NAFTA's demise just one potential trigger for a market crash: Don Pittis

As stock markets have continued their relentless rise, investors watch fearfully for something that could trigger a rushfor the exits.

Although thedatefell on a Thursday this year, yesterday was the 30th anniversaryof 1987's Black Monday, when markets plunged about 23per cent in a single session. The equivalent today would be a drop in the Dow Jones Industrial Average of more than 5,000 points.

No one knows if or when another market crash mightcome, but as business commentatorsglance warily at the inflated value of assets, there has been plenty of speculation aboutwhat might be the one little nudgethat could cause nervous traders to lose faith.

One suggestion has been a severe and decisive political meltdown in the Trump administration. Others includean outbreak ofglobal conflict or a serious cyberattack. One report suggeststhe beginning of the U.S. central bank's plan to reduce itsbalance sheet could set things off, even though the details and date have been known for months.

But there are also hints a worthytrigger could be an abrupt change in international trade co-operation signalled by the failure of the North American Free Trade Agreement, which remains under tenserenegotiation.

Scary stories

Most investors andbusinesses would obviously be unhappy if markets suddenly tumbled. Nevertheless, forthe business media and many of their readers market crashes seem to hold a fascination similar to the one that inspires fans of apocalyptic fiction.

A top story this weekin one of the world's bibles of hard financial journalism, Britain'sFinancial Times, was an article comparing the current markets not just to 1987 but to the Great Crash of 1929 that presagedthe Great Depression.

The writers noted that respected Yale scholarRobert Shiller, author of the book Irrational Exuberance, has recently warned that the comparison is not favourable.

"The cyclically adjusted price-to-earnings ratio kept by Yale economics professor Robert Shiller is at levels topped only by the peaks before the dotcom bubble burst in 2000 and the Great Crash in 1929," the Financial Times article says.

In the comments below the piece, there are many who offer reasons for why it can't happen now, including the suggestion that, since everyone is now talking about the danger of a new crash, traders all have their eyes wide open.

Greater fool

But someone responding to that comment quotes previousresearch by Shillerthat shows even before the crash of 1987, thevast majority of investors worriedthe market was overvalued.

"Speculators typically recognise that they're buying into a bubble, but think they're smarter than everyone else, and will be able to predict the top, then sell before everyone else," says the commenter,who uses the pen name Phoenix.

That's the greater fool argument, well-known in all kinds of investing including the real estate market.

That kind of trigger-finger mentality where so many investors are nervously watching for the signal to sell is clearly destabilizing. But so far, every time the market retreats, investors buy on the dip.

That could be changing, according to a piece this week inWall Street Journal affiliate MarketWatch. What the author describes as professional"smart money" is increasingly betting the market will fall while ordinary investors, described as "dumb money," are upping their stake.

Most great crash analysis in the business press comes to thereassuring conclusion thatfor a variety of reasonsit won't happen this time.

As mentioned, that doesn't mean there aren't plenty of suggestions aboutwhat could abruptly change the mood.

One that may not have received enough attention is the danger of a changing global trade climate should NAFTA fall apart.

'Worst possible outcome'

Certainly Canadian Foreign Affairs Minister Chrystia Freelandhas expressed nervousness about the rocky state of the trade talks, clearly pointing a finger at "unconventional" and "troubling" demands from the U.S. that could bring the deal down.

"We need to be prepared in a very sensible, pragmatic, dare I say it, a no-fuss Canadian way, for the worst possible outcome," Freelandsaid this week."And we certainly are."

A directwarning about the financial impact of a tradebreakdown came from an unexpected source this week when the Canada Mortgage and Housing Corporation used the threat of such an outcome to demonstrate it's equipped to deal with the worstkind of crises.

Although it described the event as unlikely, the CMHCsaida move toward anti-globalization and increased tariffs could lead to a 31 per cent decline in house prices. The federal corporation did not get into how such an event would affect stock prices, but there is every reason to expect the same logic would apply to securities.

• Looking back at the Black Monday stock crash, 30 years later
• ANALYSIS| Smart folks know stock market euphoria can't last forever

NAFTA critics have expressed doubts that the deal has created miraculous benefits for the U.S. or Canada. Nonetheless,there are widespread fears that the process of unwinding integrated cross-border industries that have grown together over 23 years will hurt should the deal fall apart.

In the event of that outcome, the question is whether a sudden collapse ofNAFTAand its implication for future corporate earningswould be enough to alter the current exuberant mood. Just the threat of such a resultcould be one more reason to try to seal a deal.

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