Friday, September 28, 2018

FELDSTEIN: Recession and Stock Market Crash Coming; $10 Trillion in Wealth Could Be Wiped Out

By Robert Wenzel

My favorite Keynesian economist, Martin Feldstein, chairman of the Council of Economic Advisers under President Reagan and current professor at Harvard, writes in a Wall Street Journal op-ed:
Ten years after the Great Recession’s onset, another long, deep downturn may soon roil
the U.S. economy. The high level of asset prices today mirrors the earlier trend in house prices that preceded the 2008 crash; both mispricings reflect long periods of very low real interest rates caused by Federal Reserve policy. Now that interest rates are rising, equity prices will fall, dragging down household wealth, consumer spending and economic activity... 
Homes aren’t as overvalued as they were in 2006, so there’s little chance of an exact replay of the 2008 crisis. The principal risk now is that a stock-market slowdown... 
As short- and long-term interest rates normalize, equity prices are also likely to return to historic price-to-earnings ratios. If the P/E ratio of the S&P 500 regresses to its historical average, 40% below today’s level, $10 trillion of household wealth would be wiped out.
Feldstein is, of course, correct. Asset prices are very high. And in the EPJ Daily Alert, I am now more bearish on the stock market and economy than at any other time since the Great Recession.

In the ALERT, I have not yet made a full out warning that a crash will occur in the near future. There is a small possibility that the Fed via its monetary policy actions could delay a crisis for a bit longer.  But things are precarious and this is no time to be in the general stock market.

It is noteworthy that Feldstein discusses a 40% regression in stock market prices. In the ALERT,  I have suggested that a break in the stock market would result in a decline of somewhere between 30% and 50%, which of course averages out to 40%.

I am not, yet, pounding the table with immediate concern about the stock market the way I did in 2008 but this could change at any time. Things are very unstable. This isn't like 2015 when Austrian-lites thought all hell was going to break loose for the stock market and economy because of one tiny Fed rate hike and were wrong. We have now had eight rate hikes in the current series, eventually, a rate hike will break the back of the stock market.

Bottom line: The stock market is very high risk right now.

Robert Wenzel is Editor & Publisher of


  1. Understands ABCT but is still a Keynesian?

  2. The only reason the stock market hasn't crashed yet is because the the elite have not yet figured put how to stick their losses to the taxpayers like they did after 2008.