In the World of Investing, Beware of Oracles
In the investment world, there’s an oracle on every street corner, all looking to pop out in your face and tell you all about what is going to happen. Be careful who you listen to.
Jeffrey Gundlach is certainly not one afraid to go out on a limb. He famously proclaimed municipal bonds as “the new subprime” back in 2011, based merely on the fact that he saw munis in the same situation that year as the subprime market was in 2006.
He liquidated most of his muni holdings, and rather than see them tank, he saw munis gain in value over 12% that very same day. The collapse of munis ended up occurring only in Gundlach’s mind.
His rationale here was based upon the fact that munis have low default rates, and so did mortgage backed securities back then, so look out below. The fact that none of this made sense did not bother him.
This move is a blunder that does stand out in a world of blunders by way of its sheer madness. It was the sheer lack of justification that made this one so different, to a degree that should well alarm us. When someone even capable of something like this starts proclaiming again, we need to be particularly diligent with it, and as it turns out, his most recent predictions are out of touch with reality as well.
There are a lot of views out there on where the stock market may be headed, all with different levels of merit. If someone makes a prediction, we at least expect it to be justified. This is a world where divergent positions can exist side by side and each may have its own merits, where the task for us is to decide which is more likely and which is based more on sound reasoning.
Sometimes these predictions do not have any merit at all though and even become deserving of ridicule. Gundlach recently shared his view of where U.S. stocks are headed, and even though his expertise is in bonds and not in stocks, we would not hold that against him and we at least need to have a look at his claims.
Perhaps he has come to realize that making predictions like this does require reasons sufficiently convincing to believe, rather than relying on an opinion that does not ground itself in reality at all and relies on naked speculation that is at odds with everything else.
Gundlach starts by telling us that he sees U.S. stocks substantially underperforming international stocks, and that we should sell our U.S. holdings and buy stocks held in other countries and in other currencies besides the U.S. dollar.
The Dollar Isn’t in Decline, and if it Was, It Wouldn’t Matter to Stocks
He proclaims that “the linchpin to this thesis is the dollar, which will be weaker thanks to the explosion in the deficits and the Fed” taking short-term rates toward zero, he said. “Foreign-currency investments should be superior to U.S.-dollar investments.”
There are a few problems with this thesis though which he does not bring up, starting with the fact that the U.S. dollar is not weakening from these things. The deficit story has been ongoing for a long time, and the Fed just put in three back to back rate cuts, yet the dollar is strengthening.
This is because it’s not that simple, and the value of the dollar versus other currencies relies on a number of factors, with these just being two of them. His argument is that current policy will put the value of the dollar down, and when the dollar goes down in value, U.S. stocks do as well.
The dollar isn’t going down, but if it were, just as the dollar is subject to many influences, so are stocks. As it turns out, the strength of the dollar and stocks aren’t well correlated at all. The dollar can lose a lot of strength like it did in 2017, and this was a year where it declined in value by 10%, a pretty massive amount where currencies are concerned. The stock market gained 20% that year in spite of this, which just became drowned out by other factors as is so often the case with the dollar.
The dollar was pretty flat during the first 5 years of the current bull market, yet the market forged ahead quite well indeed and did not in any way rely on this. During the last 5 years, we’ve seen it bounce around quite a bit, putting in a nice rally in the second half of 2014 and then sticking around that area before crashing in 2017 and recovering from this since.
All the while, the stock market has just gone about its business and forged ahead, where the normal ups and downs of currencies markets hasn’t had a noticeable difference either way. We only have to break one of his two premises, that the dollar is going down and when it does, U.S. stocks go with it, and we’ve broken both premises with ease, and watched the argument fall flat on its face by only shining a little light on it.
Just as we throw the last pile of dirt on this, Gundlach’s arm reaches out from beneath the ground in defiance, and in his typical style, we get to hear that other markets such as the Japanese and European market have experienced falls, and this means that our time is about to come as well.
He speaks of how well things were in Japan before that market collapsed, and how much better off European markets were in the past, and beware, the same thing is about to happen to the U.S. market. This is presumably due to the dollar losing value, but looks to go beyond that with his insinuation that these markets fell and ours will too serves to try to to create fear in us to try to disguise how vacuous his reasoning is.
People are even being told to get out of U.S. stocks and into other stock markets, particularly those in emerging markets, even though no real reason is provided for this. He does chastise emerging markets for the fall that they took a few years ago and advances this as further evidence that we will decline as well, while at the same time anointing these emerging market stocks as the next best thing, merely by way of his proclaiming this to be so.
We Need to Separate the Good from the Bad and the Ugly
This serves to remind us how low the threshold actually is for commentators to have the opportunity to share their ideas with us through the financial media, and how even the most broken and false of them are allowed to stand without even questioning them very deeply or at all.
That will never happen on our site and we continue to shudder at how bad the guidance out there can be, and especially all the people swallowing this stuff whole and then wondering why they are so confused, or worse, not wondering anything at all.
We need to be careful about who we listen to and what views we accept based upon making assumptions such as having a certain position or a certain amount of experience in the industry allows people to not even bother thinking whether these views even make sense let alone being probably.
This one is fortunately easy to see through but there are some that require a decent understanding of reality, and the less initiated and even those who feel that they are up on things can be easily fooled by these oracles who may sound convincing enough to the ignorant but don’t stand a chance if you aren’t and are not based upon the careful thought that we should expect of someone who wishes to advise us.
The buck always stops with us though and if we end up being led down the wrong path, we ultimately chose to do so ourselves. We need to be careful which ones we go down and at a minimum insist on questioning everything and get off of it when the answers stop making sense.
Editor, MarketReview.com
John’s sensible advice on all matters related to personal finance will have you examining your own life and tweaking it to achieve your financial goals better.
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