November 6 Will Make NO Difference: Stock Bubble Crash is Coming

Harry S. Dent | Tuesday, October 30, 2012 >>


One week to go until elections and the big question isn’t who will win but will it affect the stock markets or economy very much?

If I were to give you a knee-jerk answer to that question, it would be “no.” Demographic trends in productivity, incomes, spending and borrowing of new generations has a much greater impact over time than politics. So normally, no matter who gets elected, the economy and markets will continue in the direction they were moving in prior to the elections.

Ah. But I used a crucial word in that previous sentence.

“Normally.”

Normal is not a market so jacked up on crack that we will still suffer from withdrawal a decade from now…

Normal is not an economy where we have a debt and real estate bubble unraveling with more determination than a teenage boy trying to unclip his first bra with one hand…

No, in a world where the largest generation in history peaked in its spending cycle back in 2007 (as we predicted it would roughly two decades ago), politics has become increasingly important.

Why? Because governments around the world are trying desperately to stave off an inevitable crisis… and they’re sparing no expense…

The Fed and central banks around the world have fought this debt bubble and natural demographic slowing with all guns blazing. They’ve done more than any of their predecessors at any time in history.

Sure, governments have fought economic slowdowns before. They’ve lowered short-term interest rates and injected some fiscal stimulus. But never have they injected such massive amounts of artificial money into the system… just to save the banks and keep a massive debt bubble from deleveraging.

Leading the cavalry in the battle against an undefeatable foe, Ben Bernanke and the European Central Bank’s Mario Draghi have persistently unleashed these unprecedented stimulus efforts.

But what are they really doing?

Well, they are stopping the economy’s natural processes of debt deleveraging and consolidation… the same processes that have followed every major debt bubble in history. They are preventing our economy from rebalancing in order to grow again.

That’s like your body doing everything it can to hold ONTO the bad sushi you ate last night instead of flushing it out as quickly as possible.

That doesn’t sound like a good idea to me. In fact, that sounds like suicide.

Japan applied similar quantitative easing policies after its real estate and stock bubble burst in 1990. Twenty-two years later, they’re indisputable proof that such policies don’t work long-term. Sure, they ease the pain and kick the can down the road. But that just delays the inevitable. And it mutates normal into an ugly, dangerous beast.

So back to the question I started with: will the outcome of the elections affect the stock market very much?

In this crack-addicted world, yes… it will have a noticeable effect for perhaps a few months. The question then becomes: is an Obama win or a Romney win better for stocks and the economy?

Does it Matter WHO Wins?

Well if Obama wins, stocks will likely perform better because that’s what they tend to do in an election year, shortly after the incumbent wins. After all, the markets would rather have the devil they know, than the one they don’t know.

And the natural election year cycle is playing out. Stocks took a minor correction into mid-October so I expect them to rally into year-end, especially if Obama wins.

But Wall Street is more republican and free market-oriented by nature. Many investment and economic pundits argue that, if Romney wins, he will be more pro-business… he’ll fight the natural tendencies for taxes to rise in a weak economy that has high deficits. And he and Ryan will work to reduce government spending, entitlements and budget deficits over time. They say that is good for the economy. There will also be less political polarization and that should be better for resolving the fiscal cliff in early 2013.

I agree… when I consider the longer-term picture. But in the shorter term, such austerity measures forced onto an already weak economy only leads to further economic weakening and greater debt deleveraging. We’ve seen it happen in southern Europe. We saw it happen during the Great Depression.

Of course this is better for us in the long-term, as Iceland and Estonia have already proven recently. The economy must get worse before it gets better… no pain, no gain!

So, while I agree with policies that more directly address the growing public and private debt issues that overwhelm and threaten our future growth and expansion, there is just one problem…

How long will it take the markets “on crack” to figure out they won’t get more crack after 2013, once Romney fires “crack daddy Ben” as he’s promised to do? His intentions may be right, but Romney’s plan leads to much-needed pain.

I can assure you, it won’t take the markets long to realize things are going to get excruciating.

Fed stimulus is the only reason the banking system did not collapse after 2008… it is the primary reason that an artificial recovery followed, pushing up earnings and inflating the third major bubble in stocks and commodities.

The commodity bubble has already started to burst with slowing growth in the most overstimulated manufacturing economy, China.

Stocks will be next as the current bubble goes to new highs from Fed stimulus and then crashes from its own extremes. I think stocks are due to peak by the end of this year, or early next year at the latest, despite Ben’s aggressive QE3 policy. I think the economy will slow in the fourth and first quarters ahead despite QE3.

Any natural stock collapse from decelerating earnings and the global slowdown in growth, and less impact from QE3, will only be exaggerated at some point if the stock market sees less QE from a Romney-picked Fed chairman like John Taylor.

After all other factors, in an artificially stimulated economy, “markets on crack want more crack!” A Romney win will end that addiction and likely mean lower stocks and a slower economy between mid-2013 and early 2015.

Regardless, no president will be able to counter the ever-slowing spending from Baby Boomers and the $42 trillion private debt deleveraging, especially as the top 20% of consumers finally peak in their spending cycle about five years after the average household did in 2007, and they are holding up over half of consumer spending.

This third bubble will naturally crash either way, likely between early 2013 and early 2015. Japan has also proven over the last two decades that you can only pump up the economy artificially for three or four years before it falls again and stocks see new lows to follow.

Harry

 

 

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Categories: Economy

About Author

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.