Is the Market Topping?
This is a continuing dialogue about why I believe the markets are in the ‘process’ of forming a major top.(This is an early warning. It could happen now, or take a year or less.) In the last two current market updates, I have indicated three reasons for my concern. The theme of today’s blog centers around the concerns of two recent best-selling books; This Time Its Different and House of Cards. History has shown us that booms and busts a can occur for a variety of reasons and are somewhat unpredictable across time. However, the one thing that doesn’t change is human nature. In Plato’s Republic in the Allegory of the Cave he describes prisoners that are chained in a cave in such a way that they can only view their shadows on the wall in front of them. In the allegory, Plato has Socrates suggest that the prisoners would believe that their shadows represent reality, not knowing what caused shadows. Socrates further suggests, that if the prisoners are freed and dragged into the sunlight, they would be unable to relate to the new reality and would continue to see things as they thought them to be. We are the prisoners in the cave and we are trapped in the chains of our beliefs.
The recent economic growth has been fueled by government debt, artificially low interest rates and federal reserve buying of bonds. Presently, corporate earnings are high, inflation low, and housing prices are returning to formal levels and the world is in a ‘relatively stable’ period. However, this could change quickly.Housing prices in places like Seattle and New York City are going through the roof. How can a young couple afford an average priced $800,000 house or condo. Because of lower energy prices, inflation appears to be flat. However, four tickets for a basketball game now cost a thousand dollars, college prices are beyond the means of the average person and healthcare costs and basic living expenses are skyrocketing. The average US worker is not making enough money for a decent living and should be classified as ‘the working poor’.
The last banking crisis occurred because banks were too big to fail and were caught with derivatives that wound up to be close to worthless. Then, the 10 largest banks had approximately 30% of all US deposits, now they have above 55% of all deposits and 75% of total assets and they own more derivatives than there were in 2008. The most dangerous derivatives are in Europe (Greece and Spain for instance) and emerging nations. Also banks are holding bonds at prevailing lower interest rates, which was caused by the Fed’s stimulus buying. The Fed is no longer buying. Interest rates could easily double and once again crippled bank balance sheets. What will happen the next time banks need a federal bailout with a Conservative Republican dominated Congress? I don’t think they would approve a trillion dollar stimulus (like the democratic congress approved in last crisis), that would increase the deficit. Then what?
Carl M. Birkelbach