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“Sell Everything!”

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Rick Kahler MS CFP

[By Rick Kahler MS CFP]

“Sell Everything!”

That’s the advice to investors from RBS, a large investment bank based in Scotland, which issued the dire recommendation to its customers on January 8th, 2016.

The warning urged investors to sell everything except high-quality bonds, predicting the global economy was in for a “fairly cataclysmic year ahead …. similar to 2008.” They said this is a year to focus on the return of capital rather a return on capital.

Stunning

I was first stunned that a respectable investment bank would issue such a radical recommendation. Then I was amused at my own surprise. I had momentarily forgotten this is logical behavior for a company whose profits depend on its customers actively buying and selling. It is not legally required to look out for customers’ best interests and has no incentive to do so.

Clearly, the time-honored way of earning market returns over the long haul is to diversify among asset classes, rebalance religiously, and always stay in the markets. The research is overwhelming that shows those who attempt to time the markets have significantly lower returns over the long haul than those who don’t.

Example:

For example, according to a study by Dalbar, Inc., over the last twenty years the average underperformance of investors and advisors that timed the market was 7.12% a year.

What’s so bad about trying to minimize loses and selling out when things begin looking scary?

Nothing. Who wouldn’t want to exit markets just in time to watch them fall so low that you could sweep up bargains by buying back in? Therein lies the problem: not only do you need to get out on time (not too early and not too late), but you must then know when to get back in.

The Crystal Ball

The only way I know to do this is to own a crystal ball, which the economists at RBS apparently possess.

Here are a few of the things they say to expect:

  • Oil could fall as low as $16 a barrel.
  • The world has far too much debt to be able to grow well.
  • Advances in technology and automation will wipe out up to half of all jobs.
  • Global disinflation is turning to global deflation as China and the US sharply devalue their currencies.
  • Stocks could fall 10% to 20%.

Prediction

The last prediction was the one that grabbed my attention. Given the comparison of the coming year to 2008, I expected a forecast of a significantly greater drop in stocks, say 40% to 60%. Comparatively, their forecast of 10% to 20% seems almost rosy.

While RBS is particularly gloomy, bearish forecasts have also been issued by other investment brokerage firms, including JP Morgan, Morgan Stanley, Bank of America Merrill Lynch, Barclays, Deutsche Bank, Societe Generale, and Macquarie.

Just for perspective, here’s a look as reported by The Spectator at previous predictions from Andrew Roberts, the RBS analyst who issued the recent dire warning. In June 2010, he warned,

“We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable.” In July 2012, he said, “People talk about recovery, but to me we are in a much worse shape than the Great Depression.”

Incidentally, one thing Roberts did not predict was the meltdown of 2008.

***

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“Sell Everything?”

***

Assessment

The inaccuracy of earlier dire predictions should encourage physicians and all investors to stay the course.

As usual, chances are that those who diversify their investments among five or more asset classes and periodically rebalance their portfolios will come out on top. The odds greatly favor consumers who ignore doom-and-gloom warnings, especially from those whose companies may profit from investor panic.

Conclusion

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

 

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***

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2 Responses

  1. CAPITAL HAS BEEN LEAVING CHINA

    When Federal Reserve Chair Janet Yellen testified before the House Financial Services Committee last week, she made no bones about the fact the Fed is keeping an eye on economic developments in China and evaluating the ways in which changing circumstances in the country, including currency devaluation, could affect global growth and the U.S. economy.

    Yellen is not the only one worried about currency devaluation in China. The New York Times reported Chinese companies and wealthy citizens have been pulling money out of the country because they’re worried the purchasing power of their savings will decline significantly if the government further devalues the renminbi. Some have been using renminbi to invest in real estate abroad, buy overseas businesses, or pay off dollar-denominated debt.

    Others have been avoiding China’s capital controls, which are measures designed to regulate flows from capital markets, by engaging in ‘smurfing.’ The New York Times described the practice of smurfing this way, “…Individuals are asking friends or family members to carry or transfer out $50,000 apiece, the annual legal limit in China. A group of 100 people can move $5 million overseas.”

    According to the Institute of International Finance, cited by CNBC:

    “The 2015 outflows largely reflected efforts by Chinese corporates to reduce dollar exposure after years of heavy dollar borrowing as expectations of persistent renminbi appreciation were replaced by rising concerns about a weakening currency.”

    During the final six months of 2015, capital flowed out of China at a rate of about one trillion U.S. dollars annualized, according to The Economist.

    Arthur Chalekian GEPC
    [Financial Consultant]

    Like

  2. Something Surprisingly Special is Happening in Markets

    At the start of January 2016, the consensus opinion was largely the same. “We are entering a recession…We are at the start of a bear market…Emerging markets are in full blown crisis mode…Sell everything!” All it took was the worst first start to a year in history for the perception of the future world to change.

    Fast forward to March, and emerging markets are positive despite all of the panic over their performance the “moment” the Fed raises rates. The S&P 500 is now down just 1.7% on the year. All it took was a little over 2 months for everything people believed with 100% conviction to suddenly look, with hindsight, completely and utterly wrong.

    There is tremendous noise in today’s world thanks to the media, increased short-termism, and failure to appreciate randomness. To react and be so convinced of the way the future will play out based on information which may be completely and utterly meaningless is no way to live life. It is certainly no way to invest in markets.

    So much market information/misinformation comes at us in the heat of the moment that sounds convincing, yet when put to test the validity of what is said is nil. The great example of this? Moving averages, which are hailed as a reason to buy or sell stocks because they indicate what the trend is. As shown in our newest 2016 Dow Award winning paper (click here to download), this is simply not true. Yet, myths persist about what has predictive power and explains the gyration of the moment, causing investors to extrapolate the randomness of the past to a future which no one can possibly predict with any degree of certainty.

    Here is what we know. Inflation expectations are recovering. Commodities, notably Oil, Lumber, and Copper, are recovering. Emerging markets are not only recovering, but now meaningfully are outperforming the “cleanest dirty shirt” of US equities. Treasuries are weakening. Utilities are weakening. Low beta is weakening. We finally have a rally unlike one we have seen in some time – one led by truly bullish and reflationary areas of the marketplace. A significant change in leadership happened right in front of us while panic ensued and conviction about the bleak future hit a fever pitch.

    Does this continue? I have absolutely, positively no idea. No one does, again because no one can possible predict the future with 100% certainty. Everything is about probabilities. From the standpoint of cycles and mean reversion, however, it is entirely plausible that the cycle has changed in a way that favors the reflation thesis now. If this is indeed happening, bonds and “safe” trades may face significant headwinds. It also means the risk-on, risk-off is finally reverting back to the right types of intermarket behavior. That behavior is based off of longer cycles rather than the small sample of the last few years.

    Something quite special is happening in markets. And no – it isn’t about reflation. It’s about reminding the world that just because the past happened a certain way doesn’t mean the future will look similar. Hopefully, the truth stops changing every day and investors will begin to realize just how special the unknown can be.

    Michael A. Gayed CFA
    [Portfolio Manager]

    Like

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