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RBS Predicts a Global Market Crash

I read a report from RBS predicting that there will be a global market crash come the end of summer/beginning of fall 2008. The crash will be due to the price of oil, increasing inflation, increasing interest rates, and more global credit issues coming to light.

Here are some snippets of the highlights:

… the bank’s research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as “all the chickens come home to roost” from the excesses of the global boom, with contagion spreading across Europe and emerging markets…

… RBS expects Wall Street to rally a little further into early July before short-lived momentum from America’s fiscal boost begins to fizzle out, and the delayed effects of the oil spike inflict their damage. …

… the massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets …

My initial thoughts are that it’s simply fear mongering. However, even if RBS is 100% correct, my thoughts are to keep your eye on the big picture as it will be only a blip on the stock chart 20 years from now. In fact, market corrections should be welcomed as it gives investors an opportunity to pick up some oversold strong companies at great prices.

If you can’t stomach the volatlity, you could look into hedging your portfolio with some Horizons BetaPro ETF‘s or purchasing put options.

What do you think of reports like this? Do they influence your portfolio strategy?

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 27 comments… add one }
  • Investing911 June 25, 2008, 9:07 am

    I am putting 25% of my portfolio into HOD (Horizon’s Ultra Short Oil (twice the inverse of oil)). Then I’ll enjoy the ride from $140 to $115 a barrel!

    • FT FrugalTrader June 25, 2008, 9:18 am

      Are you a big believer in oil dropping? Judging from the charts, it looks as though HOD may have bottomed out.

  • john June 25, 2008, 11:33 am

    Fear and Emotion drives markets a lot of the time. What do you want to bet they sold short right before releasing this article? That way they can ride it down and then back up. The market is over sold right now as it is, and oil has no where to go but down (supply increase, demand decrease, and alternative energy)

  • The Financial Blogger June 25, 2008, 12:00 pm

    It is funny how people tend to forget the past. I remember that in 2002, when Worldcom, Enron and others went bankcrupt based on falsified statements, “experts” were saying that it was the beginning of a new era on the stock market where nobody will trust financial statements anymore and where the market will go down for a decade.

    That’s interesting to see that between 2003 and 2007, almost everybody made money ;-)

    This is exactly the same thing now. I actually hope that the market drop by 20% +…. it will be a nice time to remortgage my house and buy more stocks ;-)

  • Geoff June 25, 2008, 12:10 pm

    Finally – something from the mainstream that is not 100% bullish 100% of the time.

    There are deep systemic problems in our financial system. The next 20 years will not be like the last 20 years.

    News like the one from RBS has been circulating in the alternative news for the last 2 years. The mainstream is always late to the party. Look elsewhere than the financial times to see whats percolating for us in the financial system…

  • MikeG June 25, 2008, 1:47 pm

    The whole idea of “Buy Anytime and you’ll make money in 20 years” doesnt sit well with me. A quick glance at the charts for the S&P index says that $100,000 invested Aug 25 2000 is worth 11% LESS today, not to mention lost value due to inflation. Bonds would have at least kept pace with inflation, if not had some real return.

    Note, Im not saying that we need to time the market, nor trying to suggest that we’re on the cusp of another Fall 2000-Spring 2003 type market..

    @ Geoff, of course the next 20 won’t be like previous 20.. We have many differences.
    Baby boomers are no longer working and are retiring, massive sell off of investments over the next 30 years..

    Is the global population still booming like it has for the past 60ish years?

    Alot of North Americans (and probably Europeans) are signed up to blindly put $300 a month into their funds.. If there’s a crash will they stop and compound the effect? or will they support the market through a crash and deaden the blow by buying up shares?

    Lots of unknowns, I still “feel” its a good time to buy.

    -MikeG

  • Xenko June 25, 2008, 2:25 pm

    “The whole idea of “Buy Anytime and you’ll make money in 20 years” doesnt sit well with me. A quick glance at the charts for the S&P index says that $100,000 invested Aug 25 2000 is worth 11% LESS today, not to mention lost value due to inflation.”

    Who knew that August 25th, 2000 was 20 years ago? Time really flies. Does your quick glance also take into account any dividends (assuming reinvestment) and the associated compounding? Doing a quick look just at the prices, in 1990 the S&P 500 was worth ~$250, now it is sitting at $1325. Assuming 3% inflation, $250 then is worth $425 today. That’s leaves an inflation adjusted return of ~300%.

  • ThickenMyWallet June 25, 2008, 2:47 pm

    Maybe not a crash but the thesis I agree with. As soon as cowboy capitalism went from tech to real estate to the banks, the entire economic system was in trouble. The American election is also hiding the fact that the U.S. is in a whole world of hurt and it won’t be solved in a day or a month but years.

  • Dividend Growth Investor June 25, 2008, 2:47 pm

    Actually this article is useless for me since I am a long-term investor. If you have done your homework and you have a proper asset allocation mix in place ( large cap, mid cap small cap domestic and international stocks, reits, govt and corp bonds) you should do just fine. Oh yes, and if you bought SPY on Aug 25, 2000 ( maybe you meant Jun 25,2000) and you reinvested your dividends in a tax defered account you’d be down only 2%. But if you bought on jun 23 or june 26 2000, you’d actually be up 1.5%-3%, again assuming dividend reinvestment.

    If you like looking at charts, however, if the SPY closes below 124.76, then that would really open us to the downside. I liked the higher high that SPY made in May. If we could only make a higher low and don’t go as low as $125, we might have a bullish structure ahead of us.
    http://stockcharts.com/c-sc/sc?s=SPY&p=D&yr=1&mn=0&dy=0&i=t02390403926&r=4400

    • Dividend Growth Investor January 13, 2016, 12:04 pm

      When I say useless, I meant that the RBS article is useless not the MDJ article.

      I guess I was wrong though ;-)

  • moneygardener June 25, 2008, 11:05 pm

    Bring on the crash! When it comes I’ll be buying quality.

  • Sarlock June 25, 2008, 11:36 pm

    And, of course, if you threw all of your money in to the stock market on August 25, 2000 and didn’t invest a penny more during down times, you would probably deserve to have lost money…

    I do agree that there are some rough times ahead. Massive US trade deficit, real estate market crash, tight credit markets, big bank losses… the process of deleveraging the US economy is going to be long and painful. Whether this translates in to a deep recession or just a significant period of stagnant growth and inflation (stagflation) is to be seen, but it is certainly something to keep an eye on.

    Regardless, I dollar cost average my investment, so if we see a 20% plunge in the markets, it just means I get some juicy buying opportunities during the down cycle. My job will be safe.

  • Cash Canuck June 26, 2008, 1:05 am

    I think time-specific predictions are ridiculous. Especially when those predictions apply to the entire market. I think it’s fine to say “Oil is overvalued, a correction is likely” but to say:

    “the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September”

    How can they gague how irrationally people will behave? With the tech crash of 2000 and the housing market cooling down as we speak, the “herd” will need another narrow minded get-rich-quick scheme to climb aboard. Could it be oil? Who knows?

  • Chuck June 26, 2008, 1:41 am

    I wouldn’t necessarily believe its going to be a fullscale crash as in a loss of confidence in the market. However I do expect interest rates to climb upwards over the next couple years. If that happens the market will go down, as prices adjust to reflect new rates of return. (ie stock prices tend to vary inversely to changes in interest rates)

    I’m curious to see what happens in the fall when most people negotiate raises for 2009. That will be one of our interest rate triggers.

  • mrbear June 26, 2008, 2:55 am

    DGI has it right. A few of points to ponder: there is absolutely no market correlation between deficits [of any kind, trade, budget or otherwise] and poor stock performance. Also, dollar cost averaging is a myth; that is to say, there is no statistical evidence to show that either dropping 10k in a lump sum or investing monthly has an advantage over the other. Tight credit markets are irrelevant to an astute investor. Remember, if everyone [or almost] everyone agrees that something will happen, nine times out of ten you can rest assured that it won’t. cheers.

  • Dividend Growth Investor June 26, 2008, 10:51 am

    Mr Bear you got me thinking about dollar cost averaging.
    http://dividendgrowth.blogspot.com/2008/02/dollar-cost-averaging.html

    DCA didn’t perform very well. Over the past 20 years (excluding 2008) DCA outperformed a lump sum investment in VFINX 85% of the time.

    The US deficit is not anything new. When everyone tells you that the world is coming to an end, then you should be buying :-) And yes, the price of Oil is going up, because the trend is up, not because of peak oil, pipeline explosions or policitcal instability. These “oil horror stories” ( peak oil) came out after the price rose a lot. These theories evolve as the broad population wants an answer to a question which nobody really can answer.

  • Josh June 26, 2008, 12:26 pm

    Now that markets are becoming more and more linked (oil effecting everyone, banks going global, etc.) boom and bust cycles are just a part of the game. We’ve all been through them. Now they will just happen to everyone on the planet at around the same time. Of course what that means to everyone is an unknown. The US launched out of the great depression like a pro and became what it is today. Maybe it will be some other countries turn next time… who knows. You certainly can’t count that the US will come out on top again. Especially with how it’s doing business lately. And if you think Canada isn’t VERY dependent on their economy… you’re VERY wrong.

    As for oil, it reminds me of the housing boom going on now in Canada. Everyone you know is buying houses as the prices rocket upward. Anyone who was trading stocks prior to 2000 knows that “what goes up…”. Meaning it’s unsustainable. So now you live in India or China, and everyone in your town/city goes from riding bikes everyday to buying cars AND gas prices start shooting up. I think then you start seeing the correlation. It becomes more obvious that this new pattern is unsustainable. I think if you live in the US or Canada you just aren’t getting the whole picture… we are the biggest wasters of gas… but a WHOLE bunch of other countries are about to pass us AND they have 10x the population…

  • The Sentinel June 27, 2008, 3:19 am

    DCA is an invention of the mutual fund industry to ensure that new money will be coming in on a regular and timely basis. Of course, the MF’s (that’s mutual funds not motherf…) increase their earnings with more money under management by way of MERs.

    DCA is still better than doing nothing, though. However, I think an indivdual investor who’s willing to put in some elbow grease can do much better than DCA.

  • Gates VP June 30, 2008, 1:32 am

    I’m a Canadian living in the US (in the mouth of the beast, so to speak).

    The US is over-leveraged everywhere. It’s not just the large entities (markets, banks, governments), it’s the individuals.

    I’m living in Kansas City and the people here just work more: they get less vacation time, less statutory holidays and longer work hours. They live further from the office, often further from all the usual amenities. They have slightly lower taxes, but it washes out in the end. They have a higher individual burden of healthcare, higher education costs and a very poor welfare system (with much weaker labor laws). Minimum working age is 14 here in Missouri.

    The point to all of this is simply that people in the US are already stretched very thin. Costs are rising and people (not just organizations) are too far in debt. I don’t know if the RBC is right about such a tight timeline. But I’m seeing an inflationary recession and there’s nothing any new president can “do” to “get out of it”.

    Fortunately, the world continues to turn, and if there’s one thing US businesses have figured out, it’s making profits (however possible), so I wouldn’t count them out yet.

  • Dividend Growth Investor October 7, 2008, 3:41 pm

    I think that this report turned out to be pretty accurate. I wonder if they have any further reports out..

  • Gates VP October 8, 2008, 3:45 am

    Hey DGI, here’s a personal guess. Retail stocks are going to tank in mid-December.

    The Holiday season is going to be really bad. Major chains are likely going to start closing stores in January. Right now, I’m not seeing this priced in. It looks like people are just pulling the bottom out of everything.

    But hey, I have no active money on the deal, so I could be really wrong :)

  • Rick December 22, 2008, 3:35 pm

    Congrats RBS was so right.

    I’m still plenty of HQD (negative return of nasdaq times 200%).

    We didn’t see the end yet with the retail season.

  • DAvid December 22, 2008, 8:48 pm

    RBS has been a major part of that collapse. Their share value has dropped to 10% of its’ value 12 months ago, and they have ceased their cash dividend.

    Graph

    DAvid

  • FT FrugalTrader June 5, 2013, 6:13 pm

    This is interesting, just looking at this post and seems as though RBS was right on the money with this one!

    • Dividend Growth Investor January 12, 2016, 2:20 pm

      Apparently, they are predicting another crash:

      http://www.telegraph.co.uk/finance/economics/12093807/RBS-cries-sell-everything-as-deflationary-crisis-nears.html

      Interesting times we live in..

      • FT FrugalTrader January 12, 2016, 6:59 pm

        Thanks for the link DGI! They were right the first time, wonder if they can go 2 for 2? The problem this time is that everyone is calling for a crash. I remember back in 2008, very few were expecting the correction.

        • Dividend Growth Investor January 13, 2016, 12:09 pm

          To be honest, I am seeing a lot of newbie investors who are just told to buy index funds and hang on to a high stock allocation. Whether they stick to those high allocations if things get difficult, is yet to be seen. We have a lot of investors who I think are doing victory laps, telling everyone how they are mostly in stocks, or how they just bought low.

          Most investors seem to be ignoring bonds/fixed income – so it is possible that many could be proven wrong in the short to intermediate term.

          Of course, I am mostly in stocks, but I do plan to put incoming money to work in the US equivalent of the Canadian RRSP and my regular dividend stocks… So lower prices should be good for me.

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