Will the global stock market crash?

Posted on June 6, 2006 , Filed Under Stocks

I’ve been reading some of the opinions of financial commentators that are predicting a global stock market crash. The opinion of one author, Chris Laird of the Prudent Squirrel, caught my attention last week.

Here is a quote from the article:

…Japan allowed financiers world wide to borrow Yen for a literally zero interest rate and then invest that money in world stock markets and to buy other nations bonds for about a 3% interest rate premium. The amount of borrowed Yen invested in the world’s financial markets is astounding. We are talking trillions of dollars value in Yen that has found its way into every major financial market in the world.

The US is considering a pause in its interest rate hikes of late. The interest rate differential the US holds over Japan and Europe is as much as 3%. If that differential is not maintained, trillions of dollars of US denominated financial investments are going to be unloaded on the world markets. A combination of unwinding the Yen carry trade and a serious drop in the value of the USD will just simply pull the rug out from under every major financial market that has benefited from the cheap USD and Yen.

I agree with Chris that there are early signals of a global stock market crash with declines in emerging markets such as Indonesia, China and India. I’ve written for sometime that the stock market faces extreme uncertainty due to global fears over terrorism, natural disasters such as hurricane Katrina, or sicknesses such as a Bird Flu pandemic.

I am going to continue to recommend gold mining stocks as the best hedge against a major drop of the USD or a global stock market crash. I do not believe we are in store for a major crash in the next 6-12 months unless a new war erupts in the Middle East or we face some type of global Bird Flu pandemic. I will update my current top gold mining stock picks with current buy price targets with gold trading under $650.

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2 Comments »

Comment by MktCrash

2006-06-06 20:23:08

I agree that the volatility in many markets around the world is a warning sign of a possible correction. We are now seeing the cycle of excess liquidity and easy money come to an end. This cycle was perhaps the single most important factor in driving up asset prices in recent years.
Be prepared for a change in the investment landscape.

Market Crash

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Comment by Ben

2006-06-06 23:03:33

I’ve read a few of his articles. He mentions in some free articles in the past that the potential for the U.S. to experience deflation, given our high level of national debt, could also pose a threat to the dollar and expand demand for gold. But I found an interesting speech given by Bernanke in 2002 that details what the Fed could do against deflation. Gold could have an interesting run, but I think the U.S. economy has such good leadership in the form of Bernanke and Paulson in the Treasury that the dollar should have the ability to weather the future. Maybe the dollar isn’t dead?

Check the deflation article out at: http://www.federalreserve.gov/boardDocs/speeches/2002/20021121/default.htm

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