Aftershock wisdom is clearly different from conventional wisdom on stocks. If you look at the longer term historical perspective, the stock market grew 300 percent from 1928 through 1980. ; yet between 1980 and 2006 the stock market bubble grew over 1,000 percent. [The Aftershock Investor by David Weidemer, Robert Weidmer, and Cindy Spitzer; These authors accurately predicted the 2008 financial crisis in their previous book: America’s Bubble economy]. Basically right now this stock market growth is a bubble. Present economic growth was stronger in the past not weaker. Right now we are experiencing an economy that grows in a virtuous upward spiral of multiple rising bubbles (real estate bubble, stocks, private debt, dollar, and government debt) that interact to drive each other up and that will inevitably fall in a vicious downward spiral as each falling bubble puts downward pressure on the rest, eventually pulling the whole economy down.
Stocks will fall in three stages
The Recent Past and Now
During the global financial crisis of late 2008 stock markets around the world fell 40 percent and more. Since then massive money printing by the Fed. and massive borrowing by the U.s. government have been helping to boost and support the stock market.
The Short -Term Future
Stocks will not likely fall dramatically in the immediate future, although investors are getting more skittish and the Dow could easily drop 100 to 200 points or more in a day, depending on the news. As long as the Fed is able to continue massive money printing without significant inflation as long as the government is able to continue its massive borrowing, the U.S. will continue to be viewed as a relative safe haven. Remember, these present investors are in love with stocks and it will take them time to give that up.
Medium-Term future
Over time, as inflation and interest rates rise, the bloom of love will begin to wilt. Certainly, rising inflation and rising interest rates will not be good for companies or their stocks. That’s because massive stimulus is not the same as massive growth. And increasingly the stimulus will have less impact over time.
Before the Aftershock, the Federal government can, and will, ease the pain of this for as long as it can with more money printing. Right now, the Fed can put money into the system with very few short term consequences. But once inflation gets going (5 to 10 percent) the lag time behind any new money printing will get shorter and shorter, and investors will become increasingly concerned. Once enough investors, particularly foreign investors who now own so much dollar denominated assets begin to exit. The bubble will suddenly burst as more and more investors begin to flee.
What is a Savvy Aftershock Investor To Do?
Clearly being 100 percent out of all stocks before the Aftershock hits. Conventional stock wisdom will no longer protect you. So the wise thing for every investor to face is that this is a bubble and it is going to pop. In a rising bubble economy successful investing means picking stocks that are going up or are about to. If you are going to own any stocks between now and the Aftershock, then your investment portfolio requires active management.
Current Recommendations
At present, high-dividend stocks, such as electric utilities, as a temporary safe haven because they are defensive and pay good dividends, but when the stock market falls a lot they will fall too.
A good way to move out of stocks is to move out a little bit at a time, selling more and more each month and moving into gold and other investments as we approach the Aftershock in the next couple of years. This way you can benefit from temporary rises in the stock market without exposing yourself to too much risk. it is also a good strategy to stay diversified while the Aftershock is less imminent, allowing you to protect yourself more only as you become more convinced of the crash ahead. In the meantime, stocks in safer sections like health care and electric utilities will be a safer bet than stocks in volatile financial or technological sectors.
The bottom line for stocks is that in the long run, they will all drop sharply in the Aftershock. In the shorter term, if you want to be in the market, you must limit your risks with active portfolio management.
Summary: Right now, most people think that the economy will get better soon. Most people do not get the right facts because most financial analysis today is based on preconceived ideas about a hoped for positive outcome. Also Robert B. Reich confirms the precarious economic trouble ahead for America, “Yet none should a climb out of the hole we fell into 2008 with a healthy growth over the long term. Other holes lie ahead. “
Source: Aftershock, Protect Yourself and Profit in the Next Global Financial Meltdown