Stockmarkets: when will the third shoe drop?

The stockmarket (Dow, FTSE) has halved twice since the beginning of 2000, bottoming in 2003 and 2009. Earlier this year I wondered when the next drop would come (“Killing the Small Investor”,  28 June).

Since then I have read that banks are being asked to consider the effects on them of a 50% drop in equities; and now John Hussman (htp: Zero Hedge) is saying the same thing:

“I continue to believe that it is plausible to expect the S&P 500 to lose 40-55% of its value over the completion of the present cycle, and suspect that whatever further gains the market enjoys from this point will be surrendered in the first few complacent weeks following the market’s peak.”

I have long been of that view, and in fact having worked for 20 years in the financial services industry my mindset now is that I don’t trust it as far as I can throw it. The politicians have allowed – encouraged – the banks to pillage the economy with debt bubbles that give the temporary impression of prosperity, and now we’re maxed-out, so after fraud will comes outright robbery by inflation, confiscation or whatever.

Which is why the Chinese are piling up gold and Chinese rich are diverting their wealth into portable assets like fine art. In the short term – when the panic is on – these assets, too, may decline in value, but sooner or later the wretched, crooked game of pneumatic prices will resume.

Smart, daring, quick-handed investors may make a killing in the disruption – just selling at peak and buying at trough would have quadrupled the value of your equity holding since 2000 – but when the game is on some of the players may find they’re not so fast and smart after all. Remember Jesse Livermore.

This is why I continue to campaign for a safe, government-guaranteed store of value, such as National Savings Index-Linked Certificates. There should – must, if government is to have any moral authority – be an option for those who don’t wish to gamble and so cannot fairly be expected to suffer loss. US investors still have TIPS available. Even then, we shall have to watch out for attempts by the thieving swine to misrepresent price inflation.

They say you shouldn’t give a price forecast and a time frame at the same time, but I’m getting the feeling from what I’m reading that the third shoe will drop to the bedroom floor within the next year.

Maybe that’s why the intelligence services are spying on us all so assiduously. If you can’t control the problem, control the customer.

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