties and other Fog of War problems, even in the best case scenario.
- Black Swan – There’s always the potential that a solar flare or another natural disaster hits at any time.
- Market spirits – Markets go up and markets go down fast and furious for no good reasons sometimes.
So let’s say there’s a 20% hit in the stock markets. Of course, there’s always a possibility that our own stock markets completely crash from there and that the US economy get taken down. Because banks.
The banks are safe, the system’s fixed, there’s no worries, right? Think again. I think the Too Big Too Fail banks in the US are the unnoticed biggest risk to our stock markets and economy.
I mean, it’s been a long time since we had a LIBOR-gate scandal or an MF Global scandal or a London Whale scandal or CDS mark-to-market scandal or so on. Unless the global banks have miraculously become fully law-abiding ethical customer-centric service centers, we’re pretty due for a bank crisis or two.
And with bank attorneys getting to rewrite their own regulations once again (ie, deregulation) including ending the already spurious Volcker Rule which purports to keep banks from completely gambling their savings deposits in the markets, there’s bound to be some fully legal but completely risky bets being made with your savings and checking accounts.
Steady Betty Bubble Blowing Bull Markets (and ultra-low interest rates and strong corporate earnings and targeted corporate tax cuts) can mask over a lot of risky behavior which begets complacency which begets greed which begets downturns which beget crashes which beget crises.
I ain’t saying the Steady Betty Bubble Blowing Bull Market is over. But I’m saying be careful out there and make sure you’re not going to be sick to your stomach if and when the markets take their next routine 20% downturn. And make sure you’ll be okay if there is a major crash and economic downturn. Just in case, you know?
Bubbles -> Risk -> Complacency -> Greed -> Downturn -> Crises -> Crash
