I have been waiting for a market crash since I started working more than half a decade ago. When Covid-19 struck, there was a big market correction of about 30% over one month. However, the recovery to the previous heights took only four months and has since kept breaking the record for all-time highs. I would say this isn’t the market crash that I am waiting for but who knows?
My investment war chest is still waiting to be deployed when the time comes. I understand that there might not be a market crash soon and I might miss out on the biggest bull market in history, only time will tell. Don’t believe anyone that says they can predict a guaranteed market crash.
Let’s take a look at some of the potential triggers of the next market crash.
Disclaimer: All comments on this blog site are an expression of opinion. You are recommended to consult with a licensed, qualified financial advisor before making any financial decisions.
Evergrande Contagion
Source: Reddit
I cannot remember how many times the mainstream media has reported that Evergrande has “defaulted”. Evergrande is one of the biggest property developers in China and has been in the news for being unable to service its debt. Evergrande has more than US$300 billion in liabilities with the majority being domestic. With “only” US$20 billion of international bonds are deemed to be at risk, the debt portion might not directly affect the market outside of China. Indirectly, Evergrande finally defaulting might have major ramifications on the international market.
Evergrande Is Not The Only One In Trouble
Evergrande’s troubles just shone a spotlight on other overleveraged property developers. Modern Land, Sinic and Kaisa are some of the Chinese property developers to supposedly default. If there are any international companies especially investment funds out there holding their stocks or bonds as collateral, they might get margin called as these assets have fallen greatly in value. It might also be more difficult for them to raise funds as no one wants to buy assets from a defaulting company.
The real estate sector, including housing investment, services, commodities and consumer durables make up 29% of China’s GDP.
Besides companies, individuals are also greatly affected. Some have pre-paid for apartments but they might never get delivered.
Lunar New Year is also around the corner and there is an approximate S$236 billion worth of deferred wages that are not paid to construction workers. It is estimated that 52 million workers work in the construction sector. This could lead to social unrest if so many workers are not paid before one of the most important holidays in China.
If China is in trouble, it might also spill over into the international markets as China is a major cog in the global supply chain. China is the largest exporter of goods in the world. If the global supply chain is disrupted, industries outside construction and real estate might also be affected.
Covid-19 Mutation Or The Next Pandemic
This pandemic has plagued us since early 2020 where all our lives have been disrupted. Wearing a mask and social distancing has been our way of life for the past two years. The last market crash of 30% coincided with the first spread of Covid-19 but it recovered quickly and has since broken new highs. At that time, we were not sure if there will be any vaccines or cures for Covid-19 in the near future so market confidence dropped.
Today, we are at our 5th variant of concern, Omicron and we have vaccines and drugs that can lower the risk of transmission and severe complications. I can safely say that many of us are tired of living with Covid and can’t wait for the day we can go back to “normal”. No more masks, no more social distancing, no more vaccines every 6 months.
There is also pandemic fatigue where people are disregarding rules. These might be the vocal minority but I have seen some comments actually supporting the illegal gathering at Clark Quay this new year’s eve. The current understanding about Omicron is that it has milder symptoms but it is much more transmissible. We will see over the next few months whether the ICU usage will increase due to the higher transmission factor. We also do not know what are the long term effects, if any.
What happens if there is another Covid-19 mutation that causes more damage or even another pandemic coming in from the wild? Can we, economically or psychologically, survive another major lockdown? We managed to get Covid-19 in control as we can make use of past research and huge amounts of money to fast track effective vaccines. Will we be able to repeat this the next time?
GameStop And Other Shorted Stocks
If you have paid attention to finance related news, you would have come across the gaming retailer, GameStop’s meteoric share price rise.
Source: Reddit
For those out of the loop, it is basically a battle between hedge funds and retail investors. There is a theory that companies like GameStop have been shorted extensively by hedge funds bankruptcy. By extensively, I mean multiple times the float, which is illegal.
Investors who call themselves “apes” on Reddit noticed this phenomenon and started buying shares, causing a huge rise in the share price.
I would like to emphasize that there is no group of investors that are colluding or orchestrating buying the stock together. Information is shared on an open forum and decisions are made individually after reading the due diligence.
Rational market behaviour is out of the window at this time as the holders are not shaken by volatile share pierce movements a.k.a diamond hands as they are either waiting for life-changing money or for the hedge funds to get imprisoned. The risk of loss on a short position is infinite. It costs the hedge fund margin fees to keep holding their shorts while it costs the stockholder nothing to hold the stock. There is also a loyal group of investors that believe in the transformation of GameStop so they are holding regardless plus they are directly helping the bottom line of the company by shopping at GameStop. Although GameStop is the more prominent stock in this phenomenon, there are also other heavily short stocks like AMC and Bed, Bath And Beyond.
MOASS?
MOASS is the abbreviation of the Mother Of All Short Squeezes. If the theory is correct, GameStop is has a short interest that is many times its actual float. If the hedge funds have to close their shorts, they will have to buy shares on the market, no matter the price, leading to MOASS. An example would be the Volkswagon short squeeze.
If there is a short squeeze, hedge funds that have short positions on these heavily shorted stocks might get margin called and be forced to sell their other stocks to maintain their margin. When there is major selling of their collateral, there will be selling pressure on these stocks that make up their collateral, bringing the share prices down, possibly causing a market crash while the squeezed stock to up in price. Banks that have relations to these hedge funds might also have big losses such as in the case of Archegos Capital.
Disclaimer: I have a small position in GameStop as this can possibly be a hedge against a market crash caused by MOASS. I feel that the theory is sound and even if we do not reach MOASS, GameStop is a company that is transforming from an only brick and mortar company into a physical-digital hybrid company.
War & Social Unrest
There are both international and domestic instabilities that might lead to war.
Inequality
There is a big gap between the wealth of the rich and the rest. Covid has also exacerbated the situation where asset prices owned by the rich keep rising while salaried workers are losing income.
Source: Visual Capitalist
A study by Credit Suisse shows that the top 1% owns almost 50% of the total global wealth while the poorest 55% owns only about 1.3% of the total global wealth. Coupled with the pandemic, a big gap between the different wealth levels can fuel social unrest.
Antiwork Movement
Source: Reddit
This brings us to our next point where the labour side is tired of working for peanuts while their bosses take all the profits. They are taking back the negotiation power and demand for proper pay and treatment. Previously, individuals might just suck it up and just work through abuses from entitled owners or managers. Now, however, the individuals are realizing their worth and these business owners are the ones that need them and not the other way around as they are now more willing to look around and shift to a job that treats them better financially and with respect. If your company doesn’t deserve any loyalty, your employees will just pack up and leave for another company that respects them. There are many stories where the employer threaten the employee with dismissal if they do not listen to them. Now, the employees won’t take such abuse and grant the employers their wishes and quit on the spot, making the employers backtrack on their threats, but it is all too late.
When the sentiment of resentment keeps growing and people rather just live on their unemployment income or savings, it will be a disaster for society and the stock market. Employers are already feeling the pain of this movement and also with recent data, 4.5 million Americans quit their jobs in November 2021.
China And Taiwan
China is getting more aggressive with matters regarding Taiwan and there are countries like the US and Japan speaking out on intervening if China attacks Taiwan. They have also been trying to push boundaries in the South China Sea to “claim back” their territory. If there is a war between China and Taiwan or any other country, it will definitely affect the markets.
Nationalism
There are high amounts of nationalism in major countries like the US and China. In the US, we have white nationalists while China has their “little pinks”. White nationalists have been a source of domestic terrorism while the “little pinks” have been “jumping over the wall” to attack anyone that “speaks badly of the Chinese”. These groups are getting more uncontrollable and there might be social unrest if one day they get triggered and go on a rampage.
Natural Disaster From Climate Change
Source: Reddit
Due to climate change, we are facing rising sea levels, storms and other natural disasters that are worse and more common than normal. If there is a natural disaster that affects a major city or multiple cities, it can halt markets and lives will be severely affected. When the future is uncertain, this is where markets lose their stability and might lead to a crash. Market crash from climate change is more of a long term thing but it might or might not happen in the near future, who knows?
Black Swan
A black swan is an event where there is an unpredictable event that has extreme consequences. There might be events that come out of nowhere where we least expect. A big storm might be brewing in some obscure corner of the economy and hit us from our blindspot, creating a market crash.
An example that I can think of would be the student loan crisis in the US where technically you cannot declare bankruptcy from student loans so it is a loan that will “never” default. However, what if one day the law changes and students start defaulting en masse? There is currently over US$1.5 Trillion worth of student loans owed. I think the major problem is that wages are not keeping up with the increases in the costs of college and other household expenses, making college graduates get deeper and deeper in debt with no relief in sight. The student debt crisis has also led to people being less willing to start a family and unable to own a property. All these factors can lead to social unrest and eventually a market crash.
TL, DR
I identified a number of potential triggers for the next market crash. I have the majority of my assets in cash as my war chest is still pending to be deployed should a market crash arrive. The events identified are not exclusive and might arrive in a combination to push the market over the cliff. Of course, it might not happen too. Do you think there is a market crash coming or the market will keep going up?
Do you have any events in mind that you think might trigger the next financial crisis? Drop a comment and let’s talk about it.
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