You Have Been Warned! "Nobody Expects a Disaster Similar to 2008 to Happen"

March 2 2015

Former baseball player Yogi Berra was right when he said: “It's tough to make predictions, especially about the future.” That is why I smiled from ear to ear when I read the following sentence in the Dutch newspaper Algemeen Dagblad: “In the short term, nobody expects a disaster similar to 2008, when stock exchanges collapsed worldwide.”

You Have Been Warned! Nobody Expects a Disaster Similar to 2008 to Happen

Former baseball player Yogi Berra was right when he said: “It's tough to make predictions, especially about the future.” That is why I smiled from ear to ear when I read the following sentence in the Dutch newspaper Algemeen Dagblad: “In the short term, nobody expects a disaster similar to 2008, when stock exchanges collapsed worldwide.” But it is not as if investors had foreseen that the S&P 500 would decline by 37% in 2008. Shockingly, stock markets are now even more overvalued than they were in 2007, despite all the optimistic headlines.

About ‘the Positive Outlook’

It is an unmistakable fact that public authorities do an even worse job in forecasting than the markets do. Despite the efforts of the Netherlands Bureau for Economic Policy Analysis (CPB) to forecast economic growth up to decimal places, even CPB’s director Coen Teulings admitted that they were “poor in making forecasts.” I find this an understatement. In boom times they structurally underestimate economic growth, while in times of crisis they underestimate the economic contraction. What Teulings actually wants to tell us is that the CPB is really good in drawing a straight line.

It should not come as a surprise to anybody that the CPB was completely wrong in fifteen out of their last sixteen GDP growth forecasts (from 2010 until 2014).

Another interesting forecast came from the Dutch government; projecting an expected rise in fines which the Netherlands Competition Authority collects each year. Apparently the Dutch Competition Authority is doing so poorly that the market is becoming less fair, as opposed to fairer, considering there are no other reasons to impose fines.

But the CPB is not alone in making poor forecasts. The Federal Reserves also comes up short. In their research, Lansing and Pyle came to the conclusion that the Fed is systematically too optimistic in forecasting economic growth. Not very startling, and perhaps not worth further research, however it shows that economists and forecasting are not a match made in heaven. 

Last week it was announced that the growth of the U.S. economy in the fourth quarter had been adjusted downwards to 2.2% on a yearly basis. Still, Reuters continues to emphasize that “the outlook for economic growth remains positive”. When will they learn?

Economic Indicators below Expectations, Corporate Profits Decline

Out of the 39 U.S. economic indicators released in February, no less than 34 were below expectations. Remarkably, a figure such as the Case-Shiller Home Price Index did better than expected. However, it is a ‘lagging indicator,’ or in other words; an indicator which is lagging behind the facts. All the while, another important indicator for the U.S. housing market, the number of mortgage applications (a ‘leading indicator’) was worse than expected.

As I discussed before, more important are the declining corporate earnings in the U.S. Expected earnings have been negative for the first time since 2008 (-3.5% compared to the previous quarter). We have only seen negative projections of this magnitude back in 2008, 2001, 1990 and 1982. Every time it was followed by a recession. We have also discussed the relationship between a strong dollar and profit warnings given by listed U.S. multinationals.

Unprecedented Stock Overvaluation

By looking at the Q ratio, we clearly saw that the U.S. stock market is tremendously overvalued (by now, with 75%). An even worse projection is given by other indicators.

Take stock prices relative to average corporate profits over the past ten years. The price-earnings ratio of the U.S. stock index now shows that stocks are overvalued by 73%. Other indicators show an overvaluation of more than 90%.

However, these indicators do not tell us when stock prices will return to ‘normal levels.’ What they do tell us is that investing in stocks at this moment is incredibly stupid. Personally, I think that a return to normality will happen sooner rather than later, maybe even later this year.

I can see, contrary to the Algemeen Dagblad, a disaster happening similar to 2008. Investors will need to prepare themselves against disappointing (negative) stock returns and/or a strong market downturn. 

The End of the Gold Price Correction?

Perhaps you anticipated better news, but I suspect that the gold price correction has yet to finish. I mentioned earlier that the gold price could fall below $1.200/oz after the enormous increase in the beginning of this year. However, that does not necessarily mean that the gold price is bottoming. It could be the case that, in the coming period, the gold price drops further to $1,100.

Among others, this is a result of the, for now, high returns in the stock markets (we are waiting for a correction) and the long time we have been waiting for potential interest rate hikes by the Fed. Naturally, interest rate hikes by the Fed, and a recession followed by a market crash, go hand in hand.

The gold price in euros, considering the euro’s recent weakness, is of course further removed from its bottom.

This provides a golden opportunity for investors who aim to shift their portfolio to precious metals. Smart investors make sure they are ready before the greater public collectively shifts.

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