24/7 Wall St.

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.

4. Seeing the new stock market wealth, and a collapse of social welfare funding due to the austerity imposed by a now imminent government debt default, a generation of lower middle class and lower income workers become increasingly disgruntled. Years of media-encouraged political class warfare mongering has only fanned the anarchy flames.

5. Ultimately the U.S. government is forced to cut Social Security, Medicare and other medical spending as the aging demographics of the nation catch up with the programs’ ability to pay them. Seniors become disenchanted and start to relate to the growing radical movements demanding a “share the wealth” policy be enacted by the government.

6. Hammered by crushing debt, the government is forced to raise income taxes to unheard of levels approaching 75%. The government also is forced finally to concede it cannot pay its bills, and it declares a form of governmental bankruptcy. The long booming stock market faces a withering attack of selling as the new wealthy want to get out now to take their gains. The problem is margin debt has skyrocketed during the boom as Wall Street firms have encouraged income-producing leverage.

7. The stock market collapses, shedding 70% of its value in less than six months as a stampede of selling and margin calls crushes any bid on the street. Half of the major Wall Street firms collapse as the demand for cash and liquidity is unable to be met because corporate capital is tied up in a string of private equity and illiquid investments. The only viable asset becomes gold and precious metals.

8. With the stock market collapsing, the Federal Reserve is powerless to do anything. Years of easing and a balance sheet loaded with almost $4 trillion of its own nation’s debt has left it with no dry powder to help or alter the situation. Citizens stage a run on the banks to withdraw their cash as they see Wall Street firms failing and investors unable to extract their funds. The sacred $1 level for money market funds is shattered as banks and managers have little or no liquidity.

9. The U.S. dollar collapses, driving oil to $175 a barrel. Natural gas spikes to $25 Mcf and rampant inflation rocks the United States. Echoing the Weimar Republic of post World War I, a loaf of bread now costs consumers almost $20. Riots ensue as the years of greed and avarice finally drive the middle and lower class into the streets, with the senior citizen contingent not far behind. Every major U.S. city is faced with massive rioting, looting and destruction. The government is forced to use military force to restore order.

10. With Armageddon both financially and socially at hand, the nation rejects its leaders in Washington and 90% of all incumbent politicians are defeated and replaced. All Americans are finally convinced, with the wolf at the proverbial door, that change must happen and happen immediately. The new president and Congress end all foreign aid, discontinue all earmarks and unnecessary spending, and fire half of all government workers. Amendments are added to the Constitution for a balanced budget and term limits. The nation goes into a prolonged depression. The only thing that changes the economic situation, at least for the time being, is World War III breaks out in the Middle East as Iran launches a nuclear strike against Israel. Israel retaliates and we are forced to enter the conflict.

This is not some exercise in financial Nostradamus whispering. It is just a look at what could happen if everything went wrong. There are numerous arguments to debate each and every point and prove them al l implausible or plain wrong. The bottom line is that almost all of these hypothetical situations, in one way, shape or form, have happened in the past. As we well know, history has a strange way of repeating itself.