Thursday, January 21, 2016

Time's Up For This Prediction - The Market Correction Will Be Over in Four Months

Not my prediction, but while looking for something I'd written around last August or September, I ran across this piece from September 4th quoting an interview on CNBC with Brian Jacobsen, Wells Fargo Advantage Funds chief portfolio strategist.  He said that the market drop to 16,000 was a correction and it should be over within two to three weeks:
"I do hope that it is a two to three week bottoming pattern. However, when I look at the history of bull market corrections, it actually suggests that it might take a little bit longer than two to three weeks," Jacobsen told CNBC's "Squawk on the Street."
The piece goes on to quote the observation that "There were two major corrections since 2009. In each case, stocks recovered all their losses within about four months."

Coincidentally, we're just over four months since that article.  The DJIA was 16,102 on that day, "correcting" down from 18,312.  Today it closed at 15,882.  Doesn't sound like it has recovered its losses in four months like those other corrections, does it?

As I've said here many times, the money that the Fed has cranked into the economy has distorted it extremely badly and those distortions have rippled everywhere so that it will take a long time to recover.  Check that.  It won't recover and go back to being a free market because before that can happen, someone will find ways to inject other distortions into the system.  They've essentially completely destroyed the free market.  As Milton Friedman said, “Underlying most arguments against the free market is a lack of belief in freedom itself.”

Simple question:  Can a small bunch of PhD economists with no market or business experience really manage the entire world’s economy?  Of course not.  A true free market doesn't need to be managed; it's an almost infinite set of signals and feedbacks that sets prices, sets demands and rights itself.  For example, the Fed decided years ago that they want inflation of 2%.  Why 2?  Why not 1?  Why not 3.14159%?  Why not a negative number?   What theory… what experience… what divine revelation leads them to think that an economy should have annual price increases of 2%? There is none. It is a modern myth.  In reality, prices go up and down on supply and demand.  There’s no more reason they should always go up by 2% than down by 2%.

Any commanded change in interest rates (the cost of money) to encourage buying or selling, lending or borrowing, distorts the free market.  The tired example is the bank loaning you money at low rates to prompt you to buy only moves that purchase forward in time.  Now that you have that item, you don't need one and you're paying it off, anyway.  Something you would have bought next year, say, moves into this year, but it doesn't change the aggregate number to be made and sold; it only changes the timing of making and selling it.  Eventually all of your income goes to making payments on what you bought and you can't add the payments when something breaks and you need a replacement.
Reality is that resources are limited. Prices tell us what we’ve got to work with. Falsify prices and you get errors of omission and commission. After a while, the system suffers from things it shouldna, oughtna done.

As Hjalmar Schacht, Germany’s minister of economics in the 1930s, put it: “I don’t want a low rate. I don’t want a high rate. I want a true rate.”

An honest interest rate tells the truth about how much savings are available and at what price. People still make mistakes; they still get up to some pretty weird stuff. But at least the perverts aren’t handing out candy on the playground.
There are those saying we're entering a bad bear market while the system goes through the equivalent of withdrawal symptoms from all that free money, the delirium tremens.  Some say five years of recession, some say 20.  I. Don't. Know.  What I was looking for when I found this "four months" quote was my technical analysis predictions that we could be looking at Dow 6000 or even Dow 5000.  It was in response to seeing a click bait ad that "one expert" predicts Dow 6000. 
The MSCI Index tracks stocks in both 23 advanced countries and 23 emerging economies worldwide.  Staying below 20% from its 52 week high is a standard definition of bear market. 

Is the DJIA really heading for 6000?  I think it's within the realm of possibility.  If I knew for sure, I'd be saying we should all be buying more beans, bullets and band-aids.  At those levels, there will be blood in the streets.  On the other hand if you can protect your assets now and avoid a bank haircut/bail-in as Peter comments, then when it is 6000 - or 5000 - that will be the time to buy. 


  1. What's the difference between predictions and wild ass guesses? Predictions are what happens to comes true and wild ass guesses we don't ever talk about again.

  2. SiG, excuse what may be a question born of laughable ignorance, but could it be the Fed wants 2% (or more) inflation simply to cover - or partially cover - how much they inflate the money supply by printing more fiat currency? That it isn't _price_ per se they want increased so much as trying to hide that they have devalued the dollar by that much or more, with price tied to how much currency is floating around out there rather than supply and demand? Or am I completely missing the mark?

  3. Not a dumb question at all. These ideas are all interrelated and I think they're really different ways to describe the same thing. The Fed creates money in an effort to cause 2% inflation as their goal. In doing so they devalue the currency and raise prices, so I have to assume those are also their goals. I think they so flooded the world with free money that they pumped up the biggest bubble in history. It makes the stock market and house prices look good artificially.

    Why 2% and not 1.5% or some other number? My guess is some PhD wrote a paper and everyone believes it. Under the "rule of 72", the time for costs to double is 72/2 or 36 years. Why is that any better than any other period of time? Why should costs go up at all?