Gold News

Don't Panic?! You Kidding?!

Why this could be worse than 1929...

WHATEVER were investors thinking? wonders Bill Bonner in his Diary of a Rogue Economist.

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 Gray 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.

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.

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 yesterday, 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?

Bill Bonner has co-authored a number of New York Times Bestsellers including Financial Reckoning Day, Empire of Debt and Mobs, Markets and Messiahs. In his own opinion, Bill's most recent title, A Modest Theory of Civilization: Win-Win or Lose, is his best work yet. Bill also founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group have exposed and predicted some of the world's biggest shifts since that time, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and more recently the election of President Trump.

See full archive of Bill Bonner articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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