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As investors are carried away by the Fed’s unconventional monetary policies, relying on constant liquidity injections to hold the entire financial mechanism together, they seem to be forgetting that these measures are only delaying an unavoidable stock market crash.
Many analysts have been stating that, at this stage, there isn’t even a remote possibility for the economy to ever come back to normal. And, more dramatically, that even if a quick recovery takes place in the next chapters of this economic collapse, it will only deepen the downturn. The higher up the greater the fall.
In fact, all their optimism may actually be a harmful thing, as strategists assets that the investors are sounding too idealistic about the pace of this upturn, while the economy can’t support such an irrational market for much longer. They’re finding themselves in the middle of a dangerous stock market bubble.
The chart in this video illustrates the logic in which stock market bubbles are formed and how this pattern has been repeated over and over. For instance, during the bitcoin bubble burst and also the dot-com bubble of the 90s. At the present time, it is possible to notice that we are going down the same road. At least, the second chart regarding investor optimism has been pointing this way. It appears that we’re stuck in the “return to normal” stage, which is when the market cheerfully projects a fast economic recuperation to happen soon, just because it is managing to heal from a correction.
The main issue is that buyers haven’t proved to have enough strength to make any progress lately, and when this happens in moments of down trending markets, such as the one we’ve been in, with a prolonged stretch near but below the 200-day average, it potentially indicates bigger troubles and deeper economic collapse ahead.
Additionally, just as Warren Buffett’s investment principle attests that investors are to be greedy when the market is fearful and fearful when the market is greedy, the unreasonable exuberance in today’s market is most certainly greedy.
While valuations are increasing close to pre-sanitary-crisis levels, investors must ask themselves if the risk is worth it. Will it be possible for stocks to set all-time highs with growing unemployment rates that will last until the next year? That seems unlikely. The scenario won’t be late to shift, and investors will have to take a reality check once again.
Meanwhile, as they focus on potential vaccines and reopening the economy, these investors are still forgetting about one fundamental component to this equation: the economy. Sooner or later, the stock market will have to deal with what is happening in the real economy. When investors realize how profound is the damage of the lockdown for Main Street, it will quickly move to the next stage: fear, capitulation and despair.
Moreover, when investors remember that the liquidity crisis had started five months before the health outburst had arrived in US grounds, and that a collapse in central banks was expected longer before these circumstances, they’ll find out that the Fed’s magic money printer – meant to keep the market bubble inflated, fund government deficits and rescue the economy – is actually making the situation worse.
As a matter of fact, a prominent economic newsletter has already described in detail how we are moving towards what they call “the path to fiat obscurity”. Considering the extent of this situation surpasses the effects of current sanitary outbreak, the combination of the massive debt-creation, and desperate bankers trying to contain lending risks is going to be fatal.
As central banks will try to do everything they can to avoid a debt-driven depression, the result won’t differ from bank failures and bank collapses.
In conclusion, with both ends of the economy completely exhausted and lacking in options to sort the crisis out as fast as they would like and need to, it will be time for the leaders and the elites to finally act as adults, because so far they have shown no responsibility with all the lives that are being affected by their ego fights. As the real economy has been crashing on a loop, the stock market crash will only be one more catalyst to a huge financial system reset. Wait and see.
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