The U.S. economy is falling apart all around us. With inflation soaring to the highest level in 40 years, the central bank is trying to stay ahead of a potential hyperinflationary spike by rolling back its Quantitative Easing policies, initiating a taper, and introducing interest rate hikes. All of that indicates that a liquidity crunch is nearby. According to the financial and economic analyst, Charles Hugh Smith, this might be investors’ last chance to get out of the bubble before its inevitable explosion. Investors have missed the timing to get out of the rally several times in the past because the vast majority of them don’t see — or don’t want to see — the rising dangers until after the crash happens and causes very painful losses. But in Smith’s view, “every asset bubble has a last chance to get out before the crash point that becomes obvious in the aftermath”.
Today, this last opportunity to exit before the stock market crashes is exceedingly difficult to identify for a series of reasons. First and foremost is the extreme confidence investors have at the peak of the bubble that more gains are right ahead. Everyone who sold when the bubble started to show signs of bursting is eager to get back in, so every dip in the market is reversed by ‘buy the dip buyers’ who have been collecting huge profits from buying previous dips. In theory, even after conditions start to reverse in the broader market, the bubble can still reach a new peak and even a double peak, head and shoulders if investors keep going all-in in the market. The rally that follows the beginning of a downward trend tends to exceed whatever levels were considered bearish triggers. So bullish investors have the deceiving notion that the market still has enough technical support to provide further gains.
But that’s when they miss the last chance to exit the market. They keep buying shares to fuel a rally that has already begun to falter. The ‘buy-the-dippers’ ignore this decline and buy the second dip. “That too falters and once the third buy-the-dip has failed to rally back to previous highs, many buy-the-dippers have been wiped out and the momentum of buying slackens,” Smith continues. It’s only when investors collectively realize that the ‘buy-the-dip’ strategy has failed and will not work anymore that a major sell-off begins, turns into a self-reinforcing avalanche, and the stock market finally crashes. For those who want to believe that the rally will last forever, none of this is visible until it’s too late to get out of the bubble with some profits in hand.
Right now, bulls are still thinking that fundamentals don’t matter, and the Fed will do everything in its power to prevent a collapse while bears are still mumbling about elevated risk. However, the tech bubble has already popped. We have already witnessed the first dip and soon traders will realize that there’s no way to keep reaching new highs anymore. Everywhere we look, we can find a series of indicators showing that this window is closing fast. But the problem is that most people don’t want to look at the red flags. All of this is scaring some veteran insiders, who worry that the stock market will go from a zero-interest rate to a zero-alternative environment. Amongst them is the chief strategist at RIA Advisors, Lance Roberts, who recently warned his clients that “without exception, rate-hiking campaigns led to a negative outcome”. The last time we’ve seen such exuberant stock prices was during the peak of the dot-com bubble. And at this point, anything could derail the market, but Roberts exposes the top ten threats signaling the arrival of a downturn. Today, the best-case scenario for the market seems to be one in which the number of virus cases significantly drops, inflation fades away by itself, rate hikes and tapering don’t affect the economy or stocks, and consumers continue their strong spending. Needless to say, that’s a lot of boxes that need to be checked. Only a miracle would bring back economic and financial conditions to somewhat normal levels to impede the looming stock market crash. This last chance to protect yourself from the disaster that is fast approaching. It’s your choice to take it or risk losing everything.
Source: Epic Economist