The perils of predicting a market crash in 2014

The only bubble we're in appears to be filled with hot air.

By The Week Dec 19, 2013 2:46PM
Image: Crystal ball (© Brand X Pictures/Jupiterimages)By John Aziz, The Week

In the world of Wall Street crystal-ball-gazing, you can always count on a bearish faction to predict the worst. But Paul B. Farrell, a columnist at Marketwatch, might have gotten a little carried away this week, warning that there is a 98 percent chance of a stock market crash in 2014.

I have no idea where he got that 98 percent figure. Based on his article, it does not appear to be the product of any analytical model. Claiming a 98 percent probability just seems to be a quick way to express the idea that a crash is extremely likely.

This isn't the first time he's made such a prediction. This June, Farrell theorized that there was an 87 percent probability of a stock market crash in 2013, a prediction that is quickly running out of time.

He theorized that the financial apocalypse is nigh because we are in a huge economic bubble -- the Bubble With No Name -- caused by the Federal Reserve keeping interest rates too low.

Yes, interest rates have been very low for a long time. But that's not solely because of the rate targets set by the central bank. Interest rates, after all, are simply the price of credit. If you combine a weak economy with high unemployment and low demand for credit, then interest rates are going to be low whatever the Fed does. In the Great Depression, for example, interest rates were simillarly low, even without a massive monetary intervention.

Plus, having low interest rates is not really a bad thing, because it means that spare capacity can be deployed more cheaply. It means that the unemployment rate can be reduced, and businesses, individuals, and governments can invest in productive activities cheaply. If we’re going to have a sustainable recovery, low interest rates are a path to get there.

And guess what? Since Farrell made his doomsday predictions in June 2013 -- and while he was writing more articles with titles like "America’s new 'economic guillotine' is dead ahead" -- the economy made some substantial progress, with unemployment falling quickly and growth picking up strongly. Low interest rates aren't dooming America -- they're helping America recover.

Now, I don't know if there will be a crash in 2014 or not. I don't think anyone really does. Trying to predict markets involves understanding human psychology, and humans are not always rational and certainly not mechanistic. The number of variables at work in the stock market are dizzying.

There are plenty of risk factors for 2014. Weakening demand from China due to a Chinese real estate or financial slump is a possibility. The Federal Reserve tapering its asset purchase programs also probably poses a risk to markets' upward trend. And there are the usual geopolitical risks: Natural disasters, conflict in the Middle East, etc.

But there are also plenty of causes for optimism, too. A premature taper of the Fed's asset-buying programs is beginning to look significantly less likely with the appointment of Janet Yellen, who is seemingly determined to lower unemployment further, and has scope to do so with inflation still a whole percentage point below the central bank's target. And Congress is on the verge of passing a budget deal, suggesting that the days of uncertainty resulting from Congressional dysfunction may finally be over!

Energy prices are moving lower as American domestic oil production ramps up; indeed, the U.S. is on trend to become the largest oil producer in the world. After years in the dumps, real estate prices are finally improving, meaning that one big drag on the economy is being lifted. Credit is expanding to both businesses and households. And growth remains reasonably high around the world, suggesting that global demand for American goods and services will remain decent.

There is plenty of reason to believe that the recovery will strengthen, growth will continue to climb, and unemployment will continue to fall. Obviously, nobody knows the future so we can’t be sure. But those who keep predicting imminent doom and disaster keep getting more egg on their faces. Perhaps the real unsustainable bubble is in claiming that there is a huge unsustainable bubble.

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18Comments
Dec 19, 2013 3:44PM
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It really does not make sense that the fed can just print money when the stock market or real estate market goes down.  Otherwise, we would always do this.   There will certainly be unexpected ramifications of this policy in the future.  I would expect a declining dollar and stock market correction as the rest of the world looks for alternatives to using the dollar.  Only time will tell. 

 

The rest of the world really does not have to trade comodities in the dollar.  Since the US government and the fed has abused the reserve currency status of the dollar, we will eventually see a decline in purchasing power and it will effect all of us. 

 

The fed has made rich people even richer through the stock market, and eventually the rest of us will be paying more and more for basic essentials of life. 

Dec 19, 2013 5:02PM
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Where's the volume? .............. The new "show me the beef".
Dec 19, 2013 5:32PM
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Does the market only go up then? Is history not applicable to the market anymore? What criteria would the Bulls put on a market correction?
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pretty much Paul B. Farrell is close to right

 

there is a 100 percent total collapse of the US stock market and bind market and financial system planned to go off some time in Sept 2015.

 

is he is just off one year.

 

All the smart money is already out of the US

Dec 20, 2013 1:49AM
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Repukelicans and hot air go hand in hand!
Dec 19, 2013 5:33PM
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You notice the people always predicting a market crash are the right wingers who weren`t

smart enough to invest when Obama took office and missed 98% gains?Jeolousy is a terrible

disease.

Dec 19, 2013 5:38PM
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My favorites... Gold is falling to record lows... no Comments blog to stop yellow journalism. Bernanke rewrites the rule book. Typo... Bernanke is a fool, books as a loser. Here is a good one-- the best banks... we don't have any. 
Articles on career recovery: zero. But WAIT... here are corrupt bankers who made ridiculous fortunes this year... the President pardons crack addicts... film at 11. I'll pass. 
The overriding disease for all of this is-- psychopathy. We have no economy. Those "old people" in teenager jobs thwarting recovery (how DARE them), GAVE US REAL ECONOMY. Kool Aid isn't good for America. We have ZERO CHANCE of coming out of this well. 
If yesterday was free shipping day, is today bail USPS day? Anyone up for an audit of Amazon to find out how many items sold under cost SOLELY to destroy competition and free enterprise?
Arrogant egos on crack, using game tokens, playing video games, destroying the world. 
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