Why Market Could Spike to All-Time Highs Before it Crashes
By Michael Markowski, Director of Research, April 23, 2016
Following the close of the markets on Friday April 22, 2016, the NIRP Crash Indicator went from a pre-crash Orange level, where it had been holding steadily since the close of trading on April 1, 2016, to a Yellow caution signal indicating that the probability of an imminent market crash has diminished. Please see my April 1 Equities.com article entitled, “No April Fool’s Joke: NIRP Crash Indicator Elevated to Pre-Crash Warning”.
The catalyst for the change to Yellow was Bloomberg’s April 22, 2016 article entitled, “BOJ May Consider Negative Rates on Loans”. The subject matter of the article resulted in the sentiment of the U.S. dollar and euro versus the Japanese yen switching from a very recent negative to extremely positive. The NIRP crash signals are published and freely available each day at www.dynastywealth.com:
- Red — full crash
- Orange — pre-crash
- Yellow — caution
- Green — clear
The chart below depicts the advance of the U.S. dollar versus the Japanese yen for the week ended
April 22, 2016
I predict that an announcement by the BOJ that it is instituting negative rate loans could occur as early as April 28, 2016 when the BPOJ’s April Policy meeting concludes. This announcement has the potential to be more earth shattering to the capital markets than the BOJ’s January 29, 2016 announcement that they were instituting a Negative Interest Rate Policy (NIRP). Such an announcement by the BOJ will likely result in an increase in market volatility to the upside versus the downside, which occurred following the BOJ’s NIRP announcement.
From my research I have concluded that the yen is a leading market indicator. My April, 9, 2016 Equities.com article entitled, “Yen Volatility puts Markets on Precipice of Crash” and video interview below entitled “Yen Volatility Causes Market Crashes” contains the evidence of the yen’s predicting the crash of the markets in 2008 and also the V-shaped reversal off of the March 2009 bottom.
Should the BOJ announce at any time that it is instituting a Negative Rate Loan policy, it is conceivable that the markets could spike to levels eclipsing their 2015 highs. This new BOJ stimulus policy would cause a dramatic, but temporary, increase in the prices of all of the world’s bonds and dividend paying stocks.
Under a negative rate loan a bank pays a borrower to borrow monies. This would, no doubt, stimulate loan demand. The borrower could utilize the proceeds from the loan to make a spread by investing into stocks and bonds that pay a dividend or carry a coupon. The influx of cash being funneled into the stock markets of the U.S. and the other developed countries in Europe and Asia would be huge. Additionally, should the BOJ institute a negative rate loan policy it would likely be adopted by the European Central Bank.
The implementation of negative rate loan policies by the BOJ and the world’s other central banks would better stimulate the world’s capital markets as compared to any of the previous monetary or fiscal stimulus policies that have been previously utilized since the crash of 2008. However, the effect of such stimulus would prove to be very temporary. Negative rate loans would not stop the spreading of the negative interest rates that will eventually render the world’s banking system dysfunctional and cause a collapse of the world’s capital markets. See my April 11, 2016 report entitled “Negative Rates Pose Grave Risks to Banks” which includes imbedded videos.
Assuming that Japan institutes negative rate loans, it is very likely that most of the world’s stock markets could substantially eclipse their 2015 highs by the end of 2016. It would result in a blow-off, or a final upward spike, in the prices for all of the dividend paying shares and corporate bonds trading in all of the world’s developed countries. Should such a scenario unfold I would not be surprised by the markets increasing by 10% abov3e their 2015 highs. A spiking market would increase the probability of and speed up the time-table for the eventual crash of the markets since the yields on all U.S. sovereign debt Treasury securities will go negative much more quickly. The massive bubble for the prices of income-producing assets that would likely form, would result in the eventual crash of the markets becoming more horrific than previously imagined.
The NIRP Crash Indicator has performed reliably since I developed it in February of 2016. See Equities.com “New Indicator to Predict Market Crashes”, March 7, 2016. After the indicator spent the entire month of March 2016 at the Cautionary Yellow level, its reading went to Orange after the close of Friday April 1, 2016. Subsequently, during the week ending April 8, the world’s stock and currency markets experienced increasing levels of volatility not experienced since February of 2016. For the week ending April 8 all of the U.S. stock indices, including the S&P 500 and the Dow 30 Industrials composites, declined by more than 1% and the dollar closed at 18-month lows versus the yen.
Below is a one-month chart comparing exchange rates for the U.S. dollar and Japanese yen. The significant decline for the dollar versus the yen that began on March 29, 2016 and continued through the close of Friday April 1, 2016 resulted in the NIRP Crash Indicator going from Cautionary Yellow to Pre-Crash Orange after the market closed on April 1, 2016. After bottoming on April 7th the exchange rate between the dollar and the yen stabilized with the lows being tested on April 11th and 18th. With the appreciation of the dollar that began during the week beginning April 18th and culminated with a spike back to the April 1, 2016 exchange rate level on April 22, 2016, the NIRP Crash Indicator’s signal concluded its Yellow-Orange-Yellow round-trip.
Negative rate loans would have profound effects on all of the world’s markets. This would include sovereign debt securities, commodities, gold, oil and currencies. I will produce a report that will cover the effect on all of the markets when I am in possession of final details regarding the BOJ’s plan to institute negative rate loans. The BOJ is expected to announce the new policy during the central banks’ scheduled April policy meetings that will conclude on April 28, 2016. The report will be available at www.dynastywealth.com pending receipt of BOJ’s announcement.
Based on all of the research that I have conducted on the spreading negative rates and the devastating effect that they can have on the global banking system the probability is high that the major global stock indices including the S&P 500 will begin a significant decline by sometime in 2017 at the latest. My March 16, 2016 article entitled, "Ridding World of Negative Rates May Require Meltdown of Income-Producing Assets”, provides details about the potential mark down of the S&P 500 could likely be in stages. My interview “Why Negative Rates could send the S&P 500 to 925” provides the rationale for why the S&P 500 could decline to under 1000.
For those preferring to liquidate as soon as possible, instead of their having to monitor Dynasty Wealth’s “NIRP Crash Indicator” that is monitoring for the next market crash, my recommendation is that they employ a “black swan” investing strategy. Nassim Nicholas Taleb devised the strategy of investing 90% of one’s liquid assets in government or sovereign debt securities and the remaining amount in extremely high-risk/high-return investments including venture capital and small cap and low priced stocks. The video below entitled “Markowski Visionary Analyst 5 of 5” provides details regarding sovereign debt being the only 100% safe solution that an investor can apply to protect their liquid assets from a market crash or economic calamity.
Taleb’s book (Taleb, N.N. 2007. The Black Swan: The Impact of the Highly Improbable. Random House) spent 36 weeks on The New York Times, Best Sellers list. In his book, Taleb, who had a distinguished career as a trader, contended that banks and trading firms are especially vulnerable to hazardous “Black Swan” events that expose their very defective models. (Please see CNBC interview with Taleb.)
Taleb’s philosophy is both extremely simple and safe. Invest under the assumption that it is inevitable that there will be a “Black Swan” or one-off event(s) that will devastate a market. Should such an event occur, the result would be that the shares of the companies, even those in the S&P 500 — arguably the world’s highest quality stock index — would get clobbered. Thus, it is ludicrous for an investor to believe that they have little risk because they are fully diversified. Diversification does not protect an investor during periods of extreme volatility or against unforeseen mega-events. Taleb made huge profits from the crash of 1987, the bursting of the NASDAQ dot-com bubble in 2000, and from the crash of 2008.
The research philosophy of the Dynasty Wealth LLC, the “boutique” research firm that I founded perfectly positions an investor with the high-risk and high-return investment opportunities required to effectuate a “Black Swan” investing strategy. Dynasty Wealth evolved from research that I had conducted on the ongoing transformation from the industrial economy to the digital economy. My research findings enabled me to conclude that the period from 2015 through 2020 would be the best ever for investors to generate dynasty wealth returns of 10- to 100-times from utilizing a truly diversified portfolio. The video entitled, “Digital disruptor companies have the potential to get $10 billion valuations quickly”, below provides details about how investing into a portfolio of digital disruptors enable investors to create dynasty wealth. It discusses digital disruptor UBER. A $10,000 investment into UBER in 2010 was valued for $105 million in 2015.
The following are additional video interviews of me pertaining to negative interest rates:
- Video: Negative Rate Risks Parallel to 2008’s
- Video: Negative Rates Pose Risks to U.S. and all Global banks
- Video: Michael Markowski, Founder, Dynasty Wealth sits down with SCN's Jane King
Additional videos are available explaining digital disruptor and first mover companies, whereby selectively investing in these market niches enables an investor to create dynasty wealth relatively quickly. (Please see http://www.dynastywealth.com/video.php.) In-depth information regarding my past and current predictions is available at www.michaelmarkowski.net.
My predictions are frequently ahead of the curve. The September 2007 predictions that appeared in my EquitiesMagazine.com column stated that share-price collapses of the five major brokers, including Lehman and Bear Stearns, were imminent. While accurate, they proved to be premature. For this reason I had to advise readers to get out a second time in my January 2008 column entitled “Brokerages and the Sub-Prime Crash”. My third and final warning to get out, and stay out, occurred in October of 2008 after Lehman had filed for bankruptcy. For my article “The Carnage for Financials Isn’t Over” I reiterated that share prices for the two remaining public companies continued to be too high. By the end of November 2008 share prices of both Goldman and Morgan Stanley had fallen by an additional 60% and 70%, respectively — new all-time lows.