Do Not Be Fooled: the stock market may be at record highs, BUT the stock market is NOT the economy.
Most people are familiar with the image of a duck, seeming to cruise effortlessly across a lake. Many people do not realise, that, hidden just below the surface, the duck’s little legs are paddling furiously quickly. If the fast and furious feet stop or stumble, the seemingly effortless image of calm would stop or crash.
As at May/June 2020, I see a lot of “Covid-washing” by companies: many are saying they have had to lay off staff or close their businesses “due to the CoronaVirus”; however, this may not be entirely true.
If we examine how many retail stores announced closures in 2019, the vast majority of these occurred before October 2019; long before the virus had been discovered. It was not so much the Covid19 (COrona VIrus Disease 2019) which brought about the unfortunate demise of so many industries, it was a combination of bad management, and COVID08 (Creation Of Virtually Infinite Dollars 2008).
When the GFC1 hit in 2008, central banks responded by bailing out troubled and troublesome banks (which should have been left to fail), and the creation of virtually infinite dollars by a process known as Quantitative Easing (QE).
The QE process of printing trillions of dollars of fiat currency is supposed to be a tool which prevents bank runs, as were witnessed in the Great Depression, with people lining up for days to access their money.
The QE is now used by governments and central banks to purchase stocks and bonds, thus artificially propping up the investment markets. Do not be fooled! The stock market is NOT the economy. The market is the price of a stock, the economy is the underlying earnings of a company.
Historically, stock prices have reflected underlying earnings in a ratio of 12-20 times. This means that a person would pay $100 for a stock which earned $5; which is similar to buying a $100 000 house which rents for $100/week ($5 000 pa) or having a $100 000 term deposit which pays 5%. This rule of thumb has worked for centuries, and when it gets out of alignment, this is when we have massive crashes.
Stock prices and earnings were out of alignment in 1999 (cue the ’99 “Tech Wreck”). They were out of alignment in 2001 (post-9/11 stock crash), and they were definitely out of alignment for the ’87 ‘Black Monday’ crash, and the 2008 GFC.
As I study a lot of historical charts to see patterns which may emerge for the future, I accurately predicted GFC1 back in 2006 in my best-selling book “Who’s Taking Your Money? (and how to get some of it back!)”
I predicted a 2020 crash as far back as September 2019, starting the hashtag #GFC2 on social media. Anyone who was aware of corporate debt levels and national debt levels, could see that things were beginning to become unsustainable. As the USA soars over 100% debt to GDP ratio, it is a warning sign to anyone who invests into US companies, or has dealings with the USA (this is much of the world).
GFC2 and QE 2020 has seen more cash printed in three months than was printed for the entirety of the GFC1 (2008-2012) and it does not seem to be stopping. Printing more dollars devalues the ones in existence, so we could all soon be millionaires on paper, yet, like Germany in the 1920’s or Zimbabwe in the early ‘noughties, we cannot afford to buy bread.
Job losses which occurred in early 2020 had been coming for a long time throughout 2018-2019 (when retailers blamed softer earnings on “the Amazon effect” and online shopping. Now they are blaming Covid19, when in reality, the fault was poor planning and no future vision.)
The jobs which disappeared in an instant will take many months, if not years, to return. Anyone who has run a startup (I have had 13) will know that in the early days, everything is either done solo, or outsourced to contractors in the gig economy. It is usually a long time before full-time jobs are able to be afforded or created.
I may sound pessimistic, and I wish I had some happier news. However, my past predictions have always come true, as the only lesson we learn from history is that we (especially bankers, economists and politicians) do NOT learn from history.
Despite the past pandemic warnings of Black Plague, Spanish Flu, SARS, MERS, Ebola etc, the world was not prepared for Covid19. Despite QE policy having never worked, central banks keep doing it (the US dollar has lost 93% of its value since its creation only a hundred years ago, as have other world currencies. The British Pound kept its value for over 300 years before they tried QE.)
Many industries will fold up. Millions of jobs will be lost. Companies who have adapted to social distancing will find that, not only can bank ATM’s replace tellers, but screens can replace order takers in fast food drive-through as well as in standard restaurants. Staff in many service industries can work from home and be offered a part-time wage or subcontract position, without the benefits of full-time work such as job security, sick leave, holiday pay and workers compensation.
The outlook for the next few years may be bleak. But to quote the “world’s greatest treasurer” Paul Keating, “This is the recession we had to have.” We had lived far too long overspending and not saving. This is the hangover from when we woke up hungover in 2008 and decided to drink vodka for ten years to make the headache stop.
Anyone who saves 10% of their income will know that one bad month will wipe out a year of savings. A bad year can see you lose a decade of progress.
Yes, the country will recover. The world will recover. Jobs will recover. But it will be a slow decade from 2020 to 2030. Be sure to be flexible, adaptable, take nothing for granted, and definitely have a Plan B.
Are you feeling bearish? There are TWO bearish BetaShares ETFs on the ASX.
These are BEAR and BBOZ. BEAR is inverse (if market goes down 10%, BEAR goes up 10% and vice versa); BBOZ is inverse with leverage
check the BBOZ climb when the ASX 200 fell -37%.
BBOZ went from $8 to $19…a gain of 100+%
BE WARNED — if the standard market goes up, BEAR will go down and BBOZ will go down significantly. You can lose a lot if you’re wrong.
If you really think ASX is going south, take a ‘B’ position. If you think ASX is going up, buy a standard index. If you are unsure, consider emerging markets (eg. China, Africa etc) or precious metals or crypto 🙂 #gold #silver #bitcoin #bostoncoin
Always have a #planB 🙂
- Perf from March 2 to June 2 2020
Sth Korea Index 9.94%
Gold Miners ETF 38.77%
Silver miners 45.28%
Jeremy Britton DFA SA(Fin)
financial planner since 1992. Money Magazine award-winning best-selling author. CFO #BostonCoin, world’s first crypto-ETF BostonTrading.co