Why Another 50% Correction Is Possible

I recently sat down with Peak Prosperity’s Chris Martenson to discuss an article I wrote last year on why another 50% correction is possible.

I have attached a link to the original article below the interview along with a the chart and explanation of the RIA Economic Composite Indicator I discuss with Chris.

(Video length 00:53:20)

 

Notes To Interview:

“During a bull market, prices trade above the long-term moving average. However, when the trend changes to a bear market prices trade below that moving average. This is shown in the chart below which compares the market to the 75-week moving average. During ‘bullish trends’ the market tends to trade above the long-term moving average and below it during ‘bearish trends.’”

In other words, at least for me, it is the overall TREND of the market which determines a bull or bear market. Currently, that trend is still rising. But such will not always be the case, and we may be in the process of the “trend change” now.

Fed:

In 2008, when the Fed launched into their “accommodative policy” emergency strategy to bail out the financial markets, the Fed’s balance sheet was only about $915 Billion. The Fed Funds rate was at 4.2%.

If the market fell into a recession tomorrow, the Fed would be starting with roughly a $4 Trillion dollar balance sheet with interest rates 2% lower than they were in 2009. In other words, the ability of the Fed to “bail out” the markets today, is much more limited than it was in 2008.

Valuations

One of the most important issues overhanging the market is simply that of valuations. As Goldman Sachs pointed out recently, the market is pushing the 89% percentile or higher in 6 out of 7 valuation metrics.

So, just how big of a correction would be required to revert valuations back to long-term means? Michael Lebowitz recently did some analysis for RIA PRO:

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Disclosure: The information contained in this article should not be construed as financial or investment advice on any subject matter. Real Investment Advice is expressly disclaims all liability ...

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Gary Anderson 7 months ago Contributor's comment

Sobering possibility. Investors should pay attention.