Why a Market Crash is Coming and You should Protect Your Profits Now

While it can be almost impossible to predict the timing of a market crash we can say with 100% certainty that a market crash is coming. We are in, perhaps, the biggest market bubble of all time at the moment with valuations of major corporations having lost all connection to normal fundamentals of valuing a business. Inexperienced investors have been programmed to buy the dip every time it happens. So far it has worked, but that won’t always be the case. Nothing is different this time from past market bubbles. A market crash is coming, most likely within the next 12 months. Here’s why:

Interest Rates are Going to Rise

Interest rates have been at all time lows. It’s almost difficult to imagine interest rates heading back up to their long term average of 5% or more. The fact is they’re likely to overshoot the long term average. The same as they overshot on the downside, they’ll overshoot on the upside. Keep in mind too that this doesn’t have to happen for the market to crash. Investors just have to wake up to the fact that it will happen. It’s absolutely inevitable. Rising interest rates will suck all excess liquidity out of the economy. That in itself will cause the market to crash.

The Market has experienced 30 crashes that wiped more than 30% off stock prices since 1897. That’s roughly one every 4 years. It’s now more than 12 years since we’ve had a significant correction. That number can’t keep going up forever. A market crash is coming in the near future.

Overvaluation of Stocks

The market, especially US market is at an all time high. Currently, the P/E ratio is over 30. That’s stretched by any definition. Other fundamental measures are also crazily over valued, like market cap to book value. The market is overvalued by any metric you look at. In such an environment, a market crash is coming.

Inflation will cause market crash

Inflation and the market are clearly co-related in a negative way. Inflation is rising now. Central banks will have to stop printing money under quantitative easing schemes. When this source of liquidity dries up a market crash is coming. For those that say this won’t happen and that the Federal Reserve has no choice but to continue printing money – why would they choose to give away their power in such a way?

The whole source of the power of a central bank is being able to issue money that people accept and have confidence in. When they lose this confidence, they lose their power and they’re out of business. This may happen eventually but it’s not going to happen yet. The Federal Reserve and other central banks around the world will fight to keep their power. They will reign in the money printing and accept the market crash that’s coming in order to save their own diminishing power.

Share Buy Backs Will Stop

Share buy backs are a major factor that has maintained market valuations. In fact, market cap rose 30% in the last 3 years thanks to share buy backs alone. When they stop – market will crash. The share buy backs have been funded by corporations borrowing money at ultra low interest rates to buy back stock. When interest rates rise this will no longer be possible. In fact when interest rates rise and it’s no longer so easy to borrow money the whole procedure will reverse. The corporations will have to sell stock to raise money to stay in business, causing a glut of new stock to pour onto the market. This will cause the market to crash.

Market Sentiment is at All Time Highs

Market sentiment is at all time highs. Investors are generally positive, bullish and market friendly in that they’ll accept any market news as good so long as it doesn’t have to deal with interest rate rises or the Fed taper off QE. When investors are nearly 100% bullish everybody is already loaded up on stocks. Who is left to buy?

When this happens people will take profits and sell – this will cause market crash. Markets don’t go up forever. Market valuations can only get pushed higher for a finite period of time before they correct back down toward normal valuations – market crash coming!

Market Cap to GDP is at an All Time High

market crash is coming
Photo credit: AdvisorPerspectives (advisorperspectives.com)

Total market capitalization is near record levels. However, the market cap to GDP ratio is over 200%. In fact it’s at an all time high. This is legendary investor Warren Buffet’s favourite measure of market valuation. At previous market crashes this level has been below 100%.

Human Behaviour

How else can we explain these past few years of irrational human behaviour with respect to the stock market? It makes no sense for investors to keep buying stocks when prices are so high and there has been no sign of letting up. The market has been in a market bubble for years now and market corrections will happen at some point in time. Human behaviour is such that investors become irrational about the market just like they do with everything else in life which leads to having no fear when buying stocks as their prices go up.

Unfortunately, there comes a time when human behaviour begins to correct itself, including the stock market and this current market bubble. The stock market has become little more than a casino where inexperienced investors are continually gambling on the same outcome.

Leverage and margin loans are at an all time high

This market crash is also predicted to happen due to the fact that market investors are using excessive amounts of leverage and margin loans. Each market increase ends up being magnified 10 times over by market investors who use leverage in their trading activities (i.e., put more on the line than they are actually investing).

While there may have been market corrections in the past, what we are seeing now is unprecedented as far as market peaks go. The Dow Jones Industrial average has is at an all time high and valuations are more stretched than ever no matter how you look at it. 

Technology stock market bubble is still going on

market crash is coming
9 powerful Reasons a market crash is coming 3

This market crash is going to be the result of market overvaluation overall, not a specific sector. While market prices have been increasing for years with no sign of letting up, market participants have ignored market fundamentals in favour of skyrocketing prices. This too has never happened before in market history (at least on this scale). Technology stocks have continued to increase in value, barely pausing for breath. It’s difficult to see how economic fundamentals can catch up with the current bloated valuations.

It’s always possible for markets to head higher before the coming market crash. Think of the market like an elastic band that is getting more and more stretched. Eventually it’ll be stretched too far and it will break. When the band breaks that’s when the market crash is coming.. In this regard, we can see how market corrections work themselves out over time although these past few years seem to be all-time highs are in fact not too different from previous market boom periods with respect to their effect on market prices.

The good news is that market crashes are a market correction and necessary part of market functioning. Markets crash and the weak players are weeded out. The weak holders are forced to sell and the strongest hands who are interested in the company fundamentals remain for the long haul. Now is the time to protect ourselves from the market crash coming that’s likely to be bigger and longer lasting than anything we’ve seen in the last 100 years.

It’s likely to lead to an economic depression greater in scale than the Great Depression of the 1930s. But this is part of capitalism. The government has stopped this from happening with endless money printing since the 2008 recession. That has just made the problem worse and more difficult to solve. Central banks and more money printing are not the answer to the market crash that is coming. Capitalism is the answer and letting market forces build back a stronger economy and more efficient markets that are not addicted to the artificial stimulants of quantitative easing and share buy backs.

We know the market crash is coming but we don’t know exactly when. That’s why it’s essential to have a plan B in place to protect your assets and your family from what could be one of the biggest market crashes in history.

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