Some years ago, through a friend’s pass to the New York Stock Exchange floor, I found myself sharing the gospel with a seasoned trader. Before discussing eternal things, he stated that the markets are largely psychological: they react negatively to bad news and surprises but often perform wonderfully during seasons of stability.
Based on this insight alone, stocks will not be the place to invest right before, or during, a time of crisis. But what makes the topic of this blog different than the others in this series is the realization that a stock market crash could actually initiate the next national crisis.
Claudio Borio, the head of the Bank for International Settlements (BIS), which sometimes is known as the central bank for central banks, warns of economic trouble ahead. Because of what is taking place in China and other emerging economies right now (June 2017), a financial crisis may hit “with a vengeance.” These countries’ economies are “overheating as the US and the UK demonstrated before the financial crisis of 2007-’08.”
Turning our attention to the US markets, the Dow hit a new high of 19,000 in the wake of Donald Trump’s election, and on June 19, 2017, hit a staggering 21,529 points. The S&P 500 and Nasdaq have also hit record highs. Since the presidential election, stocks like Caterpillar and U.S. Steel have surged in anticipation of Trump’s plan to rebuild America’s infrastructure. Pharmaceutical stocks, such as Merck and Pfizer, have risen in the hope that a Trump administration will not focus as much attention on controlling the price of medications as a Clinton administration. Even bank stocks, such as JP Morgan Chase and Goldman Sachs have risen with the belief that Trump will be more lenient to financial firms, possibly even revoking the Dodd-Frank Act.
Even as we read about these amazing gains, the stock market has a long history of being highly capricious, especially in times of crises. Furthermore, the stock market does not appear to accurately reflect what has been America’s weakest economic recovery since 1949. In fact, president and chief investment strategist of Yardeni Research Ed Yardeni has declared to CNBC, “These markets are all rigged, and I don’t say that critically. I just say that factually.”
Lu Wang and Jennifer Kaplan write for Bloomberg:
If you sold every share of every company in the U.S. and used the money to buy up all the factories, machines and inventory, you’d have some cash left over. That, in a nutshell, is the math behind a bear case on equities that says prices have outrun reality.
The concept is embodied in a measure known as the Q ratio, developed by James Tobin, a Nobel Prize-winning economist at Yale University who died in 2002. According to Tobin’s Q, equities in the U.S. are valued about 10 percent above the cost of replacing their underlying assets – higher than any time other than the Internet bubble and the 1929 peak.
Further, director of Marc Faber Ltd. Marc Faber announced to CNBC that “We’re all on the Titanic.” Financial investment author, Dale Davidson, who correctly predicted the collapses of 1999 and 2007, has cautioned, “There are three key economic indicators screaming SELL. They don’t imply that a 50% collapse is looming – it’s already at our doorstep.” And co-founder of the Quantum Fund with George Soros and creator of the Rogers International Commodities Index Jim Rogers has warned, “A $68 trillion ‘Biblical’ collapse is poised to wipe out millions of Americans.”
Yet it is not only the U.S. stock market that is overpriced. In 2016 the Bank of Japan (BOJ) doubled its exchange traded funds (ETF) purchases in the Japanese Nikkei, setting the BOJ on a path to become the top shareholder in 55 companies by the end of 2017. Already, the Bank of Japan owns 55% of Japanese ETFs and is a top shareholder in at least 200 of the 225 companies within the Nikkei. Sean Ross reports, “Through these policies, the BOJ risks creating a very big asset bubble. Market analysts would say the Nikkei is detached from the fundamentals, much like the American technology sector in the late 1990s or the Japanese real estate market in the late 1980s.”
Also, in 2015 China’s stock market bubble popped, resulting in 1/3 of the value of A-shares on the Shanghai Stock Exchange being lost within a month. By mid-July, the Shanghai stock market had fallen 30% over three weeks. Despite government efforts to stabilize the market, stock prices continued to fall. On August 24, 2015, the Shanghai index fell another 8.48%. Nevertheless, by 2017 the Shanghai Composite Index had stabilized around 3,000 points, which is 50% more than before the bubble.
Clearly, at the very least the stock market remains in a precarious situation. As evidenced in Japan and China, overpriced stocks and artificially manipulated markets, give rise to the threat of a sudden and severe market correction. As such, the stock market cannot be the refuge that we seek, especially in a time of crisis.
What about other forms of investing? What perspective does the Bible give?
To be continued . . .
