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The Misleading Comfort of Calm

Have the headlines below given investors a sense of continuing peace, rest, and optimism regarding their financial futures?

IMF slashes world growth forecast again, CNBC, April 12 '16
G7: Global Growth an Urgent Priority, Al Jazeera, May 27 '16
'Act Now or Risk Another Deep Downturn', OECD Warns, Yahoo Finance, June 1 '16
World Seeing Greatest Monetary Policy Experiment in History - Rothschild, RT, Aug 17 '16
Global Bonds Suffer Worst Monthly Meltdown as $1.7 Trillion Lost, Bloomberg, Nov 30 '16
Strong Dollar Drags US Growth At Slowest Pace Since 2011, The Guardian, Jan 27 '17
China Reserves Edge Below $3 Trillion as Yuan Pressure Increases, Bloomberg, Feb 7 '17

Clearly the answer is no. Then is public optimism a good guide for future stock prices?

US Consumer Confidence Jumps To a 13 Year High, Business Insider, Dec 23 '16

As an American, I can understand the optimism over having a pro business President coming into the White House.

However, he or any world leader is still starting 2017 after 8 years of the greatest assistance by the state (i.e. central banks) on record. Every world leader saw sovereign bonds across the world began their decline in prices (rise in yields) from three century lows last summer.

Without trillions added to global debt levels and speed of light computer trading programs that close their day at neutral, the image of "never decline" stocks would have cracked long ago.

The problem with depending on a central bankers' assisted bubble, is that it defies the laws of science, the history of bubbles, and human behavior. We expect this image of "calm and controlled" to go on without interruption. Yet this idea is irrational when considering the most complex system in our world.

Benoit Mandelbrot

"From 1986 to 2003, the dollar traced a long, bumpy descent against the Japanese yen. But nearly half that decline occurred on just ten out of those 4,695 trading days. Put another way, 46 percent of the damage to dollar investors happened on 0.21 percent of the days. Similar statistics apply in other markets. In the 1980s, fully 40 percent of the positive returns from the Standard & Poor's 500 Index came during ten days - about 0.5 percent of the time." - The (Mis)Behavior of Markets: A Fractal View of Risk, Ruin, and Reward (2004) Dr. Benoit Mandelbrot, pg 234

Stock markets have rewarded complacency since early 2016. Ignoring headlines on rising risk, debt levels, rates, and slowing growth has been seen as "wise".

Yet the fingers of instability in this mammoth financial sandpile grow longer and more in number with each passing all time high headline.

The lessons of previous bubbles will come home to roost again unless history has no value, and the laws of science are altered.

Combined Assets of the 10 Largest Central Banks

Daily Dow Industrials Chart

Daily TNX Chart

This is not a time for complacency. It is the worst time to trust a "centrally planned" market.

The time to think outside the conventional box is now. Don't wait for central bankers to tell you when to sell.

 


Click here to test drive The Investor's Mind while we still float at Dow 20,000. See how computers and markets are presenting very rare data to contrarians looking for cracks in the "no risk here" bubble and seeking rewards for standing outside the herd in the period ahead.

 

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