People tend to dismiss the likelihood of high magnitude events — terrorist bomb at the footy, nuclear explosion over the CBD, tidal wave submerging the suburbs — that kind of thing.
These things hardly ever happen…so why live in fear of them?
Where we live — or most of us do, at any rate — is right in the middle of the bell curve. A place where today is mostly like yesterday…and tomorrow will be mostly like today. Because this is mostly true.
Because of this, when someone steps up and declares that the excrement is about to encounter the air conditioning, they’re considered a nutjob…a kook…someone we can all point and laugh at.
You’ve heard a bit about my mate and Rum Rebellion co-editor Vern Gowdie these past few days. Vern thinks the Aussie market will crater this year. You’ll read about this warning and the facts that support it tomorrow.
Speaking of facts — and bell curves — the difference between Vern Gowdie and the nutjob with the sandwich board pacing up and down Flinders Street (or indeed, Main St, Davos) is that Vern has done his sums.
Believe me, Vern is not a man given to making wild-eyed predictions about the apocalypse. In fact, here’s a little-known fact about Vern: he’s not really a bear. Not the dyed-in-the-wool kind, anyway.
Vern’s a realist. But he’s also an optimist. And, believe it or not, an opportunist. The reason he’s chosen to be mostly in cash right now is that he wants to be ready to pick up stocks on the cheap after the stuffing’s been knocked out of them.
‘I want to have a hundred cents in the dollar ready to buy assets that are trading at 30 cents in the dollar’ — says Vern.
That’s a strategic view. A pragmatic view, even. You don’t tend to get those from the ‘end is nigh’ crowd.
That — right there — is what makes Vern different. And it’s why he’s worth listening to.
Let ‘the market’ tell you what is happening.
Look, if you’ve been reading my stuff for a while, you’ll know that I don’t think you can predict market outcomes. My view is to let ‘the market’ tell you what is happening.
Since the start of this year, the market has gone into melt-up mode. The odds are increasing that we’re in the blow-off top phase of this long bull market.
I don’t know whether it ends with a whimper or a bang. But I do know that Vern’s view, guided by facts and a simple concept known as ‘reversion to the mean’, is one worth listening to.
That’s because for the falls he’s predicting to play out, something truly terrible has to happen. One of those high-magnitude events has to slide over the edge, right into the middle of the bell curve.
And that’s where consensus is hard to find. Because these things hardly ever happen.
Except they do.
Outrageous falls in stock prices are a fact of market history. 1929…1987… 2000…2007/08…can you really file these under ‘hardly ever happen’?
The last three are in living memory for most of us. I’d say a large proportion of Rum Rebellion readers were active investors at the time Lehman Brothers took a bath.
With that in mind, today I’m going to ask you, if you can find the time, to please watch the second part of my conversation with the man himself, recorded earlier via Skype.
If you can’t see how it’s possible for the ASX to drop 65%, let Vern show you.
The maths is pretty simple. I asked him to explain it to me, because, well, it IS a big, scary claim.
For me, the scariest part of all isn’t the potential magnitude of any crash. It’s how it all starts. Simple. Small. A slight change in sentiment at the margins. ‘This is already happening’, says Vern. ‘The fuse is lit…’
How long that fuse takes to burn to the middle of the bell curve is anyone’s guess. But Vern isn’t planning to wait there for it. And if you don’t want to either, make sure you read his research report that’s due out in The Rum Rebellion tomorrow.
As for today…have a watch of part two of our conversation, somewhat ominously titled: ‘How bad will things get?’
Click the thumbnail below to watch the video now…and make sure you remember to check your inbox tomorrow for access to Vern’s new report.
PS: Interest rate cuts will trigger the next global financial crisis. Here is what you should do now to protect your wealth.