The world’s stock markets are in freefall. Why? Here is the universal explanation: investors are worried about a U.S. recession — a recession that the mainstream forecasters insisted in December was not going to happen.
Here is a rule: “No economist ever got fired for predicting ‘no recession.'”
Virtually all institutional economists always forecast “economic growth will continue.” Growth usually does, so it is safe to predict it. I cannot think of a recession in my lifetime when even a quarter of the institutional economists had predicted a recession in the previous year.
The following assurances were published in December, 2007.
Washington, DC — Despite a relatively uncertain economic cycle, the leaders of America’s top companies showed a slight uptick in their expectations for the economy over the next six months, according to Business Roundtable’s fourth quarter 2007 CEO Economic Outlook Survey, released today.
The CEO Economic Outlook Index, which indicates how CEOs believe the economy will perform in the six months ahead, improved moderately, rising more than two points from last quarter’s 77.4 to 79.5 today.
“This quarter’s survey suggests that CEOs, as a whole, still see the economy as steady and that the vast majority expect their sales, capital spending and employment levels to either increase or remain steady in the first half of 2008,” said Harold McGraw III, chairman of Business Roundtable and chairman, president and CEO of The McGraw-Hill Companies. “These latest results demonstrate tempered CEO confidence with a slight rebounding of expectations since last quarter.”
December 5
By Alex Veiga, AP Business Writer
Forecast Sees No U.S. Recession in 2008 Despite Housing Woes
LOS ANGELES (AP) — The nation’s housing doldrums will drag on at least through 2009, dampening U.S. economic growth and job creation, but the slowdown won’t push the economy into a recession, according to a new economic report.
Despite plunging housing values, rising oil prices and credit problems that continue to plague Wall Street, the nation’s job market is unlikely to suffer the kind of steep losses that would tip the economy into recession, according to the quarterly Anderson Forecast by the University of California, Los Angeles.
“We still think an official recession is not in the immediate future,” concluded Edward Leamer, director and co-author of the forecast set for official release Thursday. . . .
In addition, the U.S. unemployment rate would have to soar from the current 4.6 percent to nearly 6 percent by the end of next year, the equivalent of a loss of at least 2 million jobs, Leamer said.
By Diana Furchtgott-Roth
December 21, 2007
It probably won’t happen, says DIANA FURCHTGOTT-ROTH, and even if it does, we may not know until 2009. . . .
On balance, it is not likely that the United States will experience a recession in 2008. Most economic forecasters expect growth to continue in the 2.5 percent range. Employment and personal income have remained strong through October and November of 2007, so consumption spending should continue, buoying the economy. The weak U.S. dollar makes American exports more competitive, thereby fueling economic growth and employment. Even if the economy dips in 2008, its slowdown may not last the requisite “several months” to be designated a recession by the NBER.
Stock markets around the world are giving their collective judgment on the accuracy of these forecasts.
I told my Website’s subscribers to get out of the stock market on November 5, except for (maybe) energy stocks, if they did not want to hold U.S. T-bonds, and a defense industry fund. To cover for the possible fall in these stock sectors, I told them to short the S&P 500. The rest of their portfolios were to be in foreign currencies (CDs), an international bond fund, gold bullion, and an FDIC-insured bank account.
I had been recommending gold since October, 2001, so this was no surprise.
I specifically recommended against foreign stocks. In my December 14 issue of Reality Check, titled “Bubbles and Levitation,” I wrote:
There are some investors who think that they can find safety and even profit by purchasing stocks in developing nations like China and India. They think these nations are somehow insulated from the Western economies and the business cycle that has created the real estate bubble. But there is no insulation.
So, I address the following to readers who still are invested in stocks.
STOCKBROKERS
Did your stockbroker call you in December and suggest that you short the U.S. stock market?
No.
Did he tell you to sell all of your shares in your tax-deferred 401(k) and IRA accounts and move to cash?
No.
Did he tell you last year that there is going to be a recession in 2008, and that shares will fall in anticipation of this recession?
No.
In good times, stockbrokers tell you to buy and hold.
In bad times they tell you to buy on the dips and hold.
Stockbrokers are like barbers. For a barber, you always need a haircut.
The stock market is now giving a “haircut” to millions of investors.
If you have read my warnings that this would happen, you are at least not surprised by what is happening. Maybe you did not believe me late last year. Maybe you still own stocks. But at least you read the opinion of someone who doesn’t make a living from commissions, which in turn are earned by selling shares and stock mutual funds.
I have repeatedly commented on the fact that the mainstream media refuse to recommend the obvious investment defense: short the stock market. I do not recall even one time over the last four decades when I read a mainstream economist or forecaster say, “Get completely out of stocks. Then use this money to short the market.”
Instead, they tell you to buy more stocks: sectors that will resist a falling stock market.
I say, “Don’t fight the ticker tape,” to use the terminology of Thomas Edison’s ancient technology. Get out.
If you are truly convinced it’s going down, use a short fund or a short ETF to short the S&P 500.
The reason I included energy shares (maybe, though T-bonds were my first choice) and defense industry stocks in my November 5 portfolio was that it was for retirement accounts. Some people simply will not sell all of their shares. They cannot bring themselves to get 100% out of the stock market. So, I had them short the market to cover what I thought was risky: holding any stocks at all.
FAVORITE MYTHS OF BROKERS
Stockbrokers have a list of myths — also known as lies — to tell clients. Let us consider some of them.
“A broad index of stocks goes up by 7% per annum, long term.”
To assess the accuracy of this statement, let us look at the performance of the Dow Jones Industrial Average from February 6, 1966 to August 12, 1982. On February 6, the Dow made an intra-day high above 1,000 for the first time, but closed at 998. On August 12, 1982, it closed at 777. Take a look at the chart. You can use your Adobe Acrobat reader to enlarge it, so that you can see this 16-year period clearly.
That’s the good news: a “mere” capital loss of 22%. But we must adjust for price inflation. Go to the inflation calculator of the Bureau of Labor Statistics. Choose the dates 1966 and 1982. Insert “1000.” Click. Presto! The investment lost two-thirds in purchasing power, after deducting for the 22% loss.
Anyone who bought and held the Dow in early 1966 until August 12, 1982, had his head handed to him.
In September, 1982, I announced in my Remnant Review newsletter that I thought 777 was the bottom, and that stocks would move up. I had no idea how high and how long they would move up.
In February and March, 2000, I announced that the U.S. stock market was close to a mania-driven peak, that it could not go on much longer. On March 24, the S&P 500 peaked at 1555 intra day and closed at 1527. It fell below 800 in 2002.
The NASDAQ had peaked at 5040 earlier in the month. I warned against it, with its insane P/E ratio of 198. It fell to just above 1000 in 2002. Investors lost 75% of their value, plus losses due to inflation.
The hottest stock sector was the dot-com sector. This fell by 90%, but many firms fell to zero.
Yet nobody in the mainstream media was warning in late 1999 against the stock market. The tech stock mania was rampant. It was a new era.
No, it wasn’t.
Since 2000, the dollar has fallen in purchasing power by a little over 20%. Add this to any losses you have sustained by adopting “buy and hold.”
THE BOOMLET IN NOVEMBER
On November 27 and 28, the Dow rose by 540 points. Things looked rosy. The market’s recovery was here. The woes of August were behind us. So the experts thought.
In my November 30 report, “Grasping at Stock Market Straws,” I ended with these words: “This is not going to turn out well.” It hasn’t. Yet for two weeks after the late November boomlet, the market continued higher.
Happy days were here again! They weren’t.
That reversal is what speculators call a bear trap. The stock market looks like the worst is over. The optimists come roaring back in. They then get hammered when the bear market resumes its fall.
This leads me to the next beloved myth.
“Buy on the dips.”
People who do this are called “dips” — at least by stock market bears. Sometimes they are called “dipsticks.” Or worse.
Stockbrokers need commissions. Say that the stock market is falling. The sensible strategy for the investor is to sell. A risky strategy is to sell short. But sell.
A commodities broker makes money both ways: long and short. What makes him money is volatility. Wild swings are his cup of tea. Long, slow moves don’t lure in the suckers, 95% of whom lose. He needs volatility to excite people. He needs them to replace the 95% who lost money and who will not return for another shearing.
A stockbroker sells to people who are not traders. They are investors. So, investors want to get rich by buying and holding. No muss, no fuss. That is why volatility is bad for stockbrokers. It scares away the average investor.
The retirement fund managers don’t sell short except to hedge a position briefly. If they guess wrong when short, they can get fired. Nobody ever got fired for going long if every other fund manager was also long.
So, the brokers’ sales commissions are structured for long-term investors who keep putting in their tax-deferred investment funds. A broker tells investors to buy on the dips because he needs the commission money.
A discount brokerage firm that offers no advice does not care. It sells to all comers: bonds, money markets, foreign bonds and stocks. It offers no advice. It provides services for on-line traders. But brokers who call people are looking for commissions.
Also, media advertisers need buyers of stuff. Bear markets scare investors. Then investors stop buying stuff. So, the media are always bullish. Advertisers pay for bullish sentiment only.
CONCLUSION
If you are still in the stock market, you are suffering a lot of pain.
You think, “But should I really sell?” You have been taught the myths by your broker. You have seen these myths reinforced on TV. You hesitate.
You must decide: Is the fact that all of the American stock markets are lower than they were in March of 2000 a relevant fact? Does this fact tell you anything regarding “buy and hold” and “buy on the dips”?
Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.
Copyright © 2008 LewRockwell.com
