Tuesday, February 6, 2018

Is The Market Crashing?

Is the market crashing? I hope not!

The financial media is at it again, using specious statistics to generate clicks and eyeballs for their stories. They were reporting that the Dow Jones Industrial Average has shown its largest point drop in history which sounds alarming but really isn't.

Since the market has grown over time, the amount of points that it drops really is meaningless.  A better measure would be percentage overall drop rather than number of points. But that wouldn't get you to click on their clickbait article, would it?

The reality is, I made $40,000 this month in the stock market - and then lost $30,000  $45,000 of it.  I am still coming out ahead behind, just not as euphorically as before.   People are realizing that the tax cut isn't going to be the panacea they thought it was - and actually may end up having some unintended consequences.  And maybe trillion-dollar deficits are also troubling.  Time to dust off the old debt clock, I'm afraid.  (Funny how Republicans stopped talking about that once Obama left office - even as they double the deficit!)

It is akin to these clickbait stories that say such-and-such is the highest it has ever been, which sounds alarming, but then again, with inflation over time, everything goes up in price and everything ends up being the highest this or the largest that.  Whether the level is alarming or not depends not on mere dollar amounts, but percentages, adjusted for inflation.

This is not to say the recent drop in the Dow is not concerning - it is.  However, whether this is merely a correction or the start of a bear market remains to be seen.  And if you have balanced your investments and invested wisely, you really have nothing to worry about.  The really bogus investments will indeed crash and burn, but companies that crank out products that make profits and pay dividends will tend to do well over time.  Maybe not all of them - even General Motors went bankrupt.  But most of them will do well, and your portfolio will recover - if you are diversified.

If you have it all in Bitcoin, well, sorry.

But what is going on?  Why is the market dropping?  People like to blame interest rates as the cause, as people want to find a single cause for things.  But often a multiple number of factors are at work in driving the market.  Even the market crash of 2009 was more than just "housing."  Looking back, we tend to say that the over-inflated housing bubble of the 2000s created the market crash of 2009, as mortgage-backed securities turned out to be worthless and brought down the entire market as a result.

But there were other factors as well.  You may not remember this, but in the fall of 2008 right before the election, gasoline shot up to $5 a gallon in many areas, causing a lot of people financial pain. Suddenly buying a giant monster SUV or pickup truck seemed like a really stupid decision.  As a result, The Big Three automakers which were geared up to make nothing else but SUVs and pickup trucks started to falter - and two of them went bankrupt.

Consumers had a record amount of personal debt, which meant that when interest rates went up they could ill-afford to service this debt - including their wacky mortgages on their overpriced houses. They started cutting back on everything from restaurant meals to buying clothes to whatever, and as a result there was a recession across the board.  While the housing bubble was certainly a big part of it if not the majority of it, there was a lot of other ancillary things going on as well.

If you've been reading my blog for the last few months you'll know that I've had a generally pessimistic tone about the economy.  It's not that there is any particular one thing, only that we've had a record length bull market and eventually the party has to end sometime.  And then there are little things in the background that sort of cumulatively start to nag you.  Airlines are claiming they will never lose money - which is always a horrible thing to say as it insures that you will lose money in the future.  Learn from the Titanic, and never claim to be "unsinkable."  Fare wars will start, and as the price of oil goes up, these predictions of never losing money will look ridiculous in retrospect.

Meanwhile consumers are stressed by larger and larger amounts of debts for everything from home mortgages, to college educations, to automobiles, to payday loans, to whatever.  The amount of junk debt that the average consumer has is at an all-time high, and the default rate on subprime auto loans is nearly one-third.  Consumers are running out of money to borrow in order to spend, and wages are not increasing fast enough to counteract inflation.  Demand for consumer goods could drop - and may very well be dropping.  The thing starts to feed on itself, and the snowball effect kicks in.

Bill Ford warned us about seven-year car loans - over four years ago.  Now those folks who took them out are upside-down on their cars, and cannot afford to trade-in or trade-up.   The few that do, fold negative equity into subprime loans which are at huge risk for default, and surprise, surprise, they are defaulting in 1 out of 3 loans.

And yet unemployment is it at all time low - which as many economists have noted, often precedes a market crash or at least a bear market.  We saw the same thing in the 1990s under Bill Clinton. Unemployment was an all-time low, and it was very hard to hire people without paying them an inordinate amount of money.  This added to the cost of goods and services which cracked up inflation and eventually stalled the entire economy.

And there are signs the same thing are happening today. As unemployment drops to record low levels, people can demand higher salaries - and are getting them.  This means companies have higher cost basis which they cannot pass on to consumers who have no money to spend to buy their products in the first place.

Then there are the zombies.   These are companies I thought would go bankrupt nearly seven years ago.  Sears, J.C. Penny, and a whole host of other retailers which have been tottering along for years now, which look to finally collapse this year.   Slashed pensions and lost jobs will not create consumer confidence.   And then bubbles like cryptocurrency will burst - or have burst - affecting a small number of consumers (college kids who "invested" $750 in Bitcoin using a credit card) but having its own effect, nevertheless.  Sketchy "dot com" companies that never made a penny - and never will - will finally collapse as venture capitalists run out of dough to throw at them.   Stupid stuff like the Elio three-wheeled car will finally end up in bankrutpcy, as they can't even afford to pay someone to add blog entries to their website (the only activity the company is currently doing).  All this specious bullshit will start to appear for what it is - bullshit - in the harsh light of a new day.

Will there be a dramatic market crash? I don't know - I hope not.  They say the DJIA will drop another 1,000 points this morning.   But I take no comfort or glee in that or in "being right" about predicting this.  Because like everyone else, I'm just as invested in this market.  Although in the last six months, I've been steadily selling off a number of stocks and bonds and other investments and I'm sitting on a lot of cash right now (about 20% of my portfolio) more than ever in my lifetime.

But I'm not suggesting that as a strategy to anyone.  For my particular situation, I am living on savings at this point in my life, so I need to cash-out to pay my monthly bills.  The amount of money I can make from interest at this point of my life is not as large as it would be what I was 20 years old, where I could count on 30 years of compound interest to work in my favor.  Compound interest for two or three years really doesn't add up to much, so I don't lose that much in the marketplace by sitting on cash.

For someone in a different situation, sitting on a cash could be disastrous.  You could be missing out on market opportunities which over time - decades - will more than make up for temporary losses during bear markets.  As bad as bear markets get, bull markets always supersede them.  Even the losses of the big crash of 2009 were won back in the market within about a year or so.

It gives me no joy to say "I told you so!" about the price of gold or Bitcoin or over-inflated stocks or overpriced houses.  But it's not hard to spot these things once you see the pattern.  Once you see the hype and the hyperbole being bandied bandied about by people, as well as the illogical statements that things will go up in value - just because they will - you start to realize that you're in the middle of a bullshit storm.

And a market cannot be sustained on bullshit for very long.  Eventually it corrects itself.   Things fall apart and people get hurt - with something new rising from the ashes every time.  And often these painful cutbacks result in the availability of low-cost assets which enable an entirely new generation of businesses to thrive.

Recessions, like bankruptcy, can be a healthy pruning of the economic tree. Pruning often encourages new and more vigorous growth over time.  It's better to cut off a rotting branch than to hope that it grows back.   And what we may be seeing here is a long overdue pruning taking place.

Stay tuned.