Why You Should Ignore JPMorgan’s Doomsday Prediction

In 1806, the people of England believed Christ would return to this world.

For centuries, Christians have been anticipating this very moment.

John 14:1-3 says:

Let not your heart be troubled… In My Father’s house are many mansions; if it were not so, I would have told you. I go to prepare a place for you. And if I go and prepare a place for you, I will come again and receive you to Myself; that where I am, there you may be also.

As you might know, Christ’s return won’t be great for everyone. The second coming will bring on Judgement day.

It’s the day where the righteous are saved and the wicked will have rocks and hills fall on top of them. So says the good book.

But why did they think he would come back in the year 1806?

Would you believe an egg from a domesticated chicken inscribed ‘Christ is coming’?

Failed predictions

Sure, the people of England in 1806 look silly now.

But they’re not alone.

Hundreds of events and signs were supposed to have brought on an apocalypse. The ancient Mayans famously believed the world would end in 2012. It was a year that marked the end of their first Grand Cycle.

In 1910, people believed Halley’s Comet, which passes earth every 76 years, would come far too close. The white hot comet would cause unimaginable destruction, destroying the Earth and us with it.

Even last year, a guy called David Meade predicted Nibiru, an imaginary planet, would become visible in the sky.

According to David, we will see volcanic eruptions, tsunamis and earthquakes as Nibiru passes Earth.

MoneyMorning 17-09-18

Source: NZ Herald<
[Click to open new window]

As you know it didn’t pan out for David last year, or this year as a matter of fact. David pulled the same prediction in April this year…to no avail.

Now I’ll bet most of you won’t put much faith in David’s next prediction. Yet, as soon as an institution like JPMorgan talks about financial judgement day, investors are more than happy to buy in.

Reported by Bloomberg (my emphasis):

How bad will the next crisis be? JPMorgan Chase & Co. has an idea.

A decade after the collapse of Lehman Brothers sparked a plunge in markets and a raft of emergency measures, strategists at the bank have created a model aimed at gauging the timing and severity of the next financial crisis. And they reckon investors should pencil it in for 2020.

The good news is, the next one will probably generate a somewhat less painful hit than past episodes, according to their analysis. The bad news? Diminished financial market liquidity since the 2008 implosion is a “wildcard” that’s tough to game out.

At first glance it seems totally plausible. And maybe it is.

But what I’ve emphasised could have come straight out of the doomsayer’s handbook.

JPMorgan strategists have created a model aimed at gauging the timing and severity of the next financial crisis.

If we swap out a few words we get: David has created a model aimed at gauging the timing and severity of Nibiru’s passing.

OK, maybe it’s a bit harsh to put JPMorgan in the same basket as David.

But both have come up with dooms day predictions that have questionable likelihoods.

While I’m not saying JPMorgan is wrong. Asset prices might decline a whole lot in 2020.

But the likelihood of JPMorgan having the ability to time the market with such accuracy probably isn’t as great as you might think.

Let me explain why.

Investment expert’s top picks: The three ASX stocks with the biggest potential for 2018. Get your free report now.

Why you can’t predict human behaviour

Unlike the thousands of doomsayers who predicted the end of the Earth, we know financial apocalypses do happen.

You saw one in 2008.

The problem was very few people saw 2008 coming. Or maybe they did but were unsure when the merry-go-round would stop.

Those that did profit from the crash are geniuses today, so we’re told. But if you were to look at the history of their predictions, I’d doubt you’ll think the same.

Almost no one has an unblemished record at predicting what the market will do next. If there is, please tell me who this billionaire is?

So why don’t I think JPMorgan is right?

Let’s consider for a moment that these strategists brought their model to the heads of JPMorgan. If they believe this market wizards were 100% right, why not sell everything and place leveraged bets on what the model says will happen next?

Much like David’s predictions, JPMorgan’s models, and all models in fact, are only as good as the assumptions they’re built on.

If just one assumption is off, then the whole model will struggle to be accurate.

The point I’m trying to make is that it’s incredibly difficult trying to predict what the market will do. You’re essentially making a bet on human behaviour.

A great analogy is John Keynes’ beauty contest.

How to ensure you continue to profit from your investments

In his 1936 book, The General Theory of Employment, Interest, and Money, Keynes likened the stock market to a beauty contest.

The winner is not the most beautiful candidate; rather, the winner is the candidate who most people think is beautiful.

If we relay this to the stock market, investors wanting immediate gains are looking for stocks the majority likes at the present.

The problem is there are a lot of investors doing the same thing.

What ends up happening is a search for not what the majority likes, but what the majority thinks the majority likes. Keynes writes:

We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.’

So rather than trying to pick the average of the average, be content that the market will go up and down in the short-term but that, historically, it’s gone up over time.

Instead, use your time to find stocks that have the key characteristics that could make them successful.

Once you buy all you have to do is sit and wait.

Your friend,

Harje Ronngard,

Editor, Money Morning

PS: If you want to lay down a little money on the hottest corner of the ASX right now…but you don’t know your way around the small-cap sector…this report is for you. Get access now (free).

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

Money Morning Australia