Consensus Building for 2016 Stock Market Bubble, Crash

Thu, Jul 24, 2014 - 3:56pm

The year 2016 will see a number of important events: the US presidential election, the Summer Olympics, and, according to a growing number of market analysts, another financial crisis.

Why? What’s so special about 2016? That’s the interesting thing—they all have different reasons.

First, I have to admit, I didn’t realize this pattern until it reached a certain level of blatant obviousness when the always chipper Paul Farrell of MarketWatch recently wrote a piece titled, “Great Crash of 2016, third $10 trillion loss this century.”

Paul isn’t an analyst…or, at least, from his MarketWatch columns, he certainly doesn’t seem as one. So why does he target this date then? Answer: Jeremy Grantham. If you trace back through his archive you’ll find another amusing piece titled, “The Great Obama Bull Market will roar till 2016,” where he quotes Grantham, “one of America’s more accurate forecasters,” as saying that the stock market “is likely to be strong…in the following 18 months up to the next election…then around the election or soon after, the market bubble will burst, as bubbles always do, and will revert to its trend value, around half of its peak or worse, depending on what new ammunition the Fed can dig up.”

After Grantham there’s Lance Roberts, who writes in “The Coming Market Meltup and 2016 Recession” that projections of the Fed’s balance sheet (see chart below) along with a ten-year cycle support the idea “of a market ‘meltup’ before the next big correction in 2016.”

Then, we have global investment strategist James Kostohryz who also sees a bubble developing over the next 1-2 years…and then a likely crash. In a recent Financial Sense Newshour interview (click here for audio) he explains that all the money the Fed has injected will remain in the financial system long after their most recent program of QE3 ends, which, in addition to the economy finally starting to recover, still record low interest rates, and less risk-aversion by investors, will lead to another bubble in stocks that, given the 1-2 year time frame, lands us again right around 2016.

What about money managers and strategists outside the US—what are they predicting? One very well-known guest to Financial Sense, CNBC, Bloomberg and elsewhere is Puru Saxena, publisher of Money Matters, who is based out of Hong Kong. In his March issue titled, “The Trend Is Your Friend,” Puru writes:

“Going forward, we suspect that as long as monetary policy remains accommodative, housing markets will continue to heal and this will be good for the developed world. At some point in the future, credit growth will accelerate, prices will rise sharply and central banks will start tightening monetary policy. When that happens, credit creation will diminish, business activity will slow down and we will get the next recession… Although we do not possess a crystal ball and cannot guarantee when central banks will start raising interest rates; we suspect that the yield curve will not invert for at least another 2-3 years; thus the ongoing uptrend in stocks may continue until 2016-2017.”

Then, there’s our recent interview with the widely followed metals and market analyst Avi Gilburt. Here’s the relevant portion of our exchange:

Financial Sense: Avi, with regard to stocks, do you think we'll see a final euphoric phase of this bull market as we've seen in the past?

Avi: That's my expectation I believe for 2016. Somewhere around the 2016 period of time I believe that is what we could be seeing. Until then, while I do see a very strong potential decline over the next six months, once we break that 1900 region [on the S&P 500]—I do see that big decline taking place—I still do not believe yet that this market is done with these all-time highs. Initially, years ago I didn't think we could get up to the 2000 region, but as we were developing this move higher I now see the possibility of getting up even as high as 2500 to 3000 on the S&P, but not yet—not just yet. That's going to take some time. That's the 2016 region...[but] my expectation is that, once we get that big decline, then you're going to start seeing mom and pop pouring into this market, which is what's going to be driving our last move higher.

Last, but not least, is someone that is so convinced the market and economy will crash in 2016 that he’s staked his reputation on it and written a book. I give you New York Times bestselling author Thom Hartmann and his book, “The Crash of 2016: The Plot to Destroy America—and What We Can Do to Stop It,” which I have not read. From skimming the pages available on Amazon it appears his choice of the year 2016 is based roughly on an 80-year cycle. He writes: “It was roughly eighty years from the Revolutionary War to the Civil War, and eighty years from the Civil War to the Great Depression and World War II. And here we are, eighty years later after that great disaster.” Hopefully, there's more to his analysis than just that.

What do I think about all of this? For that I point to a different book, “Prediction or Prophecy? The Boundaries of Economic Foreknowledge and Their Socio-Political Consequences,” where Gregor Betz shows empirical evidence that “macroeconomic forecasts cannot reasonably be derived for horizons larger than two years.” Certainly, 2016 falls within that window. Beyond that, however, it’s anyone's guess.

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cris [at] financialsense [dot] com ()