Doc Eifrig: Hello, everybody, and welcome to this episode of my team's update. With me today is Jeff Havenstein, one of our analysts. We just wanted to kind of give people a quick update. This is going out to Retirement Trader folks and Alliance members and anyone else on here. We just kind of want to give you some ideas of what we're thinking about in the markets.
One of the first slides here is from a book I gave to my analysts on my team about a year and a half ago now called Factfulness by Hans Rosling. He's since passed away. But let me just read this. "When we are afraid, we do not see clearly. Critical thinking is always difficult, but it's almost possible when we are scared. There's no room for facts when our minds are occupied by fear."
Folks who have seen me speak before, I've talked about this – the amygdala and the science of fear.
And this is an area that sends signals throughout the brain. It's in the central part of your brain. And it starts to fire when you are bucking the consensus, when you're going against the crowd. It tries to give you chemicals and signals to say, "Hey, you need to be back in the group... you need to get back in the herd." Pain causes this thing to fire. Physical and emotional problems cause this thing to fire. You want to be aware of the amygdala when this is happening. It is a challenge and is a problem.
The other thing that we want to look at today – Jeff, you put this slide in – is about the extreme bearishness that's going on. And what do you know about the bearishness? How does this affect us?
Jeff Havenstein: Yeah. So this is a survey of individual investors, and they can either answer that they're bullish, neutral, or bearish. And as you can see from the chart here, there's more investors bearish than pretty much ever before. And the key, no doubt, here is the 50% line. So when investors are this bearish, when they're this fearful of stocks, the market tends to return about 14% over the next 12 months. So I think that's a reason for a lot of optimism.
Doc Eifrig: Yeah. Our next slide shows what we talk about in options, the VIX signal, sometimes called the fear index... volatility.
And it's an extraction of when people are playing a lot for options – puts, especially, but puts and calls. That level is sort of a predictive – it's really called implied volatility because it's implying how volatile the future is going to be. So when we see it really high, we get nervous. And you can see a couple of these peaks back in late '15 and then in 2020, how high this thing can really get. So the point here is when it hits 35 or more, the S&P has gained an average of 26% over the next 12 months. So that's also kind a bullish signal.
Jeff Havenstein: Yeah.
Doc Eifrig: Look, let's review this, what's called late-stage bull market signals, as a way of thinking about are we in the late stage of a bull market.
We were talking earlier today... are we in a bear market or where are we? But these are the four things you want to look for: confidence is increasing in late bull markets, risks are ignored, the return expectation increases, and – you've seen this in a lot of different things and that has started to come off here in the last month or so – the last high becomes the place to sell. So when you start to climb back up to those places, if we see selling again – which I think we've seen a little bit of this – that's the sign that we're in the late stage of a bull market because people are like... [sighs]
They get scared, the amygdala starts pumping, and now they're back up like, "All right, I'm just going to get out." The husband or the wife says, "Just get out. We'll wait until we get up to that level we were before." And boom, you see that. So these are things to watch for.
The other thing I want to say, the amygdala starts firing and people have to wonder if you're a scientist and you might know your reptiles, but I don't know... do you know which one of these is the one that's deadly and the one that's friendly? You don't.
Jeff Havenstein: I don't, no.
Doc Eifrig: So our brain is hard-wired – like there's nothing we can do about this. We see both of those snakes and you're running. Animals see those snakes, they're running. But one of these is perfectly safe and fine. You and I could handle it. The other one? Deadly toxin.
So we look for patterns. You and I are looking for patterns. We're trying to find patterns. We just kind of want to share with you our thoughts we're thinking about this today. The other thing I like to share is correlations. So when we talk about things that might be correlated, the one shot of investors who are bearish, that has been correlated with an increase in stock prices 12 months later.
I show you this slide of divorce rates in Maine and per-capita consumption of margarine... almost perfectly correlated, clearly has nothing to do with anything that we're thinking about. Also Jeff, I know you know this research that comes from handicapping horses. With the Derby just last weekend, this reminds me having a whole bunch more pieces of information, and that's along the bottom – five, 10, 20, or 40 pieces of information. The more information people get, the more confident they are about what is right and what's going to happen.
But then this shows you that accuracy actually goes down once you get up above 12 or 13 pieces of information. So today, we're going to give them no more than 12 or 13. We've already given them a couple. We've talked about the amygdala, we've talked about what happens when bearishness is in there. How about next? What happens here? Talk about corrections for a minute.
Jeff Havenstein: Yeah. I think it's a really scary time in the market for sure. I know our inbox has been blowing up lately. Subscribers are asking whether they should sell, whether it's a buying opportunity, and I think one thing to really keep in mind is that market corrections happen, Doc. I mean, this chart here shows you they happen once a year on average. They're nothing to, you know, "sell everything, go to cash" about.
And I think the market's down about 16%, so it falls in that standard correction range. We'll have to see if it turns into anything else, but I think it's important to understand that this does happen, even in healthy bull markets.
Doc Eifrig: Yeah, which this next slide shows us, that even in bull markets you get these corrections. We show here the number of days, the percentage losses in the midst of longer, major-term bull markets. This visual shows that as well. Do you have comments and thoughts on that? What would you want readers to take from this?
Jeff Havenstein: Yeah. I would say any time the market drops 16% like it showed in that chart there, it feels like the world is ending. It feels really scary. But when you look at it over the long term, like this chart here, they're just bumps in the road. So as long as you do have a healthy market, these corrections are nothing to freak out about. They should be taken as normal market behavior.
Doc Eifrig: Yeah. That's great. One of the things that we are worried about a little bit is this probability of recession, the idea that recessions come, and what happens in recession... how do we get out of it? Do we do monetary stimulus again like we've done for COVID? Like we did for collapse in the housing market in '08 and '09? This is starting to tick up.
Where are you on this? Do you think this is right that we have a 25% probability of recession, or do you think it's higher than that? And again, notice that in March, this thing shot up and stayed at 100%. And it was probably the fastest bottom in any bull market. So again, we're showing you this.
Is this a dangerous snake or is it a friendly snake? What's your take on probability of recession? I don't think you and I have actually spoken about it, so I'd love to hear your take, yeah.
Jeff Havenstein: Yeah. I think obviously it's a scary jump up, but at the end of the day, there is only a 25% probability over the next 12 months. And I don't know about you, Doc, but everywhere I go, lines are full. I just flew the other day. The airplane was completely packed.
Doc Eifrig: Yeah.
Jeff Havenstein: So in my mind, I'm not seeing that many signs of recession. I think we're still a little ways out. But I'd love to hear what you take on it.
Doc Eifrig: I'm the same way. I'm seeing things – people – prices are going up. We'll get to inflation in a minute. But things are full and it's hard to still find stuff. If you want cars, if you want an airline ticket in the summer to go to Europe or cross country... really expensive and not many seats left in a lot of these places.
One of the things that worries me, folks – and this is a question to ask yourself – the irrationality of this market and these companies that are called zombie companies. And just so we define it, zombies are companies that are unable to cover their debt-servicing cost with their profits. And one of the things that frightens me is one in six U.S. companies is now a zombie, and that's 13% of world companies are zombies. That's a frightening level.
That's kind of high and higher than really what I've seen in my lifetime of thinking about it. So it makes me nervous and concerned, but we haven't seen the problem yet in the credit market. Do you have any feelings about that at all?
Jeff Havenstein: Yeah. I think if we do kind of go into a recession, this is the kind of indicator that can get pretty ugly.
Doc Eifrig: Right. Exactly.
Jeff Havenstein: You know, it's like for a long time we've been kicking the can down the road and eventually that's going to –
Doc Eifrig: Yeah, with interest rates low, you could refinance.
Jeff Havenstein: Right.
Doc Eifrig: Your debt costs were still there, but they were so low that it didn't affect you. Now if debt and pricing of the interest rate goes up on those rollover of the debt, that could get really, really ugly. All right. Let's turn to inflation for a minute. Go ahead and take this... your talk, your feeling about inflation.
Jeff Havenstein: Yeah. So this chart shows the five-year inflation expectations. So you can see it is ramping up again. It just crossed over 3%. I know inflation numbers just came out today, and it was about 8.2%... so a lot higher than what people expected.
Doc Eifrig: Right.
Jeff Havenstein: I know not much higher than what we expected, but –
Doc Eifrig: No. Yeah. That's the thing that troubles me as I was watching the television last night. It was world news... it was China opening up and they were talking about inflation there. That's starting to creep up even though their GDP is dropping as well. And around the world, there's this problem of the monetary supply being so great where governments have made up money – without the work that has been created to do that – and that had led to pricing problems.
And as we'll see here, let's go to this next chart which shows you year over year at 8.2%. This is the print from this morning. You know, Biden and government officials want to blame Ukraine and the Russians, but as you can see from this, it was really ticking up before that and starting to head that way. And we called it. We were seeing this almost a year ago.
So don't believe when governments are telling you, A, that they can fix it or B, that it has all to do necessarily with the efforts in Ukraine. We thought we should look at food prices, right? And this is over a long period of time, back into the '50s. This is worrisome to me.
This is nerve-wracking because this is U.S. based, and globally, it's even more of a problem because of the Ukraine and Russia thing, but less so here. But this is starting to move up. Does that worry you at all when you see that on the right side, ticking up?
Jeff Havenstein: Yeah, it does. For me personally, every time I go into a restaurant like Chipotle, I take note of how much the burrito costs. And they've gone so high, lately I'm debating whether or not it's worth me to buy the burrito or not.
Doc Eifrig: Right, right.
Jeff Havenstein: So I think it is concerning. You know, are these consumers going to stop going out to eat as much? It's definitely troubling.
Doc Eifrig: Yeah. Food inflation. Here's a number that looks back even further, to 1913, and you can see in the Great Depression back in the '20s and '30s when there really was food deflation. And we've essentially had a fair amount of inflation all the time. And going back to the 1990s, we're kind of at the highest it has been in 30 years.
So that starts to make me a little worried, a little uncomfortable, because that could create societal problems as well, and like I said, the global challenge issue. Do you have any other thoughts on this chart at all on food inflation?
Jeff Havenstein: No, I think it is just a big increase and I think it really is going to start affecting consumers soon.
Doc Eifrig: Yeah. And well, like I said, the deflation back in the '20s and '30s, whenever I see this chart, I'm reminded of that. Those were interesting times. Housing prices. You know, people have to eat... they need energy.
Housing prices here. What? Like, wow. What's that? Is that just cheap, free money for mortgages or what do you make of that? What's your sense there?
Jeff Havenstein: Yeah. I think part of it is just such a low supply of houses right now. It's such a competitive market, so prices are just skyrocketing. I see it my neighborhood all the time. Any time a house goes up for sale, it's gone within, I don't know, a week?
Doc Eifrig: Yeah.
Jeff Havenstein: And there's multiple bids on it too.
Doc Eifrig: Yeah. See, I feel like this has to come down and maybe a recession or somewhere we'll see this drop and come back into this line that's over a long period of time increasing. A lot of people put their savings into their homes and then, in retirement, roll down to something smaller. But that certainly has played a role in the inflation, and I think it might help tamper it going forward.
When I look at crude oil prices, it's hard for me to look at this and draw any specific conclusion. But again, I would point out that we're having problems. Before Russia and Ukraine, this thing was bottoming out in the $25 range and then now has shot up to $100. And again, our government – Biden group – will blame the Russia-Ukraine, but that's not the case. This is variable. And right now, it's a mix of supply, but it's also a policy thing, right?
If you cut off drilling in the United States because you want everything to go green, you're going to have this problem. And we still run a lot of stuff – even your electric vehicles are being fed by things that use carbon, like natural gas. So this remains a concern to me. I'm going to be in Texas next week and I'm going to a conference there as well as speaking, so I'm going to kind of be digging a little deeper into this.
All right, final thoughts here. The VIX signal... We bring this back in and just remind people that when it's at 35 or more, we get this nice return 12 months later, so don't necessarily be surprised. And then I just want to remind people about your amygdala.
Charles Mackay in a great book called Extraordinary Popular Delusions and the Madness of Crowds said, "Men, it has been well said, think in herds. It will be seen that they go mad in herds while they only recover their senses slowly one by one."
So everybody, thanks for joining us for just a quick kind of recap of things that we're looking at from both a recession point of view, bearishness, inflation. We'll keep monitoring this, keep paying attention to it, keep trying to give you great investment ideas, both in Retirement Trader and in our other publications. Jeff Havenstein, again, thanks for joining us.
Jeff Havenstein: You got it.
Doc Eifrig: Appreciate it. All right.