Credit-fuelled US stock market now ripe for a major crash

Posted on 14 June 2015 with no comments from readers


The chart below traces the performance of the S&P 500 over the past couple of decades and compares it to NYSE investor credit. Even the most ardent bull ought to have a sharp intake of breath.

Not since 1929 has this Wall Street roadmap looked anything like so dangerous. It’s credit expansion that turbo charges stock markets to the upside but history suggests that it always runs out in the end.

Bond alert flashing red

The longer the party the bigger the hangover after that happens. Global bond warnings have been flashing red for the past few weeks and the professionals are alarmed although few retail investors really get the message.

Unstable bond markets are the canary in the coal mine singing its warning of poison gas coming the way of the stock market. So too is the smaller and smaller number of shares supporting the S&P 500 index at its current lofty levels.

S&P 500 index is usually maintained by large companies which have heavily priced shares and a change in the value of even a single share leads to a significant change in the index also. When the share values of a company at one of the highest positions go a step down in price, more than one share of a company at the lower positions might be required to gain in rice to off-set the reduction in the total index. In summary, the change in the index may be because of a few shares of the largest companies which are big in terms of their market value.

If shares of Bitcoin Code software alone takes the plunge, the shares of two emerging platforms with half the price, but double the number will off-set the balance. However, if the number of smaller shares if far less and there is no other gain in the market cap, the prospects of a recovery are gloomy. Drawing parallel conclusions to this, the present day index is held by smaller shares, more in number and lesser in price. There may be multiple shares of the same type and value and if there is a downfall in a single type, it is enough to burst the bubble of the index.

One small uptick in Fed rates or a Greek default as soon as tomorrow and this great bubble is over and what has gone up so far will have a long way to fall…

Posted on 14 June 2015Categories: Banking & Finance, Bond Markets, GCC Stock Markets, Global Economics, Hedge Funds, Investment Gurus, Investment Management, Personal Finance, Sovereign Wealth Funds, US Stocks