Just because doomsayers warn of Armageddon doesn’t mean they’re right

Markets are doomed. Again. Warnings of looming Armageddon have become routine over the last decade, so it wasn’t surprising to hear another apocalyptic forecast at the recent World Economic Forum at Davos.

“Guggenheim says market a ‘ponzi scheme’ that must collapse,” headlined Bloomberg, following comments from Scott Minerd, the global chief investment officer of Guggenheim Partners. Loose monetary policy had inflated asset prices but investors would eventually “awake” to the rising tide of corporate bond defaults and downgrades, said Minerd. A “tipping point” will be reached and investors should expect a “severe” equity bear market with losses of 40 to 50 per cent. Guggenheim has more than $275 billion in assets under management and Minerd, a member of the New York Federal Reserve’s investor advisory committee on financial markets, is widely regarded as a thoughtful, experienced money manager. In other words, he is not regarded as a perma-bear given to wild scaremongering.

Nevertheless, we’ve been here before. “Markets are on ‘collision course for disaster’, says Guggenheim’s Minerd”, headlined MarketWatch in March 2018. “Guggenheim investment chief sees a recession and a 40 per cent plunge in stocks ahead”, reported CNBC a month later. Near the bottom of last May’s minor market pullback, Minerd warned of a “much more severe downturn before the end of the summer”, with stocks likely going “somewhere below the lows” at the end of 2019.

Investors who followed this advice lost out – the S&P 500 quickly recouped its losses and ended 2019 with gains of 29 per cent, its second-best year since 1997.

Apocalyptic commentary

Minerd is obviously entitled to share his concerns and healthy markets have always been made up of a mix of bullish and bearish voices. Nevertheless, the sheer volume of apocalyptic commentary today is different, noted a November report by JP Morgan strategist Michael Cembalest.

“Something peculiar happened after the global financial crisis: the rise of the Armageddonists,” said Cembalest, referring to the variety of money managers and forecasters “whose apocalyptic comments spread like wildfire”.

Armageddonist commentary differs from money managers adopting a “defensive posture”, said Cembalest, in that the latter are conservatively dialling down their risk profile while the former are effectively calls for “wholesale reductions in portfolio risk” due to expectations of “recession, bear markets, financial crises and general mayhem”.

The report contains a table containing Armageddonist commentary dating back to 2010 from 17 different observers. The tone tends to be certain: in 2011, high-profile bear and Gluskin Sheff strategist David Rosenberg said he was 99 per cent sure of a recession by the end of the following year; the odds of a near-term global recession were “100 per cent”, said Marc “Dr Doom” Faber in 2012; “I am 100 per cent confident the crisis that we’re going to have will be much worse than the one we had in 2008,” said money manager Peter Schiff in 2013. Some of the names on the list are widely perceived as investment cranks, although others are major figures. They include Jeffrey Gundlach, the billionaire bond manager who said in 2011 that it “seems suicidal” to buy stocks and who advised investors to “sell everything” in 2016. Legendary investor George Soros, who warned in 2016 that markets were facing a “serious challenge that reminds me of the crisis we had in 2008” is also there, as is billionaire investor Carl Icahn, who warned in 2015 of a “very massive bubble” and a “bloodbath”.

The table of 17 names was “not an exhaustive list”, said Cembalest, and it’s easy to think of other major figures who could have been included. Billionaire investors like Bill Gross, Stanley Druckenmiller and Paul Singer have all issued dire warnings at various stages over the last number of years...

- Source, The Irish Times