Financial Insider Warns of an Imminent Stock Market Collapse – Lombardi Letter

Wall Street Insider Warns of Coming Stock Market Collapse

The hits just keep on coming. Yet another money manager has predicted a stock market collapse, based on immutable trends the Federal Reserve cannot change.

Mark Yusko, Chief Investment Officer (CIO) of Morgan Creek Capital Management, has recently weighed in on the expected market performance for the next seven years, and it isn’t pretty. The core theme is demographics, which will continue to act as an economic headwind for at least the next two decades. Because of this, Mark believes tax cuts and stimulus programs will fail to stimulate demand, and consumption will fall over time. This is a fatal problem since the U.S. consumer accounts for about 70% of gross domestic product (GDP).

As bad as that sounds, there’s more.

Mark believes a recession is coming as long-term trends in credit growth and tax receipts continue to show declining year-over-year growth. Without rising increases in either, America’s debt-based economy cannot advance forward. Nor can government spending increase significantly, which is problematic since it is the largest purveyor of economic activity.

There’s also the fact that recessions tend to occur soon after a sitting two-term president leaves office. Every time this occurs, “There is a recession within the first year of the new administration. I believe this time will be no different” said Mark Yusko. As America is already indulged in the third-longest business expansion on record (soon to be the second-largest in a couple of months), the U.S. is overdue for a recession.  (Source: “Mark Yusko: I’m Telling You Right Now, the US Is Going to Have a Massive Crash,” Mauldin Economics, May 25, 2017.)

Mark also pointed out that since S&P 500 earnings growth has been flat since 2012, the stock market rally has been entirely valuation-driven. This makes the U.S. stock market among the most expensive in the world. It also makes it particularly vulnerable to a stock market collapse should these anticipated earnings fail to materialize. Investors keep hoping the earnings will come in to support valuations. But if it doesn’t, there’s a giant air pocket waiting to be filled. How far down is limited only to one’s imagination.

Declining earnings

Upcoming Stock Market Crash?

The biggest kicker in Mark Yusko’s prognostication is about expected returns. Due to the frothy valuations and expected recession on the “cusp” of emerging, investment management firm GMO projects returns will be negative over the next seven years. If we think about that for a moment, it implies a stock market crash is coming.

Why? Because the market moves in irregular distribution patterns, as opposed to a predictable curve. Think of it this way: assuming negative returns do materialize over the next seven years, is it more likely that the market will decline low single digits every year, or that it will have a large decline surrounded by years with normal distribution? The answer, both intellectually and historically, points to the latter.

In the end, Mark Yusko’s voice adds to a growing chorus of worried market professionals. This is troubling because these firms generally do not have an incentive to dissuade investors from allocating capital with them, or to promote fund redemptions. The undertones of warning seem poignant and genuine.

Fortunately, there’s still time to act if you haven’t done so already. But the window is closing, if the professionals are to be believed.

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