Despite the recent happy talk, our economy is facing major headwinds and it will last for a while, reports Landon Whaley.
As I have listened to the barrage of advice spewed from Wall Street and the media over the last few weeks, my inner Andrew Shepherd came bubbling to the surface.
“We have serious problems to solve, and we need serious people to solve them.”
On March 4, Jim Cramer was telling people to buy stocks because his “trusted” market indicator was telling him, “the selling may have gotten ahead of itself.”
He said, “When it goes above a reading of 5, it means it’s time to sell. When it goes below -5, it’s time to buy. Recently, it went below -12, and that’s almost always a great time to buy.”
Cramer then goes on to reference four previous instances when this trusted buy signal worked, including 9/11, the debt-ceiling crisis in 2011, China’s 2015 stock market crash, and in December 2018, when the Federal Reserve hiked rates for the final time.
He did note one previous occurrence when the indicator’s buy signal was dead wrong, the 2008 Financial Crisis. However, he thinks the 2020 situation is nothing like 2008 because “There was no credit crisis. There were no big failures. There was no systemic risk. The one time we failed to bounce, we had all those problems.”
“Whatever your [investing] problem is, I promise you [Jim Cramer] is not the least bit [capable of] solving it.”
First off, I can’t think of anything more Wall Street than looking at a single factor, like a freakin’ oscillator, to make market calls. I could do a week-long seminar, backed by data, on why a single factor model will lead to losses and not gains, but today I’ll keep it quick and dirty.
Tools like Cramer’s trusted MarketEdge Short Range Oscillator are built for use in a linear environment, which is not how markets behave at all. Markets act like weather, or turbulence, they are nonlinear and chaotic. What this nonlinearity means is that most investors are using the wrong tools in an attempt to understand markets, a lot like trying to measure the coastline of Ecuador with a ruler. A ruler will certainly get you a measurement, but it’s completely wrong, and therefore useless!
Second off, the idea that here in 2020, we don’t have a credit crisis, big failures and systemic risk is laughable!
In terms of a credit crisis, the amount of distressed debt just doubled in the final two weeks of March. Doubled! Is Jim under the impression that this +100% move is a blip? We are also just beginning to see a cascade in credit quality downgrades. Case in point, both Delta Airlines (DAL) and Ford (F), are now carrying a junk rating on their debt. Does Jim think these are the only two companies that will be impacted in the months ahead?
As for no “big failures,” my response is just you wait. We’ll be lucky to have a restaurant industry that extends beyond McD’s and Domino’s when this whole thing is said and done. I can promise you that big failures are coming to shopping centers and strip malls all over this country. Further, these failures aren’t going to be isolated to travel and entertainment, a plethora of industries are about to get body-bagged.
The phrase “systemic risk” is defined as “the possibility that an event at the company level could trigger severe instability or collapse an entire industry or economy.” I’d say that the Coronavirus (the event) hitting a weakened U.S. economy and causing a minimum 20% contraction in Q2 GDP growth (severe instability or collapse of an entire economy) meets this definition precisely.
Given all that I just laid out, is it any wonder Cramer’s trusty indicator has failed him once again? The unfortunate investors who followed this knucklehead’s guidance and bought U.S. stocks on March 4 have lost -19.0% and now must gain 24.0% to get back to even.
Folks, the number of worst ever economic data points are stacking up like dirty dishes at a frat house, and this type of data is going to be even more prevalent in the months ahead. We’ve also not seen the last of historic price moves (bullish and bearish) across all four asset classes.
The bottom is not in, the worse is not behind us, and your only hope of success over the next 12-24 months is implementing a time-tested, proven process for making high quality investing decisions. The U.S. is entering a severe recession (possibly Depression), and we are only one month into an epic bear market.
“We've got serious problems, and we need serious people. And if you want to talk about [successful investing], [Jim], you'd better come at me with more than [an ineffective market indicator and willful blindness to what’s going on around you]. If you want to talk about [what’s required to successfully trade all four major asset classes in economies around the world regardless of economic or financial market conditions], fine. Just tell me where and when, and I'll show up. This a time for serious people, [Jim], and your `5 minutes are up.”
My name is Landon Whaley, and I remain process-driven, data-dependent, and risk-conscious.
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