Stock markets have of late
dropped about 10 per cent from the peak. If you think that’s bad, you ain’t seen nothing yet. What happened is small beer. A real collapse is much worse. In 1997/98, the Hang Seng Index fell by over 70 per cent in a year. The S&P 500 did something similar in 2000 and 2007. The current stock market bubble is much greater than on those three occasions. When the real crash comes, it will be worse.
We live amid the greatest bubble in human history. This is the culmination of a series of successive bubbles over the past four decades, based on US dollar printing. People clearly never learn. After one bubble based on a wacky idea pops and wipes out a generation, another generation is sure to come along and embrace another bubble with a new wacky idea. Homo sapiens must be hard-wired to love bubbles.
Dow suffers biggest point loss in history
Every bubble is based on monetary excess. This one is no different. US Federal Reserve chair
Janet Yellen refused to
raise interest rates from zero despite the country having a normal economy for years, hoping to heat up the
US labour market.
Because labour is globalised, the
Fed has essentially been heating up the whole world. Hence, the monetary excess had to be incredibly large for the US labour market in particular to warm up. This is the source of the fuel for the biggest stock market bubble in history.
When the market falls, people ask why. “What goes up must come down” isn’t good enough. “What was the last straw?” curious people ask. The rising
US bond yield was the trigger this time. Then some crazy
leveraged Exchange Traded Fund (ETF) that bet on calm markets forever went belly up, amplifying panic. But none of this would have happened if the market was at normal valuation. When the market is the most expensive in history, it doesn’t take much to cause a rumble.
When a bubble peaks, it usually pops. But, sometimes, it fades away gradually. It took Japan’s Nikkei nine years to bottom out. The Japanese property market is still deflating 25 years after its peak.
A quick burst usually follows a banking crisis. This happened in 1997 in Asia and
2008 in the US. When the government keeps the banking system liquid no matter what, as was the case in Japan, a bubble could deflate gradually. Considering how central banks have been nursing and protecting bubbles, there could be enough liquidity and confidence for this one to fade away rather than pop.
