Rule Number One: Get Ready to Exit Stocks
,Just after the financial crisis and stock market crash in late 2008, coauthor Bob Wiedemer had dinner with a friend. After a few drinks, the man revealed that he had recently made one of the biggest financial mistakes of his life. A fan of our first book, Bob’s friend admitted he only half-believed our 2006 predictions in America’s Bubble Economy about the coming Bubblequake, and therefore, he sold only about half of his stocks prior to the 2008 crash. For sure, this guy saved himself from what could have been twice the loss by selling half his holdings near the market peak. But he felt terrible having not sold the other half, too.
Let Bob’s friend spare you his learning curve. Despite the stock market rally in 2009 after the big crash, stocks are vulnerable to a crash or a series of smaller downturns, and will eventually fall much further than the crash of late 2008.
As we said before, the long term and the short term are not the same.
In the short term, more massive money printing by the Federal Reserve could continue to support the stock market and could even push it higher in 2011 and beyond, assuming there are no Black Swan events that spook investors. In fact, if the Fed wanted (and if there was enough political support for it, which there may not be), continued massive money printing could potentially push the Dow back to its 2007 all-time high of 14,164 or higher. (See the Appendix on possible market manipulation for further thoughts on how high the market could go.)
Since the Financial Crisis of 2008, the Only Time the Stock Market Has Gone Up is When the Fed Prints Money
That’s right. Since the financial crisis began in late 2008, the stock market has only gone up when the Fed has printed money via QE. The stock market began its rebound from the financial crisis lows in March 2009 with the beginning of the first round of money printing (QE1). That ended on April 1, 2010 and only five weeks later, the market faltered and we had the May Flash Crash. The market continued to struggle through the summer of 2010 and only began climbing again when Ben Bernanke announced that the Fed would soon print more money (QE2). It will be interesting to see what happens after QE2 ends on June 30, 2011. Past history has shown that when the bubbles start to pop, the stock market needs a lot of printed money support if it is going to go up.
However, in the long term, inflation and interest rates will climb, and the stock market (and all our asset bubbles) will fall. Again, if we did not already have a multibubble economy on the way down, big economic stimuli, like massive government deficit spending and massive money printing, might do the trick of jump starting some real economic growth. But we do have a multibubble economy on the way down, and big stimuli funded by more massive government borrowing and more massive money printing are only going to make things much worse in the long term, when inflation rises, investors lose their appetite for buying our debt, and the bubbles fully pop.
When to Exit Stocks?
In the short term, the answer depends on your particular investment style, goals, and risk appetite. Some people have already exited the stock market completely, and that’s fine. (In about five years, you will be very happy you did.)
If you want to own stocks for a while longer to take advantage of any potential additional upside, in large part driven by massive money printing by the Fed, please be aware that at any time things can change very quickly, depending on what the government decides to do. It can also change due to events in the Middle East, Europe, China, no or slow economic growth, rising unemployment, more bad news for real estate, or any wildcard events that may occur. Most people will stay in the market and will lose money when it falls because they don’t think it is a bubble; they think it’s a bull in a downturn. It will be quite difficult to tell when the market has topped out and is going down long term. As they say on Wall Street, nobody rings a bell when the market peaks.
This new investment environment takes very active, time-consuming, and complex portfolio management. Unless your financial advisors have the correct macroeconomic view of what is going on (very few do), you will essentially be flying solo. Therefore, you will need to watch the news, have the correct macroeconomic view of what is occurring, and know how to apply it to your particular investments. (Our newsletter and other services can help with that. For details, call (800) 994-0018 or go to www.aftershockeconomy.com.)
Please also be aware that eventually the short term will evolve into the long term, and at some point you will want to exit stocks before they begin to drop significantly. The fall may occur in a few stages with some stabilization between the drops, or all at once. There is an increasing possibility of a catastrophic collapse that could happen very quickly. Once the market starts to rapidly crash, it will become increasingly difficult to sell your stocks because there will be so few buyers. If everyone is running for the gates at the same time, most people can’t get out.
One action the government might take to try to slow down this financial death spiral is to halt stock market trading. At a certain point, market declines could be very large—like a Flash Crash that doesn’t rebound. Hence, government and market officials may decide that the best option is simply to close the market for a few days or a week to let investors settle down and get their confidence back. They might make changes to limit high frequency trading as an excuse for closing the market. Blaming the market’s decline on high frequency trading or some other technical issue is certainly a lot better than blaming it on a fundamental lack of confidence. These market stoppages—there may be several—might even work short term, but more likely, they won’t and they certainly won’t work long term. The downward spiral will simply resume after the stoppages since the fundamentals won’t have changed.
Ultimately, automated selling may be completely blocked. In addition, after a market stoppage, selling may be limited when it re-opens and there may even be incentives for buying stocks. Shorting stocks may also be limited or stopped completely.
Given that it is nearly impossible to time these market declines perfectly, you will likely either get out of the market a bit too early or get out a bit too late. Which would you prefer?
How Long to Stay Out of the Market?
As a general rule, once the stock market begins to crash, stay clear of all stocks, until each one of the interconnected asset bubbles has fully popped, especially the dollar bubble. There are a few small exceptions to this rule (see Chapter 7), but in general, get out and stay out of your stocks until after the dollar and government debt bubbles fully pop and inflation stabilizes.
Only the correct macroeconomic analysis can give you this kind of accurate road map over several years. What macroeconomic analysis cannot do is tell us what any individual stock will do week to week or even month to month. As we said, in the short term, stocks could continue to hold up and even move up further. But the overall long-term trend is down. Stocks could drop sharply at any time with little warning, and then for a while, could come back up. As the market goes down in stages, resist the temptation to throw money away on what may look like bargains. Do not get lured back into stocks until after the dollar bubble has fully popped, if you still have any interest in investing in stocks at that point (most people won’t). Also, asset purchases may be a better investment at that point, which we will discuss in detail in a later book.
We discussed the timing of the dollar bubble pop in Chapter 4. It could happen as early as 2013, but more likely in 2015, 2016, or even later, depending on what the United States and other governments do in the fierce fight to save the dollar. These actions will only delay, not prevent, the dollar fall. As mentioned earlier, it is very hard to predict exactly when the dollar bubble will pop because it is so heavily influenced by additional money printing by the Fed, and by the willingness and ability of governments, like China, to intervene in the foreign exchange markets, and, most importantly, by foreign and domestic investor psychology. When the expected recovery does not occur, it seems reasonable to assume that massive money printing, massively growing deficits, and rising inflation and interest rates will all have increasingly negative effects on investor sentiment over time.
Another factor that makes precision timing difficult is the real possibility that the stock market is occasionally manipulated by certain powerful forces (see the Appendix).
You don’t have to leave the market all at once, but you should do it over a reasonable period of time. In the short term, stock prices will go up and down, but long term they most definitely will go down, down, down, so you should sell them within some reasonable time frame, depending on your personal views, how much you believe our macro view, and how close to the edge you are willing to push it. This same advice applies to the stocks in your 401(k) plan or other retirement accounts. Within what you believe is a reasonable timeframe; begin to move your money out of stocks and into cash.
This “Recovery” Is 100 Percent Fake
That’s right. The recovery is fake. It is completely a result of massive increases in government borrowing. The cheerleaders like to tell you that the economy has rebounded. We had government stimulus earlier, but now they say that the Animal Spirits have taken over and the recovery is running on its own. Ha! The recovery is only stimulus. Let’s look at the numbers:
In 2007, the GDP was $14.0 trillion.
In 2010, the GDP was $14.6 trillion.
That’s a net increase of $600 billion. Now let’s compare that to the increase in government borrowing:
In 2007 the US government borrowed and spent $163 billion.
In 2010 the US government borrowed and spent almost $1.4 trillion.
That’s a net increase of over $1.2 trillion.
That means the entire increase in our GDP can be attributed to the increase in government borrowing and spending. In fact, the increase in government borrowing and spending is almost two times the increase in our GDP. Therefore, the economy is doing very poorly indeed. Without massive increases in government borrowing and spending, there would be no “recovery” at all.
As additional evidence of how much the U.S. government has increased its borrowing, in February 2011 we borrowed $222 billion. That’s almost 40 percent more in just one month than we borrowed in all of 2007.
The next chapter offers ideas about what you can do to make money during the coming Aftershock, but right now, you need to wrap your mind around this very difficult to accept idea: In the long term, stay away from investing in stocks. This is also true for U.S. investors looking to invest in foreign stocks and for foreign investors looking to invest in the United States or in their own countries. Stay away!
While it is true that profits can be made in any market as long as it is moving either up or down, trying to survive and profit in this stock market will take an extraordinary amount of time-consuming, active, and complex management, with precision timing and a good dose of plain luck. Very few people will do it successfully, and even those who do may not be able to do it again, as things keep changing. The only exception to our no-stocks rule is if you are extraordinarily talented and have a whole lot of time on your hands, or if you are working with a very sophisticated money manager who closely follows the macroeconomic analysis of Aftershock and can actively—and correctly—play the ups and downs.