Are Stocks Going To Crash?

Includes: DIA, QQQ, SPY
by: Moses Kim

Markets need to be viewed without preconceived notions. So many people are turning bearish on stocks on a 5-10 year horizon, and I’m not sure this is the correct perspective. Let’s think this through for a second.

From 2000-2003 stocks dropped 37%, and from 2007-2009 stocks dropped 54%. I don’t think people realize this, but the stock market collapse from 2007 to 2009 was not that big of a deal. It is not because of the correction in stocks that we are in so much trouble, it’s because of the debt.

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People get all bent out of shape because they remember the crash of 1929, the Depression and bigger stock market crash that followed. They forget the crash of 1987, the boom in stocks and the economy that followed. Why the selective memory?

Our situation today more closely resembles the 1929 experience due to the sovereign debt crisis. But it will most likely be resolved differently, since we are not on a gold standard. This means inflation is on the horizon, not deflation.

The gold standard created a link to the dollar, which meant safe haven moves into gold were the equivalent of safe haven moves to the dollar. As the dollar rose in value due to this demand, it created deflation. Because the link to gold is severed today, demand for gold is not the equivalent to demand for the dollars. The dollar will be sold, which is inherently inflationary.

This is the key point most deflationists miss.

As for stocks, we have essentially completed a cyclical bull market, which means it is entirely reasonable for another drop to 900 or so. But take a step back and see the bigger picture, because the bigger picture dictates the monster trends. We have consolidated for over a decade now, and these type of consolidations have always led to huge rallies. If and when the market does correct, it may very well lead to a huge rally that catches everyone by surprise, especially the deflationists.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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