- the source for market opinions


August 24, 2015 | No Kidding

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

 Fear is greater than greed.

That pretty much describes things on Monday when stock markets plunged, recovered, wobbled and weaved. The doomers saw it as the beginning of the end. Bottom-feeders feasted on Apple stock. Day traders knew it was better than sex. Sage investors ignored it.

After all, a correction of 10% or more for the Dow or the S&P doesn’t mean the US economy is sick. It’s not. Instead, after hovering around record highs for the longest period of time in 90 years, markets blew off some gas. That’s how dangerous bubbles – which pop with far worse, longer-lasting consequences – are avoided. Like the one brewing with Canadian real estate.

But market declines spook people. We think the worst. The media and the bullion-hocking newsletter guys know that. Human nature clicks in – the same hormones which makes people want things that keep getting more expensive. Once again the emotional are led to slaughter – those who bought high end up selling low. A few days, weeks or months later it all passes. Only the realized losses remain. Poor little sods.

So, stocks are fun to watch, but oil matters more. Watch that this week. It means jobs.

Crude oil (WTI), last 12 months
CRUDE-1 modified

The price of crude is close to $38 US. It was ninety-four bucks a year ago and sixty dollars in June. Oil lost 5% of its value again Monday and probably has more to go. At these levels there will be a lot more people out of work in our pivotal energy sector, even more empty office space in Calgary’s towers and more projects cancelled. Revenues from the country’s major export commodity have plunged, and big producers are pumping at a loss.

These are the two real consequences of the current mess: Job stress putting downward pressure on housing markets, and a move to the political left. The Bank of Canada can slash interest rates to zero, but it’ll be a loss of employment confidence and higher personal taxes that most impact people’s lives. Looks like both are coming.

Now, here’s my take on investments and equity markets.

First, Corrections are normal. We’ve had seven of them (5% or more) in the past four years. The last whopper was in 2011 (20%) during the US debt ceiling crisis. At that time this blog was a virtual swamp of primordial juices, rendering it damn hard to type above all the wailing. Of course, it passed. The stock market then advanced by 70%, making geniuses of people who stayed invested or got that way.

Second, nothing about the US recovery has changed over the last few weeks. The economy there grew at a strong rate of 2.3% in the second quarter. Over 13 million jobs have been created in 65 months with an average monthly addition of more than 200,000. Corporate profits are robust, and forecast to rise above 10% in each of the next two years. The budget deficit has plunged and Donald Trump will surely fix everything else.

Third, yeah, China matters. It consumes more commodities than any other nation. Weakness there means troubles in Fort Mac. But the world’s engine is still America, and that will not change for a long, long time. This is why US equity markets have advanced relentlessly since the 2008-9 blowoff, but even so, valuations are not inflated by historic norms.

Besides, China was an accident waiting to happen (which is why investors should have only about 1% exposure to it). The geniuses in Beijing allowed massive speculation on the part of unsophisticated, leveraged investors, which sent the stock market to insane and unsustainable levels, creating excessive volatility. Despite the trip back down, the market’s still up by 40% over the past year.

Fourth, the commodity collapse is already overdone. Prices for copper, oil, grain, nickel and much else are way below levels experienced during the GFC when the world economy was contracting fast. Yet these days the world’s expanding, albeit slowly. If anything, cheap energy and other commodities support more global growth. So it’s hard to see how this will not snap back.

Finally, the kind of portfolio I’ve encouraged – balanced (with safe stuff and growth assets) and diversified (among assets and regions) – is designed to mitigate against days like these. And it’s working. Nobody whose investments are structured this way has seen a 10% drop.

But, as I said, fear is greater than greed. So I’ll probably be writing this same blog again in four years. At least you’re getting your money’s worth here.

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August 24th, 2015

Posted In: The Greater Fool

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