The stock market rally has its days counted and the substantial drops seen over the past few weeks suggest that the catalyst for an epic crash is rising inflation. The US is experiencing the worst inflation surge in nearly four decades, and the Federal Reserve is facing mounting pressure to start tapering its bond purchasing programs and hiking interest rates over the next two weeks. In normal times, those measures could cause some serious economic damages. But these aren't normal times, these are crazy times, and the risks have never been higher. For months, market insiders have been warning that this is effectively the biggest stock market bubble in history. And now that the burst has begun, the situation is particularly precarious. The tech sector has already witnessed some sharp losses, but right before the market closed on Friday, the meltdown was becoming more widespread. For a long time now, analysts, experts, economists and investors have been sounding the alarm about an explosive and sudden stock market crash that would wipe out billions in earnings overnight. And even though the collapse of the bubble has already started, we're still hearing silence. Investors desperately want to believe that this is just a downward trend that will be over soon, but once they realize what is really going on, it might be too late. And we'll start hearing panic screams. An 80% crash is not out of the picture, as explained by the 48-year market veteran, David Hunter. The coming meltdown is going to look a lot like the 2000s tech bubble burst, when thousands of internet companies fell spectacularly. Today, the leading tech stocks belong to companies that have been in the red for most of the past three years. According to Bernstein tech analyst Toni Sacconaghi and his team, these stocks are likely to sink even further in the coming weeks. "Today, more than a third of all unprofitable tech stocks trade at greater than 15 times revenues," Sacconaghi wrote in a client note. "Tech names with such high multiples and no earnings, historically have shown returns that are very poor,” he continued. The problem is that these stocks can only climb as long as growth stocks are climbing too. This means that things can go badly very rapidly when the market turns against growth. Bernstein has been examining unprofitable tech stocks over the past 50 years, many of them sported price/sales ratios of more than 15, and the firm concluded that they are likely to lose on average 30% of their value, with the most acute losses concentrated in the "most richly valued tech stocks, as determined by price to sales". In essence, the momentum that has propelled tech stocks to sky-highs is losing force as economic conditions worsen. In October, the U.S. economy started showing signs of depressed growth. In this final quarter, retail sales have been disappointing as shortages and rising prices leave consumers with fewer choices and inflation affects consumers' purchasing power. None of this is good news for overvalued stocks. With interest rate hikes right at the corner, and a stagnant economy, the outlook for growth is considerably reduced. Top tier investors seemingly agree with his view. Only in the past week, a whopping $43.2 billion was allocated into cash, as players run from risky assets and look for ways to protect their wealth. It's time for a wake up call. After almost a decade of near-zero interest rate policy, massive amounts of liquidity, and financial support, the market has become detached from reality. But that bonanza is close to an end. As the Chief Investment Strategist of Real Investment Advice, Lance Roberts, has recently explained: "One of the most fundamental disconnects currently is between stocks and the economy. Historically when stocks have deviated from the underlying economy, the eventual resolution is lower stock prices". With earnings disappointing, some stock prices already readjusted by 65% to realign with weaker-than-expected profits and slower future earnings growth. Last week, we could already observe a significant crash in oil prices, small cap stocks, and crypto as inflation-induced taper tensions gained force. “Stocks are NOT the economy. But the economy is a reflection of the very thing that supports higher asset prices -- corporate profits,” stressed Roberts. That means that even though the market rally might have defied logic, fundamentals and our economic reality, those are the only things that matter in the long term. Optimism is blinding some investors who are failing to see that the main support that drove the market higher over the past two years will not be there to support economic expansion and growth anymore. The risk of disaster is high. And so will be the price to pay for being “wilfully blind” to the dangers.
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