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A Storm That May Cause The Next Stock Market Crash Is Brewing – TheStreet

A Storm That May Cause The Next Stock Market Crash Is Brewing – TheStreet

Release Date:  Friday, October 27, 2017

Gold declined this week as the US Dollar Index hit a three-month high after the European Central Bank’s monetary policy decision.

“Gold prices fell to their lowest level since October 6 on Thursday as the U.S. Dollar posted a strong gain against the Euro after the ECB announced a dovish monetary policy decision.” (“Dovish ECB Decision Drives U.S. Dollar Index to Three-Month High.” Nasdaq 10.27.17)

Additional pressure on gold is mounting as traders begin to mull over the possibility of a more hawkish Federal Reserve Chairman to succeed Janet Yellen.

“Also pressuring gold was fresh speculation that the next U.S. Federal Reserve Chair could be a policy hawk following reports that current Chair Janet Yellen is out of the running.” (“Dovish ECB Decision Drives U.S. Dollar Index to Three-Month High.” Nasdaq 10.27.17)

Precious metals received a slight reprieve Friday morning as the Catalonia parliament defied the Madrid government and declared independence from the rest of Spain.

“Gold edged higher on Friday, reversing earlier losses after the Catalonian parliament's independence declaration from Spain led investors to seek safety from political upheaval.” (“PRECIOUS-Gold rises on safe-haven appeal after Catalonia declares independence.” Reuters 10.27.17)

Gold ended the week down $7.80, closing at $1,273.20. Silver prices closed at $16.94, down $0.16.

A Storm That May Cause The Next Stock Market Crash Is Brewing – Even At Dow 23K – TheStreet
In this week’s part of TheStreet’s Black Monday series ‘Crash of ’87, they take a look at what factors could come to fruition in the near future, three decades after Black Monday

“As part of our recent ‘Crash of 87 – TheStreet Special Report’ package, TheStreet spoke with a number of experts who say that it will also be another storm of things that causes the next stock market crash, a combination of factors that could soon present themselves.

“Overall investor sentiment seems to be at an all time high as the markets continue to set new records just about everyday. Still, questions remain about the role and policies of the Federal Reserve and it's unclear as to whether or not the group will need to step in once again as it did in 2008 after the start of the Great Recession.

Markets Getting Ahead of Themselves
“In 1987, most managers and traders agreed the market was drastically overvalued. But the bull market was strong and stocks were climbing.

"’By the summer of 1987, stocks were drastically overbought. That's not the case today,’ Faber said.
But drawing similarities is the most accurate means of predicting when the market will change course. According to Scott Nations, president and chief investment officer of NationsShares and author of ‘A History of the United States in Five Crashes,’ each market downturn has come after a distinct pattern of events that was ‘astonishingly similar’ to the last.

“They all start with a market that has ‘really gotten ahead of itself,’ Nations said. Next comes a ‘new, novel, financial contraption that everyone thinks is the best in the world.’ Finally, there must be some sort of catalyst, which, for the most part, are ‘very rare events.’

Fed Policy Needs to Adapt
“The question to ask moving forward is whether the Fed will be able to pour money into financial systems to keep them from tanking, as the bank has before.

“But a disconnect between the Fed and investors could topple markets, Zandi said. That rings true today especially, as the Fed plans for gradual rate hikes throughout the coming years while the market has priced in fewer hikes that would top out around 2%, Zandi said." (“A Storm That May Cause the Next Stock Market Crash Is Brewing – Even at Dow 23K.” TheStreet 10.25.17)

Central Banks Are Preparing For The Next Crash - MarketPulse
In the opening of the International Monetary Fund’s April 2007 Global Financial Stability Report the following was said.

“Favourable global economic prospects, particularly strong momentum in the euro area and in emerging markets led by China and India, continue to serve as a strong foundation for global financial stability.”

Since this benign view was published on the eve of the most devastating financial crisis in nearly eight decades, it has to be viewed, in hindsight, as a spectacular misjudgment.

The fund is determined not to be caught out again. The question is whether the concerns it pours forth in its latest Global Financial Stability Report are well judged or whether it is crying wolf. As important, what might be the implications, especially for policy, of its worries?

Risks
“The underlying argument of the report is that ‘near-term risks to financial stability continue to decline’, but ‘medium-term vulnerabilities are rising’. The return of global economic growth, combined with comfortable monetary and financial conditions, together with sluggish inflation, strengthens investors’ reach for yield and appetite for risk.

“As the report notes, shocks to credit and financial markets well within the historical range could have large negative impacts on the world economy: ‘A sudden uncoiling of compressed risk premiums, declines in asset prices, and rises in volatility would lead to a global financial downturn.’ Many hold the room for monetary policy manoeuvre to be limited. The result might then be a less deep, but still more intractable, global recession than that of 2009.

Capital
“This has also encouraged greater capital flows to – and so more borrowing by – emerging countries. Non-resident capital inflows of portfolio capital reached an estimated $205 billion in the year through August 2017 and are on track to reach $300 billion in 2017, more than twice the total in 2015-16.

Instrument
“One reason is that monetary policy is a blunt instrument for achieving the latter. A more fundamental objection is that we cannot tell people they must remain stuck in a deflationary economy because it is the only way to stop the financial system from exploding. They will rightly respond that these priorities are wrong.

“Similarly, ensuring creditors get the returns they think they deserve is not the job of the central banks. If governments think creditors are so deserving, they should change taxes accordingly. Again, if they think the financial sector remains excessively unstable, they should regulate it.” (“Central Banks are Preparing for the Next Crash.” MarketPulse 10.25.17)

China’s Rise, America’s Fall - ZeroHedge
What does the launch of the PetroYuan by China mean? Does it mean that China will rise and America will fall? Or is a decline more accurate?

“At the moment no matter what level of debt America carries, other countries need dollars. Dollars to pay for oil, since oil is traded in dollars. Dollars for their financial system so their banks can settle contracts for goods and services traded in dollars.

“But over the last few years China has been systematically putting in place everything it needs to launch the Yuan as not only a rival to the dollar in trading and settling oil contracts but as a rival to the dollar as the world’s reserve currency. At the moment the only rival to the dollar is the Euro. I think it fair to say the relationship between the two currencies and their issuing powers, has been… ‘delicate’. The news that Sadam Hussein was going to start trading his oil in Euros came just a few months before America and its lap dog GB, decided Sadam was a threat to world peace and went to war with him. Something similar happened to Colonel Qaddafi.

“Under Qaddafi Libya’s currency was backed by the country’s large holdings of gold and silver. This had allowed Qaddafi to finance, for example, the entire construction of the Great Man Made River without going to Western banks for a single loan.’

“China’s plans for the replacement of the dollar and the positioning of their own currency are very like Libya’s. China too has had the idea to back its new settlement and perhaps one day its reserve currency, with gold. And China is not alone. Russia has been a part of the BRIC group with an interest in the plan. Russia, like China has been a very large buyer of gold.” (“China’s Rise, America’s Fall.” ZeroHedge 10.25.17)