All the warning lights are flashing

A medical doctor can list the warning signs of pending serious health problems. Similarly, an economist can cite the warning signs of looming economic troubles.
However, no one can predict the timing of these events, although they are certain to occur.
There are two things to consider here. First, the condition of the stock market itself. Then, the economic background is key to the economic future.
What is surprising is the widespread optimism about the stock market—this despite the fact stocks have provided a negative return for a decade and investors have suffered a great deal in recent years.
We have learned that being a contrarian usually is rewarding. Nowadays, market “experts” keep repeating that the stock market has seen its lows for some time to come.
A market commentary from Bloomberg repeats this sentiment with a headline, “It’s Time To Buy Equities.”
A highly-regarded mutual fund manager stated he is getting back into banking stocks and a hedge fund manager, who sold half his equity portfolio, changed his mind, saying, “I’m more optimistic. I’ve put risk back on.”
Then, too, a famous buy-and-hold advocate has been quoted as saying that nearly everyone should invest in the stock market and keep their money there as long as they can.
A headline in USA Today announced that “Optimism kicks off earnings season.”
A Stanford University professor, an author of research papers on the market, mocked the comment of the U.S. Federal Reserve chairman who declared the outlook is uncertain.
The professor said he knows what to do when others are uncertain: buy stocks.
None of the above comments are typical of market bottoms, but rather epitomize complacency. Investors also are contented, so they have not reduced their holdings of mutual funds.
Investors should be very wary of this widespread lack of skepticism.
In addition, the economic background is more ominous than it has been since the 1930s.
The ratio of household debt-to-income remains alarmingly high, at an incredible 126 percent, while the pre-2000 average was 70 percent—even though nearly $600 billion of household debt has been destroyed.
The U.S. Federal Reserve’s balance sheet is triple its normal size, having provided funds for companies in need.
There simply is too much debt outstanding while governments suggest individuals take on more debt and continue to purchase houses beyond their means.
The euphoria today is similar to 1930 when the stock market recovered half of the 1929 crash.
Clearly, all the warning lights are flashing “trouble ahead.”
Bruce Whitestone, an economist, was educated at Yale University (where he graduated with top scholastic honours) and McGill University Graduate School.
For more than 40 years, he has been involved in Canadian government affairs and the investment community.