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Economist Says Stock Crash Imminent in 2016

Economist James Dale Davidson believes that the stock market crash is already happening.

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Economist James Dale Davidson — who correctly predicted the collapse of 1999 and 2007 — is once again sounding alarm bells on what he says is an inevitable stock market crash this year.

Davidson has recently published his book, The Age of Deception: Decoding the Truths About the U.S. Economy, has said, “Yes, the stock market is near all-time highs. In fact, it is up 200% since its low in 2009.That is an historic rally. But this rally is coming to an end. The writing is on the wall.”

Alarming Indicators

In a feature on The Sovereign Society website, Davidson enumerated several indicators to back up his stock crash pronouncement. For starters, he pointed out, “Since it is clear that the stock market is going up because so many people are gambling with margin — with debt — when the market starts to pull back, it will be fast. Real fast. As stocks go down, investors will get margin calls and they will be forced to sell their positions immediately…which will accelerate the markets sell-off.”

stock market runup

You can see the above chart to understand what Davidson is talking about with the stock market running up and now….going sideways.

Davidson identified the low stock market participation rate as the next indicator, noting that it’s “at astonishingly low levels for a market selling at such high valuations.”

“You see, after the last crash of 2008, many people have resisted getting back in the market. So essentially, although the market has hit all-time highs, there aren’t a lot of people investing. Never before in history has there been a sustainable market rally on low volume,” Davidson explained.

Next, Davidson highlighted the price-to-earnings (P/E) ratio of the stock market, which is “hitting all-time highs.” The P/E ratio measures the price of the stock versus how long it will take for the stock to be worth that price.

Davidson noted, “In a healthy, normal stock market, the Shiller price to earnings ratio is about 16. That means it will take 16 years for a stock’s earnings to equal its price. But right now, the average stock in the S&P 500 is sitting at a Shiller P/E ratio of 27. That’s nearly 50 percent higher than the normal ratio.”

pe ratio

Davidson further added, “The only other times we have seen the price to earnings ratio this high was in 1999 and 2007. Again, both times this happened, stocks dropped by 50 percent and 55 percent. So we know that we have fewer people trading, but they are using more margin, and they are pushing the PE ratios to dangerous new highs.”

Worst Case Scenario

Davidson has said that he expects the massive collapse that’s “coming very soon” to “blindside most investors.” He disclosed, “To be frank, a 50-percent correction in the stock market is actually a conservative estimate. If the market drops to its 2009 lows, we’ll actually see a 70-percent correction.”

Davidson then uses some staggering percentages to illustrate the worst case scenario: “Real estate will plummet over 40 percent, savings accounts will lose 30 percent of their value, and unemployment will triple,” he said.

Similar Predictions

There are others who share Davidson’s view. Among them is American business magnate Carl Icahn who — in his guest appearance on CNBC’s Power Lunch last month — said, “I do believe in general that there will be a day of reckoning unless we get fiscal stimulus.”

Icahn cited the Federal Reserve’s decision to maintain low interest rates, which would potentially create “tremendous bubbles.”

For the record, Icahn had already sounded the alarm on the potential stock crash back in 2015. Back then, he expressed his belief that the market is “extremely overheated—especially high-yield bonds.”

Icahn had told CNBC’s Fast Money Halftime Report: “I think the public is walking into a trap again as they did in 2007. I think it’s almost the duty of well-respected investors, like myself I hope, to warn people, to tell people, that really you are making errors.”

In a Profit Confidential article, Jing Pan — a research analyst and editor at Lombardi Financial — explained,  “Icahn thinks that a large part of the growth in the real economy we see today comes from the artificially low interest rates. His rationale is that businesses have been getting access to cheap money, and by using that money, they were able to expand their operations; creating jobs and generating revenue. However, once the Federal Reserve raises interest rates, businesses will no longer have access to that cheap money.”

Aside from Icahn, a report in The Sovereign Investor, cited economist Andrew Smithers, who warned, “U.S. stocks are now about 80% overvalued.” The report explained, “Smithers backs up his prediction using a ratio which proves that the only time in history stocks were this risky was 1929 and 1999. And we all know what happened next. Stocks fell by 89 percent and 50 percent, respectively.”

The Sovereign Investor likewise highlighted the fact that “the Royal Bank of Scotland says the markets are flashing stress alerts akin to the 2008 crisis.” the said bank has reportedly told its clients to “sell everything.”

Flip Side

Davidson’s doom-and-gloom pronouncements, which he backed with 20 compelling charts, has definitely gotten everyone’s attention. However, it’s worth looking at it from a different perspective.

In a Motley Fool Funds feature earlier this year, Nate Weisshaar wrote, “Even if Davidson is correct that the market will get clobbered in 2016, it doesn’t mean we should be running for the hills. Keep in mind that during the market collapse caused by the financial crisis, the S&P 500 dropped over 50% between October 2007 and March 2009. Then it almost doubled by the end of 2010.”

Weisshaar explained, “Doom and gloom is a story that sells quite well and has apparently been doing well for Davidson for years (although not so well that he doesn’t need to still sell it).” He then said, “Let’s check back in with Davidson’s prediction in 12 months. I’ve placed a reminder on my calendar for Jan 2, 2017.”

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Economy

Next Wave of Stimulus Could Be $2 Trillion Infrastructure Bill

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Next Wave of Stimulus Could Be $2 Trillion Infrastructure Bill

“Phase 4” of the government’s economic stimulus plan could include spending up to $2 trillion on improving America’s infrastructure.

The bill already has bipartisan support, and could be voted on as soon as April 20th when representatives of both the House and Senate return to Washington, D.C.

During his 2016 campaign, President Trump said he would make improving America’s roads, bridges and airports a top priority during his time in office.

“The only one to fix the infrastructure of our country is me – roads, airports, bridges,” Trump tweeted on May 12, 2015. “I know how to build, [politicians] only know how to talk!”

While previous attempts to pass a major infrastructure bill have failed, both sides seem willing to try again in an effort to help America’s economy rebound from the coronavirus outbreak.

House Speaker Nancy Pelosi, who is often at odds with the President, said she is “pleased the president has returned to his interest” in the issue. She called an infrastructure proposal “essential because of the historic nature of the health and economic emergency that we are confronting.”

She added “I think we come back April 20, God willing and coronavirus willing, but shortly thereafter we should be able to move forward.”

The Democrat’s proposal is part of a five-year, $760 billion package that includes money for community health centers, improvements to drinking water systems, expanded access to broadband and upgrades to roads, bridges, railroads and public transit agencies.

The plan designated $329 billion for modernizing highways and improving road safety, including fixing 47,000 “structurally deficient” bridges and reducing carbon pollution. It also aimed to set aside $105 billion for transit agencies, $55 billion for rail investments such as Amtrak, $30 billion for airport improvements and $86 billion for expanding broadband access.

“I could provide the legislative language in very, very short order for this package. It’s the funding that’s been holding us up, and if the president insists on funding, then I believe that Senator McConnell and Leader McCarthy will move on this issue,” said Democratic Rep. Peter DeFazio of Oregon, who chairs the House Transportation and Infrastructure Committee.

During an appearance on CNBC yesterday, Treasury Secretary Steven Mnuchin said he is talking with Congress about a potential infrastructure bill.

“As you know, the president has been very interested in infrastructure. This goes back to the campaign: The president very much wants to rebuild the country. And with interest rates low, that’s something that’s very important to him.”

He added “We’ve been discussing this for the last year with the Democrats and the Republicans. And we’ll continue to have those conversations.”

Earlier this week President Donald Trump said he wants to spend $2 trillion on a massive infrastructure package.

He tweeted that “With interest rates for the United States being at ZERO,this is the time to do our decades long awaited Infrastructure Bill. It should be VERY BIG & BOLD, Two Trillion Dollars, and be focused solely on jobs and rebuilding the once great infrastructure of our Country! Phase 4.”

“The president very much wants to rebuild the country, and with interest rates low, that’s something that’s very important to him,” Treasury Secretary Mnuchin added.

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Economy

Stocks Will Head Lower, Warns Billionaire Bond Investor

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Stocks Will Head Lower, Warns Billionaire Bond Investor

Billionaire bond investor and DoubleLine Capital founder Jeffrey Gundlach is the latest Wall Street veteran to warn that the worst is yet to come for stock prices.

He joins famed investor Jim Rogers, who said on Tuesday that he expects the market to stay elevated for a while, but ultimately another stock market route is on the way.

“I expect in the next couple of years we’re going to have the worst bear market in my lifetime,” Rogers said in a phone interview.

Gundlach may not be as bearish as Rogers, but he did say earlier in March that there was a 90% chance the United States would enter a recession before the end of the year due to the effects of the coronavirus pandemic.

In the short-term Gundlach said during a webcast on Tuesday that he believes that the lows we saw in March will be eclipsed in April due to the uncertainty around the coronavirus outbreak and when we can expect the number of new cases to slow.

“I think we are going to get something that resembles that panicky feeling again during the month of April,” while adding “The low we hit in the middle of March, I would bet that low will get taken out.”

Mark Hackett, chief of investment research at Nationwide agrees with Gundlach and warns that there is compelling evidence that nearly every bear market has a few rallies before plunging lower.

“Last week’s double-digit gain for markets was a welcome relief rally, though market bottoms are rarely as clean as this one has been. In 2000/01, there were four rallies of greater than 20% before ultimately reaching a bottom, and in the financial crisis, the S&P 500 had a false breakout of 27% before hitting a bottom.”

Gundlach also said that any projections that the US economy will quickly recover once the spread of the virus slows were too optimistic and that the hopes of a quick recovery were causing the markets to act “somewhat dysfunctionally.”

“We will get back to a better place, but it’s just not going to bounce back in a V-shape back to January of 2020,” he said.

Gabriela Santos, JPMorgan’s global market strategist agrees with Gundlach that we aren’t going to get the quick “V-shaped” recovery that most are predicting.

She believes that we’ll start a slower “U-shaped” recovery once coronavirus infection rates peak.

“A ‘V-shape’ I think we should unfortunately discount at this point, because even when infection rates peak for COVID-19 around the world, what the China experience is teaching us is even though the government begins to relax some social distancing guidelines, individuals themselves are still very careful about how exactly they go back to their day to day lives,” she said.

“So demand was quick to shut down, but it’s actually much slower to come back online,” she added. “The better analogy here is a U. There’s a very sharp drop in activity in the first half, there’s a bit of a stall in the second, and then in 2021 is when that strong rebound begins.”

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Finance

Brutal First Quarter For Stocks Comes to End, Here’s What’s Next

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Brutal First Quarter For Stocks Comes to End, Here’s What’s Next

All three major indexes ended Tuesday in negative territory, with the S&P 500 slipping 1.6%, the Dow Jones Industrial Average falling 1.84% and the Nasdaq dropping 0.95%.

Mercifully, the first quarter has come to an end, so we can start to put the post-Feb 19th carnage into some context.

The Dow has plunged 23.2% since the start of the year, it’s worst first-quarter performance in history, and single worst overall quarter since the fourth-quarter of 1987 when it plunged 25.3% during the Black Monday crash.

The S&P 500 is down 20% so far this year, it’s largest quarterly decline since the 2008 financial crisis. It’s also the first time in more than a decade that the index started the year losing ground in each of the first three calendar months. The S&P was down 0.2% in January, 8.41% in February and 13.1% in March. That’s only happened seven other times in the indexes’ 63-year history.

The Nasdaq closed out the quarter down 14% since the start of the year.

Stock weren’t the only investments getting pummeled, oil turned in a particularly gruesome report card for the quarter as well.

Prices for West Texas intermediate crude (WTI) futures saw their largest single-quarter decline in history to start the year, with prices dropping more than 65%. In March alone the number of oil contracts fell 54%, also a record for a single-month.

While nearly all of this volatility in stocks is a result of the coronavirus outbreak (oil’s decline is also due to a price war between Saudi Arabia and Russia), the fallout from the pandemic is expected to dramatically affect our country’s gross domestic product (GDP) in the coming quarters.

Yesterday Goldman Sachs said that the second-quarter U.S. economic decline would be much greater than it had previously forecast. The bank says it expects higher than anticipated unemployment figures and “sky-high jobless claims numbers” because of the coronavirus pandemic.

It’s also forecasting a real GDP sequential decline of 34% for the second quarter on an annualized basis, significantly higher than its earlier estimate of 24% drop. Also concerning is that the bank now sees the unemployment rate hitting 15% by mid-year compared to its earlier estimates of 9%.

Looking Ahead

When the market is volatile like it has been for the last month or so, it’s often hard to imagine brighter days ahead.

But when you look at the market’s historical performance immediately following a significant decline like we are seeing right now, there are reasons to be optimistic.

According to Dow Jones Market Data, after the Dow has turned in a quarter as brutal as the one we just went through, the index returns 11.88% and 8.49% in the following two quarters.

And over the course of the following year, the Dow returns 22.75% on average.

For the S&P 500, the two quarters following a massive decline return 12% and 15.8%, and a year later the index is up 27.79% on average.

And the Nasdaq returns 3.79% and 5.57% over the next two quarters and 9.54% over the following year.

So while nothing is guaranteed, it appears we can look forward to better returns ahead.

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