Investing: Gloom And Doom or a Technological Boom?

By: Chris Ciovacco | Mon, Aug 11, 2014
Print Email

Gloom And Doom or a Technological Boom

The Future: Gloomy or Prosperous?

The debate concerning the prosperity of future generations is never ending, especially in the context of investing. In the real world, prosperous periods have often taken an unexpected turn for the worse. For example, heading into 1914, the consensus in Europe was pointing to a bright future. From The Wall Street Journal:

1913 Foden Locomotive

The world swept away had been a rising and increasingly constructive one, where total war was unimaginable: "Europe in the summer of 1914 enjoyed a peaceful productivity so dependent on international exchange and cooperation that a belief in the impossibility of general war seemed the most conventional of wisdoms."


War Alters Everything

In the summer of 1914, the peaceful productivity in Europe was threatened after the assassination of Archduke Franz Ferdinand of Austria set off a chain of events that eventually led to World War I. From History.com:

The world's first global conflict, the "Great War" pitted the Central Powers of Germany, Austria-Hungary and the Ottoman Empire against the Allied forces of Great Britain, the United States, France, Russia, Italy and Japan. The introduction of modern technology to warfare resulted in unprecedented carnage and destruction, with more than 9 million soldiers killed by the end of the war in November 1918.


Little Basis For Optimism In Early 1980s

Just as negative turns can occur more rapidly than most anticipate, periods of economic weakness and pessimism can be followed by unexpected periods of economic expansion and prosperity. For example, the U.S. economy was so unsettled in the late 1970s, the term "misery index" was used regularly during the 1976 presidential campaign. The misery index is the sum of the unemployment rate and inflation rate. After President Nixon's resignation, Gerald Ford took office in September 1974 with a misery index of 17.85%. The index peaked at 19.9% a few months later. From The Bancroft Library at the University of California, Berkeley:

In January 1980 the U.S. economy entered a recession that, at the time, was the most significant since the Great Depression. One of the causes of the early 1980s recession was the Iranian Revolution of 1979, which sparked a second large round of oil price increases. More important, however, were Federal Reserve Chairman Paul Volcker's efforts to tame inflation through restrictive monetary policy, which had the expected effect of dampening economic growth. The American economy experienced a modest recovery beginning in the summer of 1980 but declined again from July 1981 to November 1982.


Technology Can Drive Unexpected Prosperity

IBM PC

While there are numerous reasons for the economic turnaround that occurred in the early 1980s, advances in technology played a key role. From IBM:

On August 12, 1981, at a press conference at the Waldorf Astoria ballroom in New York City,IBM Lab Director Don Estridge announced the IBM Personal Computer with a price tag of $1,565. Two decades earlier, an IBM computer often cost as much as $9 million and required an air-conditioned quarter-acre of space and a staff of 60 people to keep it fully loaded with instructions. The new IBM PC could not only process information faster than those earlier machines but it could hook up to the home TV set, play games, process text and harbor more words than a fat cookbook.


2014-2024: Prosperity or Hard Times?

Having worked on Wall Street for over 20 years, I can confidently state that economic and geopolitical gloom-and-doomers are always easy to find. What they often fail to consider is the possibility of unexpected technological advancements. From The Wall Street Journal:

In the speculation on what the new technologies will look like and do, robots and artificial intelligence remain front and center, at once wished for (who likes making beds?) and feared as job-killers. We haven't seen a fraction of what is possible in information and communication technology. But the most unexpected advances may come from less glamorous corners, such as material science. One example is graphene, a sheet of very thin carbon whose molecules can be arranged to make it either the strongest or the most flexible material on earth. It conducts electricity and heat better than any material ever discovered. In the future graphene is likely to replace silicon in transistors, solar cells and other applications we cannot yet imagine.


2014: No Shortage Of Geopolitical Concerns

In recent months, investors have been worried about developments in Gaza and Ukraine. On Saturday, August 9, President Obama dampened expectations for a limited and short-term U.S. role in Iraq, which could add to uncertainty when the financial markets open Monday. From The Guardian:

Barack Obama has committed the US to long-term involvement in Iraq, warning that the rapidly evolving crisis in the north would not be solved quickly. US aircraft have targeted armoured vehicles and militant positions in a second day of strikes against Islamic State forces. A mix of US fighters and drones attacked and destroyed armored personnel carriers after Yazidi civilians near Sinjar came under attack from the vehicles, US central command said.


History Tells Us To Remain Open To All Outcomes

How does all this help us from an investment perspective? The point is the future is highly uncertain. Geopolitical events can cascade at unexpected speeds. Technological advancements can be a powerful force for rapid economic advancement. A highly uncertain and almost impossible to predict future calls for a high degree of investment flexibility. If an investor entered the 1980s with a bearish bias, they may have missed one of the greatest bull markets of all time (see chart below). Conversely, many were blindsided by the rapid changes that took place in Europe during World War I.

SPX Monthly Chart

Were there fundamental problems in 1982? Yes, a brief refresher list is provided below:

  1. Unemployment in the U.K. increased by 129,918 to 3,070,621, a post-war record number.
  2. Hama massacre took place in Syria.
  3. The DeLorean Motor Company Car Factory in Belfast was put into receivership.
  4. The U.S. placed an embargo on Libyan oil imports, alleging Libyan support for terrorist groups.
  5. The Falklands War began: Argentina invaded and occupied the Falkland Islands.
  6. The 1982 Lebanon War began.
  7. The United Nations Security Council passed a resolution demanding that Israel withdraw its troops from Lebanon.
  8. The Provisional IRA detonated 2 bombs in central London, killing 8 soldiers and wounding 47 people.
  9. Italian Prime Minister Giovanni Spadolini resigned.


Staying In The Present Is The Key

If predicting the future is difficult, then what can we do? Focus on the hard data we have in hand. If paying attention and making portfolio adjustments as needed is new to you, these articles expand on the concepts:

  1. Managing Risk In A Mature Bull Market
  2. The Most Important Thing For 2014
  3. 2007/2013: You Will Never Look At The Markets The Same Way Again
  4. Tired Of Missing Rallies? 4 Ways To Improve Your Game
  5. Scared Of Stocks? There Are Ways To Monitor Risk
  6. Guideposts Can Assist With Risk Management
  7. Want To Reduce Missteps? Become A 2-Faced Investor
  8. Investors Must Know How We Got Here And Where We Are Going


Investment Implications - The Weight Of The Evidence

As outlined in this week's stock market video, the S&P 500 held near logical support last week, but the intermediate-term investment picture remains cloudy.

While U.S. equities rallied strongly Friday based primarily on positive developments in Russia and Iraq, we need to see more than a one day bounce. Therefore, we continue to run a fence-sitting strategy with stock exposure (SPY) being offset with a large cash position and modest exposure to bonds (TLT). If the S&P 500 can "prove it" by closing above 1965-to1970ish, we will be much more willing to take an incremental step back toward growth-oriented assets, such as technology stocks (QQQ). From a bearish perspective, if support levels outlined in detail on August 7 are breached on any sustained basis (more than a day), our market model will call for further additions to cash and reductions on the stock (VTI) side of our portfolios. We will enter the new week with a flexible, unbiased, and open mind. The markets will guide us if we are willing to listen.

 


Hope image from DieselDemon. War image from Ron Cogswell. Locomotive image from David Merrett. PC image from Luke Jones.

 


 

Chris Ciovacco

Author: Chris Ciovacco

Chris Ciovacco
Ciovacco Capital Management

Chris Ciovacco

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE.

Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. CCM helps individual investors and businesses, large & small; achieve improved investment results via research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions.

Copyright © 2006-2014 Chris Ciovacco

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com

SEARCH





TRUE MONEY SUPPLY

Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
austrian-money-supply/