Breakout

The boys who cried wolf: Crash prophets on the rise

Jeff Macke
Breakout

The S&P 500 (^GSPC) rose to within one-half of one percent of a record high this morning after the Bureau of Labor Statistics said 288,000 jobs were added to the U.S. economy during April. The brush with record territory comes two days after the Dow Jones Industrial Average (^DJIA) closed at an all-time high on Wednesday afternoon.

None of which does anything to change the views of the collection of Cassandras calling for a stock market crash. This group, including esteemed figures like Jeremy Grantham and Marc Faber have been emerging from their bomb shelters with relative frequency over the last month to reiterate their bearish views and insist they weren’t wrong with earlier calls, just early.

It’s tempting to dismiss the Doomsday Cabal as buffoons but it’s not that easy. “We would be foolish to say ‘that’s just dumb’ or ‘they’re just saying that to make money’ because bad things happen, things do fall apart,” says Zachary Karabell of Envestnet. “You just have to think about what’s the probability at any given moment with the full level of humulity that most crisis are only apparent in hindsight.”

Whether they’re truly expecting a catastrophe or simply talking their book (or $300 per year newsletter) shouting “crash” into open mics is a habit that costs real people money. As Karabell notes both in this interview and his piece for Slate earlier this week the climate of fear lingering after the 2008 meltdown kept not just individuals but entire corporations on the sideline. On a macro level the refusal by corporate America to put money to work is a self-fulfilling drag on economic growth.

Risk Aversion

Only now, five years into a pathetic recovery are companies moving away from cash hoarding. Unfortunately they’re switching not to capital spending but dividends and buybacks. The amount of cash spent on buybacks rose 23% last year to more than $477 billion. Dividends were jacked up by 14% to $1.32 trillion. CapEx spending is expected to rise about 2% this year to about $855 billion.

Unrolling a massive capital spending project takes long time frames and great confidence. A buyback program can be stopped on a dime if the the economy gets ugly.

Managers don’t spend money because no one else is either. Shareholders in turn favor buybacks and dividends over spending because investing in large projects is risky but dividends can be spent. From customers to suppliers, investors to the corner offices, no one puts money to work and collectively wonders why the recovery is so weak.

CapEx begins at home

It’s beyond a reach to blame the slow recovery on pundits who’ve been predicting another crash for the last five years. It’s not even fair to blame these howler monkeys for keeping you personally out of stocks. Investing is for grown-ups and everyone is in charge of their own money.

What is fair is to recognize that being a perma-bear is as much a matter of selling books and newsletters as it is the outcome of a forecasting discipline. There’s a daisy chain of confirmation biases that make it all but impossible to understand what truly rational decisionmaking looks like. The 2008 crisis was a deeply painful event for many people. Just like we all have grandparents or great grandparents who never trusted a bank again after the Depression, there are people for whom the lesson of the meltdown was “never invest again because a crash is around the corner.”

For consumers of financial media the lesson isn’t to dismiss the perma-bears as crackpots, but simply understanding that the “crash” pundit’s motivations as a talking head may not be aligned with your best interests as an investor.

For more or the relationship between the financial media and your wallet check out my new book: Clash of the Pundits! Available in Kindle form now and coming soon in hardcover.

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