What most investors do not realize currently is they could go to "cash" today and in five years will likely be better off. However, since making such a suggestion is strictly "taboo" because one might "miss some upside," it becomes extremely important for measures to be put into place to protect investment capital from the coming downturn. Of course, since Wall Street does not make fees on investors holding cash, maybe there is another reason they are so adamant that you remain invested all the time.
With the Federal Reserve still hinting at raising interest rates, but trapped by weak economic growth, will the next big move by the Fed be another form of monetary accommodation instead? Or, are the underlying dynamics of the economy and market really strong enough to shake off the recent weakness and continue its bullish ascent?
When you tell people in self denial the market could drop 40% in a few months, they think you are crazy. They declare this could never happen. They would get out of the market before it would fall vertically. Their memories are conveniently short as their normalcy bias and cognitive dissonance blind them to what happened over three months in 2008/2009. We wonder how many willfully ignorant investors can handle a 50% to 70% haircut in their 401k, especially if they are over 50 years old. We wonder how much angrier the populace will become when the current recession results in more job losses, bankruptcies and revelations of Wall Street malfeasance. Beware of the bear.
What has always separated successful professional gamblers from the "weekend sucker" is knowing when to step away from the table.
Some people will never learn... ever. What is happening today is nothing more than rearranging the deck chairs on the Titanic. The iceberg has been struck, we’re taking on water, and this sucker is going to sink. Game Over.
The current surge in dis-inflationary pressures is not just due to the recent fall in oil prices, but rather a global epidemic of slowing economic growth. While Janet Yellen addressed this "disinflationary" wave during her post-meeting press conference, the Fed still maintains the illusion of confidence that economic growth will return shortly. Unfortunately, this has been the Fed's "Unicorn" since 2011 as annual hopes of economic recovery have failed to materialize. However, it is these ongoing views of optimism that have collided with economic realities.
The current surge in deflationary pressures is not just due to the recent fall in oil prices, but rather a global epidemic of slowing economic growth. While Janet Yellen addressed this "disinflationary" wave during her post-meeting press conference, the Fed still maintains the illusion of confidence that economic growth will return shortly. Unfortunately, this has been the Fed's "Unicorn" since 2011 as annual hopes of economic recovery have failed to materialize.
It is quite likely - given current valuation levels, deterioration in earnings growth, and a slower economic environment - that forward returns will be substantially lower. In other words, the "risk-reward" ratio for being an aggressive investor at this point in the market/economic cycle suggests that the "house will likely win." It is Deja Vu all over again...
In short, activist Fed policy is both ineffective and reckless (and the historical data bears this out), and that the Federal Reserve has pushed the financial markets to a precipice from which no gentle retreat is ultimately likely. Similar precipices, such as 1929 and 2000, and even lesser precipices like 1906, 1937, 1973 and 2007 have always had unfortunate endings. A quarter-point hike will not cause anything. The causes are already baked in the cake. A rate hike may be a trigger with respect to timing, but that’s all. History suggests we should place our attention on valuations and market internals in any event.
This past week has seen a continuation of market volatility unlike anything witnessed over the last several years. Of course, this volatility all coincides at a time where market participants are struggling with a global economic slowdown, pressures from China, collapsing oil prices, a lack of liquidity from the Federal Reserve and the threat of rising interest rates. It is a brew of ingredients that would have already likely toppled previous bull markets, and it is only by a hairsbreadth the current one continues to breathe.
Last week’s volatility to the downside was entirely predictable, as the first leg down during this ongoing market crash reached the correction stage of 11%. The technical bounce was a given, as the 30 year old HFT MBAs on Wall Street have been trained like rats to BTFD. In their lemming like minds, it has worked for the last six years of this Federal Reserve created “bull market”, so why wouldn’t it work now. Last week was their first lesson in why it doesn’t work during bear markets, and we’ve entered a bear market. John Hussman seems amused at the shallowness of the arguments by Wall Street shills and CNBC cheerleaders about the future of the stock market in his weekly letter. After this modest pullback from all-time highs, the S&P 500 is still overvalued by 92%...
"Time will tell who is right. But remember that we live in an era where computer trading dominates the American stock market. The "robots" that are making a lot of trading calls aren't sitting around pondering China's economy. They are paying attention to whether stocks fall below key levels. What are those levels? No one knows exactly. But these two metrics are worth watching. If these thresholds are crossed, both computer and human traders will consider it a game-changer point."
The discussion of why "this time is not like the last time" is largely irrelevant. Whatever gains that investors have garnered during the recent bull market advance will be wiped away in a swift and brutal downdraft. However, this is the sad history of individual investors in the financial markets as they are always "told to buy" but never "when to sell."
Is September 2015 going to be one of the most important months in modern American history?
With corporate profits falling, margin debt at all-time highs, the Fed preparing to raise rates, China’s fake economic system imploding, currency wars breaking out across the globe, emerging markets in turmoil, oil dependent countries in the Middle East seeing budgets go deeply in the red, Greece and the other insolvent southern European countries nearing collapse and tensions rising between Russia, Europe and the U.S., there is plenty to fear in this central banker created debt bubble world. History teaches us this isn’t over. It’s only just begun. The bubblevision assertions that the worst is behind us is false. They will insist all is well until you’ve lost half your net worth. When fear overtakes greed, neither monetary easing, propaganda, nor acts of desperation by politicians, government bureaucrats, or central bankers will turn the tide.