What Buffett Thinks About An Imminent Market Crash?

There has been so much talk lately about a stock market crash coming soon. The CEO of Goldman Sachs, Lloyd Blankfein, said this week in a conference that “Things have been going up for too long”. Gold prices are creeping higher at about $1,350 an ounces signally people are headed for safety. The famous economist, Robert Shiller, also thinks that there are some similarities to the .com bubble going on in markets now.

While there is no doubt that some signs point to an overbought market, what does legendary investor Warren Buffett think? Buffett admits that stocks have lost some appeal. However, in comparison to bonds, they are much more attractive.

As the moneyobserver.com states, Buffett is looking to invest 80 percent of the $100 billion in cash that his Berkshire Hathaway has stored away. This seems like a bullish statement, but we will let his investing do the talking.

One thing is for certain, crashes are very hard to predict. You may know they are coming, but it may not be imminent. It can take months or several years for these predicts of crashes to play out, if at all. Another great investor, Peter Lynch, once said:

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

As an investor, do not be fooled by your ability to time the market. Not even the professionals get it right. No matter what people tell you, they have no clue what the market is going to do. It is too complex, with an unbelievable number of moving parts.

If a crash does occur, this is typically a good time to start buying. As we sit in a major bull market, the deals just are not there. Think of the value that existed after the real estate crash. Stocks like Bank of America, AIG, and Citi could have made you a fortune if you didn’t panic and started buying when everyone else was selling.

Markets always eventually recover. It is just a matter if you have the patience to wait out the storm.

 

Housing Bubble 2.0?

Below is a good video explaining the potential for a housing crash in Canada. The host states that Canada is in a hyper-bubble. If you watch the video and look over some Canadian housing prices indexes, you can see large increases in values over the past several years. You be judge if there will a crash some time soon.

One thing that is certain is that these crashes are terribly difficult to predict. If you study some of the people that predicted the U.S. housing crash, you will find that they tended to be very early on their call. However, ultimately they were right.

Is there a way to bet against the Canadian housing market? One way is through shorting Canadian bank stocks. You should research all the risks before doing so. You can lose a lot of money if your prediction is wrong or unwisely timed. We are in no way endorsing you to short any stocks. Trade at your own risk.

What Was The Mortgage Crisis?

Real Estate Bubble

The mortgage crisis started in 2007 and rattled the U.S. economy. It sent shock waves around the world as people began to worry if we would ever recover from this disaster. Most adults are well aware of the mortgage crisis and of its lasting affect on the economy. However, not many people know even the basics about what happened.

What Went Down? To figure out what happened with the mortgage crisis we have to take a step back. Prior to the 2007 crash, there was the technology bubble that popped as we moved to the new millennium. The economy slipped into a recession in 2001 coupled with the 9/11 terrorists attacks. Governments around the world feared a lengthy recession was on the horizon because of these events.

In an attempt to stimulate the economy, central banks began to lower interest rates to encourage borrowing. However, as interest rates on things like auto loans and mortgage were lower; rates also lowered for areas of savings like CDs and bank accounts.

No longer were savers getting an acceptable return in safe accounts like savings accounts or CDs. They began to look elsewhere for perceived safety and a bit of return. In the order to receive a better return, they had to take on more risk. One area that people moved was to the real estate market.

Mortgage lenders also began to become lenient with their lending guidelines. As the 2000’s moved along, riskier loans began to become commonplace with the likes of subprime mortgages and no income/no asset verification loans. If you had a pulse, it seemed that some mortgage broker could find a loan for you no matter your financial situation.

Banks no longer needed to keep mortgages in house. They could sell them on the secondary market. The mortgages were packaged up and sold to investors who took on the risk of loans. Since lenders no longer had a direct risk for these loan, they became sloppy and careless with their lending guidelines. The mortgage lenders became more concerned about quantity over quality as there was big money to be made pushing good and increasingly bad mortgages to the secondary market or Wall Street.

Because of demand for real estate, home prices increased rapidly. Many people thought the quick way to become rich was through accumulating real estate and then hopefully selling it later as the market continued to increase. It was no big deal if you eventually couldn’t make your payment because you could just sell the property once you got into trouble and make a profit. This was the theory, anyway. Many people got stuck with a bunch of real estate they couldn’t afford, which eventually foreclosed.

Home builders added fuel to the fire by responding to the demand of real estate. They created  enormous developments to the point where several markets were over-saturated. Many home builders did not survive as the real estate market collapsed.

People had the belief that the housing market could not and would not decrease. However, past performance is never a signal of future performance. As the market actually did crash, many people were blindsided and all came crumbling down.

Their were a few people who had the foresight to see the real estate bubble. Some of these people like Michael Burry made a fortune predicting the collapse as documented in the movie/book titled The Big Short.

The above is the general idea behind the mortgage crisis. There clearly is more indepth reasons into the lead up and collapse. We will dig a little deeper into this and other potentially looming disasters as we move a long here at Financial Crisis Aftermath.

Photo: Via Flickr