The Slope of Hope

Stocks rebounded Monday after their precipitous fall late last week. The Dow Jones rose 669 points. Then on Tuesday, it tanked again, falling over 300 points.

In his latest podcast, Peter Schiff said the increase in stock market volatility is another sign things are different. He reiterated what he said last Friday. He thinks we are in a bear market. All of the flashing warning signs are there. It’s just that nobody can seem to see them.

Increased volatility usually happens at inflection points, especially when we’ve had a record period of no volatility, or minimal volatility, all of a sudden we’re having incredible swings in the stock market.”

Of course, when the market makes big swings upward, everybody breathes a sigh of relief. But Peter pointed out you get some of the most spectacular rallies during bear markets.

That is how bad markets operate. They’re trying to follow the slope of hope. It’s like trying to boil a frog slowly. You don’t want to turn up the heat so he jumps out of the pot. So, it’s a gradual increase. The idea is when you have these big spikes in the market, that creates some hope and some optimism, and now people are ‘Oh great! No reason to sell.’ You see that decline is over and people are afraid to miss out on the next big up day, so it keeps people in the market. It’s like keeping the frog in the water. They don’t realize that they’re getting boiled.”

Peter noted that the big internet stocks – often referred to as FANG (Facebook, Amazon, Netflix and Google) – all had significant drops. One of the big reason is increased scrutiny about how these companies use the data they collect from users. Peter launched into a long talk about privacy and pointed out we could see increased government regulation of these companies. (Not that the government actually cares about your privacy. It’s the biggest violator of our privacy rights.) This could dramatically change the social media landscape.

That’s going to mean their earnings are going to collapse. And how are they going to replace that lost revenue? Well, they might have to start charging people to use their product.”

The problem with all of this is these companies serve as the pillars of the Nasdaq.

These stocks dominate the market; they’re in everybody’s portfolio. And if the government takes action to diminish the value of what these companies have then that is very negative for the market.”

At any rate, we have more and more signs of a bear market, and yet everybody still thinks we’re in a bull market. They think the recent drops are nothing more than a correction.

But to me, if it looks like a duck and walks like a duck and quacks like a duck – it’s a duck. And this market is looking like, walking like and quacking like a bear market.”

Peter said the real question is how big of a bear market will the Fed allow before it tries to reverse the course?

It’s going to take more than a tweet from Donald Trump. The Fed is going to actually have to do something to change this game. They’re going to have to take away these rate hikes. They may even have to launch QE4. I don’t know if just not raising rates is going to be enough.”

Reprinted with permission from SchiffGold.com.

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