This Could Be Worse Than 1929

The stock market may have resumed its selloff sooner than we expected.

The Dow fell 660 points after Apple announced weak sales — mostly in China.

Here’s Bloomberg:

The S&P 500 Index tumbled 2.5 percent for the steepest selloff since Christmas Eve, when the gauge fell within a few points of a bear market before embarking on a 6.8 percent rally over the next five sessions. Apple plunged the most since 2013 after citing an unforeseen slowdown in China for its woes.’

Bloomberg continues:

What’s going on? Over and over in the fourth quarter, as the S&P 500 plunged 19.8 percent to the brink of a bear market, investors heard the same refrain: don’t panic; the economy, and corporate earnings, look strong.

In the last 24 hours, confidence in those assurances has taken a hit. The Dow Jones Industrial Average fell more than 600 points, or 2.6 percent, Thursday morning, while losses in the Nasdaq 100 spiraled toward 3 percent.

Bad advice

But what did investors think? What were the odds that Apple would continue to come up with knock-your-socks-off new products?

What were the odds that this geriatric bull market would race around the track again and set new records?

Of course, you never know. But stocks ultimately depend on the economy. After all, investors are buying streams of income that must come from consumers. And since the ‘beautiful economy’ story was always counterfeit, there had to come a time when the jig would be up.

Whether that begins now…or later…we don’t know. But it is probably coming. And so, we turn to The New York Times for some bad advice on what to do about it:

The sensible response to this unnerving series of developments is to do pretty much anything else. Read a book. Go for a walk. Take up knitting. Or just do nothing at all, like take a nap.

If you are a long-term investor (and any money you have tied up in the stock market should be intended for the long term to begin with), tumult like that of the last few months isn’t something that should cause panic. Rather, it’s the price you pay for enjoying returns that, over long time horizons, are likely to be substantially higher than those for cash or bonds.

The entire point of investing in stocks is that you expect to get greater long-term returns in exchange for tolerating bigger ups and downs.

Count on the Times. Whether it is politics, economics, or finance, the Old Grey Lady generally has a point of view that is not worth having.

Still, it’s breathtaking how the writer of the above piece managed to cram so much misinformation and so many wobbly assumptions into a few short paragraphs.

Should you ignore a potential bear market? No.

Do stocks always go up over the long run? No.

Will stocks go back up in a few months? Probably not.

 

 

Break even

The long-term argument for stocks is simple enough. If you’d invested $1,000 in stocks 100 years ago, you’d have a little over $15 million today.

Pretty good.

But it doesn’t mention that you would have spent nearly half your time — 46 years — waiting to get back to the previous highs.

Nor does it mention that sometimes, you have to wait forever. Japanese investors have been waiting 30 years to get back to breakeven. After three decades, the Nikkei is still 46% below its all-time high set in 1989.

We don’t live forever. And most of us are likely to want access to our savings sometime before we die. That’s why our old friend Richard Russell used to say that the most important rule in investing is to ‘avoid the big loss.’ It’s very hard to recover from a big loss. Life isn’t long enough.

And that’s why our Long-Term Dow/Gold Trading Model (LTDGTM) is set up to get us out of stocks before a big selloff.

It would have spared us the four big drawdowns of the last 100 years — in 1929, 1966, 1999, and 2008. And it would have delivered twice what you would have made from just buying and holding stocks.

Oh…and one other thing the ‘buy-and-hold’ argument doesn’t mention: All you really earn from stocks is the dividends you receive. In terms of gold, the capital gains on stocks disappear.

Prices just go up and down. But you can buy the Dow stocks today for the same 18 ounces of gold you could have used to purchase them in 1929 — 90 years ago.

Bubble Epoch

In 1929, it was the post-World War I loan repayments from Europe that flooded into the US that created the Roaring Twenties stock boom.

Today, it is the $4 trillion from the Fed, along with negative real interest rates, an unfunded tax cut, and corporate buybacks that have provided the Bubble Epoch stimulus.

Both gave the markets a boost. But both were temporary. And in the case of today’s bubble, fraudulent.

In the 1920s, the money was real — gold. And growth rates were real — based on automobiles, rising wages, and electrical appliances. And they were twice as high as today’s growth rates.

But that still didn’t stop a crash. Between September 1929 and September 1931, stocks fell 75%…They didn’t recover for 25 years.

Today, the money is fake…and the growth is counterfeit.

As we pointed out previously, it’s not like a coin toss. It’s not even odds, 50/50, up or down. Because movement in the financial world is ‘path dependent.’ Where you go depends on how you got where you are, in other words.

Since the global financial crisis of 2008, the economy has grown at a yearly rate of 2.2% — the weakest recovery on record.

Meanwhile, stocks have gone up, on average, at a rate of 11.3% each year — the greatest bull market rise on record.

Which of those two things is durable…lasting?

The real Main Street economy, with its modest growth? Or the Wall Street financial world, with some of the most extravagant stock prices ever recorded?

Which will give way when the next crisis hits?

We already know, don’t we?

 

Regards,

Bill Bonner


Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance.


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