What will cause the next bear market? Numerous catalysts could pressure such a downturn in the equity markets:
- An exogenous geopolitical event
- A credit-related event (most likely)
- Failure of a major financial institution
- Falling profits and earnings
- An inflationary or deflationary spike
- A loss of confidence by corporations that contracts share buybacks
Whatever the event is, which is currently unexpected and unanticipated, the decline in asset prices will initiate a “chain reaction.”
- Investors will begin to panic as asset prices drop, curtailing economic activity and further pressuring economic growth.
- The pressure on asset prices and weaker economic growth, which impairs corporate earnings, shifts corporate views from “share repurchases” to “liquidity preservation.” Such removes critical support of asset prices.
- As asset prices decline further and economic growth deteriorates, credit defaults begin triggering a near $5 Trillion corporate bond market problem.
- The bond market decline will pressure asset prices lower, which triggers an aging demographic who fears the loss of pension benefits, sparks the $6 trillion pension problem.
- As the market continues to cascade lower at this point, the Fed is monetizing nearly 100% of all debt issuance and has to resort to even more drastic measures to stem selling and defaults.
- Those actions lead to a further loss of confidence and pressure markets further.
The Federal Reserve can not fix this problem, and the next “bear market” will NOT be like that last.
It will be worse.
Albert Edwards: Watch out for a shock economic growth pothole in the second half of ’21
- The Roaring 20s enthusiasm may be obscuring a pitfall in the second half of the year, Societe Generale Global Strategist, and noted bear, Albert Edwards says.
- Extraordinarily strong economic economic data, especially ISM numbers, have the market behaving with “heavy abandon,” Edwards writes in a note today.
- The market “believes we are going to see blockbuster, gangbuster, and perhaps even ghostbuster, GDP data for the next couple of quarters” and that’s baked into expectations, Edwards says.
- But the cyclical wave could be cresting.
- The ISM numbers should be treated with caution because if “after an economy has been shut down every respondent thought things were getting even a little better, then the ISMs would register the 100% maximum,” he writes.
- A better gauge is the Chicago Fed National Activity Index, which collates 85 economic indicators, and shows economic activity in February falling back to trend around 2% (chart below).
- Edwards is also skeptical about how much the recent COVID relief packages will stimulate the economy, saying it’s “not the level of the fiscal deficit that stimulates GDP growth, but the CHANGE in the level of the underlying cyclically adjusted deficit.”
- Despite “the huge Biden stimulus packages a surprising fiscal cliff may yet await in the second half of this year.”
- In Q3, “the expected pop-up in YoY US core inflation will be back in sharp reverse, leaving the inflation breakevens totally detached from the Q3 inflation rate and GDP growth reality,” Alberts adds.
- “And to the extent that the recent slump in US 10y T-Note prices is large but not unusual in recent history, a dramatic reversal of cyclical sentiment may yet await us in the second half of this year.”
- Citi strategists said yesterday they see a 1999 dot-com vibe to the market.