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Affluent Christian Investor | December 3, 2023

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Don’t Drink the Schwab Kool-Aid

Kool-Aid (Photo by Brent Gillard) (CC2.0) (Resized Cropped)

(Photo by Brent Gillard) (CC BY) (Resized/Cropped)

The Schwab Center for Financial Research recently published an article intended to tranquilize investor nerves after the latest volatility and keep them shoveling funds into the stock market. “Schwab’s Perspective on Recent Market Volatility” begins with

“Global markets may have swung wildly in recent days, but we think the recent selloff in stocks and commodities is not a sign of imminent global recession.”

I’m picking on Schwab because they are big and can take it, but they have said nothing that almost all mainstream financial service firms aren’t saying. Also, Schwab put their piece in nice bullet points that are easy to address. I’ll take them on one at a time:

1. The basics of investing have not changed.

They should change because the received wisdom is to always buy, never sell and just swallow the bitter pill of a major market decline. Instead, investors should try to time the market by getting out of stocks before a recession hits.

2. We do not believe the extreme volatility in global stock and commodity markets is a sign of a global recession.

As I wrote last week, the stock market is one of the best predictors of a looming recession. Mainstream financial economists have never seen a single recession coming.

3. We believe that recent turmoil in the financial markets has reduced the likelihood of an interest-rate hike in September, but the Fed hasn’t taken the option off the table.

I’m guessing the Fed won’t be able to raise rates for at least another five years. The US seems to be desperately trying to imitate Japan in that regard.

4. China’s currency adjustment should not have a major impact on U.S. economic growth.

By itself, no it won’t. But we shouldn’t look for China to cause a US recession. Instead, we should see China’s troubles as omens of our own. In other words, it’s a signal, not a cause.

5. The drop in global commodity prices should be positive for consumers, but is a negative for commodity producers in the short term.

If the world market was in a state of equilibrium, that would be true. Declining commodity prices would shift consumption spending from commodities to other goods and services and nothing much would change. Commodities producers would employ fewer people while others would employ more. Commodity’s troubles would be someone else’s blessing.

But the market was not and never will be in equilibrium, the fictional state in which mainstream economists live. Most commodity production is done with huge amounts of debt as well as hedging via futures and options. When commodity producers can’t pay the interest on debt because prices have fallen too far, they go bankrupt and cut employment. Financial firms that sold the hedges to commodity companies now must make up for the losses in revenue to commodity companies from lower prices. Many of them will go bust and put more people on the street. And all of the industries that service commodity producers lose business and cut workers. That’s how recessions start.

6. We do not believe that the current market volatility is a harbinger of a bear market in U.S. stocks.

Schwab wrote that the US economy looks great now so they don’t see a recession coming and the current market problems will be nothing more than a correction and an opportunity to buy more. Of course, mainstream financial economists have never seen a single recession coming. By their own definitions, recessions are random events so it’s impossible for them to see recessions approaching. Recessions take them by surprise every time because recessions start when the economy is doing the best.

7. Bonds with high credit quality help to hold down volatility in portfolios.

No problems with that, as long as you have at least 70% of your portfolio in them.

8. Investors should stick to their long-term plan and not react to short-term movements.

Agreed! Hopefully, investors are not looking at just the recent volatility in the market and instead are considering the past 50 years of stock market history. The omens of a stock market crash have been piling up for over a year.

How does Schwab make money? It does so by investors constantly buying stocks because it makes a commission on each trade. So why would Schwab or any other mainstream financial firm ever recommend getting out of stocks and into bonds or cash? They have no incentive to do so and every incentive to keep pumping up stocks.


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