Dangerous Conditioning

For twelve years straight, every drop in stock prices has been an opportunity to buy, so it shouldn't come as a surprise that the current pullback has been met with record stock market inflows. Retail investors are piling up on stocks in the anticipation of new highs a few months to a year from now. The sellers are institutions reacting more or less mechanically to higher interest rates. Very few are voicing any real concern. The expectation is that the current drop will pass as have all the other ones over the last decade. Central bankers always come to the rescue. The investing public have been conditioned to buy and hold, and never sell. However, this is a dangerous strategy. If everybody is piling into stocks at the same time, they will eventually sell at more or less the same time as well.

Stocks are too expensive relative to earnings for most people to buy and hold for ever. A typical portfolio doesn't have the earnings required to pay the investor's cost of living. Hence, at some point in the future, investors will sell stocks in order to pay bills and other expenses. The same is true for pension funds. They too are underfunded in terms of earnings. They too will sell in order to cover their commitments. A prolonged bear market is guaranteed, and there's nothing central banks can do to prevent this from happening.

Central banks can only issue credit and print money. They cannot increase productivity. They cannot fix the problems associated with low earnings, which is the only thing that matters in the long run. Without increased productivity, there will be forced selling, and an increase in money supply will not help because such increases end up affecting all prices. The sellers of stocks may get a higher nominal price, but the price of everyday products and services will go up too. Relative to their cost of living, savers in stocks may find themselves worse off, even if the stock market goes up in nominal terms. Measured relative to the cost of living, stocks will be in a bear market even if they continue to go up in nominal terms.

Making matters worse, many savers are now so conditioned to seeing stock prices go up that they will reflexively buy stocks at every dip. However, once the overall trend reverses from up to down, relative to the cost of living, this strategy will only serve to impoverish the investor. Those piling into stocks on the expectation of a new high in the near future may find themselves having to wait for decades, and only the privileged super-rich, with easy access to cheap credit will be able to hold for that long. Everybody else will have to sell, and that selling will happen at a loss, if not in nominal terms then for sure in terms of purchasing power.

The only prudent thing to do is to start cutting down on expenses, and to save in things that are likely to retain their purchasing power. That would be commodity related things. Only when the price of stocks come down to a reasonable level relative to the price of life necessities will stocks again be something worth holding into our retirement years. Until then, gold and silver is likely to do better than stocks, as explained in my book on the subject.

Dawn

Dawn - By Jessie Eastland - Own work, CC BY-SA 4.0, Link