It’s been a remarkable year, with many lessons. Read more here.
Last week we were in San Francisco listening to a presentation by Schwab’s chief economist, Liz Ann Saunders. My takeaway was that the economy is not thriving because of
a. excessive debt in the system.
The excessive debt may or may not have prevented a depression but its legacy is gargantuan payments to keep from defaulting. These will only become larger as interest rates rise.
The complexity is due to technological change and off-the-charts over-regulation. Distractions have grown and regulatory uncertainty is rife.
What will happen? We don’t know. Here’s bond guru Bill Gross’ latest comment.
The fading middle class is the dominant social issue of our era, and will somehow affect our investment choices.
This article is by a leading economist. My thought is that the fading middle class is the dominant social issue of our era, regardless of politics. It is CERTAIN to have an effect on the financial markets, but what that effect will be, we cannot know.
I continue to find lessons and indicators in the Brexit experience.
- In general, economically and culturally, Asia is rising. Europe is in decline.
- Immigration is a big issue globally. Britons feel swamped by unfettered immigration from Europe. That strongly affected their votes. I’m perceiving that the immigration issue was bigger by far than economic questions.
- Social anger is increasing. Many people feel they have lost ownership of government and are at risk of losing their cultural identity. Results: anger, alienation, separation, and fear. This was apparent in the “Brexit” vote. It is also apparent in the current angry American presidential campaign.
- Low and lower interest rates. Brexit demonstrates yet again that any crisis is a giant gift to the Federal Reserve. At this point the Federal Reserve can keep interest rates as low as it wishes for as long as it wishes, and blame Brexit.
Here’s my article in the Salinas Californian, to discuss this further.
As we prepare the 2nd quarter’s reports and I study the financial markets, I’m reminded yet again that intelligent persistence is a core virtue of successful investing. My son Eric, who is on our board of directors, recently sent me this link, and I think it’s very relevant. Press on regardless.
Bill Gross is one of the most successful fixed income investors in the 20th and 21st Century. His words are worth reading, for insight into what negative interest rates may be creating in the financial world. My own thought is that negative interest rates must be KILLING the international money market fund industry. Also negative interest rates are favoring non-bank share repurchases and other self-absorbed non-productive behavior. Note also the push to criminalize cash which Bill Gross discusses. Strange days indeed.
Now that we seem to be experiencing the much-awaited stock market correction, we have a new crop of doomsayers preaching that the end of the (financial) world is nigh.
Of course I can’t say they are wrong, any more than I can say that a catastrophic earthquake won’t happen. However, history suggests that the more financial catastrophes are predicted by the experts, the more moderate our market declines are likely to be. Why does this happen? We don’t entirely know, but I’m guessing that it has something to do with investors’ emotional preparation. If they are hearing a lot about financial catastrophes, they are likely to be more cautious from the start, and less likely to be surprised.
Here’s one expert’s prediction, and it’s a genuine emotional slap. “Sell everything” is a very strong statement, especially when issued by a bank.
Here’s another, and it’s also frightening. Simply envisioning a stock market decline of 75% is painful.
Of course, I wouldn’t be surprised if the S & P 500 DID decline 30%. The world faces many headwinds currently, and the financial markets have been both blindly optimistic and historically overvalued. But, historically, a bear market of -30% which passes in a few years is not catastrophic, in fact, normally, it tends to be a buying opportunity. In contrast, both these pundits are predicting 1929 or 2008 style train wrecks which take a decade or more to heal.
However, we CAN’T PREDICT THE TIMING OF SUCH AN EVENT ACCURATELY!!! If there’s anything I’ve learned in the past three years, it’s that statistics can identify probabilities, but they can’t deliver accurate forecasts relative to when the forecast will occur. Yes, it’s possible that the downturn which is now emerging in the stock and bond markets will be severe. But the predictive indicators aren’t really saying that now. They are suggesting that we may have a downturn, which won’t be completely catastrophic.
In fact, the Value Line Median Price Appreciation Potential, which has a very good historical record for accuracy, indicated that the S & P 500 was overvalued three years ago. Since then it’s suggested that stock markets have grown ever-more overvalued. Now it’s actually becoming slightly more attractive and less indicative of future stock market maelstroms.
In my experience, the worst financial market train wrecks happen when everyone thinks the world is just wonderful. That’s certainly not the case now. I’m maintaining our relatively defensive, highly diversified positions, and I’m still keeping us invested somewhat in the stock market. The reality is that we don’t really know what will happen.