When stock market conditions become especially volatile, as they have this week, I often turn to my colleagues for perspective.

For this week’s Big Interview, I sat down with Amber Hestla, chief investment strategist of the trading services Income Trader, Profit Amplifier and Maximum Income. Amber specializes in generating income using options strategies that minimize risk.

That’s Amber to your left. You might not have guessed it from her picture, but Amber served in Operation Iraqi Freedom.

While deployed overseas with military intelligence, Amber learned how to interpret disparate data to predict likely outcomes. Upon her return to civilian life, she honed this skill to find money-making opportunities.

To put this wild week into context, I questioned Amber about the latest news and trends that directly affect individual investors.

From the trough of the recession of 1945 to the 2008 Great Recession, there have been 11 periods of expansion, lasting an average of 4.8 years. The current expansion is more than a decade long. Aren’t we overdue for a recession? If so, when do you think it will hit?

Let’s put the average expansion into deeper context. I think we can all agree that the length of the expansion is influenced by the Federal Reserve, whether we agree with Fed policy or not. Before the Fed, from 1854 when data starts, the average expansion lasted about 25 months.

In the early days of its history, the Fed was struggling to understand its role and the regional banks exerted more power than they should have. The Great Depression, for example, lasted longer than it needed to in part because branches in the Midwest were arguing with the New York branch. Expansion lasted an average of 36 months in that era, which I define to the end of World War II.

After the war, the Fed was bound by the international Bretton Woods arrangement and the average expansion lasted 45 months until that system collapsed and the Fed assumed its current, aggressive role in the economy.

Since Fed Chair Paul Volcker broke the back of inflation in the early 1980s, the average expansion has lasted 95 months. That means the current expansion is old, at about 122 months, but its age is in line with the average under this current Fed policy regime.

With that in mind, we aren’t as overdue as many analysts believe. But the economy looks weak and a recession in the next year is likely unless the Fed finds a way to boost economic growth.

Low interest rates won’t be the answer. The most recent survey of business conditions by the National Federation of Independent Business showed just 12% of small business owners would borrow more if the Fed cuts rates by a full 1%. Last month’s 0.25% cut won’t rescue the economy.

The problem is simply consumers don’t have money to increase their spending and the economic expansion will end when consumers stop shopping. We see signs of that now. This month’s consumer price index report revealed that computer and peripheral prices (including tablets and notebooks) posted the largest one-month price increase on record. Furniture and bedding prices had the largest gain in 23 years.

Higher prices are forcing a cutback in discretionary spending and that will be the cause of the next recession. I expect the recession to begin no later than the first quarter of 2020 and that has important implications for the election and the stock market that we can talk about next time.

The average age of a bull market is 4.7 years. This bull run is more than 10 years long. The bear is stirring. How long before we get a major correction?

I’ll agree with you on the average length of a bull market. But bull markets don’t die of old age. They end when we run out of buyers. There’s no sign that’s about to happen.

The Fed and central banks around the world are cutting rates. In Europe and Japan trillions of dollars of bonds carry negative interest rates so you are guaranteed a loss when you buy. Yet, there are buyers for these bonds because pension funds and insurers need the bonds in their portfolios to cover benefits.

As long as rates are low, bonds are unattractive and that pushes investors to stocks. There is a lot of risk in the world right now and that pushes investors to safe havens, like U.S. stocks.

I expect to see declines, but I don’t expect the declines to become a bear market until we have a “black swan” event. A black swan is that rare and unpredictable event like a collapse in the short-term corporate credit market like we saw in 2008. No one saw that coming at the time, no matter what they say now.

Read This Story: Does a “Lehman-Like Shock” Lie Ahead?

Bear markets are always surprises. If we saw them coming, everyone would be prepared for them. But the bull market can continue simply because of TINA — There Is No Alternative to Stocks, especially large-cap U.S. stocks.

Corporate earnings growth is projected to come in at a negative number in the second quarter, after negative growth in the first. Two consecutive quarters of negative earnings growth represents an “earnings recession.” Assess the state of corporate earnings in the last half of 2019.

Earnings are expected to decline this quarter as well, so we could see three consecutive seasons of year-over-year earnings contractions. The last earnings recession was actually in 2016, not that long ago. And stocks managed that period without a bear market.

Earnings really aren’t very important because they are determined by accountants. Some readers will remember Enron, a company that grew earnings at an incredible pace in the 1990s but was a gigantic fraud. Earnings were manufactured by accountants, and some went to jail for their role in that story.

Despite earnings, Enron never generated cash flow from operations (CFO). Companies don’t use earnings to grow. They use CFO to reinvest in operations, make acquisitions or reward shareholders with dividends or buybacks. And CFO is growing, which means the upward momentum in stock prices can continue based on fundamentals.

And yet valuations are high. How long can this contradiction last between negative earnings growth and high multiples?

The CFO yield on the S&P 500 is about 6.3%, which means companies are earning adequate after-inflation returns on their investments, especially when yields on 10-year Treasuries are at record lows under 1.7%.

P/E ratios are high, but not high when real interest rates are considered. Ben Graham, Warren Buffett’s business school professor, said we need to consider real interest rates when evaluating P/E ratios. When rates are low, as they are now, P/E ratios should be high. Graham’s methods indicate P/E ratios above 40 are appropriate in this current environment.

Graham didn’t use the word TINA but his teachings point to the reality that with low rates, stocks can go much higher.

The current contradiction between earnings and high multiples can last for years, especially since the relationship isn’t very important. I know my opinion on that differs from what traditional analysts believe.

You served with U.S. military intelligence, so I’d like your thoughts about growing geopolitical risks. Which hot spot should worry investors the most?

I’m watching India.

Just last week the Indian government took steps to reorganize India’s only Muslim-majority Kashmiri state. Kashmir is now on a virtual lock-down and tensions are mounting. Kashmiris worry that the move is driven by the Hindu nationalist agenda of Prime Minister Modi. They are worried for good reason because this action will almost certainly lead to Hindu integration in Kashmir.

This seems like an obscure problem. But Pakistan supports Kashmir. Pakistan seems to be moving troops towards its border with India. That creates two concerns.

First, those troops are moving away from the border with Afghanistan which makes it easier for terrorists to move in the region and increases the risk of terror attacks around the world. This comes as peace talks in Afghanistan reach a critical point and a draw-down of U.S. troops is possible. An uncontrolled border with Pakistan could create chaos.

Second, Pakistan and India have fought over this region for years. The most recent shooting conflict occurred earlier this year. Since 1989, an estimated 47,000 have been killed in conflict between the two countries with another 3,400 missing.

This conflict is the reason both countries pursued nuclear weapons and it is why they keep nukes pointed at each other. Based on my understanding, neither country has the level of control over weapons that we see in other nuclear countries.

Right now, we have nuclear powers staring each other down while terrorists are increasing their freedom of movement in the region. And the story is on page 5 of The New York Times because page 1 is devoted to news about a sex offender and random insights from the Iowa Kernel Poll.

This crisis is a potential black swan. Everyone knows there are problems in other places and those problems are priced into markets. Kashmir is below the radar for now and more serious than many others. It’s a complex and volatile region where problems follow unpredictable paths.

My second choice is Argentina which could be headed to a default on its government debt. This is a good example of how no one sees problems coming.

In June 2017, a little more than two years ago, Argentina sold 100-year bonds at 7.9%. Since independence in 1816, Argentina defaulted on debt eight times, most recently in 2002. Yet, investors bought 100-year bonds at a rate less than many U.S. companies offered at the time.

Some analysts say that tit-for-tat tariffs between the U.S. and China will eventually push the global economy off a cliff. What’s your view?

This is a problem and that’s why the Trump administration delayed tariffs this week. I’m certain it’s a coincidence that the delay was announced a couple hours after the CPI data showed the problems I mentioned earlier.

I expect this problem to cool down. China has enough to worry about with a slowing economy and protests in Hong Kong. The slowing economy is the big problem for the country.

Keeping people employed is a primary concern for China’s leadership and a trade war doesn’t create jobs. I believe China will be patient at this point. They know there is a U.S. election about 15 months away and there is a chance that everything could change after that. Rather than risking further problems, I expect them to stall for time. This at least delays the crisis.

Editor’s Note: I’ve just interviewed Amber Hestla, who provided insights that are valuable for all types of investors. But she’s not the only colleague at Investing Daily with an uncanny ability to pick winning investments. Which brings me to Jim Fink.

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