The Gold Report: For more than a decade, you led Morgan Stanley Investment Management’s global investment strategy; now you own your own research firm based on your observations of the industry for more than 50 years. How do you explain the volatility in the markets right now and how should investors position themselves to prepare for what is coming?
Joe McAlinden: It has been a wonderful bull market, a wild ride going all the way back to 2007 when the market made its top. That was followed by a horrendous plunge. We’ve not only made that back, but the market has reached highs that were 36% above the 2007 highs. I had been concerned recently, however, that price-earnings ratios have become elevated and we are seeing other spooky similarities to the conditions that prevailed prior to the 1987 crash, including the absence of a more than a 10% correction for three years and a breakdown of small-cap stocks. The market could be vulnerable to some kind of major shock. I believe that the big shock is only beginning to unfold and that as it does, this correction will get considerably worse, perhaps double what we’ve had so far and maybe even worse than that.
TGR: What do you think the market expects the Federal Reserve Board to do?
JM: The market is hoping the Fed will bail them out by postponing the tightening, but I don’t think that’s going to happen. It is appropriate for the Fed to begin the tightening process now. It’s not the Fed’s job to regulate what’s going on in the stock market. It’s job is to maintain the purchasing power of our currency. The Fed is tasked with keeping inflation and inflation expectations stable and fostering full employment.
“It is appropriate for the Fed to begin …read more