I am sorry to report that there is no typo in the title above. That is a ‘9’ followed immediately by a ‘0’. As in ninety percent. As in unprecedented. As in global devastation of capital and equity. So you are probably wondering if this is an arbitrary number I used to garner attention? Unfortunately, no. In fact, it stems from a very well respected economist who accurately predicted the 2008 financial collapse. So please read on…and brace yourself.
To begin, I would imagine many of you are already reading this with a huge seed of doubt in your head. To be honest, I can’t blame you. The stock market is not only reaching four year highs, it is quickly approaching all-time highs again. And even though we are still at over 8% unemployment, we have added approximately 4 million jobs back to the economy since the 2008 financial crash. Moreover, there are hints that the housing has finally bottomed, mortgage rates and borrowing rates are at all-time lows, and things really don’t seem all that bad with our economy from a 30,000 foot view.
Then where, when, and what could possibly cause an event so tragic, that it could force us to give all of these stock market gains up again? More importantly, what could cause us to not only give up what we have gained back since 2008, but to also give up almost everything that has built over the last 25 years?
A 90% drop in the stock market is the latest prediction to come from Robert Wiedemer, a much respected economist and author. Before you say, “This guy must be crazy” or “Did he accidentally add a zero behind the 9%?” you might want to consider Robert’s past track record. Back in 2006, when some authors and economists were predicting that the Dow Jones would be at 25,000 or more, Robert had the courage to say it was going to drop by 50% in the next couple of years (the Dow Jones gave up approximately 50% from its peak at approximately a couple years later exactly as he predicted). Keep in mind, back in 2006, housing was peaking, the stock market was peaking, people were feeling good, and no one was predicting that the euphoria was going to end.
I personally had the honor to meet Mr. Wiedemer at a conference and I was surprised by the person I met. After reading both of his books, “America’s Bubble Economy” (the book that correctly predicted the 2008 collapse) and “Aftershock” (the book that outlines the coming demise of the market), I expected to meet a fast talking, pessimistic, doomsayer. On the contrary, Robert was a slow, calculated speaker, very analytical, and a surprisingly very optimistic guy. Unlike some of the naysayers out there, Robert wants nothing more than America to prosper, remain a global powerhouse, and for the U.S. to have sustained economic growth. But the bad news is that his unrelenting and unbiased research only points to one direction…down.
Recall that in 2006, Wiedemer, his brother, and their team of economists and researchers, predicted almost precisely the market crash, the housing bubble, and the fall of the banks that were “banking” on Sub-prime and credit default swaps. Their research, although controversial and mostly unnoticed before the 2008 crash, makes complete sense today. To read his book, “America’s Bubble Economy” is like reliving the entire housing, mortgage, and stock market bubble over again. Except this time, you wonder how we could have all been so blind to what was going on. How could so many smart people make so many mistakes and let greed take over? How did regulators let it get that bad? How did no one else see this when it all seems so obvious?
Fast forward to today, completely ignoring his recent warnings would be tough to do in our opinion. Last time he was almost 100% correct with his predictions. This time, even if he is half right, a 45% drop is not only devastating, it would most certainly lead to a global depression.
So what does Wiedemer believe is going to lead to a 90% drop in the stock market? He says it all can be traced back to the Federal Reserve and their unprecedented printing. Their reckless attempt to stimulate the economy by “printing massive amounts of money out of thin air” will have dire consequences, Wiedemer claims. “These funds haven’t made it into the markets and the economy yet. But it is a mathematical certainty that once the dam breaks, and this money passes through the reserves and hits the markets, inflation will surge”, says Wiedemer.
He goes on to say, “Once you hit 10% inflation, 10-year Treasury bonds lose about half their value. And by 20%, any value is all but gone. Interest rates will increase dramatically at this point, and that will cause real estate values to collapse. And the stock market will collapse as a consequence of these other problems.” This is a tough argument to fight if interest rates actually do go this high. Robert also says, “Companies will be spending more money on borrowing costs than business expansion costs. That means lower profit margins, lower dividends, and less hiring. Plus, more layoffs.”
To repeat, Wiedemer and his team of economists look at all of their findings with no bias. If anything, they would be biased to see some positive news. To go on TV in 2006 and publicly tell viewers who had just witnessed the biggest boom in stocks, who had huge amounts of increases in home equity, all while the economy appeared to be in the best shape in American history that it would all be wiped out is not an easy thing to do. In fact, it is usually followed by ridicule, hate letters, and even severed friendships. The easiest thing to do as an economist is to go along with the herd, keep telling everyone that the market will continue to rise, and that there are very few threats of a recession on the horizon. However, Robert and his team risked it all to do the right thing and sound the alarm. Although people literally laughed at them just a year before the wheels began to come off, they stuck to their research findings and where ringing the alarm bell right up until Lehman Brothers collapsed. After that, it was too late for many.
Shortly after the financial collapse, they issued their second warning, “Aftershock”, which vividly describes what is now happening in our economy. To summarize their findings, they don’t see any way that all of this global money printing piled on a fragile frame will result in anything other than catastrophe. The prediction is that we will experience a second “aftershock” that will make 2008 look mild. To say Wiedemer has risked sticking his neck out there one more time would be an understatement. As you can imagine, other economists, politicians, and many on Wall Street all try to discredit Wiedemer and his prophesy. However, the scary part is that Wiedemer and his team are even more confident about this prediction than they were about the 2008 collapse. Will this “Aftershock” actually translate to the brutal aftermath of the stock market collapse it foretells? Will we all read this book a few years from now and say, “It was so obvious, how did we not all see this coming” like we can with his “America’s Bubble Economy” book today?
Even though the stock market is trending upwards and we have created 4 million jobs, after injecting $4 trillion into the economy, we should have been well on our way to double digit growth and the lowest unemployment in American history. Instead, millions are still unemployed, and many more have just given up looking. Student loan debt is at its all-time high, negatively affecting almost 20% of all American households. Even after all we just went through, the majority of American’s are barely saving more than they were before, and millions have little to no retirement savings in place. The issue is that we never fixed the issues! We are just building a giant house of cards on a fragile frame instead of rebuilding with a solid foundation. Before we hit rock bottom, we created what was supposed to be a temporary fix called TARP, we started bailing out companies, printing money, and created America’s addiction to the Fed. It is tough to argue that we didn’t need the first round of TARP, but all of the Federal easing has done is to add to our deficit, has helped feed Wall Street’s addiction for easing, followed by creating a deficit that can never be repaid.
The facts are that we have printed off $4 trillion at the expense of Americans in the last few years. After the Fed’s recent announcement to buy $40 billion of mortgage notes per month, that $4 trillion number is almost guaranteed to rise. At what point do we stop printing and “easing” to make Wall Street happy? Has America become so arrogant to think we can print forever without any consequences? Do we really believe that by tripling our nation’s entire money supply in just 4 years will not lead to inflation at some point when we actually do experience legitimate growth? Will the longest bond rally in U.S. history end in the bursting of a huge bubble? Or will other countries wake up one day and realize that the dollar has become worthless after trillions of new greenbacks have been injected into the system? If just one large country like China, Japan, Russia, or India turns its back on the dollar, the rest will be playing “last one holding the rotten tomato loses” and we could see the value of the dollar plummet in a very short period of time. I, for one, hope that everything I have read in Aftershock doesn’t come to fruition. But we seem to be making the exact mistakes it predicts that we will make. It is hard for me to read Wiedemer’s prediction without agreeing that much of it seems inevitable. And as I mentioned, if Wiedemer is just 50% correct this time, that puts us right back where we were at the bottom of the last financial collapse. Will you be protected?
To watch the full interview, click “90% Stock Market Correction”
To download this article in a sharable PDF version, click “90% stock market drop”
* This article is for educational purposes only. Nothing in this article should be construed as investment advice. Always speak to a financial professional before making any decisions.