No Shame in Cash

BALTIMORE – After a year of wandering the globe, we are back in the homeland… and ready to turn in our passport. Travel can be fun. It can also be “broadening.” But the most interesting thing about it is not so much what you find out about other places. It’s what you discover about your home.

You return to the land you once knew, as T.S. Eliot put it, and know it for the first time. So, we are ready to rediscover Baltimore – a place where children refer to handguns as “school supplies.”


back-to-school sale-1The new school year begins in Baltimore…


And what’s this? Judging by yesterday’s mailbag, many of our dear readers are Sarah Palin fans. Several helped us decipher Ms. Palin’s gnomic remarks about Donald Trump, which we covered in Tuesday’s Diary. Several more canceled their subscriptions. They must have thought our admiration for the former Alaska governor was insincere.

But, let’s move on. First, we return to questions put to us in Mumbai two days ago.

“What should an investor do?” asked an old man in a Nehru jacket.

“Should I stay in the stock market? After all, staying in the stock market always seems to pay off over the long term. Or should I move to gold and cash?”

We have been telling people there is “no shame in staying in cash” until the market finds a bottom. If we’re wrong and prices shoot upward, we will miss the upside. But the risk of missing substantial gains seems slight. Earnings are going down. Almost all the signals from industry and commerce seem to be pointing down, too.

Meanwhile, U.S. stocks are still expensive. The CAPE ratio looks at the inflation-adjusted average of the previous 10 years of earnings relative to stock prices. On that basis, the S&P 500 has been a worse deal only three times in the last 100 years. Those were just before the 1929 Crash… the dot-com bust in 2000… and right before the 2008 meltdown – hardly auspicious precedents.


1-PE10-percentilesWhere we are: the current PE/10 is in the 92nd percentile of market valuations since 1871 – exceeded only by 1919, 2007 and 2000.


Not only that, but also global debt levels are higher today than ever in history. Wouldn’t it make sense to stay in cash… on the sidelines… until prices go down and debt issues are resolved?


March to Hell

Not according to the newsletter writers at The Motley Fool. The Fool’s Matthew Frankel gives us “three reasons you shouldn’t worry about the stock market in 2016.”

“Don’t panic,” he goes on. The late Richard Russell, of Dow Theory Letters, taught us there are short cycles and long cycles. The long cycles are the ones that count. You can miss a rally now and then; it won’t make much difference. But miss a major, long-term bull market, and you have missed an opportunity of a lifetime.

On the other hand, riding through a major bear market can seem like a march to Hell. The worst thing that can happen, Russell used to say, is that you take a “ruinous loss” – one you can never recover from.

Major market swings take time. The Dow reached a peak in 1929. It didn’t regain that peak again until the late 1950s. Since then, we’ve cycled through booms and busts, reaching the latest top in 2015, when the Dow rose over 18,000.


2-DJIA - 1920-1956-annThe DJIA from 1920 to 1956 – in nominal terms, the average only regained its 1929 peak level in 1954. Apart from a short time in the 1950s-1960s, it only got back to its 1929 valuation in real terms in the mid 1990s. The vast bulk of the stock market’s nominal gains are simply a reflection of monetary inflation – click to enlarge.


The questions to ask yourself: Where are we now? Have we passed the top? Are we in a long decline? Then there are the personal questions: How long will you live? When will you need the money? How much volatility can you withstand?

Although top to top is a long time, it can also take a long time just to break even. The 1929 high was not reached again until 1956 – 27 years later. In Japan, they’re still waiting to recover half the losses from the crash of 1989 – 26 years on. How would you feel about waiting until 2042 before we return to last year’s high?


3-NikkeiWhenever someone tells you that “stocks always go to new highs in the long run”, be sure to ask for a precise definition of “long run”, because it can sometimes be a lot longer than you’d expect – click to enlarge.


No Mountain Left to Climb

The other thing to realize is that the long-term performance of the stock market is mostly a myth. Yes, you could have made about 10% a year if you’d gotten in 100 years ago and stayed in. But that figure is subject to some important qualifications.

First, you don’t really make a steady 10% a year. That’s just what you get when you go back and average out your annual gains over a century. It looks as though you have steadily marched up the mountain and now sit high and dry. But when you’re at the top, the only way to go is down! Do the math again when you get to the bottom. You will find your average rate of return looks awful.

Second, who lives long enough to make it work? Compounding is great in theory. But it only works its magic at the end. Compound a penny at a 100% a year – from one to two… two to four… four to eight, etc. – and at the end of 10 years, you have just $10.24.

Compound $1,000 at 10% a year, and after 10 years, you have $2,593. Not bad. But hardly the sort of stuff dreams are made of. And that assumes that you get 10% a year. At today’s prices, stocks are already so high, there’s not much mountain left to climb.

Nobel Prize-winning economist Robert Shiller estimates the average annual return on U.S. stocks the next 10 years at only 3%. Vanguard Group founder Jack Bogle puts it at a little more than 1%. And Rob Arnott at Research Affiliates looks for a return of less than 1%. At those levels, you can forget about the magic of compounding.


4-wmc160125bDr. Hussman’s market cap/GVA valuation parameter with actual subsequent S&P returns overlaid predicts a 12-year nominal S&P 500 return of 2.5% following the recent market losses. As you can see, this is abjectly low from a long term historical perspective – even the 2007 projection looked better.


Whacked by the Big Bear

Then, you have to worry about those drawdowns – the peak-to-trough losses you experience in your portfolio. If you compound at a rate of 10% a year but have a 40% drawdown in year three, you have to go for another three years just to get back where you started.

Worse, your lifetime of savings and investing gets whacked by a big bear market. You take the “ruinous loss” Russell warned about, with no time to recover. Most investors don’t have enough time to make compounding work as advertised. Most are already over 50 when they begin investing. They don’t have 100 years. They’re lucky if they have 15 or 20.

Over that kind of time frame, if there are any substantial setbacks, they’re finished. That’s why it’s so important to get in when the market is low. Then double-digit gains, compounded over many years, can at least be a theoretical possibility.

But if we’re right about where the economy is… how expensive the stock market is… and how difficult it will be to sustain further gains, then this is probably not the best time to begin a program of retirement financing via stocks.

On our scales, the balance between risk and reward in U.S. stocks falls heavily toward the risk. We see a reasonable likelihood of a ruinous loss against a remote possibility of a big gain.

So go ahead and panic. You may be glad you did.


big_bad_bear-615x373The big bad bear – there’s no point in sticking around when he makes his entrance.

Photo credit: WVG Medien


Charts by: Doug Short / Advisorperspectives, Acting Man, BigCharts, John Hussman


Chart and image captions by PT


The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.




Emigrate While You Can... Learn More




Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.


Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA


Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • US Stock Market: Conspicuous Similarities with 1929, 1987 and Japan in 1990
      Stretched to the Limit There are good reasons to suspect that the bull market in US equities has been stretched to the limit. These include inter alia: high fundamental valuation levels, as e.g. illustrated by the Shiller P/E ratio (a.k.a. “CAPE”/ cyclically adjusted P/E); rising interest rates; and the maturity of the advance.   The end of an era - a little review of the mother of modern crash patterns, the 1929 debacle. In hindsight it is both a bit scary and sad, in...
  • How to Blow $12.2 Billion in No Time Flat
      Fake Responses  One month ago we asked: What kind of stock market purge is this?  Over the last 30 days the stock market’s offered plenty of fake responses.  Yet we’re still waiting for a clear answer.   As the party continues, the dance moves of the revelers are becoming ever more ominous. Are they still right in the head? Perhaps a little trepanation is called for to relieve those brain tensions a bit?  [PT]   The stock market, like the President,...
  • Despondency in Silver-Land
      Speculators Throw the Towel Over the past several years we have seen a few amazing moves in futures positioning in a number of commodities, such as e.g. in crude oil, where the by far largest speculative long positions in history have been amassed. Over the past year it was silver's turn. In April 2017, large speculators had built up a record net long position of more than 103,000 contracts in silver futures with the metal trading at $18.30. At the end of February of this year, they held...
  • Broken Promises
      Demanding More Debt Consumer debt, corporate debt, and government debt are all going up.  But that’s not all.  Margin debt – debt that investors borrow against their portfolio to buy more stocks – has hit a record of $642.8 billion.  What in the world are people thinking?   A blow-off in margin debt mirroring the blow-off in stock prices. Since February of 2016 alone it has soared by ~$170 billion - this is an entirely new level insanity. The current total of 643...
  • Stock and Bond Markets - The Augustine of Hippo Plea
      Lord, Grant us Chastity and Temperance... Just Not Yet! Most fund managers are in an unenviable situation nowadays (particularly if they have a long only mandate). On the one hand, they would love to get an opportunity to buy assets at reasonable prices. On the other hand, should asset prices actually return to levels that could be remotely termed “reasonable”, they would be saddled with staggering losses from their existing exposure. Or more precisely: their investors would be saddled...
  • US Stock Market – The Flight to Fantasy
      Divergences Continue to Send Warning Signals The chart formation built in the course of the early February sell-off and subsequent rebound continues to look ominous, so we are closely watching the proceedings. There are now numerous new divergences in place that clearly represent a major warning signal for the stock market. For example, here is a chart comparing the SPX to the NDX (Nasdaq 100 Index) and the broad-based NYA (NYSE Composite Index).   The tech sector is always the...
  • From Bling to Plonk – An Update on the Debt Mountain
      Serenely Grows the Debtberg We mentioned in a recent post that we would soon return to the topic of credit spreads and exotic structured products. One reason for doing so are the many surprises investors faced in the 2008 crisis. Readers may e.g. remember auction rate securities. These bonds were often listed as “cash equivalents” on the balance sheets of assorted companies investing in them, but it turned out they were anything but. Shareholders of many small and mid-sized companies...
  • US Equities – Mixed Signals Battling it Out
      A Warning Signal from Market Internals Readers may recall that we looked at various market internals after the sudden sell-offs in August 2015 and January 2016 in order to find out if any of them had provided clear  advance warning. One that did so was the SPX new highs/new lows percent index (HLP). Below is the latest update of this indicator.   HLP (uppermost panel) provided advance warning prior to the sell-offs of August 2015 and January 2016 by dipping noticeably below the...
  • Return of the Market Criers - Precious Metals Supply and Demand
      Ballistically Yours One nearly-famous gold salesman blasted subscribers this week with, “Gold Is Going to Go Ballistic!” A numerologist shouted out the number $10,000. At the county fair this weekend, we ran out of pocket change, so we did not have a chance to see the Tarot Card reader to get a confirmation. The market criers are back in gold town [PT]   Even if you think that the price of gold is going to go a lot higher (which we do, by the way—but to lean on...
  • Good Riddance Lloyd Blankfein!
      One and the Same   “God gave me my money.” – John D. Rockefeller   Today we step away from the economy and markets and endeavor down the path less traveled.  For fun and for free, we wade out into a smelly peat bog.  There we scratch away the surface muck in search of what lies below.   One should actually be careful about quotes like the one attributed to Rockefeller above, even if it of course sounds good and is very suitable for the topic at...
  • Incrementum's New Cryptocurrency Research Report
      Another Highly Useful Report As we noted on occasion of the release of the first Incrementum Crypto Research Report, the report would become a regular feature. Our friends at Incrementum have just recently released the second edition, which you can download further below (if you missed the first report, see Cryptonite 2; scroll to the end of the article for the download link).   BTC hourly (at the Bitstamp exchange). Although BTC has been in a bear market since peaking in...

Support Acting Man

Item Guides


Austrian Theory and Investment



THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts


Gold in USD:

[Most Recent Quotes from]



Gold in EUR:

[Most Recent Quotes from]



Silver in USD:

[Most Recent Quotes from]



Platinum in USD:

[Most Recent Quotes from]



USD - Index:

[Most Recent USD from]


Buy Silver Now!
Buy Gold Now!

Diary of a Rogue Economist