The US Stock market will crash hard again and it will go lower than the March 2009 lows. We feel pretty confident in this prediction; however, there are some important caveats to this prediction. The biggest caveat is that the market could go 20% higher from here before this big crash comes. We’re not predicting this, we just have no idea. (Well, perhaps the biggest caveat is that this is a prediction and thus we could be wrong!)
Let’s explain our thought process so that you know why we believe the market is likely to drop so hard. If you’ve been keeping up with this series, you know that there are gigantic forces swirling that lead themselves to either a deflationary crash/depression on one hand. Or a hyperinflationary melt up on the other. We won’t rehash all the reasons, but there are serious reasons to believe each could happen. Most find themselves in one camp or the other.
Our camp is probably more the “hyperinflationary side will win” camp because we don’t think politicians (and this includes central bankers) will ever let the economy slide too far into deflation without whirling the printing presses.
However, we believe it’s wise to have a portfolio of assets that will do well in either scenario so that you’re not gambling on either of these deadly situations, but are instead protected as much as possible from both.
Let’s look at each scenario and see what is likely to happen to the stock market…
1) Stock Market’s crash in a deflationary depression – You’re not going to find any argument from anyone on this. They can also be volatile, so that’s not to say that markets can’t have strong years in the middle of a depression. There were some strong years in the 1930’s, but overall, the market was horrible because everyone was seeing his profits shrink or turn into the red.
2) What will the stock market do if we have a hyperinflationary melt up? – This can be a much more hotly debated topic. Some people strongly believe the Dollar will fall drastically in value and the best way to prepare for this is to own stocks. The theory is that as the value of the dollar drops, the companies who comprise the stock market would raise their prices in nominal terms and thus have much larger nominal profits and thus much higher stock prices. It’s a good theory and it might end up being correct, but here’s how we see it…
We believe in a case like this where people are becoming much poorer everyday and are panicked and scared, they are likely to sell their stocks. If you’re having trouble paying for food out of your paycheck, then you’re going to sell stocks to pay for that food. If you’re a momentum trader on Wall Street, you’re going to see the panic and the falling market and you’ll sell too. Seems like there would be a whole lot of selling amidst the panic. At some point, stocks would bottom, and at some further point when everyone thinks stocks are the stupidest investment idea ever, stocks will go on an incredible run to catch up with inflation.
We believe there will be an absolutely incredible time to be in the stock market where you’ll be able to make huge gains. But we also think it’s a dangerous place to be today.
Fortunately, for our clients, there are products that allow you to be in the stock market when it’s going up, but not participate in it when it’s going down. That’s a great way to play it because you’re not gambling on when the bottom is. You simply get little to no gain when the market is falling and big gains when the market is rising! Oh, and if we’re wrong and the stock market is up, up, and away from here? Why that’s the best news of all for you with this product!
Let us know if you’d like to hear about this by contacting us at the button to the top right of your page.
This is the 32nd post in a series. You should read the initial thoughts on these forecasts here. and the Overall Prediction Page here. Here are the rest of the posts: 3) Ben Bernanke’s Dollar Devaluation Plan, 4) The Coming US Dollar Devaluation, 5) Stock Market Volatility, & 6) Stocks to Fall in 2012, 7) The European Crises, 
European Options, 9) European Prediction, 10) Recession in Japan, 11) Japanese Yen Crash, 12) War with Iran, 13) Jewish Perspective on Iran, 14) Commodities to End 2012 Lower, 15) Where Will Gold Go Next?, 16) Gold, Should you Wait?, 17) Will Silver Move Higher?, 18) Why Buy Silver Now?, 19) Oil Prices to Explode Higher, 20) Bonds Will Fall, 21) US Dollar, 22) European Recession, 23) Sovereign Default in Europe, 24) China’s Slowing, 25) US Recession., 26) Currency War, 27) Deflationary Crash, 28) Hyperinflation, 29) Increasing Natural Disasters, 30) Fed Announces New Form QE, 31) Derivatives Pt 1, & 32) Derivatives Pt 2.