Ten warning signs of a market crash in 2015

Vix fear gauge

For five years, investor fear of risk has been drugged into somnolence by repeated injections of quantitative easing. The lack of fear has led to a world where price and risk have become estranged. As credit conditions are tightened in the US and China, the law of unintended consequences will hold sway in 2015 as investors wake up. The Vix, the so-called “fear index” that measures volatility, spiked to 18.4 on Friday, above the average of 14.5 recorded last year.

Rising US Treasury yields

With the Federal Reserve poised to raise interest rates for the first time in almost a decade, and the latest QE3 bond-buying programme ending in October last year, credit markets are expecting a poor year for US Treasuries. The yield on two-year US Treasuries has more than doubled from 0.31pc to 0.74pc since October.

Credit insurance

Along with the increased US Treasury yields, the cost of insuring against corporate credits going bad is also going up. The cost of insuring investment grade US corporate credit against default has become 20pc more expensive, rising from lows of 55 to 66 since July, according to Markit.

Rising US credit risk

The wider credit market is also flashing warning signs. The TED spread, as reported by Bloomberg, is the difference between the rate US banks are willing to lend to each other and the Federal Reserve rate, which is seen as risk free. The TED spread is taken as the perceived credit risk in the general economy, and increased 9pc in December to its highest level since the end of 2013.

Rising UK bank risk

In the UK, a key measure of risk in the London banking sector is the difference between the London interbank offered rate (Libor) and the overnight indexed swap (OIS) rate, also called the Libor-OIS spread. This shows the difference between the rate at which London banks are willing to lend to each other and the Federal Reserve rate which is seen as risk free. On Friday, the Libor-OIS spread reached its highest level since October 2012.

Interest rate shock

Interest rates have been held at emergency lows in the UK and US for around five years. The US is expected to move first, with rates starting to rise from the current 0-0.25pc around the middle of the year. Investors have already starting buying dollars in anticipation of a strengthening US currency, with the pound falling 10pc against the dollar since July to hit 1.538 on Friday. UK interest rate rises are expected by the end of the year.


Bull market third longest on record

The UK stock market is in its 70th month of a bull market, which began in March 2009. There are only two other occasions in history when the market has risen for longer. One is the period leading up to the great crash in 1929 and the other before the bursting of the dotcom bubble in the early 2000s.


UK markets have been a beneficiary of the huge balance sheet expansion in the US. US monetary base, a measure of notes and coins in circulation plus reserves held at the central bank, has more than quadrupled from around $800m to more than $4 trillion since 2008. The stock market has been a direct beneficiary of this money and will struggle now that QE3 has ended.



Overvalued US market

In the US, Professor Robert Shiller’s cyclically adjusted price earnings ratio - or Shiller CAPE - for the S&P 500 is currently at 27.2, some 64pc above the historic average of 16.6. On only three occasions since 1882 has it been higher - in 1929, 2000 and 2007.

Commodity collapse

Commodity markets have been the lead indicators for a global slowdown, as the prices for oil and iron ore more than halved in value last year. The Bloomberg Global Commodity index, which tracks the prices of 22 commodity prices around the world, fell to fresh five-year lows on Friday at 104.17.


Professional investors exit

Professional investors are already making for the exit. The Bloomberg smart money flow index tracks the market movements at the end of the trading day on the Dow Jones, when professional investors tend to make their move. The index showed heavy buying activity from 2009 onwards as professional investors followed central banks' money into the markets, achieving record gains during the past five years. That trend was reversed from the beginning of 2014 and the smart money is now making for the exit, as the S&P 500 carries on rising to new record highs.
The structure of global capital markets is such that the $68 trillion equity market is riskier and sits on top of a credit market worth more than $100 trillion. As yields have fallen in the credit markets, the excess profits have flowed up to equity, in turn lifting stock markets to record highs.
The reversal of that trend, one of increased risk and rising credit yields will reduce returns to equity and send shockwaves through stock markets. The warning signs are not all flashing red just yet but investors would do well to head these indicators that suggest caution and prepare their portfolio before the crowd flocks to the exit.
http://www.telegraph.co.uk/finance/...-warning-signs-of-a-market-crash-in-2015.html

What do you think about this? What do you think will happen when the collapse of the world economy? When will it happen?
My advice - buy ammo, medicine and food. This will be the most profitable investment.

 

I agree that a big bad adjustment will occur eventually and that it will hit the USA particularily hard, but there are too many factors offsetting a big bad collapse in the near future. The U.S. Dollar is still the de facto world currency and too many central banks of too many countries are themselves overly dependent on that status. They won't jettison that until the political and economic pressures are too brutal to ignore and avoid. As for rhetoric about guns (there wasn't a collapse of law and order even during the Great Depression), that's just silly. The food and unencumbered possessions (non-taxable ones) are a good idea, though (especially imported ones).

It is more than likely that in the next few years there will be another market "slip" and another form of bailout and another extension of the fiscal ceiling. In my admittedly non-expert opinion the real sign of impending doom will be when repeated 11th hour crises over the fiscal ceiling and repeating screaming of spoiled lobbies and voters over spending cuts and/or tax increases causes Congress to repeal or greatly relax the fiscal ceiling legislation. That will allow the escalation of government debt to the benefit of the strong lobbies (especially the crony capitalists of K-Street) and will irrevocably put us on course to not only another Great Depression but also a bout of hyper-inflation when the rest of the world repudiates the dollar and all those excess dollars and dollar instruments return in an enviornment of protectionism and higher world interest rates.

 

Thank you for your feedback. It was really interesting.
But let me disagree with you about the racial conflicts and crime.
1. We all remember Lucky Luciano and Al Capone. And corrupt police. This is viewed superficially. But you can read the criminal chronicle of those years that would they say - criminality was huge. Now, I believe - will be much more. (for example, at the time had not shot at schools and universities)
2. At the time racial conflicts occurred, but were more controlled. Everyone knew their place in the social hierarchy. Now things are much worse.

 

Since there is no chance of Prohibition coming back and we are already used to the level of organized crime associated with the War on Drugs, your first point is rather weak. If you are arguing that more nutcases will go postal in a collapsing economy, that is possible but even five times the current number of tragedies of that nature wouldn't top more than 1,200 people a year (a statistical drop in the bucket for a population the size of that of the USA).

As for your implication that some sort of mass racial conflict will break out, the evidence just isn't there. Most black crime (and especially violent crime) is directed at other blacks, while hispanics have little history in the use of racial conflict within America. You also seem to think the government would truly step back and allow large scale violence to occur on a continuing basis: the truth is that political correctness wouldn't last past one blatant incident of the type you are implying. As recent events have shown, most cops would like nothing more than to be let off the leash.

 

Time - is the most honest man. Get a peep of.

 

Aww crap. not again.

Anyway, I think the USA will be OK this time round. Lower commodity prices, particularly oil, will provide a buffer against inflation. Meanwhile a strong dollar will keep manufactured imports cheap. There is no big over-extension of credit in the market to create a catastrophe in liquidity (with excesses having been effectively transferred to the govt). Now enjoying the strongest growth of any advanced economy, the USA will continue to be a safe haven for investors.

Obama, continuing the policies of the very last of Bush's reign, has set the US in relatively a strong position. Its not great, but when being chased by a lion, you don't have to run fast, just faster than the guy next to you...

 

And kill shale oil and gas.

And make expensive American goods. That is not competitive. Hence the reduction in sales - suspension of production - job cuts - a reduction of budget revenues - the termination of social programs - hunger - the rise in crime - racial conflicts - separatism - civil war - the collapse of the United States.

The world is getting rid of US Treasuries. About what kind of "safe haven" you say?

This position is well described in the "Kama Sutra"

However, you continue to believe in miracles. Perhaps with this belief, you easier to live.