There’s an old saying that you can tell a lot about someone by the company they keep.
Yesterday we found out we were keeping company with billionaire investor Warren Buffett, and CNBC stock market entertainer (some would say clown) Jim Cramer.
We wouldn’t normally see that as a badge of honour. Both characters are about as mainstream as they come.
But in this instance, on this rare occasion, we agree with pretty much every word they had to say. Or rather, they agreed with what we’ve been saying…
The Ukraine crisis came and appears to have disappeared just as quickly – as far as the financial markets are concerned anyway.
The Aussie market went up 0.3% yesterday to close at 5,400 points.
That is, to remind you, just 61 points below the 52-week high. And after taking a drubbing on Monday, Europe’s markets staged a comeback too. The Euro Stoxx 50 index gained 2.7%, recovering entirely the previous day’s loss.
As for the US market, the Dow Jones Industrial average gained 1.4%, more than rubbing out the previous day’s fall.
What more can we say. Financial and political crises just don’t seem to pack the same punch any more do they?
A Perpetual State of Crisis
This brings us back to Buffett and Cramer. Both of them echo the view we’ve held for some time on the impact of supposed crises.
To paraphrase Buffett from an interview he gave to CNBC, if you own a profitable little milk bar in St Kilda would you rush to sell the business just because Russia got into a scrap with Ukraine?
Odds are you wouldn’t. He wonders then, why would investors sell shares in profitable companies for the same reason? He says it doesn’t make sense.
As much as it pains us to agree with an establishment man, Buffett is right. Although we will point out that for two years we’ve held this view on the slew of pretend crises that have hit the market.
Not one of them has had a lasting negative impact on the markets. That includes Dubai’s property and debt crisis, China’s Shibor crisis (we bet you don’t even remember what that was all about), and the Cyprus banking bailout.
The proof is clear and beyond refute. The following chart plots the US S&P 500 (red line) and the Aussie S&P/ASX 200 (blue line) since 2009:
As you can see. Since 2009 when there has been a series of one crisis after the other, what has been the impact on the stock market? Stocks have gone up. Perhaps if you knew nothing about stocks and drew a simple correlation, you could even say that stocks have gone up because of these crises!
Of course, that would be crazy.
Even so, it’s not as though there have only been a handful of crises. By yesterday afternoon we had counted out 19 of them. As we drove home from the office last night, we remembered another two.
That’s 21 crises in around 60 months since the start of 2009. Put another way, it’s a brand new ‘crisis’ every three months. And yet seemingly defying the odds stocks keep going up.
Devaluing a Real Crisis
What should you make of all this?
One reason for the constant flood of crises is the desire among some commentators to be the person who calls the top of the market and predict the next crash.
But rather than identifying the one key problem with the world’s economy, the mainstream just runs with any old crisis and then blows it up out of all proportion.
As small-cap analyst Tim Dohrmann told us this morning, ‘The word crisis has been devalued. When a real crisis comes it will take most investors completely by surprise.‘
We mean really, the Shanghai interbank offer rate (Shibor) crisis from last year. Do you remember that? It made front page news in the financial press. A spike in Shibor was apparently the event that would bring down China.
So what happened when Shibor spiked higher? That’s right, apart from short-term stock market volatility, nothing happened. Western markets continued on their way, and China kept growing.
Now, you can rightly ask, ‘So, what is the one key problem that will send markets crashing?’
It’s not difficult. You needn’t even ask. In fact, you’ll find the answer a total bore, which is partly why when it hits, as Tim says, it will take everyone by surprise.
The problem is…the same problem that caused the 2008 meltdown, which is the same problem that caused the 1929 meltdown and Great Depression, which is the same problem that has caused every meltdown, recession and depression in history – the manipulation of the money system by banks, central banks and governments.
Not Fixed, Only Patched Up
It seems to us that folks are already beginning to forget that and instead they’re focussing on the mini-crises that really don’t mean anything to anyone.
But although we may agree on that point with Buffett and Cramer, there is one difference. They believe that governments and central banks have solved or are on the way to solving the global financial system’s problems. Our view is that things have actually got worse due to the half-baked patch-up job by governments and central banks.
So when the same problem reappears it will likely result in a crisis many times worse than that seen in 2008. When that will happen is anyone’s guess.
But until it happens we’ll carry on taking advantage of the opportunity to buy stocks as each new faux crisis appears, then disappears, and the market defies the odds and continues to rally.
Cheers,
Kris+
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