Before you run screaming to save your 401(k), talk to Walter Zimmermann.
Then run screaming to save your 401(k).
Zimmermann, chief technical analyst for United-ICAP, Jersey City, N.J., named three destabilizing forces that may derail any type of economic recovery the country is experiencing. Calling them “risks you wouldn’t have normally thought of,” he named Russian President Vladimir Putin and climate change as two, with the third, the Federal Reserve, the biggest danger.
A combination of unprecedented weather, potential hostility from Russia and moves by the Federal Reserve to artificially inflate the value of stocks are leading to or are symptomatic of yet another economic bubble—one likely to burst as dramatically as the housing and dot-com booms of years past, he said.
Addressing attendees at the SOI Summit, Zimmermann said many signs point to the existence of a dangerous bubble, including stock-price trends that resemble the lead-ups to other historic bursts, as well as the sluggish state of telltale commodities such as copper and gold, which in a true recovery would be doing better.
“It’s probably not time to sell yet,” Zimmermann said. “But when the bubble bursts, it’s never a slow leak.”
Like walking on thin ice, convenience retailers have get out when they start seeing signs of selloffs, he said. One such an indicator is when the market moves from high-risk investments to more secure buys.
The cause of much of this looming instability, according to Zimmermann, is the Federal Reserve. Pointing out that it was created 100 years ago for the benefit of the banking class, he said the Federal Reserve has shown its colors time and again by propping up the banks back in the late 2000s and by its purchase of bad mortgages held by the banks in the years that followed. These types of actions, including its actions to fuel lower interest rates, run counter to what’s actually good for the nation’s economy.
Through its “quantitative easing,” Zimmermann said, the Fed has bought trillions of dollars in bonds to lower interest rates, hoping to push people out of bonds and into the stock market.
“Its goal is to prevent banks from collapsing and drive the stock market higher,” he said. “All this money being forced out of bonds by these ridiculously low interest rates have been pouring into short-term speculation, and this has led us to the ‘golden age’ of the speculative bubble.”
Presenting a chart displaying the lead-up to the dot-com bubble and other similar economic collapses, he showed what potentially could be “a new batch of bubbles being inflated and going to burst.”
“You cannot pour trillions of dollars of easy credit into the market and not have this happen,” he said.
Pointing Fingers
And the Fed’s leaders are to blame, he said. Past chairmen of the Federal Reserve were oblivious to impending collapses because they clung to “failed theories and broken models,” Zimmermann said. Alan Greenspan believed that the NASDAQ bubble was a sign of increased productivity; then, he said, Greenspan overlooked the recent housing bubble because “everyone needs a place to live.” But “anyone looking at a housing chart could see the rise in unaffordability,” he said.
Then Zimmermann pointed to Ben Bernanke, who he felt “was caught flatfooted” by the latest commodities bubble.
One of the best signs that the current bubble in the stock market exists is that Greenspan, Bernanke and today’s chairperson, Janet Yellen, “all agree it’s not a bubble. Can you wish for a more dramatic verification?”
Even bad news in this environment is good news, Zimmermann said, because it’ll force the Fed to continue to postpone raising interest rates.
Those touting the eventual collapse are also prolonging the inevitable, advising people to stay in the game. “They’re basically saying, ‘I’m smart enough to get out in time,’ ” Zimmermann said. “But not everyone will get out in time.”
Another sign of what Zimmermann predicts is evident in overseas markets. In China, major mortgage companies are failing. “And as investors flee emerging markets, they’re fleeing into frontier markets like Vietnam and Kenya,” he said. “Talk about getting out of the frying pan and into the fire.”
At home, Zimmermann said, many stocks are showing signs of elevated trading, including Amazon, Netflix and Tesla. “With Tesla, their price-earnings ratio is basically saying, ‘No one is going to make an electric car to compete with Tesla,’ ” he said. “So there are a number of warning signs.”
So what’s a prudent investor to do? No one long in the market should go on without an exit strategy, he said. For example, “If you live along the coast of Florida, you have an exit route. When a hurricane comes, you know what to do.”
Investors should look for what he called a multi-year, up-trend “support line.” Such an indicator will show signs of breaking, giving a smart investor a sign to bail out.
He believes the market has been bullish for too long. “Never before has margin debt been so high,” he said. “Never have investors borrowed so much to get so long on the stock market.”
High Prices, Polar Vortexes
Another destabilizing factor on the economy will be climate change, Zimmermann said. With many c-store retailers affected adversely by the extremely cold winter of 2013-2014, he said that the signs point to a yet another repeat later this year and again for 2015. He suggested that warming temperatures have affected the Earth’s jet stream, a current of wind that keeps cold air in the north from drifting downward. Climate change has allowed that buffer to weaken, setting colder air down into cities in the Southeast.
Not only did such weather directly affect the c-store channel by forcing people to stay home, but it also had an effect on the price of heating fuels and distillates. The fluctuations forced many of these prices up, despite what he called the “myth” of energy independence. “Energy independence does not mean cheap energy,” Zimmermann said, pointing out how global demand caused many refiners to export their finished product, and the cold weather only drove prices for natural gas and electricity higher.
The so-called “polar vortex” hit at the same time many other supply-and-demand pressures were peaking, he said. For instance, the collapse of the Venezuelan refining industry due to the volatile regime of then President Hugo Chavez has led to great demand for U.S. imports, Zimmermann said. At the same time, just-in-time delivery, which much of the country has moved to, creates a lot of pressure on a system that has to physically transport product. Add to this is the fact that the infrastructure—the storage and pipelines—supporting the supply of natural gas is inadequate for the growing demand.
The infrastructure problem is greatest in the Northeast, Zimmermann said. “It’s a giant slab of granite,” he said. “There will never be adequate pipelines or storage in the Northeast. It’s hard enough to get a pipeline built, but no one wants storage where they live.”
The retiring of coal plants and the fact that many of the nation’s nuclear power plants are facing a “dramatic” maintenance schedule only add to the pressure, especially because electricity is the quintessential just-in-time product. “There’s not enough natural gas to generate electricity,” he said.
Putin Pressure
Zimmermann also focused on what he believed to be a global instability, in Russia and its lead politician, Vladimir Putin. He referred to Putin as a “thug” and called Russia a “criminal” country.
“We all like to think Russia is a functioning democracy, but Russia went from communist to criminal,” he said. “The state assets were stolen in the most massive [case of] theft in history. It boggles the mind what went on.”
He said Putin’s actions in the Ukraine have a destabilizing effect on the global economy, and action on the part of other countries is justified: “He should be told, ‘No.’ ”
Putin’s goal, according to Zimmermann, is to revive the boundaries of Soviet Russia. “The long-term trend is decentralized,” he said. “Putin is a throwback.”
The country rates high on many infamous indexes, including those for corruption, enslavement and the number of journalists killed. In all, the country has the potential of being a major destabilizing force for the global economy, he said.
Getting Educated
Following his general session talk, Zimmermann led a more informal educational session on the topic of analyzing the stock market. He said retailers have the ability to see warning signs that a particular stock or commodity is about to take a bad turn in trading, based on even a limited understanding of historical movement.
“Having some knowledge is better than no knowledge,” he advised. “So when your broker is telling you to buy a certain stock, you can tell him to hold off, so you can look for yourself to judge how the stock is doing.”
Simple software applications can turn historic data on any stock or set of commodity prices into a graph that is at once an ongoing frequency chart and a bar chart moving left to right with the horizontal axis noting hourly, daily or monthly demarcations.
Using a stock example, he showed a frequently used pattern called a candlestick, named because it combines vertically standing bars, the colors red and green to note rise or fall and lines going through the center. The vertical bars look like candles.
Zimmermann showed how certain candlestick patterns revealed when investors started losing confidence in the sample stock, which promptly was followed with a downward spiral in price. He said many of these historic patterns create visually distinctive images, leading those who follow such charts to come up with colorful phrases to describe them. Some of these names include “hammer bottoms,” “shining- star tops” and “long-legged dojos.”
Zimmermann said other tools exist to help validate candlestick patterns. One of them is a relative strength index, which charts the momentum of a stock over time. “If the gas is zero, momentum will slow,” he said. Such tools will “indicate if I’m going uphill and am about to go backward.”
Speaking to the issue of high-frequency trading, Zimmermann felt the controversial use of complex computer analytics gives an unfair advantage to larger hedge-fund traders. The ability to analyze thousands of bits of data in a matter of seconds stirs the velocity of trading, makes the market hypersensitive and creates unprecedented levels of volatility, he said.
Such activity only makes any potential stock collapse worse, because computers are trading millions of shares automatically in a matter of seconds, magnifying any panic mentality.
Looking Past Ideology
Imploring attendees to think for themselves, Zimmermann at once chastised the U.S. economic system and paid it a backhanded compliment. “[The economy] is at another level of risk,” he said. “Not a physical risk, but a psychological risk.”
In his general-session speech, he said, “Three risks [inhibit] the ability of the U.S. to remain the most creative in the world:
▶ Ideologies: He said the country accepts economic ideologies that keep people from examining facts and that following such “unthinking assumptions … blocks pragmatic progress.”
▶ Theories: Revering theories that are “ill-advised” can often put blinders on the very people the nation looks to for advice, he said.
▶ Politics: Though there’s nothing inherently wrong with politics, Zimmermann said politicians “have become adept at pushing buttons, like our kids. Once all the buttons are pushed, we are not at our best.”
As one who tracks human behavior via the stock market, Zimmermann said, “We don’t outperform, we underperform [when] we are in the grip of our emotions. When emotions are activated, our creative thinking abilities are impaired.”
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