Correction

The Great Capitulation?

The Great Capitulation. That’s a great description of what appears to be happening. Low interest rates are now being accepted as the inevitable environment for the near and distant future. It feels like the stock markets of the world will benefit from central bank support now and forever.

Capitulation is what market bottoms and tops feel like. The contrarian in me is creating an urge to go out and short the bond market. Had I done that in the past seven years I’d be totally wrong. But now…I’m wondering. And watching.

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Panicky Markets

Strange days indeed. We appear to be right for the moment about gold and the stock markets. The entire situation could be erased and reversed by central bank action.

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Staying the course

Now that we seem to be experiencing the much-awaited stock market correction, we have a new crop of doomsayers preaching that the end of the (financial) world is nigh.

Of course I can’t say they are wrong, any more than I can say that a catastrophic earthquake won’t happen. However, history suggests that the more financial catastrophes are predicted by the experts, the more moderate our market declines are likely to be. Why does this happen? We don’t entirely know, but I’m guessing that it has something to do with investors’ emotional preparation. If they are hearing a lot about financial catastrophes, they are likely to be more cautious from the start, and less likely to be surprised.

Here’s one expert’s prediction, and it’s a genuine emotional slap. “Sell everything” is a very strong statement, especially when issued by a bank.
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Here’s another, and it’s also frightening. Simply envisioning a stock market decline of 75% is painful.
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Of course, I wouldn’t be surprised if the S & P 500 DID decline 30%. The world faces many headwinds currently, and the financial markets have been both blindly optimistic and historically overvalued. But, historically, a bear market of -30% which passes in a few years is not catastrophic, in fact, normally, it tends to be a buying opportunity. In contrast, both these pundits are predicting 1929 or 2008 style train wrecks which take a decade or more to heal.

However, we CAN’T PREDICT THE TIMING OF SUCH AN EVENT ACCURATELY!!! If there’s anything I’ve learned in the past three years, it’s that statistics can identify probabilities, but they can’t deliver accurate forecasts relative to when the forecast will occur. Yes, it’s possible that the downturn which is now emerging in the stock and bond markets will be severe. But the predictive indicators aren’t really saying that now. They are suggesting that we may have a downturn, which won’t be completely catastrophic.

In fact, the Value Line Median Price Appreciation Potential, which has a very good historical record for accuracy, indicated that the S & P 500 was overvalued three years ago. Since then it’s suggested that stock markets have grown ever-more overvalued. Now it’s actually becoming slightly more attractive and less indicative of future stock market maelstroms.

In my experience, the worst financial market train wrecks happen when everyone thinks the world is just wonderful. That’s certainly not the case now. I’m maintaining our relatively defensive, highly diversified positions, and I’m still keeping us invested somewhat in the stock market. The reality is that we don’t really know what will happen.

 

A Bear Market?

We’ve been expecting this for three years. But as I’ve learned many many times, probability is not certainty. We are going into this very diversified, so we should have the opportunity to grab some bargains if a downturn really evolves.

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The Recent Stock Market Turbulence Hasn’t Decided Much, Yet

Since 2008 we’ve been trapped in a global slow-growth economic recovery. In an effort to boost economic growth in the face of rising debt levels, demographic changes, and the corrosive lingering financial insecurities of the Financial Panic of 2008, central banks have poured money supply into the global financial system.

This has had several results. It has perhaps averted a global depression. Perhaps it has allowed economic inefficiencies and misallocations to survive when they should have been recognized as wrong-headed. The Greek bailout comes to mind. A swollen money supply has certainly kept interest rates down. The results of such a tsunami of money have been many, both good and bad.

Most importantly for us, this money-flood has probably created asset bubbles in real estate, bond markets, and stock markets. In Europe, the melding of the private and public sectors has obscured our ability to truly know what is happening. And in China, money flows have been uniquely obscure.

That’s why we are witnessing such epic volatility in the stock markets of the world. Investors don’t know, indeed cannot know, what is really happening. The money flows in Europe, Asia, and elsewhere have been intentionally blurred to the extent that we’re all guessing. It’s about time we figured that out.

What DO we know? We know that the economy has a reasonable baseline. In other words, the global economy is not going to entirely dry up and blow away. We know that traditional valuation measures are somewhat warped by the inflated money supply, but probably not rendered useless. So buying bargains is probably still a wise choice.

What will happen? For all the reasons mentioned before, we don’t know. In the short term I would not be surprised to see more turbulence as investors attempt to guess the future. In the longer term I suspect we’ll all muddle by. In between, there may be bargains. I intend to snap those up as they emerge.

Market Decline

Global stock markets in steep decline

If our portfolios are diversified, then today’s declining stock prices represent the beginning of an opportunity. We will take advantage of the coming days to examine the performance of our mutual funds and “weed the garden” of mutual funds which appear to be faltering. If the market decline continues, we’ll begin buying. Patience…we’ve been waiting for this.