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Why the Armageddon Trade Is Wrong

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You see their notices in your email inbox all the time.

"Stockpile food and ammo!"

"Sell your stocks and by gold!"

"Run for the hills and prepare for the worst!"

"The worst economic storm ever is about to destroy your wealth and freedom!!!"

The relentless appeal of the "Armageddon trade" has many chomping at the bit. That's because the markets fall much faster than they rise. Bear runs of 5% to 10% in a single day, or 20% in a week, are far and few between, but they do make some people into instant millionaires.

But even more often than amassing riches, these investors get crushed. Their myopic view had some of them take on way too much risk - which became their undoing. Or others got locked into their position and froze up when the time came to switch gears to the new bull run.

I'm here to tell you that the Armageddon hawkers are way wrong, and not because they exaggerate, or because the trades are so rare and hard to time. They are wrong for 3 important reasons. Discover them below along with a better path to wealth creation.

1) Fall of the American Empire is NOT Inevitable

There is a popular notion that great success must eventually fade; that it is destined to implode. It happened to the Roman Empire and other great civilizations so it has to happen here, right?

But look at the realities of a dynamic global economy that has survived some of the biggest "black swan" shocks imaginable: terrorism and war, systemic banking/housing collapse, devastating floods, tsunamis and earthquakes. Yes, capital was destroyed by these events.

And yes, an "easy" Federal Reserve supplying fresh barges of credit can artificially re-stimulate the economy and create new bubbles and dollar devaluation. But is that false prosperity when thousands of American businesses are still creating valuable products, services and jobs for existing demand markets?

The idea that the American empire must somehow naturally suffer the fate of ancient Rome is good story telling and interesting "chaos theory." But there are no laws of physics or economics that prove it has to happen this way. Besides, the global economy is fantastically complex, and as resilient as it is subject to systemic risk and shocks.

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2) The US Economy is Far More Likely to Grow Its Way Out of Debt

The Dow 5,000 perma bears have some good arguments about our national debt and the structural problems intertwined with it. Housing, banking and overleveraged consumers all weigh on growth, to say nothing of a bond market dependent on the artificial support of the Fed.

Complex systems like our economy might be subject to shocks, but that is the reality of the world we live in now. Many genies have been let out of the bottle that cannot be put back...

  • Death of Bretton Woods fixed exchange rates and birth of fiat currencies
  • Derivatives explosion and financial engineering, now integral to modern economies
  • Technology, which creates power, freedom and high-frequency trading
  • Quantitative easing and the monetizing of debt

But the US economy is vigorous and innovative enough to produce $14 trillion in goods and services annually amidst this chaos. That kind of wealth creation is not easily destroyed. We almost did it with a banking and market meltdown. Thankfully, pragmatic financial minds at the helm steered us out of those waters. You may not like the Fed's quantitative easing and the inflation it threatens. But 15 years of Japanese deflation is not the lesser economic evil here.

3) Money Seeks a Return

Should this complexity and systemic risk scare us into betting against growth that can sustain and pay down debt - especially with S&P 500 EPS about to cross the historic milestone of $1 trillion in profits?

I'm not saying the economy is headed for 5% growth and the market for all-time highs every quarter this year. What I am saying is that the most likely scenario is the middle way. Look at the fact that the S&P 500 has traded in a big sideways range from 1500 down to 700 and back for over ten years. The opportunities to participate in economic cycles and bull and bear markets have been terrific.

The breakout above that 13-year range doesn't guarantee the Secular Bear market is over. But it definitely speaks well of investor views of the economy and future corporate earnings.

Is the US economy fully sound and without structural problems? Of course not. But money isn't going to run and hide again like it did in 2008. And even if it did, how long did that last? Money is going to run and seek yield, anywhere and everywhere it can. In emerging markets with double-digit growth, in commodities, in the sovereign debt of the next world's reserve currency.

Far more interesting - and profitable - than any Armageddon trade is to "buy and trade" equities from around the globe. Money moves too fast for you to worry about a depression or even inflation. Indeed, you can whip inflation every year with a sound investing and trading method.

Want some even better news? Legendary investors like Buffett and Bill Gross of PIMCO say we should have much lower expectations for annual stock market returns (5%?) this decade. I think Warren said it in the last decade too. But really this is a huge opportunity for the small investor. The big guys have too much money and have to take too much risk to beat their benchmarks.

3 Scenarios for the Next Year

The spoils in this environment will go to the investors who are nimble and armed with information. Contrary to what some of my day trader friends say (that the "algo" machines have taken over their markets), the playing field has been leveled enough that we can have a blast - and a profitable one at that - trading the swings and following the money flow.

I've talked about the most likely outcome for the US economy and stock market. The slow growth 1%-2% GDP path is still surprisingly good for the stocks of good companies with solid earnings momentum.

The real surprise for the perma bears and anyone else expecting to be unimpressed by the US economy will be when it really does start hitting 3% growth.

What are the other possible scenarios where we can still make money?

Best case: Europe pulls together and the ECB finances stability and growth, while China embarks on pro-growth stimulus that lifts emerging markets around the globe.

Japan may have just raised the bar for all of Asia when it comes to proactive growth policy. All this puts S&P 1750 in view in the next year.

Worst case: Europe continues to melt down, China can't stimulate their economy as inflation roars out of control, and the US goes into recession, which means equity markets experience a bear market and we see S&P 1,200 again.

Armageddon? Not happening. Even in the worst case, we can "buy and trade" the swings and even short the market with unique and safe instruments tailor-made for liquidity and speed.

How You Can Catch Those Swings

Many profitable upward and downward market moves are on the radar, and I am directing a private Zacks investor group to take advantage of them. Zacks Market Timer offers a unique buy/sell approach to profiting from quick, explosive swings in industries, sectors and the market as a whole.

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Good Investing,

Kevin Cook

Kevin, a Senior Stock Strategist at Zacks, is a recognized authority in global markets and renowned for predicting market swings. A former market-maker in the $4-trillion-dollar-a-day world of interbank trade, he developed the ability to track the movement of money, and trained his reflexes to take advantage of it. Today he directs the Zacks Market Timer, providing commentary and recommendations.

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