Stock Market Faces Gloomy Decade as Economic ‘Tsunami’ Looms

May 7, 2019 10:50 UTC

By CCN: Every year, the financial world’s brightest minds convene at the Milken Global Conference. This year, many of those same minds warned that the stock market faces a decade characterized by doom and gloom.

Milken Analysts: Wave Farewell to Roaring Stock Market

Guggenheim’s Chief Investment Officer Scott Minerd grabbed the big headline at the Milken Global Conference by saying the annual returns for the stock market over the next 10 years would be minimal.

“For US equities over the next decade we should be expecting maybe a 1% to 2% return. This [current] long period of outperformance is eventually going to run into a period of underperformance.”

Minerd didn’t stop there. He added:

“Not only are equities inflated in value, but bonds are inflated in value.We’re continuing to inflate assets … and not really being compensated to take on a lot of risk.”

The stock market has indeed been roaring over the past ten years – but not for much longer.

The Dow Jones Industrial Average (DJIA) and broader stock market have boomed over the past decade. | Source: Yahoo Finance

Ignacio Jayanit, a managing partner at Corsair Capital, also sounded the alarm at the Milken Global Conference by pointing out two elements in existence today that helped create the stock market crash during the dot-com bubble.

“From the perspective of value destruction, the twin pillars of overleverage and technology were the problems of that era, from a private-equity investing perspective. Where we sit today, that could well be the same two pillars of value destruction.”

It was over-leverage that also created the stock market crash, and took the American economy with it, during the mortgage crisis.

Everyone is Taking on Too Much Debt

Excessive debt leading to a market crash was also on the mind of Christine Lagarde, the managing director of the International Monetary Fund. At the Milken Conference, she pointed out that non-financial US debt was 73% of GDP, almost the same level as right before the financial crisis.

This, of course, stems from the head-in-the-sand monetary theory that governments can just keep interest rates low, and borrow their way to ongoing growth forever. The problem, she said, is that debt eventually must be paid back, saying:

“This excessive debt is going to weigh on us and is going to be a problem.”

Nowhere to Run: Private Equity Not a Safe Haven from Economic ‘Tsunami’

More gloom and doom at the Milken Global Conference came from Mark Machin, CEO of the Canada Pension Plan Investment Board. He sees a bubble growing in the private equity sector, as more and more pension funds plow money into alternative investments.

Alternative investments are designed to diversify portfolios into assets that are not correlated with the overall stock market.

A problem can arise when volatility in the overall stock market perks up. Because private equity investments are often illiquid, that will force investors and funds to start dumping liquid positions – namely, stocks.

Machin said:

“There’s not much inventory in many of these asset classes, as we know. We saw the behavior — the gapping in December — in a number of these markets, and I think you’re going to find that risk models could blow up very quickly on the public side and trigger more events. So I think people need to be super careful.”

Finally, the chief risk officer for Credit Suisse, Lara Warner, expressed concern over a European contagion. She warned that German and Italian recessions, Italian political instability, and rising European debt could all lead to a collapse of the European economy. That, in turn, could spill over into US markets.

“I do worry that we are in a period where small earthquakes can lead to large tsunamis. It [Europe] seems to be the place that is the most fragile.”

Posted in: Market NewsNews
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