Thoughts from a recent Big Picture podcast with Jim Puplava, The Fear Trade: Snake Oil Salesmen and the Dangers of Being Duped, which you can listen to in full at Financial Sense Newshour here or on iTunes here.
In the normally volatile fall season, the doom and gloom industry likes to issue dire forecasts for major market meltdowns. But what are the chances of one actually happening this year? Many pundits, newsletter writers, and websites have been issuing similar calls for market crashes for years now, but they have been dead wrong.
In last Saturday's Big Picture, Jim addresses several of the bears’ arguments and warns investors of the dangers of excessive pessimism. “I can get scared with the best of them,” says Jim, noting that economic conditions are far from ideal in many parts of the globe. That doesn't mean stocks are ready to crash however. “Looking at LEIs, financial stress indices, recession models, and technical indicators…we are still in a secular uptrend.”
Jim then addresses several of the bearish arguments for a market crash, the first one being fears of a dollar collapse. Jim bluntly calls these predictions “nonsense peddled by the fear industry.” At a time when the US has the strongest growth rate in the developed world, and when China has serious issues with its own economy, money has been flowing to US dollar assets. When you add in the continued likelihood of interest rates being higher here than abroad, there is no crash in sight for the greenback.
Jim next takes on the fears of a major recession or depression. While growth has been anemic, the economy is in better shape than many realize. Jim feels there are signs of acceleration, and not deceleration, in many parts of the world. The future orders component of the ISM manufacturing index has been trending higher, and the ISM service report was the highest in ten years. Global LEIs indicate we are not even close to a contraction, and PFS group’s recession indicator remains at 12%, much below the 20% threshold, which usually signals the onset of a recession. Finally, Jim repeats how many global central banks are still in easing mode—as we see with the EU, Japan, China, and Canada. While there is often a lag between stimulus and economic improvement, QE has moved the needle higher on economic growth in the past and this time should be no exception. Jim is in fact looking for industrial, material, and energy stocks to form some sort of bottom soon as a confirmation of the other positive data points he sees around the world.
A third reason for investor nervousness is seasonality. August through October tends to be among the worst periods of the year for the stock market, and this is often pointed to by the gloom and doom crowd. This year, some on the web are even talking about biblical or astronomical occurrences—like the Shemitah, or blood moon eclipse—as leading to a market crash. Jim feels that investors need to maintain perspective. Yes, markets can correct up to 10%. And markets do overreact to certain pieces of news—for example, a FED rate hike, or uncertainty over China’s economy. But given what he has said above about the strength of the US economy, Jim says any correction would simply be a buying opportunity, and not the start of the end of the financial system.
Finally, Jim addresses why he believes that hyperinflation—another fear of bearish investors—is highly unlikely. While it is true that global central banks have created trillions and trillions of dollars for the financial system, nearly all of this money has stayed either on central bank balance sheets, or on the balance sheets of major banks. The money has not worked its way into the broader economy in the form of credit creation. If anything, there has been a slowdown in credit growth over the past several years, since the consumer is maxed out from taking out loans in the last decade.
Investors need to understand what has caused major market tops in the past. There are several harbingers of trouble that have led to prior bear markets. An important one is an overheating economy—where inflation picks up and the FED has to adopt a very aggressive stance towards tightening, like Alan Greenspan did in the middle of the last decade. But, at the moment, there is no sign of explosive inflation that demands substantial central bank rate hikes. Jim and John also discuss how if central banks lose credibility by, for example, not coordinating policy objectives, markets can head south. But these market negatives—while a possibility at some point—are nowhere to be seen right now. This is all the more true with an election year coming up: the FED does not want to risk raising rates too aggressively and being blamed for influencing who wins at the polls next year.
Jim then gives this advice to investors who tend to get carried away by the fear industry:
“When you manage money you have to look at the facts and deal with them as they are, not what you think they should be….You have to stay disciplined and if you don’t the markets will discipline you. You can’t let your emotions rule your decision making.”
Jim also cautions investors to use basic common sense when reading dire forecasts for the market. What is the actual investment performance of those making these calls? When these advisors get something wrong, do they own up to it? Or do they blame their bad advice on a conspiracy theory? Investors can be overwhelmed by information, but they need to seek out credible sources for market analysis and consider opposing sides of an argument—especially if certain advice is continually causing you to lose money.
Besides being taken in by unscrupulous newsletter writers or market pundits, investors also do real damage to their portfolios by selling positions and incurring taxes. Jim reminds listeners that you can create “your own personal stock market crash” by selling quality securities with capital gains and paying anywhere from 24-37% to the government.
Having a proper risk management strategy and clear investment objectives, which don’t change with headlines or human emotion, are most important when trying to navigate the ups and downs of the market. If you are constantly going all-in and then exiting the market rather than making incremental adjustments along the way, this is a good sign your emotions (and not your head) are driving your investment decisions.
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