Homepage / Investment / Op-Ed: How to spot the next market crash
Amazon says this Prime Day was its biggest shopping event ever Kudlow says President Trump is 'so dissatisfied' with China trade talks that he is keeping the pressure on As stocks regain their footing, an ominous warning looms Goldman Sachs downgrades Clorox to sell, says valuation is 'unsustainably high' How Satya Nadella has spurred a tripling of Microsoft's stock price in just over four years Kudlow says economic growth could top 4% for 'a quarter or two,' more tax cuts could be coming The one chart that explains Netflix’s stunning comeback US housing starts plunge 12% in June to a nine-month low Aerospace titans Boeing and Airbus top $110 billion in orders at Farnborough Target uses Prime Day to its advantage, logging its 'biggest online shopping day' so far this year Billionaire Marc Lasry sees bitcoin reaching up to $40,000 as it becomes more mainstream and easier to trade These are the 10 US airports where you're most likely to be hacked Amazon shares slightly higher as investors await Prime Day results Wreck of Russian warship found, believed to hold gold worth $130 billion A bullish ‘phenomenon’ in bond market is weeks away from fading, top credit strategist says Stocks making the biggest moves premarket: MS, GOOGL, TXN, UAL, NFLX & more Twitter shares up 50% since late April means most upside priced in, analyst says in downgrade EU fines Google $5 billion over Android antitrust abuse Mortgage applications fall 2.5% as buyers struggle to find affordable homes America may not have the tools to counter the next financial crisis, warn Bernanke, Geithner and Paulson Investors are getting spooked as the risk of a no-deal Brexit rises EU expected to fine Google $5 billion over Android antitrust abuse Ex-FBI chief James Comey urges Americans to vote for Democrats in midterm elections Elon Musk apologizes to British cave diver following baseless 'pedo guy' claim Disney, Comcast and Fox: All you need to know about one of the biggest media battles ever Xiaomi shares notch new high after Hong Kong, mainland China stock exchanges reach agreement The trade war is complicating China's efforts to fix its economy European markets set for a strong open amid earnings; Google in focus Hedge fund billionaire Einhorn places sixth in major poker tournament The biggest spender of political ads on Facebook? President Trump Asian stocks poised to gain after Fed's Powell gives upbeat comments; dollar firmer Stocks are setting up to break to new highs Not all FAANG stocks are created equal EU ruling may be too little, too late to stop Google's mobile dominance Cramer explains how Netflix's stock managed to taper its drop after disappointing on earnings Airbnb condemns New York City's 'bellhop politics,' threatens legal retaliation Amazon sellers say they were unfairly suspended right before Prime Day, and now have two bad choices Investor explains why 'duller' tech stocks can have better returns than 'high-flying' tech names Elon Musk is 'thin-skinned and short-tempered,' says tech VC Texas Instruments CEO Brian Crutcher resigns for violating code of conduct Google Cloud Platform fixes issues that took down Spotify, Snapchat and other popular sites Uber exec: We want to become the 'one stop' transportation app 'What a dumb hearing,' says Democrat as Congress grills tech companies on conservative bias Amazon shares rebound, report says Prime Day sales jumped 89 percent in first 12 hours of the event How to put your medical history on your iPhone in less than 5 minutes Investment chief: Watch these two big events in 2018 Even with Netflix slowing, the market rally is likely not over Cramer: Netflix subscriber weakness debunks the 'sky's the limit' theory on the stock Netflix is looking at watch time as a new area of growth, but the competition is stiff Why Nobel laureate Richard Thaler follows Warren Buffett's advice to avoid bitcoin Rolls-Royce is developing tiny 'cockroach' robots to crawl in and fix airplane engines After Netflix plunge, Wall Street analysts forecast just tame returns ahead for the once high-flying FANG group Roku shares rise after analyst raises streaming video company's price target due to customer growth China is investing 9 times more into Europe than into North America, report reveals Amazon says US Prime Day sales 'so far bigger than ever' as glitch is resolved Netflix is on pace for its worst day in two years US lumber producers see huge opportunity, rush to expand San Francisco to consider tax on companies to help homeless Homebuilder sentiment, still high, stalls as tariffs, labor and land drive up costs Powell backs more rate hikes as economy growing 'considerably stronger' Netflix history is filled with big stock declines – like today – followed by bigger rebounds Intel shares get downgraded by Evercore ISI due to rising competition from Nvidia, AMD Petco aims to reinvent the pet store with something you can't buy online Genetic testing is coming of age, but for consumers it's buyer beware Tech 'FAANG' was the most-crowded trade in the world heading into the Netflix implosion, survey shows Netflix weak subscriber growth may indicate a 'maturity wall' that could whack the stock even more: Analyst This chart may be predicting the bull market's demise Wall Street says Netflix's stock plunge is a ‘compelling’ buying opportunity because the streaming giant ‘never misses twice’ Tesla sinks after Musk tweets, again Boeing announces new division devoted to flying taxis Stocks making the biggest move premarket: NFLX, UNH, GS, AMZN, WMT & more Deutsche Bank downgrades Netflix, but says big subscriber miss is not 'thesis changing' IBM is experimenting with a cryptocurrency that’s pegged to the US dollar North Korea and Zimbabwe: A friendship explained Virgin Galactic spinoff Orbit to launch rockets from the UK with space deal Artificial intelligence will create more jobs than it destroys? That’s what PwC says ‘Treasonous’ Trump and ‘Putin’s poodle:' Scathing headlines follow the Trump-Putin summit China’s fintech companies offer ‘enormous’ opportunity, investment manager says Trump's performance at summit with Putin was 'unprecedented,' experts say Walmart and Microsoft link up on cloud technology as they both battle Amazon European stocks seen mixed amid earnings; Fed’s Powell to address Congress How I knew I should quit my day job and run my start-up full-time: Viral website founder China's stocks have been trounced, but the trade war may ultimately be good news for those shares Billionaire tech investor Peter Thiel bets on crypto start-up Block.one Asian shares subdued open after mixed close on Wall Street; energy stocks under pressure Amazon cloud hits snags after Amazon Prime Day downtime Netflix isn't doomed by one quarter unless people start questioning the long-term investor thesis Tech stocks set to sink on Tuesday after rough evening for ‘FANG’ Netflix plummets after missing big on subscriber growth This wristband lets humans control machines with their minds The U.S. has a rocky history convincing Russia to extradite computer criminals Amazon suffers glitches at the start of Prime Day Jeff Bezos is now the richest man in modern history 'The United States has been foolish': Read Trump and Putin's full exchange Goldman Sachs recommends these 5 highly profitable companies — including Nvidia — to combat rising inflation Goldman Sachs releases 'tactical' stock picks for this earnings season Three red flags for Netflix ahead of its earnings report The bond market may be raising recession fears, but don't expect one anytime soon Cramer: Banks are 'making fortunes' but are still as hated as they were during the financial crisis Putin told Trump at summit: Russia never meddled in US election


Op-Ed: How to spot the next market crash

Investors have learned that “it’s different this time” is the most dangerous rationale for buying into a market bubble. It’s easy to believe that the United States’ stock market has been fundamentally changed by the technology of trading itself or by one of the new contraptions that is supposed to make trading easier and investing safer but it just isn’t so.

What investors haven’t learned, and what may help them avoid some of the damage from the next crash, is that rather than focusing on how the next bubble might be different, they should remember all of the modern stock market crashes are astonishingly similar and they should watch for those similarities.

The genesis of my latest book, “A History of the United States in Five Crashes,” was the realization that each of the five modern stock market crashes, beginning with the Panic of 1907 and ending with the Flash Crash of May 6, 2010, exhibit astonishing similarities that we should be alert for. This doesn’t mean another crash is imminent. In fact, it’s probably years off. But less than two years passed between the meltdown of 2008 and the Flash Crash of 2010 and another crash is inevitable while we hope it is far off.

The market always rallies strongly before a crash – this is easy to recognize. The other similarities are camouflaged by changing circumstances but include the appearance of some external catalyst – the San Francisco earthquake of 1906 led to the Panic of 1907 when the rebuilding of the financial capital of the western United States vacuumed up liquidity around the world – and the appearance of some new financial contraption that is poorly understood and untested under stress and which injects leverage into a system that is on the ragged edge of equilibrium, pushing it into chaos. In 1987, that contraption was portfolio insurance; in 2008 it was the alphabet soup of mortgage-backed securities; and in 2010 it was algorithmic trading.

Another similarity is the presence of villains. Each crash has at least one and often several. Benjamin Strong was President of the newly-formed Federal Reserve Bank of New York during the 1920s and Strong’s misguided efforts to help his friend, Montague Norman, who was Governor of the Bank of England, return England to the gold standard following World War I caused Strong to recklessly lower interest rates in the United States despite knowing that low rates were fueling a “speculative orgy” in stocks and despite being repeatedly warned of the approaching danger. The result was the quintessential crash of October 1929.

With the advantage of perspective provided by the nearly ten years that have passed since the worst of the meltdown of 2008 it’s possible to recognize that villain. We now know about the abuses in the mortgage market which started with mortgage lending and ended with stupefyingly complex mortgage-backed derivatives including synthetic collateralized debt obligations and credit default swaps. The villain was the one responsible for regulating the entire mortgage process, from origination to securitization but who did nothing as all these mortgages were being written and all these mortgage derivatives were being ginned up and foisted on supposedly savvy institutional investors?

The Federal Reserve was that one regulator with the broad responsibility to rein in the entirety of the abuses in the American mortgage and it was led by Alan Greenspan, a devotee of Ayn Rand and a believer in the notion that banks would self-regulate because “the self-interest of market participants generates private market regulation.” What Greenspan failed to recognize was the “I’ll be gone, you’ll by gone” atmosphere that had seeped into every bit of the mortgage market. Mortgage brokers could stretch the truth when writing mortgages and investment bankers could stuff those inferior mortgages into mortgage-backed securities because by the time the damage was discovered, the broker and the banker would have been paid and would likely have moved on, they would “be gone.”

The Home Ownership and Equity Protection Act of 1994 (HOEPA) required the Fed to enforce the Truth in Lending laws as they applied to mortgages. Sheila Bair, who served as Chair of the FDIC during the worst of the crisis, called HOEPA the “one bullet” that could have prevented the financial crisis. But Greenspan refused to regulate.

Many pushed him to fulfill his statutory responsibility. Robert Gnaizda and John Gamboa, founders of the Greenlining Institute, begged Greenspan to regulate the mortgage business. Edward Gramlich, a Fed governor, warned of the abuses going on in the mortgage market. While Gramlich had warned Greenspan in private, Susan Bies, another Fed governor, went public with her concerns in 2006. And Bair made public warnings as well. Even Ben Bernanke, who was left to clean up the mess as Greenspan’s successor at the Fed, called the Fed’s failure to fulfill its duty as the regulator of the mortgage market “the most severe failure of the Fed in this particular episode.”

As our stock market idles near all-time highs it’s timely to wonder what catalyst might destabilize the stock market and who might be the villain who deserves the blame if we were to experience another crash?

There are plenty of candidates if the catalyst is geopolitical. Venezuela is one of the largest oil exporters in the world and their society is crumbling, North Korea is again being belligerent, and Russia is an overt danger in Syria and a covert danger in potential election tampering. Maybe the villain will be the leader of one of these floundering countries. Maybe it will be the creator of the next feat of financial engineering which metastasizes when the market is under pressure and behaves in a manner never imagined by those who turned it loose.

But the real danger for investors is that the time between the catalyst and the crash is contracting. The Panic of 1907 took place more than a year after the San Francisco earthquake vacuumed up the world’s liquidity. The Crash of 1929 took place nearly two months after a fraudster in London demonstrated how silly the faith in the stock market had become. Black Monday of 1987 took place one weekend after it seemed we were finally at war with Iran. And the Flash Crash of May 6, 2010, took place less than a day after rioting, arson, and murder in Athens led the world to believe that Europe was coming apart politically and economically.

The American stock market has financed retirements and college educations for decades. American investors have done more good in this world than any group with the exception of American soldiers. If we can warn investors about the course and cause of the past stock market crashes we’ve begun the process of minimizing the damage. At least for those paying attention.

Commentary by Scott Nations, president and chief investment officer of NationsShares. He is also the author of several books, including his latest, “A History of the United States in Five Crashes.” Follow him on Twitter @ScottNations.

For more insight from CNBC contributors, follow @CNBCopinion on Twitter.

Source: Investment Cnbc
Op-Ed: How to spot the next market crash

Comments are closed.