Why the Stock Market Will Crash 50%

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Abstract

ly reason the stock market recovered after the crash is due to the FED lowering interest rates. The FED is not here to boost your gains in the stock market, they only care about the job market and inflation. The FED even believes that if the stock market crashes and it doesn’t hurt the labor market, it’s good because it lowers the amount of risk-taking.</p><h1 id="523c">Margin statistics</h1><p id="db70">Margin is when you borrow money in order to buy stocks. This is very risky because if your stocks drop, you can be forced to sell by the bank because they want to have their money back. This is why stock market crashes can be so extreme. The <a href="https://www.finra.org/investors/learn-to-invest/advanced-investing/margin-statistics">FINRA</a> margins statistics show us that investors have borrowed 1000 billion to invest in stocks. This is way up from the 500 billion before the pandemic. There haven’t been loads of margin calls because the S&P 500 has just gone straight up.</p><h1 id="b663">Real Estate Market</h1><p id="25de">I think that everybody has heard that real estate prices have risen extremely. Almost everybody that bought a house in the last year made money, but this isn’t normal. This is a sign that we are at the top of an economic cycle, and that prices can substantially drop. Why, well when there is a lot of demand for real estate, contractors tend to make as many homes as they can because the profit margin is so high and because they sell immediately. In almost every real estate crash, the contractors flooded the market which caused supply to be too high, leading prices to crash.</p><h1 id="bad1">Inflation</h1><p id="f619">The FED had a clear standpoint on inflation, it’s transitory. Their thesis was that most of the inflation was caused due to the supply chain shortages due to COVID-19. However, in the last months, we have seen that people still have loads of money to spend on non-essentials, supply chains are getting worse due to the omicron have, and inflation is broadening. When inflation is concentrated in one sector, it’s most likely that the price will stabilize, but now, everything is going up substantially in price. Not onl

Options

y used cars, energy, gas, and travel are up, everything is up.</p><p id="6d11">Since Jerome Powell got re-elected by Joe Biden in November, he has retired the word transitory. He and the other members of the FED believe that inflation is more persistent and will most likely not decline in the short term. This is why they announced that they are raising interest rates in order to combat inflation. But the question is, will the consumer stop spending because rates went up 0.25 or 0.50%? The statistics show that consumers still have enough stimulus from last year in order to spend. So it is possible that the FED will need to raise interest rates substantially in order to make it less desirable for consumers to spend money and will likely cause the market to crash.</p><h1 id="a94c">Conclusion</h1><p id="6729">This time, there are fundamental reasons why the economy could correct. In this article we didn't look at simple indicators like the Warren Buffet or average PE ratio of stocks, we looked at what actually causes crashes.</p><p id="e436">Schedule a DDIChat Session in <a href="https://app.ddichat.com/category/financial-markets-and-analysis"><b>Financial Markets and Analysis</b></a>:</p><div id="f230" class="link-block"> <a href="https://app.ddichat.com/category/financial-markets-and-analysis"> <div> <div> <h2>Experts - Financial Markets and Analysis - DDIChat</h2> <div><h3>DDIChat allows individuals and businesses to speak directly with subject matter experts. It makes consultation fast…</h3></div> <div><p>app.ddichat.com</p></div> </div> <div> <div style="background-image: url(https://miro.readmedium.com/v2/resize:fit:320/0*O5SC1QpRyIESxIhR)"></div> </div> </div> </a> </div><p id="87e6">Apply to be a DDIChat Expert <a href="https://app.ddichat.com/expertsignup">here</a>. Work with DDI: <a href="https://datadriveninvestor.com/collaborate">https://datadriveninvestor.com/collaborate</a> Subscribe to DDIntel <a href="https://ddintel.datadriveninvestor.com/">here</a>.</p></article></body>

Inverting yield curve

The inverting of the yield curve is a metric signaling a recession in the coming 18 months. They do this by subtracting the yield of a 10 year US treasury bond by the yield of a 2 year US treasury bond. If the number is 0, it signals a recession. But how does this actually work? Well, normally you would get paid more the longer you lend your money to the government. It’s illogical that you would get paid more to put away your money for 2 years instead of 10 years. But why? This is because businesses and the public are scared that they would need the money in the coming years to survive, which leads to a higher yield because the demand is low.

Some believe that the pandemic delayed the recession because in late 2019 the yield curve inverted. This is the current yield curve.

Raising rates

The Federal Reserve or FED controls the US economy, one of their tools to grow the economy is the interest rate. The interest rate is the extra amount of money you need to pay in order to get a loan. The lower the interest rate is, the better the economy does because it encourages spending, borrowing and boosts asset prices. However, the FED raises interest rates in order to cool down an overheating economy. In their latest meeting, they have made it clear that consumers are spending exuberantly and that inflation is running out of control.

The interest rate controls the macro-economic cycle. When the economy and stock market are at the top, interest rates are raised so the economy and the stock market crashes. If we look at all the crashes since 1987, every single time the FED raised interest rates to cool the economy down. And the only reason the stock market recovered after the crash is due to the FED lowering interest rates. The FED is not here to boost your gains in the stock market, they only care about the job market and inflation. The FED even believes that if the stock market crashes and it doesn’t hurt the labor market, it’s good because it lowers the amount of risk-taking.

Margin statistics

Margin is when you borrow money in order to buy stocks. This is very risky because if your stocks drop, you can be forced to sell by the bank because they want to have their money back. This is why stock market crashes can be so extreme. The FINRA margins statistics show us that investors have borrowed 1000 billion to invest in stocks. This is way up from the 500 billion before the pandemic. There haven’t been loads of margin calls because the S&P 500 has just gone straight up.

Real Estate Market

I think that everybody has heard that real estate prices have risen extremely. Almost everybody that bought a house in the last year made money, but this isn’t normal. This is a sign that we are at the top of an economic cycle, and that prices can substantially drop. Why, well when there is a lot of demand for real estate, contractors tend to make as many homes as they can because the profit margin is so high and because they sell immediately. In almost every real estate crash, the contractors flooded the market which caused supply to be too high, leading prices to crash.

Inflation

The FED had a clear standpoint on inflation, it’s transitory. Their thesis was that most of the inflation was caused due to the supply chain shortages due to COVID-19. However, in the last months, we have seen that people still have loads of money to spend on non-essentials, supply chains are getting worse due to the omicron have, and inflation is broadening. When inflation is concentrated in one sector, it’s most likely that the price will stabilize, but now, everything is going up substantially in price. Not only used cars, energy, gas, and travel are up, everything is up.

Since Jerome Powell got re-elected by Joe Biden in November, he has retired the word transitory. He and the other members of the FED believe that inflation is more persistent and will most likely not decline in the short term. This is why they announced that they are raising interest rates in order to combat inflation. But the question is, will the consumer stop spending because rates went up 0.25 or 0.50%? The statistics show that consumers still have enough stimulus from last year in order to spend. So it is possible that the FED will need to raise interest rates substantially in order to make it less desirable for consumers to spend money and will likely cause the market to crash.