Jim Hardesty on CNBC Squawk on the Street
Jim Hardesty defends his position on an earlier show and insists the Dow will not, in fact, drop to 5,000 this year.
David Hefty: We do believe it’s gonna go into a complete freefall, much like we saw in oil back in 2008, that could push the Dow as low as 5,000.
Host Erin Burnett: And that’s an incredible plunge from where we are now.
David Hefty: It only takes a handful of hedge funds to get a margin call, before we start seeing this freefall take place.
Host Erin Burnett: Well, that was last week. We’ve got a new week and a chance to continue that conversation. Back with us on the news line, David Hefty, the man you just saw there, CEO of Cornerstone Wealth Management, he’s calling for Dow 5. And Jim Hardesty, last week he said, no, no, no, president of Hardesty Capital Management. They’re back and good to have both of you with us.
Okay. So, that was a small part of our conversation last week. Today, it’s all of the conversation. David Hefty, make your case. Why is it all you need is a couple of hedge funds to cause that sort of downdraft, which would be a decline of 50 percent?
David Hefty: Well, again, when you look at the market and you look at the fact that we have $17 trillion of leverage inside the financial system, when you look at that around the world, our particular financial system has more debt than anything else. It only takes a few hedge funds to get that margin call. When they start to sell and the fact that everybody’s already on pins and needles, that’s where that freefall starts, takes place, again, just like what we saw in oil back in ’08.
Host Erin Burnett: All right, Jim Hardesty, fight back. Why is this insanity?
Jim Hardesty: Well, first off, we also have a significant number of assets supporting that debt level he cited, namely about $54 billion. So, I mean, we are, in our leverage sense, not that exposed. I also feel that the economy is in a sharp recovery phase now and that it’s supporting the valuations that we have.
To go to $5,000 on Dow would mean that the value of Dow relative to the GDP would be 20 percent lower than the bottom of 1974. It would be 15 percent lower than it was in March of 2009.
Host Mark Haines: Okay.
Jim Hardesty: I just don’t think this is gonna happen.
Host Mark Haines: Let me just interrupt here. Jim, as I understand David’s argument isn’t that it would drop to that level on fundamental value, but rather in some sort of panic, snowball trading effect and given what happened with that 1,000 point flash crash. I agree with you. I don’t think it’s going down there. But you do kind of have to consider the possibility, do you not?
Jim Hardesty: Well, I think there will be circuit breakers put in pretty quickly to prevent a repeat of May the 6th, that was an unusual event, I have to admit to you, but this is not likely to happen.
Host Mark Haines: All right, David, a cynic might say, you know what, you’re just trying to cash in on that flash crash with an outrageous prediction to get attention?
David Hefty: Yeah, no, you know, here’s the thing to have an objective view, you have to understand where you are in the cycle. We’re in the eleventh year of a secular bear market. And when you look at these types of markets, we are still deflating or deleveraging the big bubble that started back in 1994. So, as you start to look at those trends and where things are going, it still has a long ways to go. The fact of the 5,000, that particular piece, you know, is very likely. Actually, that’s not even our extreme low, when we look at our objectives that we look at into making these determinations.
So, the most important thing investors need to do right now, though, that’s the main focus, when you look at an investor, you have to either identify whether you want to continue to buy and hold and try to –
Host Mark Haines: Yeah.
David Hefty: – ride this wave up or if you want to advance your money, when you can’t protect, when you can’t, the upside potential of the market after this next rally, ’cause keep in mind, we’re still full in right now.
Host Mark Haines: All right.
David Hefty: We’re very bullish in the short term. There’s a rally that’s coming. Once you get through that next rally and we form that major top, you have to decide how much risk you want to take, ’cause the downside far outweighs the upside potential.
Host Mark Haines: All right, David, listen. If you change your mind, you better let us know, because, right now, we’re penciling you in for January, when we can say, how dumb was that?
David Hefty: Yeah, I’ll see –
Host Erin Burnett: Well, we hope how dumb.
Host Mark Haines: David Hefty, Jim Hardesty, thank you both very much.