Europe

U.S. stock market gains are incredibly concentrated.

One of the hallmarks of mature U.S. stock markets is when index funds are doing better than actively managed mutual funds. That’s because the “rational” active managers are scared so they begin to avoid risk. The result is lagging returns relative to fearless, mindless index funds. I’ve seen this in 1987, 1990, 2000, and 2007. It can go on for years.

Another indicator of mature stock markets is when the market concentrates into only a few big players. This time, the big players are the FANG stocks (Facebook, Amazon, Netflix, Google). Citibank broadens them out to the FANTASY stocks (Facebook, Amazon, Nvidia, Tesla, Alphabet, Salesforce.com and Yahoo). However you label them, they are up a lot so far this year, about 30% by some estimates, and account for the majority of the broader indices’ gains. Doesn’t this sound familiar to anyone?

Also according to Citibank they have an average P/E of over 60, which is way up there in the bubble zone. That’s more than overvalued. And of course they are skewing the large indices’ valuations higher.

Combine this with the cryptocurrency markets and you’ve got looneytunes right here, right now. This has bubble written all over it. But it’s NOT a bubble in the entire financial system. Yet.

What happens next?

This may go on for years. My thought is that there’s no need to rush for the exits as long as we stay diversified. And if we sell early we risk being left far, far behind.

On the other hand a political event could trigger the inevitable landslide.

Meanwhile, economies are growing and valuations are much cheaper overseas. I’m examining that option.

Stay diversified. We are sure to have an interesting year.

For more evidence, read here.

What is different about the S&P 500’s longest losing streak in 8 years…

…Is that it’s a paper cut. Most days the market has barely declined at all. We don’t know what will happen. So far, not much.

To prevent becoming too concerned about day-to-day price volatility, check out this ultra-long stock market chart here.

Fascinating! Investing works. Stay the course…even if it gets a bit bumpy.

How to create wealth which lasts generations

One of my fascinations is how to pass on wealth between generations. It amazes me how people can succeed magnificently at wealth transfers, and can even prepare the following generations for wealth which they themselves never enjoyed. Or sometimes they can blow things to shreds. Life is a lot harder than we would like to realize, and providing for future generations in terms of education and actual wealth is a profound blessing. There’s a lot to learn from the European and Asian families who have managed this successfully for centuries. Read here what billionaires do.

Flash Crash in the British pound currency!

I’m guessing this is a good time to plan a visit to England. Today’s frenzy over the British pound is a good thing for British exporters too. It also illustrates why we tend to avoid ETF’s: too many technology-driven flash crashes.At some point soon I expect to go bargain hunting. Read more about why you should plan a trip to London here.

Is inflation the only way out?

At the end of a busy day of study and action, I’m looking at overall debt loads and interest rates. I’m wondering if, perhaps, the US government might seek to “accidentally” create runaway inflation for a short period to reduce the real cost of their soaring debt load. Otherwise, when interest rates go up, it’s going to be very difficult to repay. It worked for Germany in the 1920’s. No, wait, it didn’t work, did it? Still, it will be tempting when the bills come due.

Explore German hyper-inflation here.

Out of energy, into financial stocks.

We have largely exited our energy holdings. Most of these were profitable. We have cut our gold exposure in half after a very successful run. Our overall holdings in technology and health care remain in place. Now we are newly invested in bank stocks, both foreign and domestic. The challenge of financial stocks currently is that they are a very uncertain and high-risk position, dependent upon both interest rates rising and economies not stalling. We can’t really guess what will happen. For example European bank stocks…of which we own a dollop…were hammered today with bad Euro-economic news (Is there any other kind?) I’m thinking that patience and humility may help us produce outsized gains in this unloved, ignored sector. Meanwhile billionaire bond trader Jeff Gundlach says sell everything, even the kids. I’m inclined to keep the kids. Stay patient.

Read this article simply to see what billionaires think is happening…and it’s not pretty. 

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.

Read the article here.

Salinas Californian Article from last Saturday

I continue to find lessons and indicators in the Brexit experience.

  1. In general, economically and culturally, Asia is rising. Europe is in decline.
  2. 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.
  3. 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.
  4. 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.

Read here.

Brexit? What Brexit?

Early thoughts on BREXIT: first, the vote last week was a non-binding referendum, which means that it was simply an opinion poll. Second, everybody seems intent on stalling any implementation. Third, the central banks are lining up to throw money supply at the problem. So this could be a big deal…or not. What happens next is literally unpredictable but probably we’ll all muddle by as we so often manage to do. Despite the rhetoric, we may discover that this was a good event, a bad event, or a non-event. Nobody really knows. So far it’s essentially been a non-event. Stay diversified. We are following this closely.