A crash is coming, and Jim Rogers says it will be a doozy
Legendary investor, Jim Rogers, is a famed perma-bear. But this month Rogers stepped it up. He predicted that the next bear market will be “the worst in our lifetime”, fueled by a world that is laden with debt, and that it will occur within the next two years.
I have met Jim Rogers several times and most recently on a panel on which we sat during an investment conference in Singapore. Jim co-founded the incredibly successful Quantum Fund in 1970, alongside George Soros, achieved a return of 4200 per cent in 10 years, retired at 37 years of age, has worked as a guest professor of finance at Columbia University, and in 1998 founded the Rogers International Commodities Index (RICI).
He is the author of A Bull in China, Hot Commodities, Adventure Capitalist, Investment Biker and A Gift to My Children – a father’s lessons for life and investing.
I have a lot of time for Jim’s insights and while it’s sensible to always question a thesis, and Jim hasn’t always been right – nobody ever is – it is worth listening to what he has to say.
In the middle of the Dow’s recent four per cent plunge, Jim appeared on CNBC Awaaz, a Hindi business news TV channel in India. In the interview he discusses his views on interest rates and the stock market, and perhaps most encouragingly for investors in global funds, his bullish view on the US dollar.
You can watch the interview here.
Here’s an excerpt.
“You will see higher interest rates over the next few years. In fact, interest rates will go much, much higher… We have certainly seen a top for the bond market. There is no question about that. Bonds will be going lower for many years to come. We will see probably a rally in stocks after the Federal Reserve raises interest rates in March. Depending on how that rally is, then I would suspect that later this year you should be out of stocks completely in most parts of the world.”
“Oil is in the process of making a complicated bottom. We will look back someday and say in 2015, 16, 17, 18 oil traced out a bottom. We haven’t seen the high yet or low. It’s a complicated pattern…eventually we are going to see higher prices of oil maybe in 2019, 2020.”
“It’s been nine years since we had a bear market and that’s historically been unusual… You usually have bear markets every four to seven or eight years. We don’t have to but we always have. So I would imagine a bear market will come sometime within the next year or two, will start sometime in the next year or two and it’s going to be the worst in our lifetime. 2008 was bad because of too much debt. Well the debt is much, much higher everywhere in the world right now.”
“I would buy dollars…when there is turmoil people look for a safe haven, they think the US dollar is a safe haven. It’s not. America is the largest debtor nation in the history of the world but people think it is a safe haven, so I would buy dollars…”
Jim Rogers predicted that the next bear market will be the worst in our lifetime, fueled by a world that is laden with debt, and that it will occur within the next two years. Click To Tweet
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
andrew ronan
:
I wish I had a dollar for every time someone said you can’t time the market, well obviously you can’t pick the day or the month when things turn, but you can observe that things are crazy, and expensive, and if you only avoided the market when the cape shiller reached over 30 you would do well, and I guess the likes of Buffet sitting at record cash levels, and Jims comments about holding dollars and gold at the moment are observing things are a bit crazy ATM, then is that timing the market? I’d say kind of, and we would do well so take notice of what that are doing, as they have the runs on the board to back up their words, most don’t.
Chris
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Jim Rogers has been saying the same tired old stuff for years:
2011: 100% Chance of Crisis, Worse Than 2008: Jim Rogers
2012: Jim Rogers: It’s Going To Get Really “Bad After The Next Election”
2013: Jim Rogers Warns: “You Better Run for the Hills!”
2014: JIM ROGERS – Sell Everything & Run For Your Lives
2015: Jim Rogers: “We’re Overdue” for a Stock Market Crash
2016: $68 TRILLION “BIBLICAL CRASH” Dead Ahead? Jim Rogers Issues a DIRE WARNING
2017: THE BOTTOM LINE: Legendary investor Jim Rogers expects the worst crash in our lifetime
Source https://www.fool.com.au/2017/06/14/why-you-should-totally-ignore-jim-rogers-worst-crash-in-our-lifetime-call/
http://awealthofcommonsense.com/2017/06/bulls-bears-charlatans/ and https://au.finance.yahoo.com/news/extreme-market-predictions-like-jim-rogers-provide-no-value-144747654.html
garry peck
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In the last financial crisis most stocks halved in value,a year or two later they were back to the same level,many people sold out and lost, but if you were strong willed enough to hold on and prudent enough to have a fair amount of cash reserves in your portfolio as to buy when most were selling you would see Jim Rodgers scenario as an opportunity, and not something to fear but expect.
Roger Montgomery
:
You’re right Garry,
Firstly we of course cannot offer any recommendation. You MUST seek and take personal professional advice if you are thinking of transacting in any way.
We can provide some thoughts for educational purposes of course.
First, we have no idea whether the market will correct or not. Jim Rogers has made predictions so often that he’s been wrong too. Unlike our fully-invested peers however, we are in the very unique position of being able to hold large amounts of cash. The Montgomery Private Fund is currently holding 27.5% in cash and The Montgomery Fund is holding 23.5% cash.
In the very long run, we believe investors will always be better off being invested in a portfolio of high quality businesses, than they would be buying and selling markets, and trying to pick the tops and bottoms.
Since the bottom of 2009 the US market has gone up with nary any volatility. By way of example, the Russell 2000 – a US small cap index – has compounded at circa 15% per year. Benefitting from, and subsidized by, the zero-interest rate environment, even inferior companies have risen dramatically rather than being pushed out of business. In such a low risk environment its no surprise that funds have poured into index trackers. But as rates normalize – we have already seen US ten-year bond rates more than double from 1.36% in mid 2016 to 2.92% more recently – active managers come to the fore.
You see, at their core, active fund managers, especially true value investors, are managing risk. Risk managers are always thinking about risk, hence our prioritising of capital preservation at Montgomery through the preference for quality companies, value prices or cash.
In a risk-free environment, such as that which has been experienced since about 2011, any risk management has hurt performance. Our own analysis shows that the invested portion of the portfolio has outperformed the market since inception, suggesting that cash has been a significant drag.
When interest rates normalize however, risk management becomes not only prudent but necessary and risk-aware value investors should do well.
Unlike our fully-invested peers, Montgomery has a flexible mandate with respect to its cash holdings. This should provide some protection in a falling market, but more importantly provide cash to take advantage of any overreaction. Other, fully invested funds will be required to sell something before they can buy something else. In theory, provided the right companies are selected (and the performance of the invested portfolios since inception suggests we do a good job of this) one would expect to be able to recover any setbacks more quickly by being able to deploy ready cash into new opportunities.
If – and its a big IF – a correction does ensue, some investors will be looking forward to the opportunity; 1) for us to add to the portfolio, and 2) for them to perhaps add to their investments.
As Buffet just reassured investors, in his latest letter, when major declines occur, they offer great buying opportunities to those not carrying too much debt. He quotes from Kipling’s If:
“If you can keep your head when all about you are losing theirs …
If you can wait and not be tired by waiting …
If you can think – and not make thoughts your aim …
If you can trust yourself when all men doubt you …
Yours is the Earth and everything that’s in it.”
In other words, provided an investor isn’t leveraged and their time horizon is long enough, very little, if any, strategic change is usually justified.
John
:
Yep, it seems to me like planning for a drought. It will eventually come so its probably worth building the dams. If scientists keep getting predicting its this year but keep getting it wrong one should recognise that even though there is something wrong with their model , droughts will still come.
Roger Montgomery
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Only time will tell if a bull or bear market awaits investors in 2018. There’s plenty of ammunition for both scenarios. I think it will pay investors to look closely at the boundaries marked by the bull and bear cases, and treat them like the flags between which they must swim. In this article, I provide an analysis for both the bull and bear case.
The bull case
Let’s look first at the bull case.
To begin with, the economic backdrop is supportive. The global economy is described as displaying “strong”, “synchronised” growth, and ‘Goldilocks’ is the adjective attached to the economy. The US is growing at an annualised 3-4 per cent, China is growing at over 6.7 per cent, and the EU is set to beat expectations with robust growth of 2.3 per cent this year.
In keeping with this growth theme, many point to high and double-digit rates of earnings growth for US corporates. Many argue that valuations are not stretched with the PE ratio for the S&P500 at an “undemanding” 21 times.
Furthermore, with wage growth virtually non-existent for many years, commentators are suggesting inflation is dead. Some even go so far as to suggest that advances in technology have simply made inflation “obsolete”. As more jobs are replaced by technology that never sleeps, takes holidays or requests superannuation, salary costs fall and wages decline, thus increasing the profits for companies.
The combination of economic growth, rising profits and modest, if barely existent, inflation is of course a perfect picture for equities, hence the ‘Goldilocks’ monicker.
Most surprisingly perhaps is the view that stocks remain cheap in aggregate, especially when compared to bonds. In the United States, for example, US 10-year Treasury Bonds can be purchased on a yield of 2.40 per cent. This is equivalent to paying 42 times earnings with no growth in those earnings. Clearly, if an investor can purchase a stock on a Price-to-Earnings ratio of less than 42 times, with the benefit of earnings growth, stocks are ‘relatively’ more attractive than bonds.
Indeed, that equation, along with low inflation – suggesting rates aren’t going to rise anytime soon – is the force driving more than a little of the enthusiasm for stocks today.
Another source of optimism is what investors refer to as the “Central bank ‘put’”. Record-low volatility suggests that there is confidence, on the part of market participants, that any setback in financial markets will be met by central bank buying of assets until stability returns. The idea that the Fed ‘has your back’ has many adherents in today’s market.
Bulls also argue that government-backed programs that encourage wealth creation, and a self-supported retirement – such as superannuation in Australia – eventually find their way into financial markets. Population growth and increases in life expectancy are also proffered as reasons to expect demand for goods and services to expand, fuelling profit growth decades hence.
With so many bullish arguments, and of course many global indices surging, the optimists make an excellent case. The issue facing investors however is that these arguments represent just one of the flags between which they should swim.
The bear case
At the other end of the beach are the negative arguments, and no fair examination of the prospects and risks for 2018 would be complete without a hearing given to the bears.
Let’s begin with the bullish enthusiasm. By itself this is not a worry for investors; indeed it can be an essential ingredient to monetising an investment strategy. Enthusiasm becomes a concern only when it morphs into unbridled exuberance, when the fundamentals of the asset are thrown out in favour of the prospect of an early gain.
There are signs of exuberance. When the CEO of American Airlines, Doug Parker, announced on an earnings call with analysts, “I don’t think we’re ever going to lose money again”, I wondered whether bullish enthusiasm had crossed over to irrational exuberance. When WeWork’s CEO Adam Neumann told Forbes.com in October, “No one is investing in a co-working company worth $20 billion. That doesn’t exist…Our valuation and size today are much more based on our energy and spirituality than it is on a multiple of revenue”, I couldn’t help but think, ‘here we go again’.
With commentators calling “Loss the New black”, citing the market capitalisations of Uber, Snapchat, Wework and Amazon as evidence of a “new world order”, and articles with titles such as ‘Buy Everything’, ‘RIP Bears’ and ‘Congratulations Capitalism’ increasingly common, it is worth asking whether sound reasoning has been usurped by unbridled optimism.
Investors have surprisingly short memories and there is no doubt that the fear of missing out – as reflected in the pursuit of companies with zero profit such as Tesla – is replacing the fear of loss. When that happens it is worth being cautious.
Recently, in American Consequences, Dan Ferris wrote, “Investors have pushed reality aside and fallen in love with companies that have a great story and a soaring share price… regardless of profitability. What they don’t realize is that equity only has value if a company earns a profit. That means there’s a much higher probability than investors currently acknowledge that unprofitable highfliers might be worth… zero.”
In the last twelve months some of the best performing stocks have been those representing companies that have generated more than a billion dollars of losses. That’s right – not profits, but losses. Meanwhile, forty-five companies listed on the Nasdaq 100 are now trading on P/E ratios of more than 200 times. The combined market capitalisation of Tesla, Uber and Twitter is circa US$130 billion and their combined profit is…zero.
Many have pointed to the extreme level of the CAPE Shiller Ratio (CAPE), a ratio created by Nobel Laureate Prof. Robert J. Shiller which compares the S&P500 index price, adjusted for inflation, to the ten year average earnings. This month, the CAPE ratio hit 32.24. That is a high ratio. Indeed, between the year 1881 and today, the average CAPE ratio has stood at just 16.8. Moreover, it has exceeded 30 only twice before: in 1929 and in 1997-2002. Higher CAPE ratios imply low future returns and the model has done a very good job of predicting future returns.
There is little doubt that the US stock market is characterised by a combination of very high market valuations, but it is also characterised by strong earnings growth, and very low volatility.
History however suggests that the combination of high CAPE, high earnings growth and low volatility existed before most significant corrections.
Indeed, Shiller recently identified there have been 13 bear markets in the US since 1871. A bear market is defined as a 20 per cent correction from a high within a 12-month period. The ‘peak months’ before the bear markets occurred in 1892, 1895, 1902, 1906, 1916, 1929, 1934, 1937, 1946, 1961, 1987, 2000, and 2007. There were a couple of notorious stock-market collapses – in 1968-70 and in 1973-74 – but Shiller did not include them in his recent study because they were more protracted and gradual.
His first observation is that the average CAPE ratio was higher than average, at 22.1 in the peak months, suggesting that the CAPE does tend to rise before a bear market. For investors today, with the CAPE ratio well above average, it is valuable to note that prior to 10 of the bear markets since 1871 were preceded by an above average CAPE ratio.
Peak months before past bear markets also tended to show high real earnings growth: 13.3 per cent per year, on average, for all 13 episodes. And “the market peak just before the biggest ever stock-market drop, in 1929-32, 12-month real earnings growth 18.3 per cent.”
Those who point to near record-low levels of volatility as protection against a bear market, should heed Shiller’s observation that “stock-price volatility was lower than average in the year leading up to the peak month preceding the 13 previous US bear markets”. He adds, at “the peak month for the stock market before the 1929 crash, volatility was only 2.8 per cent.”
The supply side argument put forward about technological innovation rendering companies more profitable fails to acknowledge the demand side of the equation: that fewer jobs and lower wages mean less customers for the products companies sell. Henry Ford broke with tradition at the turn of the last century and gave all his employees a pay rise because he realised they were the customers for his T-model car. Generational unemployment and “capping inflation for our lifetimes”, whether due to economic mismanagement or technological innovation, could produce deflation, which of course is an outcome that is as bearish for equities as rampant inflation.
Before getting too excited about the current Goldilocks economic conditions, it may pay to know that there is absolutely no correlation, in any geography, between economic growth and stock market returns. Perhaps surprisingly if the economy is expanding at above average rates, there’s a 50 per cent chance the stock market will do better than average and a 50 per cent chance that it will do worse.
With respect to the Central Bank ‘Put’, it is true that in recent history central banks have intervened following any signs of instability in markets, through measures such as Quantitative Easing. And while it is likely that central banks will be slow and measured, they can’t control ‘animal instincts’, which combined with record levels of margin debt against the S&P500 will force many investors to sell even more shares as prices decline.
So, who is right?
There are of course many other arguments put forward to suggest you should be fully invested. We agree that in the long run, being fully invested is preferred. But it is also true that the higher the price you pay the lower your return, and holding long term just means locking in a low return on a long-duration asset. Prices today are factoring in all of the bullish arguments with little room for setbacks, hiccups or speed bumps.
Those who are patient will be well rewarded for investing when there is blood in the streets. Remember, be fearful when others are greedy and greedy when others are fearful, no matter whether you are bullish or bearish in 2018.
The Montgomery Global Funds own shares in Amazon
John
:
Your comment…
“Those who point to near record-low levels of volatility as protection against a bear market, should heed Shiller’s observation that “stock-price volatility was lower than average in the year leading up to the peak month preceding the 13 previous US bear markets”. He adds, at “the peak month for the stock market before the 1929 crash, volatility was only 2.8 per cent.”
Interesting article on this issue by Jesse Colombo that demonstrates that market indicators often indicate the opposite of what is actually happening…
Why Today’s Low Financial Stress Should Stress You Out
http://realinvestmentadvice.com/why-todays-low-financial-stress-should-stress-you-out/
John
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Interest rates will be increased until they trigger a small crash (not far off given that households are now so vulnerable to small movements) – then in response interest rates will be quickly lowered. This will rapidly inflate various bubbles and cause a more aggressive interest rate rise later on down the track. Then a more substantial crisis and resulting crash will occur. Unfotunely history tells us this is the general cycle and that though such cycles can be addressed rationally they will be only dealt with via the current policy fads and when that does not work crisis measures.
Paul
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This amount of debt world wide is worrying, eventually interest rates must go up. Where will that leave us? Governments won’t just sit by and watch the whole thing just tumble over either. It seems to be just a delicate balancing act.
There has got to be difficult times ahead because this debt has to be paid off (in increasing amounts due to rate rises) which will result in subdued consumption and the flow on affects from this.
Andre
:
Roger,
My basic understanding is that debt (in all forms) has been increasing across the globe (as both a % of various metrics and as a whole). This increase has not been linear and my understanding is that the levels of indebtedness has increased in pace since the GFC.
As a global economy we have reached various levels of indebtedness, had a bear market and continued on our merry way of racking up more debt. Is it possible that Mr. Rogers is right about the debt being an issue but we as a society simply cannot live without the standards of living that this debt provides and governments will delay any discomfort to the voters as long as it gets them another term in office?
Luke Joseph
:
Jim Rogers has been calling for a crash for so long that too me he has lost all credibility and I don’t listen to him any more. Being 5-7 years early is just the same as being wrong. In my opinion he is allowing his political and economic views to cloud his investing judgement.
Carlos
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Like a broken clock, these guys eventually are right.
They’ve been calling for a crash for the past 5 years.
jimbo james
:
I’m already out Roger. As you’d say, better to be two years early than two minutes late!
brian lovelock
:
I went to a Jim Rogers seminar in Melbourne some 10 to 15 years ago. He predicted that Africa would see very strong growth in the foreseeable future. I am in Africa and been twice before and I don’t see much progress . Perhaps there is progress in that there are more stable regimes but I don’t see much progress in the economic well being of the people. I know that not everybody is right all the time . I think financial busts happen when nobody expects them ,not when experts are predicting them.