John De Goey is a senior investment adviser and portfolio manager at Wellington-Altus Private Wealth.
Everywhere you look, it seems there are people who believe what they want to believe simply because it’s comforting compared to what others might call objective reality. Behavioural economists call this “motivated reasoning.” Another adage about potentially self-serving denial is that while you can avoid reality, you can’t avoid the consequences of avoiding it. Many investors currently avoid the reality of the serious risks baked into present valuations of the stock market – especially south of the border.
And it’s not just stocks. Around the world – but especially in the United States – there is a massive and unprecedented confluence of asset bubbles. Stocks, bonds and real estate were all near record high valuations to start the year, but from the peak on Jan. 3 to Jan. 27 the S&P 500 fell by about 10 per cent. Since then, valuations in all asset classes have contracted as real rates have gone increasingly negative, and we haven’t even had an actual rate hike yet. Central bankers have lost credibility by not hiking sooner and are being shamed into acting, so now hikes look to be inevitable.
The prolonged dovishness on monetary policy has caused animal spirits to run amok. What with the continued popularity of meme stocks, special purpose acquisition companies, non-fungible tokens and cryptocurrencies, we may now be nearing peak enthusiasm. Central bankers insist they have no interest in market cycles and their only concern is price stability, but the evidence suggests otherwise. After a massive runup in all manner of asset classes in the past 22 months, many thoughtful observers agree that central banks bear at least tacit responsibility, even if they offer no accountability.
Consumer price inflation is running at its highest level in more than two decades in the world’s big industrial economies. This is especially so in the U.S., where the annual rate of price growth hit 7.5 per cent in January. The de facto choice is awful. Central banks can maintain their dovishness and risk stagflation or tighten up and risk causing a major market drawdown. Pick your poison. Either way, the history books won’t be kind on the credibility front. Almost all analysts think multiple hikes are on the near-term horizon. I suppose doing the right thing late is better than not doing it at all, so now it looks like we’re about to try the rate-hike poison.
My view on how this will play out is simple. Easy monetary policy caused the bull run to start – and a tightening of monetary policy will cause it to end. The next two-day meeting of the Federal Reserve is set for March 15-16.
Owing to the unique nature of the 2022 “everything bubble,” I believe the next drawdown will be worse than anything any of us have ever experienced. Worse than dot-com. Worse than the global financial crisis. And longer than any of them, too. I hope I’m wrong, but indications are that the next bear market will be a doozy.
Not trying to be sensationalist, but I fear that our collective economic future looks like it may be challenged in ways many of us cannot imagine. Some people simply prefer to be happy and naïve and therefore could resist thinking critically about what might come next. They say ignorance is bliss.
Critics have called me a “permabear,” “market timer,” “attention seeker,” and worse. But how else does one draw attention to the real and consequential risks outlined here? I’ve been giving financial advice for nearly 29 years and have only been worried about valuations in the past two. I don’t claim to be able to reliably time markets, but want to warn people of the potential danger they may be subjecting themselves to. My message is simple – please take a moment to truly consider the risk you are taking in the current environment.
In 1929, a mere nine days before the stock market crashed, economist Irving Fisher, who was considered one of the greatest ever, said markets had hit “what looks like a permanently high plateau.” If one of the top economists in the world can succumb to motivated reasoning, why are you immune?
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