Will The Markets Recover?

So here’s the deal.

This market was always going to correct. It was writ large well before the Coronavirus inflicted its first victim.

History will show this correction was sparked by a virus which will settle down almost as quickly as the fires…although it doesn’t feel like it at the moment.

Further, this virus is not as bad as the market suggests (so far). The reason for the major sell-off is because we were in the ‘red zone’. i.e we were in the longest bull market in history and the market was well and truly over-priced.

This correction has a loooong way to go, but ultimately, it will be driven by ‘excess’.

It will be about excessive credit (aka low interest rates, cheap money and mountains and mountains of debt) and excessive asset prices.

We are now sitting on a bigger credit (debt) bubble than pre GFC. Every developed economy is up to its eyeballs in debt and deficits, while Europe and Japan are hoping like hell they can turn their economies around with ‘negative’ interest rates, which they won’t.

In the meantime, asset prices have continued climbing to nosebleed levels, until now.

Where to from here?
The sell-off we witnessed this week in the markets was just the beginning of a much bigger correction.

However, very shortly the market will do a massive U turn and rally up. But it won’t last.

But regarding the virus, my biggest concern is ‘data integrity’.

For example, how does a country like Indonesia with 250,000,000 people, not have ONE infection? It’s either a miracle, their diagnostics are draconian or they’re lying.

This virus will only add to what is already a very weak underlying economy.

Therefore, in my opinion, the ultimate wrecking ball in the markets will be the credit bubble. Hence the reason we started putting clients into gold last year.

I’m also expecting another GFC which means all our clients will remain in their ‘Winter Portfolios’ until this storm has passed. Then when the market has bottomed out, we’ll sell the Winter Portfolio and buy back into a ‘Summer Portfolio’ ready for the next decade.

There’s no such thing as a bad market, only a bad strategy. And to get the strategy right, you just need to know what season you’re in. We are definitely heading into a financial winter.

As such, I expect the Dow Jones will eventually bottom out around 16,000 – 18,000 points but it will take about 18 months to get there.

The Lesson
Despite all the uncertainty and gyrating which will ensue for next little while, there is one big lesson to come out of all this…

When assets are overpriced, they will always correct. It doesn’t matter if it’s shares, property or cows.

But here’s the good news. When this market finally bottoms out, stock prices will be that cheap it will feel like Boxing Day at David Jones.

Everything will be on sale, even the suits.