For the last 25 years, the markets have been driven largely by two things: Government stimulus and low interest rates. For example, after the March of 2000 dot-com crash, the Fed slashed interest rates from 6.5% down to 1.75%. And the Fed cut rates again during the 2008 Financial Crisis, and kept rates near-zero through 2022. At the same time, the Government has pumped trillions into the economy.  We had $700 billion in “Troubled Asset Relief Program (TARP)” after the Financial Crisis.

We had $2.2 trillion in Covid Relief in 2020…

Between low interest rates and artificial stimulus, the Dow Jones has gone from 7,500 to over 40,000 on the Government’s dime.

And along the way, every crash has been resolved by printing money.

But those days are over…

Why is that?

Simple. The Government is $35 trillion in debt. That’s a record level. It’s never happened before. And they spend over $2 billion a day on interest payments alone.

Doesn’t sound like the Government is in a position to pump money into the markets.

Nope. Any stimulus, if it comes at all, will be limited. At the same time, the Fed is struggling to keep inflation in check. Consequently, they’re not going to be able to create that NEAR-ZERO-RATE environment that fueled the markets for 25 years.
Inflation is easing for now. And we could see a couple of rate cuts by year-end. But prices remain high. A trip to the grocery store or gas station will tell you that. And according to Oxford Economics, we are going to see inflation come rushing back, no matter who is President. Consequently, the Fed is very limited. Easy money days are over.That’s right. 
Credit card debt is sitting at $1.1 trillion and counting. Plus, household debt is at $17 trillion. Another $12 trillion is in mortgage debt. Here’s the bottom line,  Americans are tapped out…

And this is why we see such a gambler’s mentality in the markets. People chasing stocks higher… They know corrections are a reality, and yet they’re afraid of missing any moves higher.

But that’s not going to end well.

It never does. Take a look at what I call a “crash-indicator”. It’s based on inflation-adjusted earnings from the trailing 10 years. Now, this indicator has only crossed the 30-level a handful of times in history. And every time, it’s been followed by a severe correction. For example, in 2000 ahead of the dot-com crash it hit 30… in 2020 it hit 30… and in 2022 it hit 30…

It’s at 36. Higher than it was in 1929… or 1987… or the 2008 financial crisis… To bring the indicator value back in alignment with historical values, the market would need to need to drop about 50% from current levels.

Magnetic Reversion?

Yes. It’s like a Law of Physics. And it says that an asset’s price — no matter how high or how low it gets — will eventually be pulled back to its historical average.

Now, I’m not saying it will drop 50%. Maybe it will drop 25%. Maybe only 10%. Or maybe 80% like in dot-com. We just don’t know for sure. But, like I said, the real threat is what comes AFTER this correction.

Unfortunately, we’re looking at a long stretch of zero returns… because, I believe our Nation has reached a breaking point.

There is so much division… so much uncertainty… so much anger. At the same time, Americans have completely lost faith in our institutions.

I did see a recent Gallop Poll saying Americans’ trust in institutions has NEVER BEEN LOWER…

We don’t trust our banks. We don’t trust our courts. Or the media. Or our politicians.

It’s is an environment that has investors fearful… lurching and lunging with every piece of breaking news that rolls across their screen. And I believe it’s about to get a lot worse.

Well, take our record Government debt — $35 trillion… record credit card debt… stifling inflation… bone-headed government policies… mash it together with all the uncertainty… all the anger… the lack of faith in institutions… and pour it on a market that could be as much as 50% over-valued…

Take all that… and then throw in an Election… that no matter who wins… half the country – OK, that’s 100 million people or more… they’re going to take it as a very bad omen. 

It’s like pouring gas on a fire. In fact, I saw a Reuters report that 4 out of 5 Americans believe we are headed for chaos…

And remember, with stimulus and rate cuts off the table… the Government isn’t going to pump up the markets like they’ve done for the last 25 years.

Well, you’re not alone in your concern. In fact, Goldman Sachs issued a warning saying a correction is imminent. Forbes says an imminent stock market warning just flashed red… And one best-selling financial author is warning of the biggest crash in history. This sounds pretty dire…

A correction of some level is imminent. But like I said, I believe the bigger threat is what comes after…

No matter who wins the Election — our Nation’s problems are not going away. Again, we’ve got record debt that took decades to amass. It isn’t going to magically disappear. Inflation is here to stay. Plus, we’ve got war in the Middle East… plus a war in Russia… both of which we could get pulled into. And we haven’t even mentioned the commercial real estate problem that Harvard Business Review says is headed toward crisis…

And again, these problems took years — even decades — to create. And they’re going to take years — even decades — to solve.

In the meantime, I expect an extended period of extreme market volatility… one where investors are so unsure of what’s coming next, that they lurch and lunge at every turn.

As a result, the markets swing back and forth… never really getting anywhere. In the end, it’s lost time that investors never get back.

By buy and hold, I mean folks who need the market to go up in order to build wealth. Folks who use mutual funds and index funds for example.

Or even folks who just buy stocks and hold them for the long haul. It’s going to be brutal. Take a look at this. If you’d put a $100,000 portfolio into the S&P 500 in January 1970… and held it for 15 years… until January 1985… take a guess at how much you’d have made…

You’d have lost 24%. Your $100,000 would have turned into $76,000…I mean, I’m not saying this will happen, but Japan’s market — the Nikkei 225 — it crashed in 1990, it’s just now — in 2024 — getting back to break-even in 2024… that’s 34 years of zero returns.

Brutal. Of course, after the dot-com crash, it took the NASDAQ nearly 15 years to climb back to break-even.

Yep. Same with the S&P 500 after dot-com. After 10 years, it was down by 27%. Investors got nowhere. I believe this is what the next 3 years, 5 years, maybe even 10 or 15 years could look like. It sounds rough.

 It’s going make it very hard for traditional buy-and-hold investors to make money because for every move up, there’s going to be a move right back down.

 And yet, I believe this coming volatility offers an unprecedented opportunity.

 Yes. As a trader — someone who exploits volatility — I expect a lot of money will be made.

I expect the coming crisis could be even better. But only for folks who know how to play it. Play the Volatility. Buy and hold is a no-no.

Courtesy: Jeff Clark – the Trader