Tags: Burnham | bubble | 5000 | Dow

Economist Burnham: We'll Hit Dow 5,000 Before Dow 20,000

Thursday, 18 Jul 2013 09:38 AM

By Michael Kling

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Prepare for an impending stock market crash, warns economist Terence Burnham, a former Harvard Business School professor.

"I believe the stock market is about to have a devastating decline," Burnham writes in a post for PBS NewsHour.

"To make a concrete prediction, we will see Dow 5,000 before we see Dow 20,000," he predicts.

Editor's Note:
 
Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.

"The signs of collapse are right in front of us. We cannot see the signs now, however, because our brains aren't built to seem them," says Burnham, now an economics professor at Chapman College and author of the books "Mean Genes" and "Mean Markets and Lizard Brains."

That's because people have "lizard brains." Like small-brained reptiles following previously experienced patterns, they continue investing in stocks despite warning signs and flee in panics when stocks decline.

Burnham predicts that a steady decline in stocks will frighten investors and prompt a panic with a 1,000-point one-day drop in the Dow. However, he's not predicting the collapse in the next week or month.

"I don't pretend to know the timing. I only think that I see the inevitable."

Burnham lists three reasons why "we should all be terrified."

Americans' saving rates are far too low and must increase, especially as more approach retirement. With saving rates essentially at zero percent and future returns expected to be low, savings will have to increase. That will cause spending to drop, prompting falling incomes and increasing layoffs in a vicious downward cycle.

Secondly, government fiscal and monetary policies have been making the problems worse, not better. Although the Federal Reserve has kept rates low, unemployment is still high. Instead of boosting the economy, the Fed has fueled speculative markets. Fiscal policy is also poor, as the government has overspent.

Thirdly, stocks are a lousy investment. Investors tend to panic in declines and become overexcited in rallies. "The vast majority of individuals are absolutely horrible at market timing," Burnham notes.

"Most people should not own stocks today — none," he stresses. "Yet individuals have been getting back into the stock market with a vengeance, and they have far more of their meager savings in stocks than they should.

"If the decline does not happen, everything I have learned in my life as an economist and investor is not true," Burnham adds.

MarketWatch, calling Burnham's post "Critical Warning No. 17," recounted the many warnings of coming stock market crashes issued so far this year.

For instance, strategist Kit Juckes of Societe Generale previously said all three of the big worldwide financial bubbles that burst in recent decades — the Asian crisis in the 1990s, the dot-com bubble, and the 2008 financial crisis — have "been fueled by the Fed keeping policy rates below the nominal growth rate of the economy far too long."

We're now in the fourth bubble fueled by the Federal in the last 30 years, Juckes warns.

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.

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