« Saturday Gumpagraph | Main | Today's Joke »
November 15, 2008
| Conventional Wisdom | Economy |
One of the surest ways to go wrong in predicting the future of the stock market or the economy is to go with conventional wisdom. People are most bullish at the top of the market and most bearish at the bottom. That's just a fact. People are practically hard-wired to expect that current trends, whatever they may be, will continue.
With that in mind, watch this video (via John Robb). In it, Peter Schiff — one guy who saw the economic meltdown coming — tries to argue with a succession of well known idiots back in 2006 and 2007. They literally laugh in his face. But he who laughs last...
Even Schiff gets some things wrong: he predicts inflation and a surge in the price of gold. When credit bubbles burst, the result is not inflation but deflation, and that is what we're seeing now. As Robert Prechter, the heavyweight champ when it comes to predicting the present crisis years in advance, wrote recently:
Cash now buys 1.7 times as much stock and real estate, twice as much silver, and 2.5 times as much oil as it did a short time ago. And if you are incautious enough to want high-yield bonds or asset-backed (in)securities, you can get a wheelbarrow more of them for your dollar as well....This trend is far from over. The longer you hold onto your money, the more it will be worth, until the deflation ends.
Fans of gold think gold soars when the economy is in crisis, but historically that's just not true. As Prechter has shown, gold does better during economic expansions than during recessions. And over the last six months, gold has fallen just like every other commodity.
I took my retirement money entirely out of the stock market more than a year ago. It was obvious to me that all the big trends were unsustainable. I don't mention this to say I'm smarter than other people. What I am, I think, is more skeptical. My bias is to expect the conventional wisdom to be wrong on most things. It's especially wrong on the markets.
There are going to be rallies, but I think the bottom is a long way off. I do expect that we'll get a fairly good bounce soon. It's likely to be impressive. If so, you might want to take it as an opportunity to get your money out. But the conventional wisdom will tell you otherwise. People will see the market rise and they'll say the bear market's over. They'll sing "Happy Days Are Here Again," just like they did in 1930. When that sentiment reaches a crescendo, that will be the time to get out — assuming you're still in. That's how I see it, anyway.
When will it be time to get back into stocks for the long haul? When almost everybody says there's no hope.
There's a lesson here about conventional wisdom generally. Just because everybody says something, that doesn't make it so.
Disclaimer: This is not a recommendation to buy, sell, or hold any financial instrument.
Posted by Jonathan at November 15, 2008 02:16 PM
Comments
"Even Schiff gets some things wrong: he predicts inflation and a surge in the price of gold."
I respectfully disagree. I believe that it is still too early in the game to say that he is "wrong" on inflation and gold. When we come out of this, I think he will be right.
First, according to the current spot prices of gold & silver, it appears so. However, people are currently willing to pay almost $20 an ounce for physical silver bullion and almost $1000 an ounce for physical gold bullion. Don't take my word for it, please just check the prices on E-bay. There is currently a huge disparity between the paper price and physical price.
Second, prices may be deflating, but the money supply is rapidly increasing. Please see what legendary investor Jim Rogers has to say regarding the current market conditions (this is must see in my opinion):
http://www.youtube.com/watch?v=PvFWrLBBwKo
Posted by: at November 18, 2008 12:22 AM