Amidst rumors of an impending stock market crash, one Finnish economics professor believes the end of the stock market is coming in 2050. In a recent paper titled “Armageddon of Financial Markets,” Klaus Grobys from the University of Vaasa argues that recent financial deterioration has put the stock market on the path to a wider collapse.
According to Grobys, a number of “dramatic” events have served to aggravate global financial systems. These include the dot.com bubble burst, the 2008 financial crisis, the Covid-19 pandemic, the Russian invasion of Ukraine, and more. The accompanying impact on supply chains and price levels has directed equity markets towards a “spontaneous singularity” that “may have an enormous impact on the global financial ecosystem.”
Grobys’ notion of a “spontaneous singularity” is, in itself analogous to the physics concept of a “finite-time singularity.”
“Viewing stock markets through the lenses of complex self-organizing systems, stock market crashes are caused by the slow build-up of long-range correlations resulting in a global cooperative behavior of the market and eventually resulting in a collapse (viz., finite-time singularity) in a short, critical time interval.”
Grobys makes the case that the “log-periodic power-law singularity” (LPPLS) model, first theorized in 2001, projects a collapse of U.S. equity markets by June 2050. The LPPLS model is in some ways akin to a bizarro Big Bang; instead of creation, it’s destruction, and instead of the universe, it’s modern financial systems.
Now, doomsday theories aren’t exactly a rarity in 2023. However, Grobys’ take is grim even by modern standards. What’s Grobys’ basis for his extraordinarily bleak projection?
Stock Market Crash Fears Amidst Warnings of Future Instability
One of the most interesting verifications of Grobys’ LPPLS model is how the system would’ve actually predicted the infamous October 1987 stock market crash, known as Black Monday.
To this day, the 1987 crash remains something of a mystery to economists and analysts alike. While there has been plenty of speculation surrounding the worst stock market crash in recorded history, a single root cause has yet to be verified. The most prevailing theory is that the unfounded rise of stocks in the nine months preceding the crash led to fears of a speculative bubble that eventually resulted in widespread sell-offs on Black Monday. Indeed, U.S. stock prices soared nearly 32% in the nine months prior to the crash, only to drop 20% on Oct. 19, 1987.
According to Grobys, the single-day nature of the event, the magnitude of the drop, and the lack of any warning preceding the crash make it a truly bizarre occurrence.
However, inputting relevant data into the Grobys’ model up to Dec. 31, 1986, yielded a projection of a “finite time singularity” on March 1, 1988, just 92 days after the actual crash, which is actually in line with the established bias of the model
Grobys references Ex-Bridgewater Chief Executive Ray Dalio’s The Changing World Order (2021) to set up the potential causes of an eventual U.S. stock market collapse:
“Specifically, Dalio observed the following recent three factors: First, the confluence of enormous debts and close-to-zero interest rates led to massive printing in the world’s major currencies−especially the US dollar. Second, due to substantial increases in wealth, political and value gaps in just a century, significant political and social arose within countries. Third, China as a rising new power challenges the US which is as of today the existing world power setting the rules for the world order.”
Wall Street Veterans Add Fuel to Economic Collapse Fire
Grobys isn’t exactly alone in his financial doomsday theory crafting. As fears of a recession continue to ramp up in the face of falling consumer spending and continued rate hikes, a number of Wall Street legends have come out of the woodwork to share their bad omens for what’s to come.
This includes British Investor Jeremy Grantham, who warned investors just last week that a “stomach-churning” crash could erase 50% of value from the S&P 500.
Meanwhile, Economist Nouriel Roubini, sometimes referred to as “Dr Doom,” believes the global economy could be headed for a stagflationary debt crisis. Indeed, Roubini maintains that should the Fed take its foot off the gas in its monetary tightenings, the entire world could be in for a devastating financial crash.
Roubini iterates this point in a December Project-Syndicate op-ed titled “The Unavoidable Crash.”
“Once the inflation genie gets out of the bottle – which is what will happen when central banks abandon the fight in the face of the looming economic and financial crash – nominal and real borrowing costs will surge. The mother of all stagflationary debt crises can be postponed, not avoided.”
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.comPublishing Guidelines.
