Edge of the Cliff

After an eight-year bull run with extended equity market valuations, a growing number of high profile and vastly experienced investors are sounding concern about the future health of the stock market.

After an eight-year bull run with extended equity market valuations, a growing number of high profile and vastly experienced investors are sounding concern about the future health of the stock market.

Without doubt this is the most overvalued equity market in memory and by some reckoning the stock market is running on fumes alone. It’s clear we have a tired, old bull market, with deteriorating breadth, dominated by the rise in a handful of major technology stocks. The valuations on the companies are extreme and in some cases the companies, like Tesla, are not even profitable.

After such a massive bull run and with the Fed preparing to reduce its balance sheet – removing a major prop of support for the stock market – the equity market bubble could be about to pop in a major way. With half the US population already financially marginalized, a major market correction and recession would be devastating.

This scenario has been discussed for some time by numerous guests on Real Vision. “It’s a deeply systemic bubble,” said Doug Noland, Portfolio Manager at McAlvany Wealth Management, who has built his career spotting bubbles. “And the markets believe they’ll do anything to keep it going. And that’s just a very dangerous place to be.”

In his Real Vision interview, Diego Parrilla, of Quadriga Asset Managers, said there are a lot of similarities to what is happening today and what led to the Lehman crisis. “In fact I would call that Lehman 1.0 and what is developing now I would call Lehman Squared.”

Martin Barnes, Chief Economist at BCA Research is an expert of the business cycle and he joined the chorus, commenting: “There is a big risk. The stock market is long overdue a correction. We haven’t had a bear market sized decline in stocks since 2011.”

Mehul Daya, econometrics specialist from Nedbank in South Africa concluded from his experience studying long term liquidity trends that: It’s not a case of whether we will have a financial crisis. “It’s a matter of choosing the name for the next financial crisis.”

The drum beat is getting louder and major investors are starting to take risk off the table, including Warren Buffett, who recently took his cash position to an all time high of above $100 billion. Jeff Gundlach, CEO of Doubleline Capital has also been in the news saying it’s time to pull back from risk assets.

Real Vision has highlighted this issue in the Big Story – The Edge of the Cliff. 

After a decade of weak growth, driven by what appears to be little more than accommodative central bank policies and ultra low interest rates, the economy is weak and worryingly, consumer debt is at an all time high, above $1 trillion.

The rewards of the stock market advance since the last financial crisis have not filtered through to the population and wealth inequality has become more extreme than ever. With consumer debt at high levels, combined with sharp increases in housing and healthcare costs, US households have no cash savings. Indeed analysts warn that 50% of US households could not cope with another market crash or recession. The situation is even more severe for the baby boomers approaching retirement as most of their investments are in the stock market. A major market correction could wipe out these portfolios without enough time to recover.

The bottom line is that we’re at the edge of the cliff for the equity markets.

One of the reasons we started Real Vision was to make sure people had the tools and information to protect their financial future. And in the Big Story – Edge of the Cliff, we show what has brought us to this stage and why a bubble in the post Credit Crisis, Post QE environment is potentially so destructive.