At the risk of curbing anticipation over what Fed Chairman Jerome Powell might say at next week’s annual symposium in Jackson Hole Wyoming, it is unlikely he’ll say anything that you can use to trade the markets over the balance of this year. Why? It’s not clear that the Fed knows what’s likely to happen nor could it tell us if it did without running the risk of bursting the global financial bubble that it, along with other central banks, has blown since 2008. Secrecy and uncertainty have been instrumental in keeping the market “bears,” most notably the “short sellers” away.
Most informed observers know that the global economy is slowing and that Mr. Powell’s policy to continue raising interest rates, ostensibly because growth is strong and inflation is rearing its ugly head, is making matters worse. Higher rates strengthen the US dollar, which is deflationary to our own economy and exacerbates the woes of most emerging markets. I believe the real reason the Fed is continuing to raise short term rates is because financial institutions, especially insurance companies and pension funds, desperately need higher rates to function properly. Also, raising rates will provide leeway for the Fed to lower them and offer some relief to the markets when (not if) the next financial crisis occurs.
Mr. Powell has the financial markets exactly where he wants them right now, completely uncertain as to what’s actually going on or what action the Fed might take in the weeks ahead. And there are plenty of reasons for the market to sell-off and plenty for it to rally into the New Year.
The bad news is that while many are concerned about inflation, there is still tremendous global deflationary pressure demonstrated by the more than half of commodities, and most notably gold, that are in “bear” markets (i.e., greater than 20% decline), and the fact that almost all have had at least a “correction” (i.e., greater than 10% decline). Many emerging markets have declined and some are on the brink of financial crisis, and with the exception of the US stock market, most global markets are performing poorly. Making matters worse is that the global yield curve (which compares long to short term interest rates) is inverted and copper prices have tanked recently, both signs of bad economic times ahead.
Those poorly performing international markets, and the fear they could worsen, is one good reason the US market might continue to rally, as a steady inflow of offshore capital keeps our markets afloat. Corporations flush with offshore cash liberated by this year’s tax reform could also keep the party going as major corporate buybacks continue this fall. And, if all else fails, history has shown that Q4 is critical to the entire year’s economic welfare, so don’t be surprised if the Fed provides some “unexpected” interest rate relief to goose the markets into year-end, assuming a major crisis doesn’t occur, in which case all bets are off.
Just be aware that even if the US market rallies into year-end, it could severely correct before, perhaps during the next several weeks. So, are you bullish or bearish?
Monday, August 20, 2018
Thursday, August 9, 2018
Is it Possible to Negotiate Fair Trade Practices With China?
I applaud the aggressive approach that the Trump Administration is taking on trade with China and it is difficult to argue that the effort is not only fair but long overdue. China has notoriously flouted long standing trade agreements by engaging in unfair trade practices. Most egregious among them is the stealing of intellectual property from foreign companies, and the least of which is the raising of trade barriers and the manipulation of its currency, the yuan, to protect its domestic industries and boost its trade exports.
The debate over whether the USA or China stands to lose the most in a trade war is really beside the point. The USA is still the stronger, more diverse economy, and the envy of the world because of its transparency, rule of law, depth and liquidity of its capital markets, and the fact that it still possesses the world’s reserve currency, a major advantage for conducting world trade. So, clearly the USA has many more tools at its disposal to wage a trade war than does China. However, the real question is which country is likely to succeed in getting its way as the trade war becomes more protracted and entrenched, which appears to be the case currently. In that regard, it would appear China has the upper hand. The USA must balance the long term benefits of achieving fairer trade, with the short term fallout and criticism from opposing political factions, the media and its citizenry. China is better positioned to present a unified resolve, even if it means sacrificing the welfare of, and suppressing the will of, its citizens to do so. China has the luxury of taking its time, completely unfettered by challenges posed by periodic elections and from opposing political factions.
With the recent abolishment of term limits, Chinese president Xi Jinping is defacto China’s leader for life, which confirms his status as the most powerful Chinese leader since Chairman Mao Zedong. President Trump is midway through a four-year term, and Congress, now controlled by his party, faces a midterm election this fall that could jeopardize that majority; these are political realities he must balance with his desire to negotiate a satisfactory trade agreement for America.
President Xi has the luxury of presiding over a state-controlled and censored media, in sharp contrast to our President that must contend with a biased mainstream media that ridicules him, undermines his strategies, and voices a consistent lack of respect for him and his office.
The real advantage for China is its ability to negotiate freely without regard for the welfare of its own citizens, compared with America where government is responsible to its citizens and must answer for its actions at every turn. As blunt as that statement appears, few developed nations in the world would argue that individual liberties are respected in China. That ability to sacrifice the needs of its citizens could give China the advantage in a trade war of attrition and could mean the difference between success and failure in those trade negotiations.
Knowing these facts, if you were President Xi, would you give an inch in these negotiations, or would you sit back and wait to see if President Trump loses either house of congress in the upcoming November elections, thereby further advantaging China in those negotiations? Regardless of the outcome in November, if you were President Xi, wouldn’t you wait to see if Trump is re-elected in 2020, knowing that if he loses the election it is likely that his successor will not have the fortitude and courage of conviction to continue to wage a Trade War? After all after decades of jawboning about the need to negotiate with China, heretofore there has been no real attempt by America’s politicians to remedy that injustice. All good negotiators like to let the negotiations come to them and in the meantime, President Xi can bide his time and watch America’s divisive and ineffectual political leaders win the battle for him.
The debate over whether the USA or China stands to lose the most in a trade war is really beside the point. The USA is still the stronger, more diverse economy, and the envy of the world because of its transparency, rule of law, depth and liquidity of its capital markets, and the fact that it still possesses the world’s reserve currency, a major advantage for conducting world trade. So, clearly the USA has many more tools at its disposal to wage a trade war than does China. However, the real question is which country is likely to succeed in getting its way as the trade war becomes more protracted and entrenched, which appears to be the case currently. In that regard, it would appear China has the upper hand. The USA must balance the long term benefits of achieving fairer trade, with the short term fallout and criticism from opposing political factions, the media and its citizenry. China is better positioned to present a unified resolve, even if it means sacrificing the welfare of, and suppressing the will of, its citizens to do so. China has the luxury of taking its time, completely unfettered by challenges posed by periodic elections and from opposing political factions.
With the recent abolishment of term limits, Chinese president Xi Jinping is defacto China’s leader for life, which confirms his status as the most powerful Chinese leader since Chairman Mao Zedong. President Trump is midway through a four-year term, and Congress, now controlled by his party, faces a midterm election this fall that could jeopardize that majority; these are political realities he must balance with his desire to negotiate a satisfactory trade agreement for America.
President Xi has the luxury of presiding over a state-controlled and censored media, in sharp contrast to our President that must contend with a biased mainstream media that ridicules him, undermines his strategies, and voices a consistent lack of respect for him and his office.
The real advantage for China is its ability to negotiate freely without regard for the welfare of its own citizens, compared with America where government is responsible to its citizens and must answer for its actions at every turn. As blunt as that statement appears, few developed nations in the world would argue that individual liberties are respected in China. That ability to sacrifice the needs of its citizens could give China the advantage in a trade war of attrition and could mean the difference between success and failure in those trade negotiations.
Knowing these facts, if you were President Xi, would you give an inch in these negotiations, or would you sit back and wait to see if President Trump loses either house of congress in the upcoming November elections, thereby further advantaging China in those negotiations? Regardless of the outcome in November, if you were President Xi, wouldn’t you wait to see if Trump is re-elected in 2020, knowing that if he loses the election it is likely that his successor will not have the fortitude and courage of conviction to continue to wage a Trade War? After all after decades of jawboning about the need to negotiate with China, heretofore there has been no real attempt by America’s politicians to remedy that injustice. All good negotiators like to let the negotiations come to them and in the meantime, President Xi can bide his time and watch America’s divisive and ineffectual political leaders win the battle for him.
Wednesday, August 1, 2018
Is Treasury Secretary Mnuchin’s Move to Reduce Capital Gains Taxes Naïve or Genius?
When I heard the news yesterday, I nearly fell off my chair, not because it’s a bad idea, but the timing in my humble opinion could not be worse. The Treasury Secretary is studying the ramifications of reducing capital gains taxes on investments like stocks, bonds and real estate, by taking into account inflation before levying taxes on investors selling those assets. Capital gains currently are figured by subtracting original asset purchase prices from current sale prices without adjusting for inflation. Obviously, such a move would be seen as favoring the rich who have more assets to sell and would thereby benefit most from such a proposal. In addition, at least in the short run, naysayers contend that the move would further increase our already obscene and growing Government debt, which nobody thinks is a good idea. However, proponents of the proposal would argue that reducing capital gains would in the medium to longer term increase economic activity and ultimately lead to an increase in tax collections by the Government.
Notwithstanding the economic merits of such a proposal, the politics of doing this and doing it now seem to be ill-advised. The Democrats already depict this administration as favoring the rich, there’s all the noise about Russia, world trade and tariffs, immigration, not to mention there’s a midterm election coming in a few months. Why would the GOP propose something like this, that is likely to inflame the media and has NO chance of happening any time soon? It would seem like a bone-headed move, right?
Or perhaps it’s a stroke of pure genius. Stock market followers sensing pending doom in the markets for months may now believe that the recent tanking of market stalwarts like Netflix and Facebook is signaling the imminence of a market correction. If history is any guide, August is a good time for a stock market sell-off. The GOP knows that the only hope of sustaining the heady economic growth recently reported (and give them a fighting chance in the midterm elections) is to delay a stock market sell-off until at least next year. What better way to keep folks from selling their stocks now, but by holding out even the possibility that if they wait until next year, their tax bills will be lower? The genius part of the move is that such a “bluff,” if you will, won’t cost taxpayers a dime and isn’t that a better idea than spending trillions propping up the market by getting the Fed to lower interest rates, print money or restarting quantitative easing again?
Notwithstanding the economic merits of such a proposal, the politics of doing this and doing it now seem to be ill-advised. The Democrats already depict this administration as favoring the rich, there’s all the noise about Russia, world trade and tariffs, immigration, not to mention there’s a midterm election coming in a few months. Why would the GOP propose something like this, that is likely to inflame the media and has NO chance of happening any time soon? It would seem like a bone-headed move, right?
Or perhaps it’s a stroke of pure genius. Stock market followers sensing pending doom in the markets for months may now believe that the recent tanking of market stalwarts like Netflix and Facebook is signaling the imminence of a market correction. If history is any guide, August is a good time for a stock market sell-off. The GOP knows that the only hope of sustaining the heady economic growth recently reported (and give them a fighting chance in the midterm elections) is to delay a stock market sell-off until at least next year. What better way to keep folks from selling their stocks now, but by holding out even the possibility that if they wait until next year, their tax bills will be lower? The genius part of the move is that such a “bluff,” if you will, won’t cost taxpayers a dime and isn’t that a better idea than spending trillions propping up the market by getting the Fed to lower interest rates, print money or restarting quantitative easing again?
Saturday, March 17, 2018
Pinchazo: A Foray Into Guatemala
Just returned from nine days in Guatemala, and thought I’d jot down some observations and impressions of the place. Having no prior knowledge, I had few expectations although I will admit that I had some biases based on its location nestled beside Mexico.
I now understand why Central America generally and to some extent Guatemala is so popular with Americans and especially retirees. First, the climate is great and actually more accommodating than Florida, as its elevation above sea level provides a more temperate climate and less humidity, at least during its dry season. Second, the people are friendly and hard working. Third, the cost of living is inexpensive. Fourth, in the case of neighbors Belize, Costa Rica, and Panama, English is spoken everywhere (not true in Guatemala).
Among my biggest surprises (even though I knew Guatemala was a poor country) was the fact that the roads are horrendous, and the driving is even worse. Between the spectacular topography (owing to mountains formed eons ago by earthquakes and volcanoes) and the fact that the vast majority of roads are either cobblestone or dirt, travel around the country ain’t easy. And there is no railroad or mass transit of any kind, probably because of the topography, unless you count the thousands of “chicken buses” the locals take to get around. (Chicken buses are yellow school buses from the USA that have been artistically and uniquely painted and used to transport people and all types of cargo, including livestock, hence the name.) It was not surprising to learn that Guatemala ranks 116 in paved roads with a mere 4,700 kilometers (less than 3,000 miles) of paved roads, behind Western Sahara and before Tunisia.
Another big surprise, which I learned by inquiring about sending postcards was the fact that two years ago, the country abolished its national postal system, so if you want to send mail, you need either a private courier or DHL. Tooling around small villages I noticed most have no street signs, so you have to wonder how the mail every got delivered even when the post office existed. No street signs tell me that all activity in most of the country is very local where everyone knows everyone else.
Probably my biggest surprise was to learn that there is no system of public education in Guatemala, meaning children can only attend schools if their parents can pay to send them privately.
The most interesting bit of history I learned was about the relationship between Belize (formerly British Honduras) and Guatemala. According to our guide, centuries ago, England was granted permission to harvest wood (Mahogany) from Guatemala in return for promising to build roads in Guatemala, but apparently not only didn’t build roads, but occupied more land than their permission allowed, and kept it, which later became known as British Honduras. To avoid a confrontation, England granted that occupied territory its independence and it became known as Belize. Today Guatemala intends to appeal to the United Nations to either reacquire that territory or at least be compensated for its improper appropriation by England. Time will tell it they are able to prevail.
If you decide to go to Guatemala, be aware that travel there carries significant risks, so your trip should be supervised by a professional tour guide, at least in a group format, or more preferably, a private tour guide (as we did). There is no public transportation, there are few road and street signs, information about everything is scarce, and YOU MUST SPEAK SPANISH to get anywhere or do anything!
We visited four areas: Guatemala City (the Capital City since the 1700s and where the major airport resides), Tikal (where the most significant settlement of the ancient Mayan civilization resides), Antigua (the well preserved former capital of Guatemala back in the 1500s, when it was ruled by Spain, later moved to Guatemala City after being decimated by an earthquake) and Lake Atitlan (a magnificent venue formed in the valley of several volcanoes).
These areas provide you with a blend of Spanish (and Catholic) history in the country, history of the Mayan civilization and some spectacular sites of natural beauty. If you have time, visit Chichicastenango (no, that isn’t Pinky Tuscadero’s kid sister) when you are in the vicinity of Lake Atitlan, touted as the oldest and largest open air market in Central America.
Additionally, we enjoyed visiting a coffee plantation near Antigua. I was surprised to learn that Guatemalan coffee is considered the world’s third best quality, behind Ethiopian and Kenyan, although you would never know it as they produce it in relatively small quantities. By the way, the locals aren’t coffee drinkers. Their chocolate is also considered very high quality, even though chocolate’s origin is apparently Brazil. By the way, the food just about everywhere we visited was flavorful and freshly prepared. Lots of fresh fruit, including papaya, pineapple, watermelon, cantaloupe, berries, and veggies, and avocadoes are served practically at every meal. The staples of the Guatemalan diet include corn, rice and beans.
My advice is to focus your visit on the two main areas of Antigua (for culture and history) and Lake Atitlan (for natural beauty). Tikal is billed as a major attraction given its historical significance as the center of the ancient Mayan civilization, and its available sites are impressive. However, be aware that only about 20% of those artifacts and tombs have been disinterred as of this writing, so you won’t see most of what archeologists believe lies buried beneath the surface. That was a bit of a disappointment. Besides, visiting there will require a short flight or a long bus ride as Tikal is located well north and east of the other two major attractions mentioned. You will probably need to fly into Guatemala City, but know that it offers little attraction and my advice would be to spend as little time there as possible.
Whenever I leave the USA I always return with a great appreciation of many things we take for granted here: words like management, organization, efficiency, transparency, disclosure, communication all carry greater meaning for me now. The Guatemalans are hard working, skilled, and talented people, but given the dire state of its roadways and communications infrastructure and the fact that they have no public or free education system, suffice it to say they face a challenging future.
In case you wonder about the title of this essay, you should know that “Pinchazo” is a Spanish word that has many meanings, including flat (as in tire) and sharp pain (as in the kind one experiences after many hours of traveling on cobblestone roads). It seemed that every mile or so, traveling on the major highways we saw signs reading “Pinchazo.” Not surprising since the roads are so bad. Our guide told us that not only do they wash their cars daily there, but they have their breaks checked every couple of weeks!
I now understand why Central America generally and to some extent Guatemala is so popular with Americans and especially retirees. First, the climate is great and actually more accommodating than Florida, as its elevation above sea level provides a more temperate climate and less humidity, at least during its dry season. Second, the people are friendly and hard working. Third, the cost of living is inexpensive. Fourth, in the case of neighbors Belize, Costa Rica, and Panama, English is spoken everywhere (not true in Guatemala).
Among my biggest surprises (even though I knew Guatemala was a poor country) was the fact that the roads are horrendous, and the driving is even worse. Between the spectacular topography (owing to mountains formed eons ago by earthquakes and volcanoes) and the fact that the vast majority of roads are either cobblestone or dirt, travel around the country ain’t easy. And there is no railroad or mass transit of any kind, probably because of the topography, unless you count the thousands of “chicken buses” the locals take to get around. (Chicken buses are yellow school buses from the USA that have been artistically and uniquely painted and used to transport people and all types of cargo, including livestock, hence the name.) It was not surprising to learn that Guatemala ranks 116 in paved roads with a mere 4,700 kilometers (less than 3,000 miles) of paved roads, behind Western Sahara and before Tunisia.
Another big surprise, which I learned by inquiring about sending postcards was the fact that two years ago, the country abolished its national postal system, so if you want to send mail, you need either a private courier or DHL. Tooling around small villages I noticed most have no street signs, so you have to wonder how the mail every got delivered even when the post office existed. No street signs tell me that all activity in most of the country is very local where everyone knows everyone else.
Probably my biggest surprise was to learn that there is no system of public education in Guatemala, meaning children can only attend schools if their parents can pay to send them privately.
The most interesting bit of history I learned was about the relationship between Belize (formerly British Honduras) and Guatemala. According to our guide, centuries ago, England was granted permission to harvest wood (Mahogany) from Guatemala in return for promising to build roads in Guatemala, but apparently not only didn’t build roads, but occupied more land than their permission allowed, and kept it, which later became known as British Honduras. To avoid a confrontation, England granted that occupied territory its independence and it became known as Belize. Today Guatemala intends to appeal to the United Nations to either reacquire that territory or at least be compensated for its improper appropriation by England. Time will tell it they are able to prevail.
If you decide to go to Guatemala, be aware that travel there carries significant risks, so your trip should be supervised by a professional tour guide, at least in a group format, or more preferably, a private tour guide (as we did). There is no public transportation, there are few road and street signs, information about everything is scarce, and YOU MUST SPEAK SPANISH to get anywhere or do anything!
We visited four areas: Guatemala City (the Capital City since the 1700s and where the major airport resides), Tikal (where the most significant settlement of the ancient Mayan civilization resides), Antigua (the well preserved former capital of Guatemala back in the 1500s, when it was ruled by Spain, later moved to Guatemala City after being decimated by an earthquake) and Lake Atitlan (a magnificent venue formed in the valley of several volcanoes).
These areas provide you with a blend of Spanish (and Catholic) history in the country, history of the Mayan civilization and some spectacular sites of natural beauty. If you have time, visit Chichicastenango (no, that isn’t Pinky Tuscadero’s kid sister) when you are in the vicinity of Lake Atitlan, touted as the oldest and largest open air market in Central America.
Additionally, we enjoyed visiting a coffee plantation near Antigua. I was surprised to learn that Guatemalan coffee is considered the world’s third best quality, behind Ethiopian and Kenyan, although you would never know it as they produce it in relatively small quantities. By the way, the locals aren’t coffee drinkers. Their chocolate is also considered very high quality, even though chocolate’s origin is apparently Brazil. By the way, the food just about everywhere we visited was flavorful and freshly prepared. Lots of fresh fruit, including papaya, pineapple, watermelon, cantaloupe, berries, and veggies, and avocadoes are served practically at every meal. The staples of the Guatemalan diet include corn, rice and beans.
My advice is to focus your visit on the two main areas of Antigua (for culture and history) and Lake Atitlan (for natural beauty). Tikal is billed as a major attraction given its historical significance as the center of the ancient Mayan civilization, and its available sites are impressive. However, be aware that only about 20% of those artifacts and tombs have been disinterred as of this writing, so you won’t see most of what archeologists believe lies buried beneath the surface. That was a bit of a disappointment. Besides, visiting there will require a short flight or a long bus ride as Tikal is located well north and east of the other two major attractions mentioned. You will probably need to fly into Guatemala City, but know that it offers little attraction and my advice would be to spend as little time there as possible.
Whenever I leave the USA I always return with a great appreciation of many things we take for granted here: words like management, organization, efficiency, transparency, disclosure, communication all carry greater meaning for me now. The Guatemalans are hard working, skilled, and talented people, but given the dire state of its roadways and communications infrastructure and the fact that they have no public or free education system, suffice it to say they face a challenging future.
In case you wonder about the title of this essay, you should know that “Pinchazo” is a Spanish word that has many meanings, including flat (as in tire) and sharp pain (as in the kind one experiences after many hours of traveling on cobblestone roads). It seemed that every mile or so, traveling on the major highways we saw signs reading “Pinchazo.” Not surprising since the roads are so bad. Our guide told us that not only do they wash their cars daily there, but they have their breaks checked every couple of weeks!
Monday, January 29, 2018
Stupid-To-Be-In-Cash Is Stupid Stock Market Advice
It’s bad enough that the daily financial news “cheerleads” (yes, that’s the right term) the stock market higher pointing to all sorts of fundamental and technical metrics but conveniently omits the elephant in the room: CONTINUING AND UNPRECEDENTED GLOBAL CENTRAL BANK MONEY PRINTING is the major reason for one of the longest and most dramatic bull markets in history!
Now, at this late date, some very savvy and successful investors have come forth with the audacious if not outlandish advice that investors may feel stupid if they hold cash, because markets will inexorably move higher. That advice evoked feelings of shock, disappointment, worry and even anger for many of us. All of a sudden, the prevalent view (for months if not years) that “there’s more risk to the downside, than the upside” was reversed for those observers.
What are possible motives for this about-face on the markets by some?
1. They actually believe what they say! It’s shocking if not frightening that such savvy observers, against a backdrop of contradictory evidence, should conclude that the market has more upside potential than downside risk, especially given how debt-burdened the global economy and how overvalued the stock market is by most measures. Let’s not forget this is the second longest bull market in history, second only to a bull market that occurred at the dawn of the internet age, arguably the most transformational technology of the last century!
2. They have been advised by the “powers that be” (you know who you are, even though we never will) that the “fix is in” and that nothing will be allowed to tank the market in the foreseeable future (however long that is). That may anger many of us because without knowing the details about those assurances (if they exist) we are unable to commit meaningful capital and invest confidently.
3. They have been advised by the “powers that be” that the only way to prevent a market collapse is to get as much dumb money (that’s us!) back in to prop up the markets. That’s both angering and worrisome for obvious reasons.
4. They are as oblivious as the rest of us to our financial future, but realize that their business models (read: hedge funds) rely on not only large amounts of borrowed money (which the government has provided at all-time low rates) but the leverage offered by cooperative dumb money that allows them to bid up prices and sell to us at all-time-highs, leaving us “holding the bag” when the market tanks. Make no mistake, this is a high-stakes game of musical chairs that will end with us standing when the music stops, i.e., when “they” (whoever they are) decide “the party is over.” Without notice and quickly the selling will begin in earnest and they will be out of the market long before we know what hit us! That’s not only disappointing, but rather worrisome and angering!
Investors should take little comfort in any of those scenarios. By the way, it’s not clear who can benefit from such savvy if contrary advice. The very wealthy who are rightfully more concerned with preserving capital than risking it for higher returns are not likely to buy into this strategy. Retiring baby boomers that barely have enough savings to live on and really can’t afford to risk losing their nest eggs at this late stage of their lives certainly can’t sign on to such foolishness. And Millennials struggling to earn a living wage and saddled with high student loan and consumer debt are unlikely candidates for such risk taking either. It would appear that only investors in the business of moving in and out of the market at opportune times (i.e., traders) are potentially able to capitalize on such advice.
Proponents of the “No Cash” strategy say history suggests that a long-sustaining melt-up is in the cards, but these are the same folks who have been telling us that historic metrics no longer apply and that a “new normal” precludes relying on old metrics to make forecasts. So what makes them so sure about a continuing market “melt up”? The question for investors is, will you feel dumber being in cash when the market rises or dumber being fully invested when the market tanks? For many who can still remember vividly the crash of 2008, the lesser of two evils in obvious.
Now, at this late date, some very savvy and successful investors have come forth with the audacious if not outlandish advice that investors may feel stupid if they hold cash, because markets will inexorably move higher. That advice evoked feelings of shock, disappointment, worry and even anger for many of us. All of a sudden, the prevalent view (for months if not years) that “there’s more risk to the downside, than the upside” was reversed for those observers.
What are possible motives for this about-face on the markets by some?
1. They actually believe what they say! It’s shocking if not frightening that such savvy observers, against a backdrop of contradictory evidence, should conclude that the market has more upside potential than downside risk, especially given how debt-burdened the global economy and how overvalued the stock market is by most measures. Let’s not forget this is the second longest bull market in history, second only to a bull market that occurred at the dawn of the internet age, arguably the most transformational technology of the last century!
2. They have been advised by the “powers that be” (you know who you are, even though we never will) that the “fix is in” and that nothing will be allowed to tank the market in the foreseeable future (however long that is). That may anger many of us because without knowing the details about those assurances (if they exist) we are unable to commit meaningful capital and invest confidently.
3. They have been advised by the “powers that be” that the only way to prevent a market collapse is to get as much dumb money (that’s us!) back in to prop up the markets. That’s both angering and worrisome for obvious reasons.
4. They are as oblivious as the rest of us to our financial future, but realize that their business models (read: hedge funds) rely on not only large amounts of borrowed money (which the government has provided at all-time low rates) but the leverage offered by cooperative dumb money that allows them to bid up prices and sell to us at all-time-highs, leaving us “holding the bag” when the market tanks. Make no mistake, this is a high-stakes game of musical chairs that will end with us standing when the music stops, i.e., when “they” (whoever they are) decide “the party is over.” Without notice and quickly the selling will begin in earnest and they will be out of the market long before we know what hit us! That’s not only disappointing, but rather worrisome and angering!
Investors should take little comfort in any of those scenarios. By the way, it’s not clear who can benefit from such savvy if contrary advice. The very wealthy who are rightfully more concerned with preserving capital than risking it for higher returns are not likely to buy into this strategy. Retiring baby boomers that barely have enough savings to live on and really can’t afford to risk losing their nest eggs at this late stage of their lives certainly can’t sign on to such foolishness. And Millennials struggling to earn a living wage and saddled with high student loan and consumer debt are unlikely candidates for such risk taking either. It would appear that only investors in the business of moving in and out of the market at opportune times (i.e., traders) are potentially able to capitalize on such advice.
Proponents of the “No Cash” strategy say history suggests that a long-sustaining melt-up is in the cards, but these are the same folks who have been telling us that historic metrics no longer apply and that a “new normal” precludes relying on old metrics to make forecasts. So what makes them so sure about a continuing market “melt up”? The question for investors is, will you feel dumber being in cash when the market rises or dumber being fully invested when the market tanks? For many who can still remember vividly the crash of 2008, the lesser of two evils in obvious.
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