Are Markets Set For A Crash?

While I don’t give much credence to wild forecasts and predictions, I read some of them nevertheless, especially when the viewpoint is presented from outside the U. S. about the U.S. Sometimes it can be interesting to see how others with (hopefully) unbiased opinions interpret our domestic market and economy.

The most recent and extremely outspoken observation came from the Royal Bank of Scotland (RBS) in an article titled “RBS issues global stock and credit crash alert.” Let’s listen in:

The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

“A very nasty period is soon to be upon us – be prepared,” said Bob Janjuah, the bank’s credit strategist.

A report by the bank’s research team warns that the S&P; 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as “all the chickens come home to roost” from the excesses of the global boom, with contagion spreading across Europe and emerging markets.

Such a slide on world bourses would amount to one of the worst bear markets over the last century.

“Cash is the key safe haven. This is about not losing your money, and not losing your job,” said Mr Janjuah, who became a City star after his grim warnings last year about the credit crisis proved all too accurate.

RBS expects Wall Street to rally a little further into early July before short-lived momentum from America’s fiscal boost begins to fizzle out, and the delayed effects of the oil spike inflict their damage.

“Globalisation was always going to risk putting G7 bankers into a dangerous corner at some point. We have got to that point,” he said.

US Federal Reserve and the European Central Bank both face a Hobson’s choice as workers start to lose their jobs in earnest and lenders cut off credit.

The authorities cannot respond with easy money because oil and food costs continue to push headline inflation to levels that are unsettling the markets. “The ugly spoiler is that we may need to see much lower global growth in order to get lower inflation,” he said.

“The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets,” he said.

[emphasis added]

Personally, I think that such a scenario is very likely and long overdue given the status of the bubble economy; I just can’t be sure if the predicted time frame is correct. As always, my reference point has been and will be my Trend Tracking Indexes (TTIs), which have kept me on the “right” side of the market in regards to major downturns for some 20 years.

As you know, the international TTI has been in bear market mode since 11/13/07 and currently remains -8.20% below its long-term trend line. The domestic TTI ended our most recent Buy signal, and it has moved to -0.68% below its trend line.

Clients’ money is now positioned safely in U.S. Treasury money market and/or in fully hedged positions as mentioned in last Friday’s update. While we may see some more upside spikes, currently the major trend is down.

Having a hedged portfolio position gives me now the luxury of removing the hedge quickly if the markets move back out of the neutral zone and into bullish territory, which would make me net long. If, on the other hand, the markets break down sharply, I can remove our long positions and become net short to take advantage of the downturn.

The key here is to be prepared and have a plan in place ahead of time to deal with the uncertainties of the market place, which avoids frustration associated with last minute scrambling and decision making.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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