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How much more can the bulls run?

The Examiner

I believe the stock market is going to soon crash, but as Yogi Berra supposedly said, “It’s tough to make predictions, especially about the future.”

I have great respect for how difficult it is to predict the future of markets. Having said that, I’ve guided those listening well through some tough emotional times over the last several years. It wasn’t easy to keep people positive when President Trump got elected, and when Trump said things that upset the majority of Americans, I argued that the trade war wouldn’t likely cause a recession, and last year predicted that the market would likely move much higher to most people’s surprise.

Aaron Pickert

I note this to show my dire prediction isn’t me being a broken clock that eventually gets the time correct. I am not fear mongering for the sake of exciting your amygdala into action like that of the local news.

They say people are naturally more skeptical of positive market outlooks and find pessimistic market viewpoints as more intellectually appealing. I am not pandering to illicit a primal fear response from you or garner your intellectual praise. I hope you’ll see it as someone who has tried to share an honest view and a framework in which to operate and financially excel.

I have waited with great anticipation for the current market euphoria. Now that we are at long last here, thriving with strong gains from the market, I believe it’s finally time to start getting worried. That may be incredibly counterintuitive, but long upward climbing markets tend to end with gross misallocations of capital. I think we are finally seeing that process take place.

I believe the seeds have been sown for financial devastation ahead. We could see the market repeat the decline of 2008 or worse. Central banks and governments around the world have done a great job at delaying this devastation, but I don’t think we can avoid it. I believe we have an enormous financial insolvency crisis ahead that simply isn’t avoidable, as much as we hope it can be. You can take a medication to disguise the pain for a while but eventually your body catches up to you.

Work from home is likely here to stay for many industries. That spells disaster for commercial real estate and surrounding business structures. Corporations are likely to continue downsizing their middle management, flattening their organizations. People aren’t likely to travel for work at the same capacity as before.

The government and banks have held off receiving debt payments during the pandemic, but we are nearing the time for collection to ramp back up. Large numbers of people are falling behind on their rent, mortgages, student loans and credit cards. All these things are going to create an unimaginable insolvency crisis that was delayed during lockdowns. Instead of a sharp disaster during quarantine, we get a longer and slower one over several years’ time.

When you consider the amount of leverage tied to much of this debt around the world, the risk of a swift blow to the financial system is real. You could get out of the market now, and you’ll likely look back and be glad you did. However, for the next few months a Goldilocks scenario exists.

Declining case counts, warmer weather ahead, prospects of a large stimulus likely, pent up spending from savings, and vaccines could heat the economy up into hyperdrive. Unfortunately, I think it’ll be short-lived as high expectations don’t get met.

What we saw recently on the news about GameStop being driven higher by 2000% in a matter of days is a sign of our times. When your cash is being treated as trash, and there’s no safe way to make 3 to 4%, you are forced to take on excessive risk. That’s what we are seeing take place. With many having been out of the market or more conservative, it’s awakening people to start chasing the market. This all has dangerous consequences, but the fun can last longer than you realize.

Alan Greenspan spoke of irrational exuberance in 1996. It took several more years and the market went 100% higher before tumbling over.

We are not running for cover at this moment. We have defined levels lower where we would move a significant amount of our portfolios to cash. In the meantime, we are letting the possibility of the Goldilocks scenario play out. It wouldn’t surprise me if the market went up another 15% from here before the insolvency troubles weigh heavily.

If you are looking to make hay while the sun shines, and run for safety when the final act takes place, please contact me for how we can help you navigate these markets. A major sea change is at hand, and I don’t believe the standard way of managing your investments is going to produce the results you hope for.        

Aaron Pickert, CRPC, is chief investment officer at Stewardship Capital in Independence. Past performance is no guarantee of future results. Advice is intended to be general in nature and not intended for specific situations.