- Etai Friedman: 80% CRASH on the horizon, S&P may drop 1400 points
by http://www.trunews.com/ , 13 April 2016
(TRUNEWS) Etai Friedman, the CEO of Eyal Capital Management LP, says the S&P 500 will crash 80% in the near future. Friedman’s statement was made during an interview with Rick Wiles of TRUNEWS on Wednesday, while speaking about the impending global financial crisis.
Friedman said that the Tobin’s Q ratio of US markets — 1.1 for Q42015 — is showing heavy overvaluation, and a crash will likely bring the ratio down to 0.3. Such a drastic change would not only expose the illiquidity and under capitalization of many businesses, such as tech startups which have thrived under low interest rate policies, but drop the Q ratio .8 or rather 80%.
Tobin’s Q ratio was first devised in 1968 by economics Nobel laureate James Tobin, to show the true valuation of a company. The “Q ratio” as it is referred in financial circles is calculated as the market value of a company divided by the replacement value of the firms assets. The data is centrally gather by the US Federal Reserve.
Friedman said the Q ratio is closely tied to the stock market, noting that whenever the markets fall the ratio falls also. Tobin said that only three or four times since 1909 has the Q ratio been as high or higher than 1.1, reaching a high of 1.28 in 1909. He added that in 2005 before the bank liquidity crisis, the Q ratio dropped to 0.55, and would have kept falling had The Fed not intervened with a bailout. This time, Friedman said, the value correction cannot be stopped and will drop the S&P 500 from 2000 to 600pts.
Why does this matter? The S&P 500 is the main US market index, and measures the overall health and movement of the 500 largest US corporations. A crash of 1400pts, which represents approximately $1.48 trillion of the $2.2 trillion index assets and $5.25 trillion of the $7.8 trillion benchmarked to the index, would gut America’s financial core. Based on what occurred during the great Depression, it would cause a wave of bankruptcies, severe price level and income drops, increased debt service costs, and mass unemployment.
Highlights from the Friedman interview: