However steady the metaphoric ship holding the stock markets may appear at the moment, many “in the know” are worried about the ultimate, painful demise of the bull market on Wall St.
Signs of Financial Apocalypse?
After seven years of consistent gains that saw U.S. stock indices hit new all-time highs, the bull market is exhausted. This is only natural in the cyclical nature of markets. However, the big concern this time is how the inflation of asset bubbles through (essentially) money-printing was the underlying driver of the gains in the first place. When the party ends, these bubbles inevitably pop. You might think of the Wall St casino as a game of musical chairs, except that when the music stops, there are actually no chairs at all! The collapse of this system has also been likened to “falling off a cliff”—because the drop goes down so far.
For an idea of how far the fall can be, the current size of the derivatives market harks to alarming visions of the financial collapse of 2008. As of last December, the global market value of all financial derivatives (mostly leveraged, collateralized debt made of thin air) totaled $1.2 quadrillion ($1,200,000,000,000,000). These derivatives dwarfs all other forms of wealth in the world. Yet, they are inherently nothing, and are only tied to some other underlying asset or market. What happens when this “house of cards” falls?
As another sign that the financial sector has gotten completely inflated, note that the number of new CFAs (chartered financial analysts) added each year to the Wall St flock has increased tenfold over the last two decades (from about 1,000 per year to 10,000 per year).
After peaking last summer, the factors weighing on profits for the financial engineering industry are coming to a head. On the employment side, not only is the number of analysts becoming bloated, but they may soon be replaced by high-frequency trading (HFT) alogrithms and “fintect” (financial technology) that makes human analysts much more expendable.
Beyond the employment dynamics, even the seemingly “good bets” made by Wall St luminaries are now being nullified by “crowded trades.” There always has to be someone on the losing end of the Wall St casino, so popular plays like Netflix and Amazon have become devoid of value for newcomers. Returns have simply grown harder and harder to come by for investors and shareholders in today’s markets. In short, business is no longer booming.
The Case for Safe Haven
With this writing on the wall, so to speak, precious metals have become an increasingly attractive alternative. At minimum, gold offers diversity and a hedge against such an utter collapse. It is frequently “seen as a barometer for skepticism about the modern financial system,” which was undoubtedly the case following the financial crisis and has again been on display during the sharp rally for precious metals so far in 2016.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.