The sign on the booth touted a new, sophisticated computer-generated money management program. I walked inside and asked about stop losses. The young man replied, “Hold on to your stocks, the market always comes back.” I countered, “Can you guarantee it?” He pulled up a chart with some blips, concluding the market has always come back from a crash.
I followed with, “Can you guarantee it will come back in MY lifetime?” He responded, “No, you could get hit by a car or something.” He missed the point entirely.
In my recent article, “Stop Losses Are a MUST For Retirement Investors” I mentioned it took 25 years for the market to come back from the 1929 crash.
Subscriber John B. writes, “…You have to take inflation into account. How much purchasing power did you lose during that time? How long until you get back to the high that provides the same purchasing power?”
Subscriber, friend and former colleague, Jeff Clark went one step further, sending me his article, “This Chart Might Make You Rethink the Adage Stocks Always Come Back” which addresses the inflation issue.
I asked Jeff to do an interview.
DENNIS: Jeff thanks for your time to help educate our readers. I want to start by clarifying today’s discussion. The market is at an all-time high and has not had a major correction for quite some time. I’m not discussing the possibility of a major correction; personally, I think it is just a matter of time. I assume we are in agreement on this issue?
JEFF: First of all, thank you for inviting me. Yes, I agree with you. Our company founder, Mike Maloney feels the stock market is facing the mother of all crashes. That’s why I responded to your article on stop losses. Without them, a lot of investors can be badly hurt and the market may take longer to recover than they anticipated; perhaps never in their lifetime.
DENNIS: “Coming back” in our lifetime is a major concern, particularly when inflation is factored in. Before we get into the details, I thought it interesting when you discussed how “Stocks Always Come Back” is different for various generations of your family.
Can you explain to readers what you meant?
JEFF: It’s basically an issue of time. I have a daughter just starting out in her career, and a son getting ready to do the same. They have 40 years to invest, capitalize on compound interest, and important to our discussion, recover from a major stock market crash. In fact, unless you believe the end of the world is coming, a crash might be a wonderful thing for them – they’d get to buy stocks at a steep discount.
My wife and I are in the middle of the picture. We have a decade before we retire, so we can take advantage of normal corrections and dips. A crash is a different story. I am forced to consider what might happen to the stock market over the next decade, which is what prompted me to research this topic in the first place. If it takes 20 years to get back to even, including inflation, well, that would definitely hurt us if we were in the stock market.
On the other end of the picture is my retired parents, both of whom are approaching 80 years old and clearly don’t have a large timeframe to wait for stocks to come back. A crash to them would be devastating. They’re forced to avoid that risk.
DENNIS: Subscriber John B.’s concern really clarified things.
| We shouldn’t be asking when the market came back; but rather when did the buying power of the market come back to the previous high. |
How much of an effect does inflation really have?
JEFF: When I first saw one of those charts the stockbrokers always pull out showing the market always comes back, I quickly realized that, while the long-term trend was indeed up, there were a few crashes that took a very long time. So my second thought was, well, now I’ve got to take inflation into account. If they were all only a year or two or even three, I might not worry about inflation. But the big ones, the true crashes, were all measured in decades. Now inflation has to be factored into the recovery.
The reason that’s important is exactly what reader John B pointed out. If it takes 10 years for my brokerage account get back to its original nominal price, inflation has made a serious dent in my purchasing power. My statement may show I’m back to $50,000 where I started before the crash, for example, but guess what… cars and everything else cost more now, even in a low inflation environment. Now I’ll have to spend $70,000 to get the same Mercedes model I had my eye on 10 years earlier. Is my brokerage account really back to even? Hardly.
Here’s just one example from the research in our article…
“The Nasdaq fell 78% in the “tech wreck” of early 2000. Most investors look at a chart and see the index is now higher on a nominal basis. But adjusted for inflation it’s still down 17.6% from its March 2000 peak! In other words, almost two decades later, tech stocks are not back to the same level of purchasing power, despite the index being higher on a nominal basis.”
Those charts brokers always pull out to show us are never inflation-adjusted. Ergo, they’re misleading.
DENNIS: Did you use the government CPI figures when calculating inflation?
JEFF: Yes, because that information is readily available.
DENNIS: One final question. Our mutual friend Chuck Butler regularly discusses the “hedonic adjustments” the Bureau Of Labor Statistics makes to the CPI. He calls it the “stupid CPI” and I agree with him.
John Williams of www.shadowstats.com is an economic guru who calculates the inflation rate using the same method used in 1990 before the government began playing their games. He compares the government data to the 1990 formula. The 1990’s calculations show our current inflation is around 5.75%.
If we couple John’s estimates with the fact the Fed is hell-bent on creating inflation, when a correction happens, it could be a very long time before the market returns to the same buying power.
Jeff, it looks like two potential threats to a retirement portfolio.
The first is making sure you don’t sit by and watch your 401K drop 40-50% or more as many did in the last crash.
The second threat is inflation, which can dramatically destroy your buying power. The CPI inflation numbers you used in your study are scary enough, without even factoring in the Shadowstats numbers.
Do you see it the same way?
JEFF: In my opinion, anyone doing retirement planning must consider those two threats, and prepare for them. Stocks are clearly overvalued. And just as the saying goes, the higher they go the harder they’ll fall. And second, inflation is low by historical standards and is at much more risk of rising than falling.
What I am personally doing is buying the only major undervalued asset class out there, gold and silver. Stocks are at record highs, bonds prices are in a 36-year bull market, and the average property price in the US is now higher than it was at the peak of the 2006 bubble. Gold and silver, meanwhile, are roughly a third and two-thirds below their last bull market highs, respectively. Simple prudence dictates a reallocation.
And of course, gold and silver are one of the history’s best inflation hedges. I’m not a gold bug; I just believe I can not only get better value with them right now but as inversely correlated assets, they will also be likely to rise when other assets fall. And, if we get some kind of monetary crisis from all the money printing and obscene debt accumulation, well, gold won’t be just a defensive weapon but an offensive one.
For now, it’s wise to hedge against overvalued markets, pricey real estate, a bond bubble, runaway debt levels, and monetary dilution. Heck, even a war seems on the table now. And as a bonus, you get to buy those hedges on sale. As a result of all this, I am overweight gold and silver and still buy them regularly.
DENNIS: Jeff, thank you for your time.
JEFF: My pleasure Dennis.
|
Disclosure Jeff is a good friend and former colleague. You will find him at www.goldsilver.com. I have no financial relationship with Jeff or his company. Jeff is a great subject matter expert and we thank him for his time. |
Dennis here. Baby boomers and retirees should factor inflation and personal longevity into their retirement strategy. The goal is to protect the buying power of your nest egg for the rest of your life. Holding some precious metals is a good hedge.
Stop losses are a MUST. As Jeff said, once you reach a certain age preservation of capital takes precedence. Retirees cannot afford to gamble on the buying power of market coming back in their lifetime; the risk is much too high!
And Finally…
“If you always protect your offspring in a cocoon they will never learn how to fly…”
For more information, check out my website or follow me on FaceBook.
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Until next time…
Dennis
www.MillerOnTheMoney.com
Will it come back in my lifetime?
At my age, probably no.
But it I was a young man again, it would be a fantastic opportunity to invest in solid companies that will survive since their stocks and nature are not simple mass enthusiasm driven fads.
Please identify those “solid companies” that are sure to survive for decades, and at comparable valuations….
Do your own stock research.
If you’re not willing to do that, stay out of the market or be ready to accept the loss of what you have put in it.
Buying at the top and selling at the bottom has never made anyone rich, but doing the opposite has resulted in most of the fortunes we see today.
“Buying at the top and selling at the bottom has never made anyone rich, but doing the opposite has resulted in most of the fortunes we see today.”
Wow. That is so profound. You must be some kind of fucking financial genius.
Stop losses are for monkeys. It’s a guaranteed loss program. Then you miss the uptick in a small market correction. You got chumped. However, if markets never come back….that means there is no economy, no workers, no companies selling things and we are all living in caves. Hence, that is the reason markets always come back. Because people will go back to work, companies will rebound and restart manufacturing and producing goods that those workers and you and me will buy. The people of a company make the company. The company sells its ownership in the form of stock (you own a piece of the company). The company operates within a Country and that country has an economy like companies selling its goods and services. That is the culmination of a “stock market”. If you don’t understand this you live in a cave. And if markets never rebound then we are all living in a cave. But don’t let facts get in the way of someone pushing a silver and gold narrative on you for a very very high commissions, no never do that…..morons.
NY city real estate didn’t reach 1929 levels again until the 1950s, and ditto for the stock market. Meanwhile, there had been substantial inflation in living costs, and, more important, you could have made 5% a year in government bonds…And a large number of the adults who were invested in the market in 1929 were dead by the 1950s…
I’m glad somebody is so absolutely sure of everything like Truther.
Thanks Specie. The funny thing is every market crash HAS come back. We are all still here living and breathing. But let’s all just forget that little fact. With that all said I am still self prepared just in case. Last word…..you cannot eat gold. I would easily prefer to trade seeds for antibiotics etc vs a piece of useless metal that can be stolen or confiscated. 87% of the shtf planners buy etf or index gold funds that have roughly 11% actually backed by the little piece of metal somewhere across a vast ocean and when shtf you can bet the us postal service will pick up your little metal and deliver it thousands of miles from far away after the little grubby banker puts it in a shiny box ever so carefully for you to open in your cave. And I have some beach front property in Arizona for sale…..cheap. Any takers?
You cannot eat gold. It’s true. Funny, though, how countries all over the planet accumulate it.
Must be a coincidence.
Good thing seeds and antibiotics can’t be confiscated, right?
Charlie Brown is the Goy sucker and Lucy is the Jew running Wall Street; the football is a Goy’s wealth. She gives you a little but then skins you alive. The Dollar and DOW are being set up for murder by TPTB printing and stealing on one hand and on the other by the BRICS fighting back with Dollar sanctions and now their gold backing of the Yuan. TPTB Beast has their all/only e-money and chip Dollar replacement scheme planned that would enslave us Goy (ref Rev 13:16,17).
Not just gold and silver; add real estate (if you know how / where you can invest / speculate, or buy an income-producing property, or a farm like HSF), collectibles (stamps and coins), local businesses (get it in writing!), art, wines, tangible equipment, and whatever you are an expert in.
When the lies stop and the currency crashes, all of these will be worth more than money in a bank (especially since the bankers will take your deposits to pay off their bad bets).
Even in a bear market there are buying opportunities. Just bookmark
http://stockcharts.com/public/3828047/chartbook/137721114
and
http://stockcharts.com/public/3828047/chartbook/497555026
and throw articles like these in the trash.
What does financial collapse look like. Let’s revisit Argentina, Zimbabwe or Venezuela. Suppose you have a $500k mortgage and hyper inflation hits. You sell a bag of apples for $500k run to the bank pay off your mortgage. I have a friend that literally did that in Zimbabwe. He became very wealthy buying land and selling his furniture etc a few weeks later to pay off that land. The inflation was so bad when going to the grocery store people paid first then shopped as if you shopped first by the time you walked around the prices literally doubled when you got to the cash register to check out.
I have to agree with Truther on Stop Loss orders, they are designed to ensure you loose money, because after they trigger, the market goes up.
There was an epic negative swing in 2011, and a lot of folks ran for the hills, but it turned out to be an buying opportunity, this is usually how stop losses trigger and result in profit loss.
As for the gold/silver angle, don’t buy the ETF, that is also a suckers game, the price will be suppressed, until it is no longer possible, so you are basically letting your money rot, until the next correction, when fear is the trade.
If you want to, buy a few coins, but don’t bet the farm. It will be very hard to convert your life savings back into whatever fiat will be used after the “crash”
PS it will most likely be a cashless society in the future, and only very small notes will be accepted, think $1 and $5.
“loose money”? Opposite of tight?
Or maybe you meant “lose”?
“The Nasdaq fell 78% in the “tech wreck” of early 2000. Most investors look at a chart and see the index is now higher on a nominal basis. But adjusted for inflation it’s still down 17.6% from its March 2000 peak!”
This example is not accurate.
In 1999 people were buying computers like crazy because their old ones were not programmed to deal with the change in the year 2000 date, known as Y2K.
This caused the tech stocks to soar above their normal levels, then after Y2K was over the stocks came down hard, and are now at the level they should be according to market demand.
I imagine smart investors knew the stocks would crash after the year 2000 date, and sold their stock when the prices were high to increase their bank account with a little profit taking.
So where’s the problem…
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