Market bubbles and signals

Market bubbles and signals

By Michael K. Rowlands

Last week I was having lunch with a good friend of mine, Tom, whom I hadn’t seen in a long time. As we were eating our lunch and catching up, Tom asked me the question I was dreading. I knew it was coming, because it always does.

“When do you think the markets are going to crash?”

I set down my fork and looked in his eyes and said:
“Buddy, it’s like the whole world has lost their minds. Nothing makes any sense. The math does not add up and the laws of economics do not exist anymore. Can we not talk about work? I want to hear how your wife and kids are doing. It’s been so long since I have seen you, and besides, we built your portfolio with balance and diversification. This is why you love me so much. You’re making money, and when the market crashes, your gold and silver will offset losses from your stocks.”

When I got back to my office, I started thinking about Tom’s question. It’s the question I hear the most from my clients, and I wish I knew the answer.

Ladies and gentlemen, I don’t have a crystal ball or any other magic economic predictor. For almost 20 years I have relied on common sense and the rules of economics 101. When you combine these things, it tells me the crash is coming a lot sooner than later. My instinct and nearly 20 years of experience are telling me it could happen as soon as September, but it could be in six months or in two years. Anyone that tells you they can predict the markets to the day, week or month is a liar or trying to sell a newsletter.

Back in 2006 and 2007, there were warning signals all over the place that a large economic crash was looming – none of the math was adding up and everyone had lost their minds over the real estate markets. Back then, it seemed everyone I knew was a real estate investor. Plus, they were all experts screaming from the hilltops, “Get your money in the market or you’re going to miss out!” and the sheeple blindly jumped off the bridge and quickly drowned.

Right now it feels a lot like 2007 and the volatility index (VIX) has the same sense of déjà vu, too. According to the VIX, there is very little risk in the markets, again totally disregarding all the warning signs like the P/E ratio. That’s insane. The P/E Ratio has been over 20 three times in history (1929, 2002 and 2008). What happens every time the P/E ratio heads over 20? There is a huge financial crisis. Currently, the P/E ratio is almost at 30. Simply put, this is a huge warning to start getting your money out of the market. Buy low and sell high is a core fundamental to investing and 98 percent of investors ignore this fundamental because they have a fear of missing out. So they end up missing out on huge profits and end up with even bigger losses.

The stock markets have reached an all-time high and there isn’t anything in particular about an all-time high that signals an impending stock market crash. Markets achieve new highs all the time. However, an overvalued market making new highs is more concerning.

Currently, the stock market is not only overvalued, but in the midst of a major bubble. This and a number of factors have led me to prepare my portfolio for an impending stock market crash. Your goal as an investor is to purchase as much profit as possible for the lowest possible price. In other words, buy low and sell high. Right now stocks are at all-time highs while gold and silver are at lows.

My buddy Tom learned his lesson in 2008, and this is why he listened to my warning this time and balanced and diversified his portfolio. When you have companies like Snapchat that have never made a profit, done nothing but lose money year after year, have stock valued 300-plus times their earnings and yet investors get in line to pay for their stock, that’s more than a signal to sell. I know the crash is coming; it’s just a matter of time.

Call us to see if your portfolio needs to be rebalanced and get our Investment Guide for free by calling 480-739-1299.

Michael K. Rowlands is CEO and Senior Wealth Consultant with Scottsdale Gold and Silver.