The Martians have landed in New Jersey! Chinese Army tanks are rolling in the Chicago Loop! California has fallen into the ocean! Giant robots have kidnapped the Statue of Liberty! D.C. is in flames!
The yield on 10-year Treasuries has fallen below the yield on three-month Treasuries!
We are doomed!
Enough already - yes, last week, the yield curve inverted.
So, the conventional thinking goes, we'll have a recession. Right? Maybe. When? Don't know. It could be a month or two; it could be almost two years from now.
The truth is, there has been a yield curve inversion before every recession - if you don't care how long it took for that recession to develop. The historical record shows the yield curve inverted a whopping 23 months before the economy slowed in the most recent recession.
So, a yield curve inversion heralds a recession in kinda the same way baseball's Opening Day "causes" the World Series, or that being born is a leading cause of death.
In other words, it's a bit of a stretch - and certainly nothing you'd want to make do-or-die investing decisions on.
There's a much better, much more profitable way...
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They Shouldn't Show Disaster Movies on CNBC
"Okay, but the inversion is horrible for stocks, right? That's what the experts on television and the always highly accurate 'Interwebs' are telling me right now. I need to sell all my stocks, and maybe even sell short. This could be the big one!"
There is not a shred of evidence indicating a yield curve inversion is bad for stocks, or that dropping everything and running for the hills is a wise, profitable course of action.
This man makes more money than he knows what to do with - and you'll never guess how...
Put another way, selling and bolting after an inversion is an expensive mistake.
In fact, since the last inverted curve--predicted sell-off in the 1970s, share prices have been higher one year post-inversion by almost 10%. Around the world, the return on stocks from the moment the curve inverted until an actual recession began was over 12%.
So why do we keep hearing about the dangers of the inverted yield curve? If curve inversion is not the death knell of the stock market, why do all the experts keep talking about it as if the world is ending?
Easy: because people are watching, listening and reacting! Fear and greed sell by the truckload.
If TV ratings and web clicks were managed by Mitch and Murray's "Premier Properties" team, fear would get the Cadillac Eldorado, greed would take home a set of steak knives... and reality would be fired - no Glengarry leads.
No one - I repeat, no one - knows what the stock market is going to do.
Stock market predictions based on the yield curve, the death cross, or whatever other indicators the fevered imaginations of Wall Street and Madison Avenue dream up are designed to do one thing and one thing only: They're meant to compel you to engage in fee- and commission-generating activities; they're not there to make you money or protect your cash.
Charlie Munger, Warren Buffett's "wingman," once commented on the folly of predictions based on these types of indicators. He said, "People have always had this craving to have someone tell them the future. Long ago, kings would hire people to read sheep guts. There's always been a market for people who pretend to know the future. Listening to today's forecasters is just as crazy as when the king hired the guy to look at the sheep guts. It happens over and over and over."
Sheep guts won't cut it when it's your hard-earned cash on the line.
Evidence will.
The Facts Say This Is the Best Play Right Now
There are a few things the evidence tells us about the state of the U.S. markets and the economy.
The economy? It's not robust, but it's growing.
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The banking system is always going to be ground zero for a market meltdown, but right now, it's healthier than it's been in my lifetime; we don't have the kind of leverage in place required for a monster bear market.
This is also true: We are overdue for some sort of sell-off after 10 years of steadily rising stock prices.
I would be the happiest guy in America if we were beset by a sell-off that scared the hell out of everybody - and created life-changing bargains.
Fortunes are made in bad markets.
Once you embrace that central idea, you free yourself forever from the fear generated by the doom-mongers and gloom-peddlers. You can be more rational about your investment decisions, and more successful.
We know that owning good, financially sound companies at bargain prices is the best way to earn long-term excess returns.
High-quality real estate investment trusts (REITs), like Independence Realty Trust Inc. (NYSE: IRT), that own property outright or collect rents are an excellent place to start; nab one at a discount, and you'll build wealth much faster than your average investor will.
History proves that certain special situations, like corporate spin-offs and small banks with activist shareholders, deliver exceptionally high long-term returns.
If we can find lots of bargains in these categories, we should be wildly bullish, and almost by default, that will occur in furious bear markets.
If bargains and special situations are thin on the ground, we should buy the few we can see and hold back some cash. This usually happens when the bulls are running so fast that your cousins' kids quit college to be day traders and options gurus.
In between these points in time, doing nothing is usually the most profitable strategy.
Love the numbers. Avoid the sheep guts.
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About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.