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Stock Market Crash Likely, BU Economist Predicts

President Trump will be bad for business, says Kotlikoff

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Despite the fact that the stock market has entered record territory, BU economist Laurence Kotlikoff recently sold all of his stocks. You should, too, he says, if you want to avoid a coming market crash.

Kotlikoff, a William Fairfield Warren Distinguished Professor and a College of Arts & Sciences professor of economics, made that grim prediction recently in his weekly syndicated column, which runs in 30 papers around the country, including the Dallas Morning News and the Seattle Times.

“If your stocks and long bonds are in retirement accounts, transfer them to short-term Treasurys,” he wrote.

Designated one of the world’s most influential economists by The Economist, Kotlikoff is being starkly contrarian to those who believe US businessman-turned-president Donald Trump is encouraging the market’s run-up with business-friendly promises, such as big government spending on infrastructure and rolling back regulations.

Au contraire, Kotlikoff argues, any number of Trump policies—protectionism (such as his abandoning the Trans-Pacific Partnership), curbs on immigration, and the global outrage they threaten to unleash—could cause the bottom to fall out of what he calls an already overheated stock market.

At least one admirer of Kotlikoff—financial author Dan Solin—thinks he’s wrong, and Kotlikoff himself opened his column by noting that “smart economists never predict the stock market.” So why is he predicting an imminent crash? He discussed that with BU Today.

BU Today: Why do you believe the market will crash?

Kotlikoff: The market is at an all-time high, the price-earnings ratio is historically very high. Trump could produce a massive deficit that raises interest rates; the banks could lend out their enormous excess reserves and cause massive inflation and much higher interest rates; Trump could start a trade war; he could precipitate a boycott of the United States by foreign tourists; he could precipitate a boycott of US-made goods by both foreigners and Americans; and he could continue to increase the level of uncertainty. None of these things leads one to predict yet higher stock prices.

There are also elements in the new tax bill, which the House may pass, that should dampen stock values, but that the Wall Street bears don’t yet seem to get.

Some analysts believe the market is going gangbusters because business expects business-friendly policies from Trump. Can you explain why you think the president will be bad for stocks?

Whatever business-friendly views of Trump exist, they were there the day he was elected. He hasn’t said or done anything new on this front since he was elected. It’s very hard to understand why the market continues to rise at this point.

Trump, if anything, has shown himself to be what he advertised—an autocrat, a know-it-all, a person with a tenuous grip on reality, a narcissistic personality, someone who feels free to interfere in private business decisions. Someone who is willing to bully defenseless illegal immigrants but can’t stand up to North Korea (which just crossed his proclaimed “THAT WON’T HAPPEN” red line tweet with respect to the testing of nuclear-capable ballistic missiles), and someone who has directly or indirectly insulted many of the world’s leaders.

Ripping up pending trade agreements, trying to destroy the North American Free Trade Agreement (NAFTA), advocating tariffs that will get us kicked out of the World Trade Organization—these are the acts of an economic madman. If the traders on Wall Street think this is good for our economy, they are about as foresighted as they were on September 14, 2008, the day before Lehman failed.

Some argue that a prudent reaction to the market’s run-up is to reduce the percentage of your portfolio that is in stocks, rather than a massive stock dump.

I rarely suggest timing the market. But I pulled every penny out of the market two weeks back and recommend others take similar cover.  This all smells like a bubble that will burst as soon as, say, Elton John and 50 other top celebrities hold a public press conference urging people around the world to avoid travel to the United States until it takes in its fair share of Syrian and other refugees and stops deporting illegal immigrants without due process, or to buy nothing made in America. That or something like it could happen any day.

You make your online retirement planner free to BU employees. How is it factoring in your belief that people should unload their stocks?

You can run our ESPlannerPLUS software and see how much your sustainable living standard would drop were your stocks to drop by 25 to 50 percent. This will provide a sense of the risk that staying in the market may entail.

Mind you, I may be entirely wrong. Bubbles are irrational phenomena, and when precisely they burst is not predictable. Nor can anyone prove that a particular market is valued based on irrational beliefs. But as I said, I’ve pulled out of the market to wait till the dust settles.

37 Comments
Rich Barlow

Rich Barlow can be reached at barlowr@bu.edu.

37 Comments on Stock Market Crash Likely, BU Economist Predicts

  • Web on 02.27.2017 at 7:50 am

    Wow. You might expect when a respected economist goes public with advice to pull all of your assets out of the stock market immediately they would have a detailed analysis and reasoned explanation for such a radical position. Instead we get Elton John might hold a press conference and yet another anti Trump diatribe. Seriously? No doubt Kotlikoff has forgotten more than I’ll ever know about economics but you couldn’t prove it by his statements here.

    • Lucas on 02.28.2017 at 7:37 am

      15th March – US debt ceiling….Let’s keep an eye on this date….Some prior selling to start soon.

    • Tim on 03.16.2017 at 10:07 am

      You really need to understand that a detailed explanation will not provide any more certainty. Crashes are all black swans by definition. All you can do is take 1000ft view with historical context and make a best guess.

  • MET Alum on 02.27.2017 at 8:00 am

    If everyone sells all their stocks, as Prof. Laurence Kotlikoff suggests, then the stock market crash will become a self fulfilling prophecy. Them some, like the good professor, will buy up the cheap stocks and elevate their status among the one percent.

  • Bob on 02.27.2017 at 9:08 am

    In November of 2016 Fortune magazine reported that “Bridgewater Associates sent out a note to its clients predicting that the Dow Jones Industrial Average could plunge nearly 2,000 points in one day if Trump is elected president.” and “That would erase nearly $1.9 trillion in value from U.S. stock market portfolios.”. Because that did not happen it makes me question the opinions of conventional experts.

    • Missy on 02.27.2017 at 3:25 pm

      The market is way over heated. There has clearly been a post election rally based on pure speculation which the technical charts and PE ratios suggest is way over due for a major correction so Kotlikoff predicting a down turn in this market now is like the weatherman predicting snow melting in the mountains in the spring time.

      More importantly, when Kotlikoff ran for president he said that neither Hillary nor Trump would be able to solve the economic mess they inherit but rather that it could only be solved by the likes of “him”. That said, I suppose Paul Krugman would disagree with him on this last point as well.

      The president has definitely inherited an economic mess created by the unwillingness of both political parties to confront the 800 pound gorilla in the room which is and has been excessive government spending over decades mediated by virtue of the dollar being the reserve currency for the world.

      Trump did not create this mess and while he may not be able to help it and may even make it worse a careful review of Kotlikoff’s previous interviews shows he knows the real cause of what comes next will not be entirely due to any of Trump’s policies irrespective of how things ultimately play out.

  • Missy on 02.27.2017 at 11:49 am

    I have been following Prof. Kotlikoff for several years and while I agree with his thoughts on the problems associated with aging baby boomers I also think that Krugman is right in that the government will print its way out of debt while at the same time raising interest rates on Treasury bonds. This will induce the aging boomers to sell stocks and purchase these less risky investment vehicles thereby effectively buying the government debt to pay for their own SS payments. TheDow Index fund will likely continue to go up in terms of numbers of USD in circulation but of course the purchasing power of these dollars will be offset by inflation. As a result, the risk of stocks will still be alluring to the less risk averse young people seeking a better ROI. The government will never truly default on its debt. The good news is the debasement of the dollar will drive up cost of imported goods even without any tariffs which means we will also need to make more stuff here in order to maintain our standard of living which in turn will be good for the jobs market.

    • Juan on 03.15.2017 at 5:19 am

      What you are describing sounds a lot like a spike in inflation, which would increase interest rates and in turn, create more inflation (incentive for banks to spend their huge excess reserves on hand).

      If this happens it will be devastating for the economy, very high inflation reduces the standard of living, and wipes out savings.

      • Missy on 03.15.2017 at 9:57 pm

        Yellen has given her marching orders today. They not only want inflation they need it to inflate away the national debt. This could get out of control but they are crosding their fingers hoping it will not.

  • Kim Makoujy on 02.27.2017 at 1:05 pm

    My comment is more about the state of the BU faculty. Is there any professor who is a conservative or moderate…? Although I respect Prof Kotlikoff’s opinion on the stock market, I find his over the top attack on President Trump unnecessary. As a registered Independent who have voted for Bill Clinton and donated money to Hilary Clinton in the past, I am alarmed with academia and students showing unreasonable left wing behaviors since the election. BU newsletters are almost always left leaning and I am concerned. We are spending a lot of money to send our daughter to BU and are worried about her exposure to the extreme left . BU and all colleges should teach the students to think on their own and be politically and ideologically neutral.

    • Joe W on 03.17.2017 at 11:23 pm

      I have to agree. I remember my econ there in 87-91 had liberal, radical, and conservative perspectives stressed and balanced. From what I see in many publications now (post silber) and especially now into 2000s is pure left doctrine

  • Betty J Ruth on 02.27.2017 at 1:34 pm

    I’m a fellow faculty member, and I respect Professor Kotlikoff’s views. I will take what he suggests seriously since he’s one of the most important thinkers on baby boom retirement and regular people’s concerns. As per the showing of “unreasonable left wing behaviors,” I’m not sure what people are referring to exactly. BU is full of diversity of viewpoint and rich in discussion. Yes, there is activism, and I’m grateful for that because it shows me that millennials are engaged and thinking about the many deep challenges to the democracy. I believe no one should be deprived of encountering any points of view in the academy. There is no such thing as neutrality, but there is critical thinking, and I am proud of how we do that at BU.

    • 1998-SMG-Alum on 03.25.2017 at 11:52 pm

      Ms. Ruth, when you say “BU is full of diversity of viewpoint” can you please tell me the exact number of your fellow faculty members that were open supporters of Trump, Rubio, Cruz, Kasich, or even Rand Paul supporters? And perhaps compare that to the number of open Clinton and Sanders supporters?

      I think you know where this is going. Your statement about diversity of views is a joke that only people on the left believe. I’ll bet you can’t name more than one or two Trump supporters on the entire BU faculty, to say nothing of those you interact with on a daily basis and “explore views” together in true Socratic fashion.

      Sorry to call you out publicly but you put it on the web.

  • Shawn on 02.27.2017 at 4:24 pm

    I stopped reading when he said Trump could run up the deficit and interest rates would rise. Where has this guy been? 10 trillion the last 8 years? And the rates plummeted. No stocks can’t be stopped now it’s forever up.

    • Missy on 02.27.2017 at 5:09 pm

      If the velocity of money increases and salaries of the middle class go up, then income tax receipts will go up as well and this could in theory offset the effect of higher interest rates on the cost of servicing government debt.

      This has to be their end game goal otherwise the government will find itself unable to service its debt without dramatically cutting government spending; a course of action that congress has historically shown no appetite for taking.

  • David on 02.27.2017 at 5:16 pm

    If you took my gains over this last year and projected an average over the next three years, I’d be very happy. Since I’m not greedy and tend to be preserving, I’ve gone almost total cash (except for my AAPL stock) and I’m sleeping well. When the crash occurs, I’ll cheer it on and get ready to buy slowly into the recovering market.

    • Patrick on 02.28.2017 at 10:47 am

      I am doing the very same thing. Only difference, I’m holding my AMZN stock. Meet you here in 1 year and let’s see whose done better, Apple or Amazon. Could be close.

  • Rich on 02.27.2017 at 6:32 pm

    The good professor is mostly, not entirely wrong. There will be an adjustment for sure to the stock market and it will fall but not to the point of collapsing. The professor respectfully is a liberal thinker and has all the Dem’s talking points, but there are in his writing lots of “could”. Whoever invests in the stock market should know full well that it’s inherently a very risky business because there are indeed a lot of “coulds'”. But stock buying is for long term investment. Check out the downfall of the stock market in March 17, 2008 to a low of 11,650.44, and see what happens now, a more than 9 thousands points increase!!!

  • kitty on 02.27.2017 at 9:59 pm

    It begins in the author’s 4th paragraph…” US businessman-turned-president.” Donald Trump was elected President; he didn’t get up one morning and find he “turned president.” I have a hunch that if this article were about Mr. Trump’s rival in the election, it would not contain the silly phrase “US politician-turned-president.” Whoever you vote for, whoever’s views you are sympathetic or unsympathetic to, be accurate in reporting: this phrase denigrates the achievement of a candidate achieving the office of President of the United States.

    These subtle denigrations, with which BU Today articles have been rife for at least the past 4 years, make it– and Boston University– appear myopic and, far from encouraging free discussion and the exchange of opposing ideas, stifle free speech.

    Kim Makoujy correctly identifies a problem at BU: There may be faculty, staff, and students who do not subscribe wholesale to progressive ideas (and the refusal to consider anything but), but my guess is that they are reluctant to assert their opinions in practically any forum at the university. This is Massachusetts, it’s “higher education,” and we’re in Boston; this is very likely the dominant viewpoint of those associated with the Boston University of 2017. However, this microcosm hardly defines the rest of the country or the opinions and attitudes of a majority of Americans.

    I was particularly taken by Prof. Kotlikoff’s statement that Trump “has shown himself to be what he advertised: an autocrat, a know-it-all, a person with a tenuous grip on reality, a narcissistic personality, someone who feels free to interfere in private business decisions.” My goodness, he just described Mr. Trump’s predecessor, Barack Obama!

    • Patrick on 02.28.2017 at 10:54 am

      Why would someone who doesn’t subscribe wholesale to as you say “progressive ideas” be afraid to express their opinion? So what if a lot of others disagree with them. If they have their facts in line and they have their beliefs, then get into the debate. That’s what healthy people do when they want to express themselves. It doesn’t have to be ugly. And if someone is confident enough with their facts and assertions, no one is going to penalize them for it. I find that those on the opposite side of progressive ideas often complain that they don’t stand a chance around those who disagree with them because they are marginalized and the like. No, that’s the case. One may disagree wholeheartedly with them and state the reasons why but that doesn’t mean the other side isn’t allowed to share their opinions. The question is, do they have the back-up and research to back up their claims? That’s ultimately what matters.

      • Missy on 02.28.2017 at 8:48 pm

        You’re right Kitty argumentum ad hominen is a logical falacy and an authority on any topic should never need to resort to it instead of making their argument based on data and facts that back up their predictions.

  • Jerry Stubben on 02.28.2017 at 1:55 pm

    Economists and investors have been concerned about National Debt. $25 trillion appears to be a threshold that could trigger an economic collapse. We must also add local and state debt plus personal debt, both at all time highs and growing. One only tour to the past to view the outcome. Germany 1920s collapse of currency values. US late 20s economic depression. We will experience both over the next 18 months.

    • Missy on 02.28.2017 at 8:38 pm

      There is one very important factor that complicates your argument which is that the USD is the reserve currency for the world. So as thevsaying goes, it may be our dollar but it is the rest of world’s problem. The dollar will have to loose its status as the reserve currency before we become the next Weimar in the mean to the extent possible the USA will continue to export its inflation.

  • Technus on 02.28.2017 at 3:05 pm

    I see a bunch of people in denial here. Do you guys not realize we are in a massive bubble and that every bubble bursts?

  • Joe B on 02.28.2017 at 6:09 pm

    He just happens to be right, not because he’s an economist, he just happens to be right.

  • Raminder on 03.01.2017 at 8:43 am

    I think BU is right especially since the 8-10 year major correction cycle of DOW S&P is still pending- “the last was Feb 2008 and persisted till March 2009”. The impact on the SENSEX of India was very similar.
    I agree with the view that no one can really predict the market, but perhaps the market
    boom is just prior to a Profit Booking spree.
    The gut feeling in this case, as mentioned by a gentleman above, is that perhaps some of the stock could be sold, however, if everyone sells their stock, it would be a fiasco.

  • Better friends than foes. on 03.06.2017 at 2:36 pm

    The 2008-2009 was not a cyclic market downturn. It was instead caused by Government interference requiring lenders to grant mortgages to those who had no hope of ever repaying. Recall, there was created an outstanding basket of mortgages whose worth was unknown and seemingly could not be determined. Fanny and Freddy, who held what they must have known were junk mortgage guarantees, bundled and sold them. Prof. Kotlikoff can easily explain what followed but somehow I doubt that he will.

    Yes, the markets will rise and fall but without any predictable date certain. If the Prof. could time the markets to the the degree he proclaims he’d soon possess more wealth than Bill Gates and would no longer need to scratch out a living teaching school.

  • Gofrustrateyourself on 03.08.2017 at 2:12 am

    When people cannot see the obvious reasons for the actions of something like the stock market trends, It amuses me. I just can’t figure out if it’s really stupidity or just denial…. Idk, maybe some ppl should stick to scratch off lottery tickets ;-)

  • pankaj vohra on 03.14.2017 at 12:35 pm

    Since the US markets have rallied a lot in anticipation of trump reducing taxes and increasing US growth rates it might be prudent to book some profits. The US demographic will make it impossible to achieve a 4% growth rate. One could take exposure to Europe and fast growing emerging markets. Trump is one of the most unstable leaders and it would be good to invest where leaders are more mature and stable.

    • Missy on 03.15.2017 at 10:00 pm

      And where on earth might that place be?

  • Umberto on 03.15.2017 at 9:42 pm

    If the scenarios he predicted will occur, that’ll not be a 100% Trump politics fault. Nobody mentioned the great FED accomodation monetary policies of the last years. If the S&P 500 fall, it will be substantially caused by the market dependancy of FED funds. Nowaday any kind of complaints about predictability of financial markets its no sense, because of the new normal (Janet Yellen taught about that). Given the recent expectations on rates and inflation to increase, it’s easy to assume a riequilibrium of stock market, because of the uncertainty about growth and cash flows (higher interest rates results in lower investments = stagnation)

    • Missy on 03.21.2017 at 7:43 am

      Spot on.

      It is very interesting how intellectually dishonest people driven by political ideology can be.

      The FED continues to be accommodating because it profits from the Federal Reserse Notes it issues. If the US government actually paid off its debt the FED would effectively be out of business. The US government could pay off its debt tomorrow interest free simply by issuing US notes. This would be highly inflationary but it would also eliminate the threat of rising interest rates contributing to the national debt.

      The most likely scenario is the one I outlined above in which the FED favors inflation and rising interest rates which will attract retiring baby boomers looking for safe investments into T bills. Reduced regulation that favors growth will increase velocity of money some of which will find a home in equities propping up markets. The only threat to this plan would be hyper inflation but i think that is unlikely at least for now.

      • Umberto on 03.22.2017 at 5:35 am

        Actually the FED is no more monetary accomodating, switching to fiscal policy (unofficial but pretty likely to be) to cover QE expenditure.
        How Ts can be attractive in a reflationary scenario? They don’t.
        The ones who search for return in bond markets have to goes up to HY, risking more (default and credit risk) given potential recession due to protectionism and isolationalism (remember that the iphones u are using are a part of a global supply chain). Altough that, fiscal incentive for US small cap and untrustability of govern will hold equity high at the actual level for almost all 2017.

  • JohnO on 04.10.2017 at 8:50 am

    “Buy low and sell high” means timing markets. Individual issues, stock mutual funds or ETFs…whatever.
    Rothschild said “You buy when there’s blood running in the streets. I timed 08. I am timing this one. You have to be blind not to see it.
    One thing that has baffled me over and over in my 54 years has been the herd mentality in bubbles. It’s just baffling. Jesus Christ could be the president right now and not avert this but the professor’s jabs at Trump are well warranted. Some really good ideas. Such poor leadership skills. When flyover country is losing their homes, I’ll be buying back in in bits. If I miss the run up to Dow 50,000 I still have my money.

  • John grant on 05.22.2017 at 2:41 pm

    All-or-nothing thinking doesn’t cut it. One example: “you can’t time the markets.” That’s like saying you can’t quantify market risk. Ridiculous. The fact is that you get the best information you can and make assessments that you know will always be at best imperfect, only relatively true. But the logical inference is not that they are therefore completely false and useless.

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