Market Crash - Imaginary or Inevitable

by David EngstromOctober 01, 2015

There may be no better way to escape reality than to lay on the beach under a partly cloudy sky.  As the waves roll in, their rhythmic crash seems to pull you into a different state of mind, one far away from the rigors of work and your daily routine.  Soon reality fades, your dream world kicks in and your imagination begins to take over.

In the clouds you begin to see things.  The face of George Washington may float by, then a ship on a cloud.  It’s easy to see a sheep, but if you are deep into your imaginary world you may even grab a glimpse of the elusive unicorn.  At that moment you are living in a dream.

Such is the world in which many self-proclaimed market experts live as they try to predict what is next.  They see images in charts like tea cups, the head and shoulders of one signaling a trend or a candlestick that has finally shown them the light.  Others look to the stars and the moon for guidance.  Which world do you live in?

Invariably, half the experts see the market going up and half see it going down.  All however, are able to make a compelling case for their own claims and capture the imaginations of varied groups of investors. . . And the market bubbles on. 

The reality, however, is this.  The times we live in are unprecedented.  Why should all of the once reliable indicators continue to be relied upon when they have already been proven useless in predicting the crash of 2001/2002 or the crash of 2008/2009. 

In both instances we were blindsided.  Debt was the culprit.

Expert predictions have always been based on highly subjective, sometimes imaginary, interpretations of what they see or want to see.  In most cases, debt levels rarely figure into predictions and remain largely ignored.  At least until it’s too late. 

Once a crisis strikes, then it becomes obvious too much money had been borrowed.  Whether it was borrowed to buy more Dot-Com stock or borrowed to buy inflated real estate or its proxy of Mortgage Backed Securities, it was debt that wiped out trillions of dollars in wealth in the two crises past. 

It is debt that allows Wall Street and Main Street to keep living the dream.  Whether it be the National Debt or personal debt, as long as you don’t borrow past your limit you can keep borrowing to maintain the standard of living to which you have become accustomed. 

But one day, this unchecked borrowing comes to an end and the harsh reality that nightmares are dreams too, hits you like a Tyson shot.  You’re broke!  The kind of broke that makes you so hungry you try to eat banana peels to satisfy your hunger.    

Once again, this is where both Wall Street and Main Street are headed.  It’s inevitable not imaginary.  Numbers don’t lie.  They do not lend themselves to emotional interpretations of cosmic signs or cryptic messages in charts. 

Once we all – government included - hit our credit limit, it’s over.

That limit is hit when all the money you earn equals the interest owed on your debt – if not sooner.  So, what are the numbers that will soon turn the American Dream into the American Nightmare? 

  • $65.2 trillion – Total U.S. Debt to include Household, Business, State and Local Governments, Financial Institutions and the Federal Government.
  • 360% - Total U.S Debt/GDP.
  • $162.9 trillion – Total U.S. Debt to include Unfunded Liabilities.
  • 910% - Total U.S. Debt/GDP including Unfunded Liabilities.
  • 75% - The total of Federal Tax Revenues paid out as interest.
  • 84% - The total of Federal Tax Revenues paid out as interest or entitlements.

Based on September 30, 2015 data provided by

These numbers tell the whole story.  Our markets and our economy are going to crash.  The situation is so critical now that if interest on our debt were just a quarter point higher, that could push us to our credit limit.  All that comes in as revenue would be paid out as interest and entitlements.  Who in their right mind would lend money to someone, who on paper, can never pay back it back?

Carl Icahn, in his recent video release “Danger Ahead” says it’s not a question of “will it happen but when it will happen.”  Icahn is just one of many noted insiders who are warning of an impending crisis.  Jamie Dimon, CEO of JP Morgan, said in his 2014 letter to shareholders, “There will be another crisis.”   Alan Greenspan, David Stockman, Larry Summers, Lawrence Kotlikoff, Ron Paul, Richard Fisher, Chris Martenson, Eric Sprott are all sounding the alarm. 

Even Warren Buffett is speaking in warning tones while 54 Congressmen are reportedly pulling money from U.S. banks.

So, when?  It’s the question everyone wants answered.  When will the markets crash?  One could argue the trend in stocks has already made a bearish turn.  In less than 3 months the Dow has lost more than 2000 points.  Perhaps the answer to “when” becomes more clear when we attempt to answer the question, “what could happen to drive stocks back toward record highs?” 

We have already had years and trillions of dollars worth of stimulus; we have seen hundreds of billions in corporate buybacks; corporate America has cut millions of jobs in order to boost margins; interest rates will not go any lower; energy costs cannot drop much further, if at all.  So where can the markets and the economy get a boost back to record levels? 

Unfortunately, the question, “What could crash the markets?” is a much easier question to answer.  Where do I begin?  Greece, China, Japan, Europe, Russia, North Korea, Iran, rising rates, the bond bubble, the dollar bubble, weakening real estate --- DEBT! 

The markets and the economy are now trying to climb a mudslide.

Is there any hope?  Is there an alternative outcome to a crash?  Hope – Yes!  Alternative outcome – No!  The talk of more stimulus is now entering the fray.  Whether it simply be more money printing or some other plan to monetize the Fed’s balance sheet, another imaginative plan to kick the can further down the road could emerge.

This, however, does not change the outcome.  To make the decision to kick the can further down the road is to decide a slow death is better than a quick crash.  Alan Greenspan warns of coming inflation so great it could quadruple the cost of living for the average family.  Inflation is the alternative outcome.  Either way, your savings and retirement lose purchasing power.

As to “Hope!”  For every action there is an equal but opposite reaction.  So it is when it comes to protecting wealth.  If you see trouble ahead in the markets, move some money into tangible assets that hedge against market and economic weakness.  It is no more complicated than that.    

I don’t give dates as to exactly when things will happen but I will give you a hint.  I am more inclined to align myself with those who rely on cosmic indicators to predict chaos than I am with the typical Wall Streeter who has failed to see any signs, acknowledge them and warn accordingly.

As for my imagination?  I leave it at the beach.  A market crash is not a figment thereof.  It’s all about the numbers.  It’s inevitable.


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