John Crudele

John Crudele

Business

The markets will crash, the question is ‘when?’

Larry Fink, the esteemed head of investment giant BlackRock, thinks the financial markets are “bubble-like.”

And he says so publicly.

The Wall Street Journal points out in an Oct. 27 article that a growing number of Internet companies that aren’t profitable and don’t even have revenues are being valued at extraordinarily high prices.

“It isn’t quite 1999,” the Journal demurs, recalling the good old days of tech company overvaluations, but it mentions the comparison anyway.

An outfit called TrimTabs, which tracks investors’ actions, says that cash has been flooding into mutual funds and other stock investments this year at the fastest pace since 2000, the height of the last big bubble.

Even CNBC, the mouthpiece and apologist for Wall Street, seems to be coaxing more guests to utter pessimist predictions about stocks.

So let’s see: Bubble-like; the highest inflow of cash into stocks since 2000; companies without earnings or even revenues valued in the billions; and, my gawd, CNBC finally trying to be honest!

Let me translate all of this into plain English for you: A lot of people are worried that stocks are headed for another crash.

And I’m one of them.

That’s the easy part, since stock prices have been rising almost every single day without the normal backtracking that has always happened during healthy ascents. Even with Wednesday’s 61.59-point decline, the Dow Jones industrial average and other indices are just 24 hours removed from all-time highs.

The hard part? Predicting when the crash going to occur.

Nobody, of course, knows for sure. (And if I did, I’d probably only tell family, friends — and random cute women who stroll by the front of our building.)

You think the market declines in 2007 and 2008 were bad? The next big decline in the stock market is going to legendary — and gruesome.

There’s a trick in predicting things like this. Many columnists will say that something bad is bound to happen — but they never say when.

I usually don’t employ that trick but I make an exception now because this time the stock market really is different.

The most obvious danger for stocks is the Federal Reserve. On Wednesday, Ben Bernanke’s Fed kept its market-rigging $85 billion-a-month bond-buying program unchanged because the economy isn’t quite right yet.

I’m hardly the only one who thinks this Fed program, which goes by the innocent name Quantitative Easing (QE), is the devil itself. But devil or not, it’s the one thing keeping stocks in heady territory.

The Fed’s policy-making Open Market Committee said on Wednesday the economy just wasn’t strong enough for it to stop rigging the bond market, which is being done to keep interest rates unnaturally low.

Those low rates, in turn, are sending investors scurrying to stocks despite the fact that corporate earnings are rising only moderately.

And even those moderately higher profits are being achieved mainly by economy-damaging cost cutting.

Ironically, interest rates rose after the Fed announced what the markets had been expecting.

In other words, Wall Street was worried — at least for the moment — that the Fed wouldn’t be able to keep either inflation or interest rates down. And if that happens, corporate profits and stock prices will be hurt.

Wall Street will get over that concern soon because it knows that the Fed has trapped itself in the QE program, which prints money to buy the bonds it holds. Until there is a reasonable gain in economic activity, soon-to-be Fed Chairman Janet Yellen won’t be able to stop buying bonds by the stadium-full.

Unless …

(This is the dramatic portion of the column, the part where I say something that doesn’t have a wide consensus. )

… unless the Fed loses control of interest rates.

Rates on government securities are up substantially over the past five months, even though they have recently backed off from recent highs. But if the market defies the Fed again and takes interest rates back up, all bets on QE are off.

I have no inside knowledge on the thinking of the Chinese, who hold the largest amount of US debt. But that country can’t be happy with what the Fed has done to its American investments.

You’ll want to get out of this bubbly, soon-to-crash stock market a good day before this or any other sentiment-changing event happens.

And good luck with that.