There always has been a long line of doom-and-gloom prognosticators willing to sell and market Armageddon. More often than not, these are people who have made a career predicting financial, and in some cases social, collapse. Like the proverbial broken clock, they are correct once or maybe even twice over a long career. The constant “crying wolf” has paid off for some of the gloom-and-doom devotees.
The founder and former head of the Prudent Bear Fund, David Tice, who had a very strong showing for investors after the tech and housing collapse between 2000 and 2008, sold his fund at the height of the Great Recession onslaught to Pittsburgh-based Federated Investors in 2008. The purchase price included a reported initial $43 million payment and future contingent payments of up to $99.5 million over the next four years. Doom and gloom pays off.
The pursuit of the “black swan” and systemic “tail risk” is the Wall Street equivalent to playing the no pass line on the craps table in Las Vegas. Eventually you will win, the odds are ultimately in your favor. Hence the slogan, “They don’t build those big casinos in Vegas because the house loses.” The problem with the comparison is that often the doom-and-gloom crowd plays the no pass line tacitly with investors’ money.
Stocks have been in a serious rally, and strategists are raising their price targets for the DJIA and S&P 500 almost daily. Still, many market participants are fearful, and some are worried that the rug could be yanked out from under this bull’s feet very easily. We wanted to give our readers a plausible look at issues or conditions, over a period of time, that possibly could spark a domestic and then worldwide collapse of financial markets. In essence, a snowball-to-avalanche situation. This is strictly an academic look from afar, and absolutely not a prediction.
1. The United States credit rating continues to decline as our deficit eventually climbs to more than $25 trillion and heads higher. A lower credit rating and higher borrowing costs eventually push the government near bankruptcy, as entitlement spending and Washington partisan gridlock inhibits any solution. Nervous Chinese and Japanese investors start selling their Treasury holdings.
2. The 30-year rally in the U.S. Treasury bond market collapses as the conclusion of years of quantitative easing ends. Rates begin to rise, when Federal Reserve President Janet Yellen declares the end of the $85 billion per month purchasing and historical low Fed fund rates. Huge losses are realized by owners of intermediate- and long-dated Treasury debt as their bonds were purchased at historically low yields. The bond market vigilantes have their comeuppance.
3. Money flees the collapsing government debt market and floods the stock market, pushing indices to record highs echoing 1929, 1987 and 1999. The S&P 500 hits 2,500 and moves higher, as an entire new generation of investors and stock traders see the stock market as the true way to instant wealth. Margin restrictions are relaxed to accommodate the flood of investor demand for the ability to own more stock on credit.