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5 Divident Stocks T0 Own Forever
The Stock Market Bubble Could Burst as Investors Ignore Major Risks Lombardi Letter 2017-09-06 08:16:39 bubble stock market bubble European central bank federal reserve stock market crash financial crisis 2008 financial crisis Donald trump stock market rally market correction chart The Dow Jones has come just a few points shy of reaching another milestone, coming just a few points shy of 22,000. Is it a stock market bubble? 2017,News,Stock Market Crash https://www.lombardiletter.com/wp-content/uploads/2017/08/iStock-627746730-150x150.jpg

The Stock Market Bubble Could Burst as Investors Ignore Major Risks

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Stock market bubble

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Are There Any Doubts the Stock Market Bubble Could Burst?

Is it a stock market bubble?  This question is affecting everyone. At just under 22,000, the Dow Jones has come a few points shy of reaching another milestone. Yet, gold prices are also soaring. At over $1,320 per ounce, gold is at the same price it was about a year ago.

Uncertainty rules and it affects everyone. 10 years after the last major financial crisis, the causes and problems that fueled it were never really resolved. Low interest rates have masked it. If the real estate and related market bubbles were fueled by sneaky banking tricks, the risks are explosive today. The excess liquidity that caused the crisis 10 years ago has grown exponentially. It might be that finance itself is experiencing a mutation. It’s becoming Godzilla—or Bankzilla, if you prefer.

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5 Divident Stocks T0 Own Forever

In the years preceding the outbreak of the 2008 financial crisis, it was difficult to predict when and where the markets would explode. But the sensation that something was not right was palpable. Then, everything came to a grinding halt in September.

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Where Is This Market Rally Going?

I am writing this on the last day of August, so you might forgive me for feeling anxious about where this strange stock market rally is heading. As an added element, worthy of the finest horror movies, investors are buying up stocks with reckless abandon. They act as if the markets are operating in a sea of tranquility, oblivious to all the sharks showing off their fins. Investors may simply have chosen not to see.

Gold prices moving up suggests that many investors are seeking traditional ways to invest. It’s a back-to-basics approach that would normally be accompanied by a market crash. If gold is moving higher, after all, it shows that many traditional investors are afraid of stocks. In turn, many are sitting on the fence, wondering which instrument is safer and more profitable in the long run. Is it better to get to know technology better, fueling the stock market bubble? It’s like a rope-pulling contest. But ultimately, there can be only one winner, and the tech bubble will burst, taking out much of the market with it.

Too many risk factors are orbiting around too many uncertainties. There are uncertain stocks, uncertain economies, and uncertain central banks. And all these are operating within the biggest risk-producing machine: geopolitical uncertainty. It’s coming to a close, but it has been a strange summer. Nobody knows where the world is heading as the conditions for major conflicts have worsened and volatility is rising.

Even as Syria and Iraq appear to be winning the wars against ISIS, both will face enormous reconstruction challenges. Meanwhile, like the Taliban in Afghanistan have shown, ISIS might lose battles and even the military war. But they can come back anytime because the deadly ideology that inspires them resists.

But, the same areas that have been confronting ISIS will soon face other problems. Turkey will challenge the Kurds, who will doubtless expect a territorial reward for their anti-ISIS efforts. Then there’s the question of Iran. It has emerged stronger from the struggle against ISIS, and the United States and Israel will probably choose to contain it. If not a war against Iran, Israel could end up fighting one against Hezbollah in Lebanon.

Conflict and Risks Are Everywhere

The Mediterranean is full of potential outbreaks of conflict. Apart from Syria, there is still Libya that needs fixing and that remains at the epicenter of the migration crisis. Africa seems no longer willing to be patient. Economic development has struggled to arrive in many areas, thus many are abandoning their lands, even at the risk of losing their lives.

Then, the Arab world is even more divided. It’s not only between Shiites and Sunnis, but within Sunnis themselves. Two camps are emerging; those who have chosen to gravitate toward Egypt and Saudi Arabia on one side, and those choosing Qatar (and Turkey) on the other.

Oh, and then there’s Afghanistan, where Trump has just committed the U.S. to an extended stay in a land that has a reputation for destroying empires, from Alexander the Great to the British and the Soviets.

Those are just some of the risks emanating from the Middle East. It’s just a taste, because we’re heading toward another Cuban Missile Crisis situation. Except, the two chief players in this latest iteration of one of the biggest standoffs in history seem somewhat less trustworthy than JFK and Nikita Khrushchev. North Korea continues to provoke Japan and America with the launch of missiles. As if that were not enough, in Barcelona another massacre that has the matrix of Islamic extremism reminds us of another face, still open.

We are faced with radical uncertainty: none of the processes we believe consolidated, in terms of geopolitical, economic, and financial progress, is linear. There are fractures everywhere.

So, as everyone wonders where the world is going, and the roots of more conflicts gain ground, stocks are reaching precarious heights. At times, it seems as if investors remember to employ some common sense. But the bullish momentum they have found after the U.S. presidential elections doesn’t want to stop.

It should.

Donald Trump no longer looks capable of galvanizing the real economy. “Make America Great Again” has become as banal as Obama’s “Yes We Can.” Try telling “yes we can” to the folks—on both sides of the spectrum—in Charlottesville to find out where feel-good slogans end up. Then, there are still such lingering problems including Russiagate, frequent staff—or cast—changes in the Oval Office, and an overall climate of tension poisoning America.

Uncertain politics in the U.S. add to enormous geopolitical complexities. Europe is dividing in at its heart, facing an unprecedented wave of illegal migration that is testing the limits of social cohesion. The Italian minister of the interior said he fears for the tenure of democracy itself. (Source: “Migrant crisis: Italy’s democracy at risk, warns minister,” The Times, August 23, 2017.)

And then there are the questions about the U.K. abandoning the European Union, Germany’s role in driving the economic divide, and many other sources of fracture.

Also ReadWarren Buffett Indicator Predicts Stock Market Crash in 2017

Governments and Central Banks Seem Helpless

Nobody seems to have the lead in the processes in hand. The same World Summits, from G7 to G20, seem to be designed to enhance contradictions and different visions. More and more often, they are asked who the allies are and who the enemies are: the first are less and less reliable, while the second ones multiply.

On the more economic side of politics, we have the central banks in a state of confusion. They’re getting mixed messages, particularly as far as the Federal Reserve is concerned. The European Central Bank (ECB) has hinted that it will stop buying up bonds to start pushing interest rates higher in 2018, given favorable indicators from the real economy.

ECB governor Mario Draghi seems confident he can shift to a tighter monetary policy also because the European stock markets have not performed as exuberantly as their American counterparts. On the contrary, Janet Yellen and the Fed must use more caution. Lifting rates now could easily trigger a massive stock market crash, a financial crisis, and a recession in short order. Cheaper credit has fueled Wall Street speculation since 2009, lubricating the entire post subprime crash recovery. There have been some market corrections, but with every new record high, the risk increases for a collapse.

Stock market correction chart

The lowest interest rates in history for almost a decade have been the engine of growth. Like an Energizer Bunny struggling to move when its batteries die, so will the markets struggle to continue their bullish course after the next interest rate hike. However, given that the U.S. has the world’s biggest economy—but not for much longer now—all central banks are on edge.

The ECB, the Bank of Japan, and the Bank of England, to mention a few, all seem uncertain about what to do. The U.S. economy appears to be moving, but record high Dow numbers have masked the realities. As the Fed keeps postponing the next interest hike, the other banks have no clue what indicators to target.

Wall Street, meanwhile, moves higher after every plateau, taking on more risk. The higher it goes, the deeper the potential fall after the next interest rate hike. In short, to justify current valuations, the U.S. economy should be performing much better. Otherwise, it’s all just speculation.

Indeed, the markets are ignoring that fundamental principle known as reason. I am worried about the excess of uncritical optimism. Just remember, when the people stormed the Bastille in 1789, King Louis XVI was convinced he was witnessing a common revolt. His advisors warned him it was a revolution, but he continued to think of it as a riot. By the time he had his head under the guillotine, it was too late. Czar Nicholas of Russia probably regretted sending his unprepared troops to war in 1914, thinking he could gain from the war. No doubt, he thought of this as he faced the Bolshevik firing squad near Ekaterinburg in July 1918. A minimum of reflection on the current situation should be made.

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