Inflation Pressure Could Cause a 'Mega' Stock Market Crash

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Inflation Pressure Could Cause a 'Mega' Stock Market Crash

Inflation Pressure Could Cause a 'Mega' Stock Market Crash



There was little overnight news flow but further weakness in Asia is just putting a little pressure on European equities this morning.

Yesterday, the FTSE dipped below the 6100 level, and looked like it could break lower, but ultimately recovered late on in the session to close back above 6100.

This jostling for position between the bulls and bears seems set to continue as neither side appears to be capable of breaking out.

On the one hand, the bears can't seem to find enough collective momentum to pull the markets lower whilst, on the other hand, the bulls are waiting for the next impetus to push us higher.

Just a couple of nights ago, I attended a presentation from a prominent asset manager whose Chief Investment Officer gave us his view of the equity markets over the coming years.

To sum up, he was very bullish of equities well into the future, in particular emerging markets, purely because of the central bank stimulus measures that are in place and set to continue.

He did, however, give a stark warning that at some point the bull market will come to an end, possibly in around 5 to 7 years.

Whilst it was no surprise to hear his predicted timescales, he was also sure that the resultant sell off will be as spectacular as some of the major stock market crashes of the past.

What did he believe would be the cause of this crash? Interestingly, his view was that it would be a considerable spike in inflation.

He argued that central bank stimulus will drive asset prices higher and fuel inflationary pressures to such a degree that it would not only cause a crash of the equity markets, but the bond markets as well.

It will be interesting to see whether this mega crash does materialise in 5 to 7 years time.

Whilst this is a long-term view, you can see that in today's market the moves to the downside remain limited to only a few points at a time.

Throughout 2012, we did see a couple of corrections to the downside, but nothing that the central banks couldn't prevent from turning into a larger sell off.

As we move into 2013, it seems that we are in a similar situation and so there may need to be a larger catalyst for the markets to really make a forceful move lower.

Also see: Today's stock market news.




By Simon Denham, 17 January 2013


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