If you’ve been following my weekly insights here, then you know I’ve been persistently bearish throughout all of 2015.
My biggest fear has been that easy-money policies have pushed investor sentiment and valuations to extreme levels. For years it’s been easy to buy the dips in the market. Stocks kept going up, and you looked like a genius while doing it.
But that strategy is unsustainable. Because now, things are changing.
We are now reaching the crisis that could lead to the really big smash.
And that crisis… is a crisis of confidence.
When easy-money policies started and interest rates were slashed, many thought that was the solution to the problems facing the economy in early 2009.
After seven years of easy-monetary policies in developed countries, central bank balance sheets have swelled by nearly $8 trillion!
And what do they have to show for it? The growth of those countries is about 1% annually. Inflation has continued its downward slide to zero.
What does the average person think about that “solution” now?
The “wealth effect” that the central banks sought certainly worked for the wealthy. That’s because the Federal Reserve specifically targeted higher asset prices with its policies. The stock market took off to new highs.
This did nothing to help the average Joe.
Real average household incomes are down over the past 15 years. Official unemployment has declined to just over 5%, but 90 million people are still out of the workforce. Higher stock prices just don’t put food on the table.
Now, it looks like the market is finally catching on. It’s lost confidence in the Fed. It’s clear that its policies have not worked as intended.
We have a crisis of confidence in the making. And that crisis will only lead to greater economic uncertainty, and much higher volatility than we’re already seeing.
Until recently, volatility had been unusually low the past few years. But when investors start to think the free lunch may be over, they all cram for the exits at the same time. And if people have finally caught on to the fact that easy-monetary policies have not helped the real economy, it becomes harder and harder to convince the markets that the next time will be different.
Investors have already been fooled several times. Now, the joke’s on the central banks. That means investors need to be prepared for greater volatility and lower stock prices to reflect reduced expectations.
In my premium newsletter with Dent Research, Forensic Investor, we’ve been more focused on short ideas throughout 2015. We’re not looking to profit on companies going up – we’re profiting on them going down, because that’s the market territory we’re in.
Some stock market cheerleaders might stick around for the big smash in prices before they abandon the buy-the-dip mentality, but we won’t. For now, the risk is still to the downside. And that won’t change anytime soon.
John Del Vecchio
Editor, Forensic Investor