Adam Taggart: Today’s financial markets make a mockery out of sanity and logic. The difference between what SHOULD happen and what IS happening is perhaps the greatest it has been in our investing lifetimes.
If you’re perplexed, flummoxed, frustrated, stymied, enraged, bored, irritated, insulted, discouraged — any or all of these — by the ever-higher blind grinding of asset prices over the past several years, despite so many structural reasons for concern, you have good reason to be.
Something Wicked This Way Comes
For most of those reading this, I don’t need to re-hash all of the reasons you already read at PeakProsperity.com and similar sites on a regular basis. Suffice it to say there’s an overwhelming plethora of reasons beyond the simple ‘reversion to the mean’ laws of math: weak economic growth, geo-political risks, sky-high valuations, goosed stock earnings, record-high margin debt, insider sales, consumer confidence, retail buying, high energy prices, continued central bank interest rate suppression, etc, etc, etc…
Instead, these are all warning signs that merit caution, and at least some degree of de-risk. They are factual, data-driven signals indicating that the stability of the status quo is unlikely to be sustained. Yet, they continue to deflect off of the Kevlar surface of the reality-distortion field today’s markets have surrounded themselves with.
The fundamental issue at hand is: risk is being mis-priced WAY too low in both the stock and bond markets right now. Therefore, the prudent investor will want to reduce their exposure to the inevitable mathematical reversion of prices.
The Good News In All This Bad Data
And now we arrive at the main point of this article: The current crazy/frustrating/scary/pick-your-expletive level of instability in today’s market is actually GOOD news.
The disconnect between financial asset prices and fundamentals simply must — per the laws of Nature — resolve itself. And given the interruption-free 45-degree ramp the markets have experienced since 2009, we can definitively say that we are closer to the coming correction than we have been at any time in the past half-decade (here’s a chart of the S&P 500 from its 2009 lows):
The bullet has been dodged for five straight years — given the instability and the inevitability, how much longer can it be dodged? Not for long, is our conclusion. And given the uninterrupted rise to record highs, the potential energy stored in the system now should be much more kinetically destructive than it would have been had it happened sooner. So, we are at a time in the markets when confidence is high that a big move will happen soon, and happen to the downside.
This is as close as we’re going to get in our lives to reading tomorrow’s stock prices today. While we can’t divine exactly what they’re going to be, the odds are very favorable that prices will be lower — likely a lot lower — for most assets in the next 6-24 months than they are today.
So, what to do with this insight?