The first lesson I learned about investing in the market was at the tender age of 10. I had been investing my pocket money in Australian gold shares from about 7 years old, with my father simulating the broker and docking my pocket money by the equivalent of 25c a week. I made a hefty $20 and $20 was a lot in 1971 for a kid. The lesson came a couple of years later when my father explained all I had to do was know which way the market was going to go, up or down, and invest accordingly. It didn’t seem like good advice to my 10-year-old brain and didn’t explain my father’s obvious success. Where was the magic in that piece of advice. Even to a kid it was obvious that it couldn’t be that simple. Yet 30 years later I realised it is exactly that simple. After all, if you don’t know which direction the price of an asset is going, why would you invest in it?
So what of market direction? Although theory suggest charts do not contain any information about trend, its hard not to see obvious trends in them, especially in long term time series. Can it really be true that the general market trend isn’t shown by the long-term S&P 500 chart? Its there because there is a trend and that trend is what we used to call ‘progress.’
He is the obvious example.
Even fundamentalists like Buffett basically say in the long run the stock market can only go up. Most investors implicitly agree with that and believe ‘the market is going up’ and put their money to work accordingly but even in the long run there are nasty corrections for even the biggest most secure stocks and indices which can make for a lot of medium term pain.
You can be a buy and hold investors and in the long term that has been a great strategy. Alternatively, you can buy, hold AND try to avoid the crashes and this is the tack I’ve been on for years. For me the market is going up in the long term, but if you can avoid a crash and buy the bottom of that slump, you are in even better shape.
Its hard to do that, but I’ve managed it pretty much since the dotcom crash only once getting out only to find out the correction didn’t turn into a crash. You should be able to trace some of these event here on Forbes as I’ve been writing here for 2 decades covering the entry and exit of the major crashes.
So what about this current ‘correction?’
So let me be clear. I’m 100% out of US equities and out of about 70% of my non-US portfolio. The remaining stocks are meant to be positions that would avoid the worst of a crash, being defence, agriculture and physical Gold ETF but I may well go 100% cash anyway depending on what happens next. I hate being in cash. I hated to sell Intel, even though I think it can go to the moon, but in a crash everything gets crushed and only special situations have a chance of not getting sucked down with the general market. Everything can turn to dust in a crash and the bigger the crash the broader the devastation. Normality does not apply in a crash.
I think this correction will become a crash and this crash into a sustained bear market. By a bear market, I mean in the classic sense, of a market trending down over an extended period, not the modern clueless definition as it being a market post a crash. This bear market could be exceptionally bleak, because prices are so high even a fall to valuations in line with long term normality, would seem catastrophic.
This outcome is not fate but it will take a near miracle to avoid a lot more bad new this year.
So let’s consider the setup.
For sure risk assets don’t like risk and chaos. Unfortunately, chaos rides out, unbounded.
Consider the promised cut of $1tr in US government expenditure. That will surely create a US recession even if the funds are being squandered in fraud and waste. That money nonetheless goes into the economy and juices it. If these budget cuts are executed, it will put millions on the unemployment rolls.
The Trump tariffs will and must spike prices, cutting US spending power, amplifying a US recession and creating a global recession. There will be higher prices but no increase in money supply unless a QE bazooka is fired. Either way, what then? Budget cuts and tariffs are a double whammy and risk a depression. Crash goes the economy and employment and government tax revenues.
If that wasn’t enough, to add to the woe, there is escalating geopolitical tension which will and must dampen the global economy further.
How can these overlapping factors combined not throw the US and global economy into turmoil and a negative feedback loop.
So now ask yourself, which way is the US stock market going?
So we don’t even have to try and deduce the direction of interest rates or the value of the dollar or the appetite of the world for US debt, to make the obvious call.
It has to be down, unless the angels sing.
So let me try and draw a projection to benchmark what happens next. Its ugly but its simply a road map,
Unless there is a sudden outbreak of sanity we are in for an almighty crash, how deep that crash is, is extremely hard to judge. Finally, the day-to-day drivers of the markets has risen since the global financial crisis, from free market dynamics, to central banking economists to now the chaotic level of political machination and the chaos erupting has no end in sight.
At the very least, all investors should get their affairs in order. Face it, when politicians tell you what they are doing is going to create short term pain you can guess whats up next is going to be epic and not in a good way.