[Inside Chodong] Is It Time to Prepare for a Market Crash?

[Asia Economy Reporter Park Byung-hee] Earlier this month, during a lunch with a junior colleague, the junior shared a story heard from an investment expert source. The gist was that the largest market crash in a decade is coming, and we must ‘prepare’ for it. The expert’s meaning of preparation was not to respond to the ‘crisis’ of a market crash, but rather not to miss the ‘opportunity’ to purchase assets whose prices have fallen significantly. The expert advised to secure as much ammunition as possible for asset purchases. The junior said the expert mentioned that if a $1 trillion bomb exploded 10 years ago, this time a $9 trillion one would explode, presenting a rare opportunity.

The crisis 10 years ago refers to the 2008 global financial crisis, and the bomb refers to the asset bubble inflated by the U.S. central bank, the Federal Reserve (Fed), through dollar liquidity expansion. Just before Lehman’s bankruptcy, the Fed’s balance sheet assets were slightly below $1 trillion, but now they have increased to nearly $9 trillion.

Economic crises have continued relentlessly even after 2008. However, looking at the New York stock market over the long term, prices have always risen. This was because central banks, including the Fed, supplied liquidity whenever a crisis occurred. When a crisis hit, there was an expectation that central banks would intervene, and the stock market rebounded as if there had been no crisis. Therefore, among many stock market sayings, the most resonant one was ‘The stock market climbs a wall of worry.’

The recent gloomy atmosphere in the New York stock market over the past few months was due less to inflation reaching a 40-year high or the Ukraine war, and more because the Fed declared it would reduce its asset holdings. At the same time, there is doubt about whether a crash like that in 2008 will really be repeated. This is because people have already thought, ‘How much money has the Fed pumped in...’ As expected, the New York stock market has been slowly rebounding this month, and debates over the future direction of stock prices are heating up.

Trust in central banks, which failed to control inflation, is at rock bottom. The independence of central banks is also under threat. Liz Truss, the UK Foreign Secretary and candidate for Prime Minister, stated during an ITV debate on the 17th that if she becomes Prime Minister, she will review the Bank of England’s (BOE) authority over price stability. Australian Treasurer Jim Chalmers has already begun reviewing the performance, board composition, and inflation targets of the Reserve Bank of Australia (RBA). The Bank of Japan (BOJ) is embroiled in controversy as the main culprit behind the weak yen. If the U.S. economy falls into recession, Federal Reserve Chair Jerome Powell, who initially claimed inflation was temporary but then chose an unprecedentedly rapid tightening, will not be free from criticism for causing the recession.

Paul Krugman, a 2008 Nobel laureate in economics and professor at the City University of New York, confessed in a New York Times column on the 21st that his inflation predictions were wrong. Is it possible for the Fed Chair, known as the world’s economic president, or a Nobel laureate to predict inflation accurately, and to foresee stock market directions that reflect such unpredictable economic trends?

While it is difficult to predict stock market trends during economic crises, it seems clear that wealth inequality deepens as crises repeat. As the expert mentioned at the beginning, one person’s crisis becomes a once-in-a-lifetime opportunity for another. It should be obvious that the more ammunition one has, the greater the opportunity.

This content was produced with the assistance of AI translation services.