The Programmed Crash

Pfäffikon SZ, Switzerland – The average investor’s mood has been put to the test over the course of the last several weeks. Everyone is noting that volatility has increased and that the stock markets – as well as commodities – are declining in value. The profits seen in 2014 have been wiped out for many investors. One voice blames the escalating Ebola virus, another cites the global weakening growth. A crash would supposedly be in the making. Investors are confronted with hard facts. Last year there was a fear of tapering, but only this month has the end of tapering become reality. The market has to carry its own weight without help from the Fed, and it needs to acclimatize to those conditions. It seems the penny has finally dropped for investors.

Doomsday thinking
The last few days doomsday thinkers have been sprouting up everywhere. They seize their opportunity and underline their thesis: we’re at the eve of a programmed crash. This is the moment to sell books and seminars. The Dutch stock guru, the late Rienk Kamer, was a master of these types of situations. The bear-market would supposedly have made its entrance and a lot more misery lies around the corner. I don’t think it will get to that point, yet. Therefore this week I am at the buying side of the market. For a new bear market, in my opinion, more misery is needed than the possible prospect of a mild recession. The total negative volume in the S&P 500 is a mere 39.4 percent when compared to the total negative volume at the onset of the last bear market in 2008. The force of the current decline, therefore, is not even half of what it was in the years 2008 and 2009. I like to look at the facts and I have to conclude that investors are being frightened more than is necessary.

Danger of deflation
The doomsday thinkers do have a point that the danger of deflation in Europe should not be underestimated. The danger of deflation is also a point of attention for the overconfident Dutch home owner. In the past I’ve mentioned that Europe needs to reform rapidly in order to avoid starting to look like an open air museum. The current decline in the financial markets is a convenient pressure tool aimed at politicians to help get things done. A positive note is that the largest economy in the world – that of the US – is slowly but surely picking up steam. The relatively expensive dollar is a point of attention, but no more than that. I suspect that one of the reasons the dollar has become stronger is the flight of capital from the unpredictable Middle-East to the US. China is still showing growth, although there is less reason to celebrate than before. China continues to become more of an economy in and of itself, something that offers investors enormous opportunities.

Russia
Anyone who has been following yours truly for a longer period of time, knows that I have been investing in the CIS region for many years. But Russia is under heavy fire this year and the Russian stock market dropped further than most other indexes, in part fueled by the problems surrounding Ukraine. Not unlike with others, this has left its – temporary – marks with us. I often get the question if now I will be saying goodbye to the region. Nothing is further from the truth, as the long term prospects for the region have only become more attractive. Russia, in the meantime, is growing like crazy. Here, again, I see the recent beating as a unique buying opportunity for the long term, and I act accordingly. The one-sided tendentious Western reporting on fund managers and media on Russia, I take for granted. The Foreign Ministers of Russia and the US – Lavrov and Kerry – met each other this week in Paris; the secret services of both the US and Russia will be working closely together in their fight against ISIS, of which we take note.

Disappointing
In the mean time 2014 looks to be turning into a disappointing year for investors in which they need to get used to seeing single digit growth figures, or even a minus, on the funds. The key question this week is if you are bearish because the markets are declining or because there is something fundamentally wrong? You have my answer, perhaps there is some homework that needs to be done to get to a well-founded opinion.

It remains for me to wish you a good weekend.


Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above shares and has no intention of doing so in the next 72 hours.