Contrarians Buy the Downside Hype

The mainstream financial media has gone recession-happy. Here are today's market headlines:

"Here's a List of Recession Signals that are Flashing Red" - CNBC

"Will America Talk Itself Into a Recession?" - New York Times

"Recession Warning Signs Are Flashing" - Forbes

The signals are real. There is the inverted yield curve, which has signaled the last seven recessions (after a 22-month delay on average).

Exports from Japan and South Korea to China are down.

Manufacturing is down - PMI posted a 49.9 number in August, which is a contracting number. The freight shipment number fell 5.9% in July. Copper prices are getting ugly.

Google searches for "recession" have spiked. GDP has dropped from 3% to 2% from 1Q to 2Q 2019. And earnings growth estimates for the S&P 500 have fallen from 7.6% to 2.3%.

The Brexit is causing uncertainty in the EU and the UK. According to Forbes, three out of four economists predict a recession by 2021. Hong Kong is on fire. The Saudis just fired their oil minister...

You get the idea. Mass hysteria, dogs and cats living together.

The problem is that when everyone knows there is a recession coming, it generally does not happen. In fact, there is a thing called the "magazine cover indicator" that says the cover story on the major business magazines, like the Economist, Businessweek, or Forbes, is a contrary indicator.

A famous example is a 1979 cover of Businessweek titled "The Death of Equities." The 1970s showed poor performance in stocks, with big moves in gold and silver.

However, in retrospect, going all in on stocks in 1980 was the best-timed buy of the next two decades. The Dow went from 800 to 14,000.

In other words, when the mainstream financial media proclaims something unknowable as a fact, you should bet the other way. By the time it hits the magazines, the idea has run its course. Think of it as the financial equivalent of the Madden curse, whereas whichever NFL star graces the cover of the John Madden Football game always has a bad season.

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That said, it actually works. In 2016, Gregory Marks and Brent Donnelly of Citigroup looked at the Economist and "selected 44 cover images from between 1998 and 2016 that seemed to make an optimistic or pessimistic point."

They found that impactful covers with a strong visual bias tended to be contrarian 68% of the time after one year - the latest example of this phenomenon being the Economist's "Living in a Low Rate World" from September 2016, weeks before one of the fastest sell-offs in global fixed income.

To be a profitable trader, you buy fear and sell greed. It seems to me the market is talking up fear while we are heading into another rate cut. This sets up a nice medium-term buy.

All the best,

Christian DeHaemer

Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor's page.