- Goldman Warns of Looming Financial Crash as Monetary Stimulus Ends
by https://sputniknews.com/
US financial markets might be heading for a collapse as a result of the gradual removal of accommodative monetary policies and the end of the speculative rally, which has caused a rift between stock valuations and growth in the real economy.
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Kristian Rouz – One of the world’s largest investment banks, Goldman Sachs, says the stunning rally in US stocks might come to a dramatic end, as the artificial bull market is wearing down amid the ongoing removal of central bank stimulus. Goldman’s bear-market anticipation index has reached its pre-dot-com crash and pre-Great Recession levels, meaning a reversal in stock market dynamics is worth anticipating in the near-term.
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The consequences of a stock-market crash in the real economy are hard to predict under current circumstances. On the one hand, a sudden decline in stock value typically hurts non-financial enterprises as they lose capitalisation and operational flexibility amid a liquidity squeeze.
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On the other hand, given that the stock market is currently significantly overpriced, and stock valuations have far outperformed real economy expansion and are purely speculative, a financial market crash might have only limited negative consequences for the real economy.
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In a separate report, Citibank says the chances on a market correction in the coming three months are currently at 45 percent.
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However, Goldman’s Bear Market Index is at 67 percent currently, and the bankers say tepid inflation and structural issues are bringing the probability of a recession closer. However, if the central bank abstains from further interest-rate-hikes, a cyclical recession is likely to define the next year’s economic developments.
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Overstretched stock valuations are the Goldman’s chief concern. The very low interest rates had driven an unprecedented stock market rally in the post-Great Recession period, and since Donald Trump was elected in November, the rally intensified due to his business-friendly attitudes and the still-loose monetary environment (despite several quarter-percent increases since December 2015).
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Typically, the last three months of stock market expansion see gains of 7 percent, followed by a three-month 7-percent correction, with a 20-25-percent crash yielding a tumultuous 6-month period of little certainty.
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Although Trump is definitely helping with a pro-growth economy, the manipulation from the FED via Quantitative Easing has made everything very artificial in the market. When that stops, its going to be a massive decline. Bitcoin is sure to rise in that environment!
This is something that I have been watching for...with the Federal Reserve beginning to pull back QE (Quantitative Easing) and actually raising interest rates above zero the economy may not be able to sustain any real expansion for much longer. For most of the past few years it seems like most of the economic growth has come from abnormally low borrowing costs and share buybacks from companies, which are artificially inflating stock market prices.
Eventually this "financial heroin" has to run out, and when it does the stock market should begin to come down in earnest, possibly touching off a major recession like we had in 2008. After the initial downdraft the Fed will likely react with "accommodative" monetary policies again, which should be good for gold/silver and possibly bitcoin as well.