Amidst all the unappointed trade worry warriors, de facto Lords of debt bombs and bongo bubble blowers preaching narratives to us about why, how and when the world is going to end again, I have but one Presidential thing to say to them…
There Is No Financial Crisis
We are nowhere near a financial crisis. The big theme that saved the world the first time is still valid. The central banks have our collective backs and that’ll be enough for quite some time.
The central bank haters are proffering until they are puffy, that there are asset bubbles and that must lead to a crisis. Sure, someday. But, there’s some huge holes in those ideas.
The first is that we really don’t have bubbles. Yes, there is overvaluation, but that does not automatically mean bubble. Some of those scary charts, if you stretch out and add the right curves, are really somewhere between about right and 50% too high based on reasonable valuations.
So, that means that yes, we can see a 30% correction pretty easily. Certain assets can drop even more on panic. But, it would take indexers to sell to really crush the market. Unless they lose their jobs and need the money, they are very unlikely to sell. Why? They are conditioned to “let it ride.” They are long-term investors afterall.
The second reason the central bank haters have it wrong, is that the pain that caused the financial crisis was a perfect storm of extremely bad fiscal policy, new hot money financial products, fraud, poor underwriting, blatant lying by ratings agencies, greed, manipulation and yes, a dash of inept Alan “laissez faire”Greenspan running the Fed. His sin wasn’t printing money, it was not regulating the financial system.
So, can we have a stock market correction. Absolutely. I think one is coming next year (give or take). But that doesn’t mean we’ll have a financial crisis like 2008-09.
BTW, The Fed Isn’t The Big Problem
If worse comes to worse, the Federal Reserve will step in and prop things up. They learned from the last time. Rather than let things get really bad, go ahead and help the system. Does anybody really wish the Fed had not acted to reboot the economy and had just let us wade through a decade of depression? Because that’s what would have happened without QE.
So, please don’t buy the abolish the Fed garbage. Yes, they will make mistakes, but they are largely responsible for the broad wealth and relatively high standard of living in the country. It’s not their fault we allow hoarding, tax dodging and regulatory manipulation.
If we fix the tax code and regulatory system (i.e. vote for people who will do that), then more than 10% of us will have a couple nickels to rub together. You know why? Because the United States is the best economy in the world, even if it’s not the biggest soon. This is, and always will be, the land of opportunity. We just need a more level playing field.
Anyway, in summary and to repeat: corrections, yes, but, probably not a financial crisis for a long time (think late 2020s when all the Boomers have retired).
But, But China
Goldman Sach’s (GS) said this week that a protracted trade war could cost the world $600 billion in trade related economic growth per year by 2021. What number does $600 billion remind us of? Hmmm…
Oh yeah, that Quantitative Tightening I have been complaining about for over a year now, that’s $50 billion a month. Or, take off your socks, yep, $600 billion per year.
Does it make any sense that the stock market has sold off $1.4 trillion (and moving) on trade fears if the annual damage will only be $600 billion? Especially when the Fed has already said it’s about to end QT and let $50 billion work in the economy again each month?
I said over a year ago that there will likely be positive surprises on trade. I might be wrong. I followed up and talked about the “no deal” vs “fake deal” scenario in a recent webinar. We’ll see what we get soon. So far, the Chinese are stretching things out to the election as I suggested they could.
Two Choices For President Trump, One Outcome For Trade
As it stands right now, President Trump has two choices, fix the trade issue or lose next year. Maybe somebody will tell him that supply chains are already moving due to machine learning and to just sell a lot of soybeans and gas to the Chinese.
The Republicans lost the midterms by 8.8 million votes. President Trump narrowly won last time despite getting 3 million fewer votes (yeah, that sounds funny, but the Electoral College is a real thing and he won the kegger).
If there is a shallow recession next year as a I expect is likely, then President Trump loses in a landslide. Even if there’s a fake deal and the economy does okay, he’s probably losing and won’t be able to go back for another swipe.
In that scenario of a new President, there’s a whole different approach to China and things get pretty well fixed quickly. What is fixed by the way? Sell them more stuff and make them pay for tech. We can’t realistically prevent them from getting technology. We can only delay it a few years. We should just charge a good price and get access to their consumers.
Anyway, you can believe what I’m saying about the election next year or not. I’ve gotten every Presidential election right in my adult life. Next Halloween, I’ll unveil my Election mask on our webinar.
Investing In A Thin Market
We have a thin market that can move a lot on traders making trades (against the institutions for the most part). Everybody is taking money from the mutual funds because for some reason, if we call “front running” high frequency trading instead, then it’s ok. What worry the SEC?
For why the market is thin, read my December piece: 4 Pieces Of Missing Money Crushing Markets
Even my #crash2020 theme is more about market forces causing a big correction into a small recession. So, while I see choppiness through the election, that only means we need to try sidestep as much pain as possible and remember to buy the bigger dips.
Our new shopping lists are full of great companies with real growth and growing income. Use them to add new holdings soon.
The stock market is either going to hold the 200-day moving average or head lower to the 2600s somewhere. It could go as low as December or maybe even the 2200 level I talked about.
Those are all buying opportunities. Pack the gear, get ready to go bottom fishing. And remember, eat your fish with small bites.