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The Next Stock Market Crash Is Coming

Do you truly believe that our nation is in a stronger economic state than what we were in 2009? While is it true that the Dow Jones Industrial Average has battled from about $6,500 to where it is now at $14,500, are we really better off than we were before? I’d say that if you would ignore the title of this post for a moment, most people would say that we’re much better off as a nation than what we were just a few years ago. After all, the unemployment rate is down, the rate of foreclosures has declined, the value of homes is on the rise, and as we already mentioned, the stock market is at an all-time high! Things couldn’t be looking better for the economy, right? Wrong. In fact, I believe that the next stock market crash is coming soon.

I hate to be that “doom and gloom” guy that continually says the sky is falling, but when I dig into the true facts of our economy it’s pretty evident that our nation’s “strength” is built on false hope and rising debt.

But What About the Increase in Jobs?

Yes, there are more jobs available today than there were just a couple of years ago. In fact, the private sector has gained almost 4 million jobs since The Great Recession. But, have you ever thought about how those jobs were produced? Is it because small business is thriving? Or maybe it’s because the large blue chip companies are showing a great improvement and are hiring hand over fist? Nope. This is not the case. In reality, many of these new jobs are coming through government subsidized programs. The big wigs in politics believe that they are helping the jobless situation, but these unnecessary (non-economy driven) jobs are only prolonging and intensifying our sharp economic decline.

The Nation’s Debt

Since the great recession began in 2008, there have been many efforts by the government to dig ourselves out and to once again be a thriving, successful nation. While I commend all the efforts, the simple facts show that while our perceived economic state is on the rise, the actual foundation of our country is crumbling. Over the past 4 years, our national debt has risen from $10 trillion to nearly $17 trillion and is even more rapidly out of control today. The “improved” economy is mainly the result of excessive government spending, which cannot be sustained for much longer.

Increased Retirement, Decreased Investing

The baby boomers aren’t getting any younger these days. In fact, hospitals and retirement homes are filling up like never before because of the increased medical needs of this generation. It seems like the increased cash flow coming into these business segments would boost the economy right? Well, yes and no. While there is more spending in the healthcare sector, think about where the money is coming from. For the most part, these hospital visits and retirement home stays are coming from retirees that no longer earn a paycheck through a conventional job. No, they’re paying their bills by taking money out of the stock market. With a decline in investor demand, companies will soon be devalued, which will then decrease the need for workers, and our “strong” economic state will soon spiral out of control. Robert Kiyosaki predicted this stock market crash many years ago, and he said it’s coming in 2016. I think he’s almost dead on.

Investing on Margin

When I’m out and about, I overhear many people blaming the government for the “mess that we’re in today”. Sure, I don’t often agree with the new bills and policies that are presented in Congress, but I realize that this mess is the result of all of us as well. Did you know that on average, investors are buying stock on 70% margin? This means that to buy $100,000 worth of stock, most people are only putting $30,000 in to make the trades. If the stock goes up, they win big. If it goes down, they might just lose their shirt! It’s basically gambling in the market.

The most interesting part of this is the correlation between the margin debt and the movement of the stock market. When people are buying more quantities of stock on margin (with debt), the market goes up. When they don’t, the market goes down. It makes complete sense, doesn’t it?! When there’s more demand, prices increase. The same thing is happening in the market. When the demand goes up, companies are valued at a higher price, which means that the overall market increases! The only problem is, the increase in the market is inflated because of the “fake” demand (people buying with margin).

Take a look at the graph on the left. You can see that the correlation is uncanny! And, take notice of the peaks toward the right hand side. These are the stock market crashes of the dot com bubble burst in the early 2000′s, and the collapse of the housing market in 2008-2009. Guess what? The next peak is on the way. According to Steven Keen, a highly regarded economist, based on the direction we’re heading, the next stock market crash is coming very soon – either in 2014 or 2015. Personally, I think that he’s 100% right on the money.

What To Do?

With all of this doom and gloom on the way, what are we to do? First of all, it should be fairly obvious that you shouldn’t put all of your faith in the stock market. I’m not saying that you need to pull all of your money out right away. More than likely, the stock market will continue to rise on this bubble for the next year or so. But, if you currently have all of your retirement money in the stock market, you should definitely consider pulling some of it out and investing in foreign currencies, precious metals, real estate – just do your best to diversify. Also, I would strongly encourage everyone to diversify your income as well. If you are surviving on a single income source for your livelihood, explore other options. The more income sources the better.

What do you think about another stock market crash? Do you believe it’s coming?

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49 comments to The Next Stock Market Crash Is Coming

  • I also have a feeling that everything is not magically better. Not that I am panicking at all, but the stock market is way too high for the economic state of our country.
    Amanda L Grossman recently posted..Adjust Your Internal Sensors to Trigger Financial Alerts at Lower Thresholds

  • That’s really interesting to hear that 70% of stocks are bought on margin. I had no idea that the percentage was so high. I’ve thought about opening a margin account myself, but I’m always scared about losing my shirt like you said. Maybe I’ll just stick with tried and true paid for investing.
    Hank recently posted..Easy Ways To Save Money Right Now Without Even Thinking

  • I think the news coming out of Cyprus will be just the thing to knock the wind out of the market’s sails. The gradual sell off may very well have begun.
    JT recently posted..Better to be a Debtor than a Saver in Cyprus

    • I think the market will continue to trend up a bit (maybe even past the 15k mark on the Dow), but it will inevitably tumble in the not-so-distant future. Thanks for the comment JT!

  • While the stock market is currently a little high, it is not the same as when it reached this level just before the Great Recession. Corporate earnings have increased quite a bit the past few years and current stock prices are justified with recent corporate profits.

    However, I agree with you on the national debt and government spending. The amount of debt of this country has to get under control and until that happens it is like a big balloon just waiting to pop and once it does it will bring down all areas of the US economy including the stock market, housing and employment rates.

    But I still advocate investing in the stock market with the right strategy. And diversifying like you stated.
    Dan Mac recently posted..Kings of Dividend Growth

    • I agree that the market is a little more cautious around actual corporate earnings, but I still think the investments need to be backed by more cash, not margin. That’s where our trouble lies. And you’re right, the balloon is getting bigger and bigger, and we all know that at some point, it’s just going to explode.

  • There was an article in our local paper this weekend about a company that does winterizing of homes for low income people. It was started on stimulus money, but now the money has stopped and they laid off half of their staff. I think this is going to happen more and more, and will certainly cause some downward trends in employment. I think there are lots of false positives that may seem like the economy is doing well but they are based on non-permanent measures. I’d like to be hopeful, but I think you’re right that real estate and other investments make more sense than stocks unless it is for your retirement that is many years away.
    Kim@Eyesonthedollar recently posted..The A-Z of Saving Money-Ebook Launch and $250 Giveaway

    • Yep, yep, and yep! The government really is working hard to solve these slowdowns in the economy, but no one can manufacture demand. It has to happen throught the actual need of the market.

  • I’m honestly not sure I agree with you on this. If we look at the PE ratio of the market right now, it’s pretty good still (coming in at 17.96 as of March 18), which is right there in the historical average. The market isn’t undervalued and it isn’t overvalued. Where you probably are right is there should be a reasonable sell off in 2014 or 2015. Not a huge drop but something similar to July and August of 2011, when the market dropped something like 14%. Now, when the PE ratio of the market starts getting in the high 40′s and 50′s, that’s when it’s a bubble and is wayyy inflated. That’s what happened in 99-01 and in 2007.

    Also, you need to remember, the stock market and the economy are not connected in the way people think. Look at it this way, when the sell off occurred in 2007-2009, it made most companies extremely undervalued. They recapitalized, restructured and refocused and become more profitable than ever. Now, they’re at the same value as before except it’s warranted this time.

    What we may see instead is a slowing growth in the market (not a drop) that will match the tepid growth of GDP. I think that’s more likely than an outright contraction of value.

    Hope this wasn’t too long Derek! I do love your posts, thanks for this one! Made me think :)

    • Good points Brian, and thanks for the comments! Based on the information I’ve seen, the market won’t necessarily implode within a few days. Rather, it will be more of a long, slow bleed. Either way though, I see it going down in the next year or two.

  • The market always rises and falls. Another crash will be coming, but when? No one really knows. Your best defensive is to invest in a highly diversified portfolio and ride out the storm. You’re never going to pick the right time to buy or sell. Based on what you posted, I could see a crash coming soon. But at the same time, the average investor is still skittish from when the market dropped in 2008. If they start investing within the next year, they will prop the market up even longer.

    Because of this, I just let my money ride. If the market crashes, I invest more to take advantage of the sale and rebalance my holdings.
    Jon @ MoneySmartGuides recently posted..How to Use Groupon to Save on Your Vacation

    • Thanks for the comment Jon! If you’re young, you probably don’t have much to worry about, which is why you’re just letting your investments ride. I’m the same way. I have a small(ish) retirement and I’m only 27 years old. I won’t be hit as hard as those that have a million bucks sitting in the market. If I had to put a date on this crash, I’d say that the doom and gloom will start in 2015.

  • Great insight and clear writing. Thanks for this, Derek.

  • History would suggest that one is coming sooner or later, so I’ll have to agree with you.

  • Crash? No! Correction? Yes. Is the country in good shape? No, but it is the company profits that are driving the market. I think this country does well despite the craziness in Washington.
    krantcents recently posted..Stop the Budget Insanity!

    • So does that mean you don’t see a crash coming, even with the rising private and public debt? Remember, that’s what’s driving the company profits…. our consumer debt.

  • I always know the next crash is coming, but when it happens is hard to predict. I think there is opportunity for things to go either way right now and don’t have the crystal ball to predict which way.
    Lance@MoneyLife&More recently posted..Debt Pay Off Update – March 2013

    • Thanks for being honest Lance! I think you’re the first to basically say, “who knows”, but you’re absolutely right. It could be tomorrow, or maybe it won’t happen until 2020. There are just too many factors involved.

  • Thanks for the info DErek. It’s always better to diversify your investments, in case one of them goes wrong, you still have the others to fall back on.
    The College Investor recently posted..Better Know a Young Millionaire Investor – Elle Kaplan

    • Well put. Simple and to the point. In other words, don’t put all of your market in the market, just like you wouldn’t invest all of your money in a painting that may or may not go up in value. Our investments are never a guarantee, so it’s best to diversify.

  • I firmly believe that we are NOT better off than we were 4 years ago. This mini-boom in the stock market we are currently experiencing is fake/inflated, mostly by the Fed pumping newly-printed money into the market. This cant last and I KNOW its only a matter of time before inflation catches up with us and everything crashes again, potentially even worse than things did in 2008. My suggestion is to invest very carefully/wisely.

    My 2 Cents. Thanks!
    Joe in Michigan

    • I’m with you Joe! I don’t believe that the economy is “back to it’s old self” just because the DJIA is back up to $14,500. I’m getting ready for a crumble.

  • The last crash wasn’t severe enough in my opinion. I think we need a big one to come and reset the system so to speak!
    Dave@Your Financial Future recently posted..Insurance and why you need it!

    • I think it was severe, but it certainly bounced back way too fast. We didn’t really repair the economy, just bandaided it by utilizing more debt. Thanks for the comment Dave!

  • Totally agree with this. The current economic atmosphere just doesn’t seem to support the rise in the stock market we have seen.

    I am getting ready to invest in real estate and feel much better about this than stocks right now.
    Greg recently posted..What Does Your Beer Say About You?

  • Great Research Derek! Yes, that is good time to shift all hard work towards the land expansion and real estate. I have also invested 32%in foreign currencies and precious metals; I have chose palladium and platinum precious metals for investment, what’s your opinion?
    Shawn James recently posted..Technical Analysis EUR/CHF Feb 2013

    • Hi Shawn. Sounds like you’re ready for the crash! My opinion? I’ve always gone by the rule of thumb that one should spread his/her investments to at least 7 different areas. It may be business, foreign currencies, bonds, CDs, real estate, precious metals, the stock market, art, collectibles, or any number of other investments. Just be sure that your money isn’t invested in just one area. Sounds like you’re doing well!

  • Hi Derek, Thanks for reply. Yes, you are right; definitely, I am going different area not in one particular sector.
    Shawn James recently posted..Technical Analysis EUR/CHF Feb 2013

  • Theresa

    I was catching up on these posts and have a different view on this one. A recession started in 2007 and then homeowners/speculators started having difficulty paying their mortgages. As this continued the 2008 crash happened due to Financial Companies holding securities of mortgages that were beginning to default. There were so many mortgage defaults that these Financial Companies were running out of money and could not get loans to tide them over. Then the gov’t bailout happened since no one could get credit and everything was going to collapse. Large corporations are doing well now…. and are not over-exposed to consumer debt like in 2008. Large companies are hoarding cash but the average worker is still struggling to save money. Wages have been stagnant for awhile and this is truly the reason for slow economic growth. Middle class incomes cannot support economic growth. Even if the stock market crashes it will not drag down all of the economy – - most middle class americans are not invested big time in the stock market due to being scared off by the last crash. Last time it was the housing and credit crash that did the damage and the stock market followed. I think the gov’t needs to keep helping the economy along until we get to a stable growth scenario but in a different way. Push more ‘buy american’ and reward businesses that employ americans instead of offshoring jobs. Penalize companies that outsource american jobs. I have heard that the stock market crash may follow the baby boomer wave and will cause a crash as boomers cashout of stocks lowering the stock prices dramatically but this will be in the 2020′s. We will get a correction from 14500 this decade but not a full blown crash. I think the crash will be in the 2020′s.

  • Theresa

    Yes I feel the national debt is a concern and taxes do need to be raised on everyone to pay for the two wars and bailout as well as entitlements – we can’t cut our way out of debt now. It is time for all of us to pay up. We could get in another war before we pay off the other two.

  • Timothy

    The crash is near and id it like none before. The money will move faster and stronger down than the last one in 2008. I hope they don’t freeze the banks too.

  • Lakshminarayanan

    I also believe there will be a collapse. Do you think the crash will happen later in 2013 (felt it is unlikely since Ben may not allow that on his way out) or do you think it would be in 2014. How low can it go and in what time frame before recovery starts. Also can the Fed stop this crash (I know they could not in 2008 or in 2000)

    • I don’t think it will happen yet this year (2013). Maybe late 2014. Things may just continue to inflate for a couple of years and then the crash will match Robert Kiyosaki’s estimate of 2016. Only time will tell.

  • Arek

    I personally think the whole corrupt monetary system must be destroyed / disassembled. All the monetary system does is cause corruption. The monetary system is the cause of all evil and the sooner it is dissolved the better for all of humanity.

    If you want a reality check to where we are really heading I highly recommend watching Peter Joseph documentaries called the Zeitgeist Trilogy and his second series called Culture In Decline.

    These 2 documentaries are absolutely awesome.

    All current mass protests in Brazil remind me of what I saw in these 2 documentaries.

  • Arek

    I recommend the monetary system to be dissolved and replaced with a Resource Based Economy. To understand what a Resource Based Economy is all about you have to watch the documentaries I stated in my previous post or go to The Venus Project and listen to Jacque Fresco who is pushing for a Resource Based Economy to replace the corrupt Monetary system we have today.

  • joe wade

    history will repeat it self. recessions come every 7 to 8 years

    • Very true Joe. So your advice is just to go along for the ride on this upcoming recession? Or are you trying to play the market with shorts (or by taking your money out)?

  • celeste

    well im 23 years old buying my first home seems impossible to buy something decent at 240k with a mortgage of 1850/m or more depending on taxes apr and mortgage insurance, its been hard since i live in san diego ca . now my question is am i buying on the wrong decade or what ? the reason why im buying is because my rent and mortgage would be the same amount of money but it would suck if instead of building equity i would be losing money :(

    • California is a tough place to find something affordable for sure. By me, $240k could buy a 2,000 square foot house on 5 or 10 acres. Are you really renting the cheapest possible place right now? If your rental is in a development with tennis courts and a pool, then you are probably paying more than you should. If I were you, I would find the cheapest rent possible (renting a room or above someone’s garage perhaps) and save up a hefty downpayment (20%+) on one of those moderate houses. With cheap rent, you could really save up some money fast. Plus, in the next couple of years I expect houses will be more affordable again. Best of luck to you Celeste!

  • […] you ever thought about investing in gold? Many of us realize that if the stock market tanks again (which will most likely happen in 2016) then gold prices will continue to increase in value. So, the question of many is, “Should I […]

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