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Is The U.S. Economy Going To Crash This Year?

Forbes logo Forbes 14-09-2015 Ky Trang Ho, Contributor

Is the U.S. economy going to crash this year? Is the stock market going to crash in 2015? Is a bear market underway? The answer is a resounding “yes,” according to many pundits across the financial media from CNBC to the Wall Street Journal. Considering that some doom and gloomers have been predicting financial Armageddon since the book of Genesis , should you believe them now? And if they are years early in making their calls, are they still correct?

I have interviewed several bearish economists and investment advisers who have been screaming of economic apocalypse every step of the way since the bull market started in 2009. They contended the economic recovery since 2009 has been fabricated by massive government debt and money printing, also known as quantitative easing. The mountains of money created out of thin air will skyrocket inflation, which will eventually cripple the economy, they said. Everyone should buy gold and silver — the only real store of value when the U.S. dollar loses value owing to the onslaught of money supply.

A man passes by an ice sculpture entitled “Main Street Meltdown,” in New York, Wednesday, Oct. 29, 2008. (AP Photo/Kathy Willens)© Provided by Forbes A man passes by an ice sculpture entitled “Main Street Meltdown,” in New York, Wednesday, Oct. 29, 2008. (AP Photo/Kathy Willens)

In 2012, one investment adviser — who manages hundreds of millions and has written several books predicting a crash — projected the U.S. inflation rate would hit 5% in 2014 or 2015. He believed the Dow Jones Industrial Average index could rise above 14,000 but was unlikely to hit 15,000. These levels are equivalent to $140 and $150 a share for SPDR Dow Jones Industrial Average ETF (DIA)

So how did he do with his predictions? He was spot on about U.S. government debt. Uncle Sam’s debt load amounted to 94% of U.S. gross domestic product in 2012, according to the World Bank. It now amounts to 103% of U.S. GDP. This ratio is sky high compared to its historical average of 61%.

U.S. government debt from 2010 through Sept. 2015. (YCharts.com)© Provided by Forbes U.S. government debt from 2010 through Sept. 2015. (YCharts.com)

Indeed the Federal Reserve fired up the printing presses, setting new records for U.S. money supply in 2013 and 2014.

U.S. reserve balances with Federal Reserve banks 2010 to Sept. 2015. (YCharts.com)© Provided by Forbes U.S. Reserve balances with Federal Reserve Banks 2010 to Sept. 2015. (YCharts.com)

However, inflation has averaged about 2% since 2012 and is almost nonexistent in 2015. U.S. inflation rate from 2010 through Sept. 2015. (YCharts)© Provided by Forbes U.S. inflation rate from 2010 through Sept. 2015. (YCharts)

The Dow broke above 15,000 in May 2013 and north of 18,000 in May 2015 — not too shabby for something that was unlikely to reach even 15,000.

Dow Jones Industrial Average price performance from 2010 through Sept. 10, 2015. (YCharts.com): Dow Jones Industrial Average priceperformance from 2010 through Sept. 10, 2015. (YCharts.com)© Provided by Forbes Dow Jones Industrial Average priceperformance from 2010 through Sept. 10, 2015. (YCharts.com)

This bearish investment adviser recommended that people shun inflation and interest-rate sensitive assets such as long-term bonds, stocks and real estate. Instead, investors should buy commodities and commodities-based currencies, which he saw as hedges against inflation. He recommend buying the following ETFs:

  • SPDR Gold Shares (GLD)
  • Sprott Physical Silver Trust (PSLV).
  • PowerShares DB Agriculture (DBA)
  • CurrencyShares Canadian Dollar (FXC)
  • CurrencyShares Swiss Franc (FXF)
  • ProShares Short S&P 500 (SH)
  • ProShares Short 20+ Year Treasury (TBF)
  • iShares Barclays TIPS Bond (TIP)

Say investors took his advice to heart after reading an article about him in mid October 2012 bought the ETFs he recommended and held them for a year, which is a fair amount of time to determine whether an investment is working out. After a year, you would have had six losing positions and two winners. Your losers fell anywhere from 6% (Canadian dollar) to a whopping 39% (silver). Your winners would have gained 2% (Swiss Franc) and 12% (Short 20+ Year Treasury). You missed out gains in the SPDR S&P 500 ETF (SPY), a plain-vanilla index, of 19%.

But what if this adviser was just early in his call? What if you wanted to give him the benefit of the doubt and held all of his holdings through the present? As of Sept. 9, those ETFs would have lost anywhere from 5.8% (Swiss Franc) to as much as 59% (silver). You would have lost 35% shorting the S&P 500 via ProShares Short S&P 500. To add insult to injury, you would have missed out on a 36% gain in SPDR S&P 500 ETF over the same period.

Bearish investment adviser’s ETF recommendations and returns from Oct. 15, 2012, to Sept. 9, 2015

  • SPDR Gold Shares (GLD): -38%
  • Sprott Physical Silver Trust (PSLV): -59%
  • PowerShares DB Agriculture (DBA): -28%
  • CurrencyShares Canadian Dollar (FXC): -27%
  • CurrencyShares Swiss Franc (FXF): -6%
  • ProShares Short S&P 500 (SH): -35%
  • ProShares Short 20+ Year Treasury (TBF): -14%
  • iShares Barclays TIPS Bond (TIP): -9%

Unfortunately, this investment adviser has plenty of company in making bad stock market predictions. I highly doubt he will be the last. To be sure, some economists and investment experts became Wall Street celebrities for making accurate predictions. But they also make many wrong predictions. How can you ever know ahead of time whether they will be right?

And why do investment gurus and economists constantly write books and articles making predictions when they could be completely wrong and ruin their reputations?

Here’s some insight from three experts:

Janice Dorn, M.D., Ph.D., trading mentor and author of Mind, Money & Markets in Phoenix, Ariz.:

“It is human nature to want to know the future.  There are deep-seated psychological reasons for this that vary from person to person, but boil down to being able to penetrate the mystery of time. There can be enormous comfort in the thought that one will be alive tomorrow or next year. Imagine how you would feel and what you would do if you thought there were be no tomorrow?

“Financial pundits often talk for the sake of talking and the possibility that they may say something that will turn out to be correct. They entertain as well as inform. They can use that something. It could be a single sentence out of 10 pages or even an entire book. They will use it to show people how smart/important/correct/useful the best indicators/skilled/totally fabulous, etc they are. And they will milk it for all it’s worth — often for decades.  This is in the face of the reality that they never again made a correct call

“It is important to accept this one fact about the markets:  Nobody knows anything. Nobody is able to see beyond the hard right edge of a chart or to know what will happen in the next minute in the markets, let alone tomorrow.  Every moment in the markets and life is unique. So much of trading and investing is learning to be uncomfortable with uncertainty. Chapter 13 in my book Mind, Money & Markets and speaks to the issue of overconfidence and hubris that can border on being delusional in terms of prediction.

“In the Land Of The Blind, the one-eyed man is King.  The great John Bollinger once said something to the effect  that a person gets one chance in his/her lifetime to call an exact top or bottom.  People will keep trying for that chance. All gamblers die broke, but predictors can live on eternally for that one correct call they made, even if it was 30 or more years ago.

“Couple this with the reality that people have a very short memory.  They forgive people for being wrong. They figure that nobody really knows, and the person was “brave” enough to at least come up with a prediction. And they worship people who actually manage to make a correct prediction.

“Predictors (who often sell newsletters, manage money or run trading/investing services) take this chance in the event that they will be idolized, followed, quoted, have some market indicator or pattern named after them, and forever telling people: ‘You see how right I was about so and so in so and so year. So just keep listening to me. Even if your portfolio is going into the sewer, just keep listening to me because I was one of the few who predicted ‘so and so’ in ‘so and so.’  I am a person of great analytical knowledge and substance and I know things that other people do not know.  I make a lot of money because I know things other people do not know.  You should listen to me and follow me and pay me because I am King in the Land of the Blind.’”

Alan M. Milner, executive editor at Tellus News Digest, former bond analyst and mortgage banker in Delray Beach, Fla.

“People who know about the market do not listen to pundits — ever.  Market makers understand the market and they are not about to be influenced one way or the other in their trading decisions. They are technicians, and whichever technologies they use, they are going to rely on their own expertise.

“Therefore, reason dictates that commentators are speaking almost exclusively to the ingenious investors — the suckers in the crowd.

“There are two types of commentators:  soothsayers and analysts.  Soothsayers try to tell us what they think is going to happen. Analysts tell what is happening right now, or what has just happened.  Without exception, the soothsayers are con men. They make their livings by alternatively scaring and enticing people in and out of the market, on or off particular stock or bond, and they always have excellent reasons for their advice.

“But the bitter pill is that if the advice were any good, everyone would be listening to it, in which case it wouldn’t be any good because the movement would have crushed the advantage the pundit thought there was in a given issue. Analysts aren’t shills, but they are harpies, because they report with hindsight what no longer makes any difference to either the winners or the losers.

“Personally, I would never listen to anyone touting stock unless that person had a lot of skin in the game and rules more or less forbid them from doing that. Bottom line: shills can’t cash chips.”

Jordan Niefeld, CPA, CFP®, part of a team managing $225 million at Raymond James, in Aventura, Fla.

“First off, I do believe it is a question of timing. Nearly every economic forecast will come true at some point. Many times it just a question of when. I do believe that economists can generally see where the problems are and usually can sense who is most vulnerable.

“But ‘timing’ is an entirely different game all in its self. Many economist fail to predict turning points within the economy. Unlike weather anchors who many times forecast accurate weather patterns over four to five days, economists in contrast have to make much longer range predictions. The economists rely on math and past experience. The problem is human behavior is still human behavior with unpredictable factors such as diverse resources, wars, natural disasters, and technology constantly changing.

“In my opinion, much of this comes down to economists and other pundits who pick and choose what they want to believe. The best context is to use the economic indicators as a starting point of a more analytical discussion and then to follow through with a plan.

“Economists are just one input among many factors. Which is why, as investors, my goal is always to stress the vital importance of a solid and comprehensive financial plan where chasing returns and economist latest forecasts are less relied on at times in the overall long term discussion. If you follow this methodology, the short term chatter is just noise anyways.

“Also, people like to boast and brag on the times when they were right so we naturally hear about those positions more often. Some are willing to take a position even if they are wrong to gain visibility in the market place or to sell a book. And of course, they will leave themselves a loophole to justify their position, somehow some way, even though it may be completely wrong.”

If they’re doing it just to gain visibility or sell books, it certainly has worked for investment adviser I was talking about earlier. He claims to have sold nearly one million books.

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