Certain of one thing in these uncertain times….

Thursday, 15th November 2018

Certain of one thing in these uncertain times….

‘One should never disregard it. It is the leading fear gauge. It scares the hell out of investors when it moves….’

That’s what Stephen Innes said earlier this week….

He’s the Head of Trading for Asia Pacific out in Singapore. And he’s talking about the VIX – or the CBOE Volatility Index….

2018 is the year that volatility returned to global stock markets – with a vengeance….

  • Spooked ahead of Christmas….

Back in February the reading on the VIX was 29.06….

What that figure told us is that stock market investors were more fearful in February 2018 than they had been at any time since the last global financial crisis almost a decade earlier….

And that feeling of fear was all-the-more shocking because it suddenly spiked after a year of relative calm – a 12-month period of supine investor complacency….

Let me be clear, the markets are not experiencing those February levels of fear right now. Not quite….

But a current VIX reading  of 21.25 tells us that stock market investors are plenty spooked as we head towards Christmas – and not just in the US and the S&P 500 index that the VIX reading is most-closely associated with….

The spooked-feeling is reflected in stock markets across the globe. Markets that don’t seem to know for sure right now if they want to go up or down – or whether they want to go both ways at once….

Worldwide, investors find themselves in the uncomfortable waters of uncertainty….

But at Money Truths we are certain. The long-term outlook is for falling stock values –across the board….

  • Step out of the firestorm….

The problem with following the news is that the bombardment of information and developments and opinion is relentless….

It’s like standing in front of a belt-fed machine gun….

The 24-hour rolling news schedules allow no time for thought or reflection. Instead, the facts, the updates and the constant revisions fly thick and fast….

There’s no way to keep up. There’s no way to hold on to anything or to make sense of it all as it happens….

Maybe that’s the point. Maybe that’s the intention. We have more information coming at us than at any point in human experience. And because of it, we frequently know less about what’s going than we ever did….

Now and again it is advisable to step out of the firestorm of the here-and-now and to focus instead on the long-term perspective….

Because the slow drumbeat of history can tell us things that the constant rat-a-tat-tat of up-to-the-minute, as-it-happens, real-time news effectively hides from us….

  • Dow to Gold….

Charts are a useful tool in this regard….

I’m no technical analyst. I have no qualifications. I have no professional credentials to speak of. But none of that matters. I like looking at charts….

A line on a chart can speak a thousand words. And a chart can show us things that we simply can’t grasp if we stick to the 24-hour news machine to feed our world view….

Here’s a chart, for instance. It’s shows the Dow to Gold ratio (the Dow Jones Industrial Average to the price of gold) across the last 100-years….

We don’t need to go into incredible detail here. We can make a simple observation based on a century’s-worth of data….

Big spikes in how much gold it takes to buy the Dow are inevitably followed by big drop-offs in stock-market values….

The Dow to Gold ratio spiked in 1929, again in the mid-1960s and again at the end of the 1990s. Each time, this spike was followed by a big drop-off in stock values. The chart clearly shows us that….

  • And here we are again….

Look at where we are now. The Dow to Gold ratio is spiking once again….

It might well spike further still. Trends keep on until they stop. They can keep on inching forward for longer than seems possible or reasonable….

But what this chart tells me is that a drop-off is coming. A significant one….

Not just a tremor like we felt in February – but a drop-off that could see global markets lose half their value and more….

Does that seems like a big call? Look again at the chart. Big spikes are followed by big drop-offs. That’s what history says. A 50%+ loss of values is not just possible – but likely….

I wouldn’t want to be charged with timing exactly when the drop-off will occur. I leave that kind of thing to the experts and the clairvoyants….

But if history and cycles represent any kind of guide at all, then I’m a bear rather than a bull right now.

I wouldn’t want my money in stocks. That’s my bottom line.

And I don’t care how many experts they dust-off and wheel into the TV studios to talk about the ‘great value buying opportunities that exist for investors right now’….

  • Harbinger of doom?

Of course, many investors don’t like to hear any ‘negativity’….

‘Why can’t you be a bit more positive?’ they ask….

I would like to be. But the climate doesn’t encourage such a carefree attitude. For sure, I can leave the house tomorrow morning in just a leopardskin thong and flip-flops – but I can’t make the sun shine….

If I am indeed a storm-crow – a harbinger of doom – I am not alone in my ravings….

Just this week, Goldman Sachs strategists were advising clients to prepare for ‘a sustained period of low-returns.’

Just this week, billionaire hedge fund manager Steve Cohen said a bear market is coming. He thinks inside two years. ‘I don’t think the returns over the next two years are going to be very good. If the market hangs in there, there’s just going to be marginal returns….’

And just this week, fund managers across the board confirmed that they are losing faith in the market….

Last month the Bank of America Merrill Lynch’s global fund manager survey said  38% of fund managers think global economic growth will decelerate in the next year. This month that figure has risen to 44%….

These are the highest readings on the survey since November 2008….

  • Tides always turn….

That last decade has been a period of unmitigated and unprecedented growth in global stock market values….

It seemed like those golden days of high summer would never end….

Like the trees would never lose their leaves….

Like the clouds would never again adulterate the blue skies….

Like the tide would never again turn….

But the leaves always fall. The clouds always return. The tides always turn. They always have. They always will. And market cycles turn too….

Right now, this market cycle appears to be in the early stages of turning. Attitudes are changing. Sentiment is back-tracking. Fear has over-taken complacency….

Markets have climbed high. Higher than ever before. They might climb a little way further yet. But the higher you go, the further there is to fall….

And that fall is coming. Of that we are certain. And it will be bone-crunching when it comes….

My advice? In a word – gold. More on that next week….

That’s how it looks from here….

All the best,

Dave Gibson

Money Truths