The End Is (Not) Near

Hate mail from the bears keeps coming. Brent writes:

I don’t know how you snuck into the top ranks of market forecasters, but your latest call to buy stocks here is nuts. Don’t you read anything? Look at Faber, a guru much more experienced than you. Look at that economic clock guy. He’s also been at this a lot longer than you — and his clock is ticking down to one of the great crashes in history. Wake up.

The abundance of fear is what’s still providing us with chances to buy select stocks on the cheap. Specifically, I’ve targeted the beleaguered housing sector where the stock we want to buy plunged 9% yesterday, and we’re still waiting.

Marc Faber is indeed a guru who has been investing longer than I. He told ABC TV’s Inside Business yesterday that the U.S. economy is heading toward recession and that the bull market will end. He also worried that the Fed would print money to escape the immediate crisis, thereby causing inflation. He believes that housing stocks have farther to fall, a point with which I agree, as mentioned above. Finally, he suggests owning precious metals as a hedge against inflation caused by an excessive printing of paper money.

While Mr. Faber is well respected and indeed more experienced than I, market forecasting and investing has been my job for the past 15 years. In that time, I’ve learned that the U.S. economy is the world’s most resilient, that fearful times are the best for buying stocks, that somebody is calling for a recession nearly every year, but that the market nonetheless rises two-thirds of the time. That means the bears are usually wrong, and I think this moment is no exception.

As for “that economic clock guy,” I assume Brent means Enzio von Pfeil, the Hong Kong based creator of Enzio’s Clock, an investment cycle timing service.

Mr. Von Pfeil wrote yesterday:

We are now on “red alert” for the current month of October. Many of the bigger market crashes have occurred in October, but nobody knows why. So we are just going to accept the reality of this perception.

Another long-held belief of ours: stagflation is returning. Those of us who survived the oil shocks of the seventies and eighties know this scenario: growth stops and inflation rises.

He cites four reasons that stagflation will return:

  • A strengthening Chinese currency leading to more expensive Chinese products in America, thus inflationary pressure.
  • The weakening of the dollar and his belief that it, like all superpower currencies, must collapse.
  • Rising commodity prices.
  • Slower productivity growth, as evidenced by unit labor costs rising 6x faster than when they bottomed.

With all due respect to my elders in the business, I don’t see much rigorous analysis here.

My research into market history shows that currency markets and stock markets are different animals. A direction in one does not say much of anything about the direction of the other.

A “weak” dollar sounds bad, but it’s not if you’re a Dow investor. Every member of the Dow Jones Industrial Average is a multinational corporation based in the United States. A weak dollar means that when they bring foreign currencies home, they get more dollars of profit. Despite my being still wet around the ears in the eyes of some, I know that more profit is good for stocks. You probably know that, too.

While I welcome all viewpoints around here, the most important remains my own and I continue to believe that we’re not entering a recession, that the housing “meltdown” just means a great time to be buying a housing stock, and that any weakness in October is another chance for those slow on the uptake to get their money into the market.

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