Is This US Stock Market Fall to Become a Bear Market?

Dear Reader,


The S&P 500 and Nasdaq dipped into correction territory in the past week. Is this the end of the longest bull market in US stock market history, the beginning of a bear market and an ensuing economic recession?

In my opinion, no. Why? To cause a bear market or an economic recession in the US and globally there has to be a large shock to the economy usually due to internal or external fundamental reasons. The 2008 economic recession and a stock market fall was caused by a fundamental problem with the banking sector - souring real estate mortgages and the connected with them derivatives which were placed around the globe and the financial crises became global.

Now I do not yet see a large fundamental problem with the banks. Yes, many financial bubbles have been blown up, but we are not yet at a tipping point, although we are close. The banks are still relatively sound.

The banking business, though, is inherently leveraged. If people start withdrawing their deposits, the liquid means of the banks are only 10% of their assets. So if 10% of the assets get withdrawn as deposits, the banks are basically bankrupt. So there is the implicit and not so implicit deposit guarantee of the global governments regarding banks.

So are the globally systematic banks stable? Yes, they are. Several smaller financial bubbles have been blown, though. The US stock market, especially technology stocks, leveraged loans, the ETF assets, real estate, China to name most. Real estate is not yet in a huge bubble, but commercial real estate prices have gone up  a lot. Some of the bubbles like China and some technology stocks have partially burst.

Although there is no one huge bubble, a perfect storm could cause many of the bubbles above to pop simultaneously which will threaten the banks.

So is this a buying opportunity for stocks, US especially? I expect when the S&P 500, DJIA and Nasdaq fall around 5% since the beginning of the year the time is rife for buying the dip.

I expect in 2021 or 2022 the financial system will be close to an economic recession and a prolonged bear market, because many of the financial bubbles above will have simply become too large and unsustainable.

Disaimer: The blogposts and comments on this blog and posts on social networks(Twitter, LinkedIn etc.) are not investment recommendation, are provided solely for informational purposes, and do not constitute an offer or solicitation to buy or sell any securities. The opinions expressed in the blogpost and posts on social networks(Twitter, LinkedIn etc.) are the author's and they in no way express the opinion or official position of the company where I am working currently!

Conflicts of interest: I may possess some of the securities,currencies or their derivatives mentioned in the blogpost and posts on social networks(Twitter, LinkedIn etc.)!

Kind regards,

Petar Posledovich

How to Detect a Financial Bubble?

Dear Reader,


There is a huge literature on how to detect a financial markets bubble. Many seem to claim a financial bubble can be detected only after the fact. I do not agree. Financial bubbles are quite obvious beforehand. The problem is, it is very difficult to pin down exactly when a financial bubble is going to burst, so one can protect his/hers assets or make money by buying put options or shorting the underlying asset.

There are various approaches in the financial research literature on how to detect a financial bubble. Some say you have to witness two standard deviations yearly change.

From my experience, the best way to detect a financial bubble is to examine the graph of the underlying asset. If on a 1 year or 5 year basis the underlying asset goes up by a steeper than a 45% angle, this is most certainly a bubble=temporary, if not long, a deviation from the asset's underlying fundamentals.

As John Maynard Keynes adeptly put it: "Markets can stay irrational longer than you can remain solvent."

So, when has a financial bubble popped. I define a bursting of an asset price bubble, if the price of the asset falls more than 30% or even better 40%. We have witnessed even larger falls of the main US and global stock market indices like DJIA, S&P 500 and Nasdaq like declines of more than 50% from their 2008 peaks. Recently many technology stock bubbles burst. Examples are GoPro, GroupON, Zynga, Snapchat and even Facebook recently.

So are DJIA, S&P 500 and Nasdaq Composite in a bubble territory currently or overvalued significantly based on their fundamentals? Yes, they are. I do expect a major correction of the major US and Western European stock market indices in 2021 at the latest. Since the bull market in the US was the longest on record I expect the following stock market slump to be deep, larger than 30% fall, and one of the longest in duration on record.

In such a period the buy and hold, value investing strategies that many leading investors as Warren Buffett embrace will not work. Actually, value investing has not worked for the past 10 years driven by the rally in technology stocks, which are momentum stocks. What will work in the coming stock market correction is timing the market and picking stocks for the short run and selling them in a short while when they reach short-term peaks.

Disaimer: The blogposts and comments on this blog and posts on social networks(Twitter, LinkedIn etc.) are not investment recommendation, are provided solely for informational purposes, and do not constitute an offer or solicitation to buy or sell any securities. The opinions expressed in the blogpost and posts on social networks(Twitter, LinkedIn etc.) are the author's and they in no way express the opinion or official position of the company where I am working currently!

Conflicts of interest: I may possess some of the securities,currencies or their derivatives mentioned in the blogpost and posts on social networks(Twitter, LinkedIn etc.)!

Kind regards,

Petar Posledovich

What Will Happen When the Stock Market Bubble Pops?

Dear Reader,


Tesla's stock fell a lot, so did Facebook's. Many information technology companies like GoPro, Zynga, Group On suffered large drops in their stock prices in recent years. In the last week S&P 500, DJIA and Nasdaq, especially, fell a lot.

Sooner or later, the equities bull market will end. What will happen afterwards?

Since this is already the longest bull market in history, it will be followed by shallow, but prolonged recession and a long and ultimately deep bear market, which will resemble the one during the Great Depression.

Why do I think that? The US, European and other advanced nations authorities seem to try to engineer a stable growth environment. It is either that or simply we are in a low growth state of the economy. I actually think it is a combination of both. The Keynesian macroeconomics the Western governments are embracing will end badly. The economic expansion has been shallow, but went far too long. Slowly, but surely a stock market bubble built up, especially for technology stocks. A real estate bubble in major economies is already obvious. The large growth of leveraged loans, although obscure part of the financial system, is also a cause of concern.

In my opinion, these bubbles will pop somewhere in 2020 and/or 2021. The bear market that ensues will be a prolonged one, akin to the one in the Great Recession. Due to the world's aging population, automation and the increased size of the global economy, currently the world economy is not so agile, so as to bounce back quickly as it did after the bursting of the Dot Com Bubble in 2001 and partly after 2009. What is more, central banks now have much less ammunition to counter the coming recession. The Federal Reserve(Fed) has started shrinking its balance sheet and raised the reference rate, but the Fed's balance sheet is several times larger that it was in 2008. There is still time until 2021, though. This time around, however, the Debt/GDP ratio of USA is very high at 105.4%  as of end 2017. So there is not much room to maneuver on the fiscal side, i.e. start issuing new government bonds and increasing government spending.

Bit if I have to name one economy that will survive best the coming long economic recession and bear market, it will have to be the USA. The US has some room on its monetary(the Fed) side and the (still) embedded dynamism of the US economy with its purest capitalist system will ensure the USA will weather the coming crisis and thrive again after that.

Disclaimer: The blogposts and comments on this blog and posts on social networks(Twitter, LinkedIn etc.) are not investment recommendation, are provided solely for informational purposes, and do not constitute an offer or solicitation to buy or sell any securities. The opinions expressed in the blogpost and posts on social networks(Twitter, LinkedIn etc.) are the author's and they in no way express the opinion or official position of the company where I am working currently!

Conflicts of interest: I may possess some of the securities,currencies or their derivatives mentioned in the blogpost and posts on social networks(Twitter, LinkedIn etc.)!

Kind regards,

Petar Posledovich

Jerome Powell, Head of the Fed Implies "The Economic Expansion Could Continue Indefinitely"!

Dear Reader,


In the past week the Chairman of the Federal Reserve, the central bank of the USA, Jerome Powell implied in an interview that the "economic recovery could continue indefinitely"!

Can it?

In my opinion, in two words, it cannot! No.

Why do I think the economic recovery could not continue indefinitely? For one, there has never been an endless period of global constant economic growth. Nor for any single country for that matter. Sooner or later, global GDP falters and the global economy enters into recession. The global economy has always developed in up and down cycles, since basically economic growth is measured. If Jerome Powell turns out to be right, this will be a huge paradigm shift in economic thought. Financial markets have always moved in up and down cycles. The second reason I think this economic recovery is unsustainable, is because the current expansion has been financed by debt. China's total debt to GDP ratio is 460%! The US government debt/GDP is above 100%, an almost historic high.

So when will the recovery end, the next recession ensue and the stock market crash? I think we are somewhere in the fourth from five known phases of the economic cycle. The rise of the economy and the stock market is not yet stratospheric. If the stock market goes up by more than 20% for two consecutive years, I would forecast on the next year there will be a deep and prolonged stock market recession. If I had to bet, I prognosticate that the economic recession and stock market fall will come in 2021.

Nobody has discovered perpetuum mobile yet.

Disclaimer: The blogposts and comments on this blog and posts on social networks(Twitter, LinkedIn etc.) are not investment recommendation, are provided solely for informational purposes, and do not constitute an offer or solicitation to buy or sell any securities. The opinions expressed in the blogpost and posts on social networks(Twitter, LinkedIn etc.) are the author's and they in no way express the opinion or official position of the company where I am working currently!

Conflicts of interest: I may possess some of the securities,currencies or their derivatives mentioned in the blogpost and posts on social networks(Twitter, LinkedIn etc.)!


Kind regards,
Petar Posledovich