Let’s just sit here, breathe deeply, and savor this economic miracle. Of course the economy and the financial markets have good and bad times. But we’ll worry about that later. For the moment, let’s just savor these astonishingly rich times. https://www.marketwatch.com/story/dow-could-carve-out-record-as-italy-fears-fade-2018-10-03?siteid=bigcharts&dist=bigcharts
This week we’ve seen US stock markets climb to new records, despite trade wars, political chaos, and overvaluation. The data says we’re at high risk, and the stock markets keep going up! The tactic of selling out and going to cash has been a miserable failure in the past. What has worked best has been the choice to simply keep our portfolios very diversified, allocate conservatively, and be patient.
Most families lose their wealth by the third generation. But it doesn’t need to be that way. https://www.theatlantic.com/business/archive/2015/09/richest-families-grandkids-gilded-age/405892/
My last entry on January 30th, 2018, suggested that US stock markets were potentially overvalued. Apparently others agreed with that assessment, because early in February, in the face of rising interest rates, American stock markets dropped (almost) 10%. At that point I was guessing…a perfect word for it…that the financial markets would continue to decline to more reasonable levels. However, I chose to do no trading because I wasn’t confident.
Good choice. This week, U.S. stock markets strongly reversed, producing one of the best weeks in years. I suppose that had I been courageous we could have bought the dip, but I was too conservative for that.
Meanwhile international markets fell more, and have recovered less.
With the prospect of rising interest rates in mind, I perceive that the possibility of a downturn more wrenching than what we have experienced is still quite possible. Where we were before somewhat vulnerable, we are now substantially more vulnerable. My guess is that this week’s recovery is driven by FOMO, Fear Of Missing Out, not from any rational expectation.
Meanwhile I’m watching the bond market, and interest rates finally seem to be stirring, moving up. That’s a real, genuine game changer, potentially negatively, for many reasons.
Bottom line: for the time being, I’m maintaining our current asset allocations. But I’m targeting potential bargains, and I’m watching the horizon. Something profound may be happening. Frankly probably not, because most warnings don’t actually materialize into anything real. But what if…? Read more here.
As the accompanying article spells out, the Value Line Manager’s Appreciation Potential statistic is now 20%. This suggests that the stock market is more overvalued than it has been since 1969.
Read the article here.
The Value Line Appreciation Statistic has been giving off overvaluation signals since 2013. It’s been screaming of imminent disaster since 2015. THIS IS WHY we have been so conservatively allocated. Yet, in hindsight, our allocations have been too conservative because not even the VLMAP can beat central bank stimulus.
As the article indicates, the VLMAP statistic has also been accurate in the long term.
In my 2012 book, “Dollars and Common Sense: Taking Charge of Your Investments in the Tumultuous 21st Century”, I wrote on page 166:
- The Value Line Estimated Median Appreciation Potential statistic is BELOW 50%.
- The Price/Earnings ratio for the S&P 500 or its proxy index mutual funds is OVER 20.
Move back to the next-lowest risk level in your portfolio allocation, and adjust your portfolio accordingly.”
The Price/Earnings ratio for the S&P 500 is now 22.85.
Classically, this suggests a rather large downturn is ahead. But the VLMAP and the P/E statistics also hinted at downturns in 2013, 2014, 2015, 2016, and 2017, albeit not as extremely as they are now. Central banks won the day, and now investors are convinced that they will always save us. Always. But what if investors’ expectations are wrong?
If, like the proverbial broken clock which is right twice a day, we DO experience a substantial correction in the financial markets, then we are poised to take advantage. If stocks are worth owning for their wealth-creating power now, then the same will be true when they are cheaper. Patience. Our portfolios are already relatively safely allocated.
2017 has been an astonishing year so far, and the most amazing part of it has been the rise of the cryptocurrencies, such as bitcoin. They are up literally thousands of percentage points in 2017 alone.
Yet many of us (me included) are still struggling to understand what essential function is fulfilled by the creation and existence of cryptocurrencies, unless you need complete stealth in your financial transactions.
One possible value is that by design there will be a limited number of cyberunits (called “coins”). However gold is also scarce, and unlike cryptocurrencies, it is actually tangible. Cryptocurrencies are literally unreal.
When we own mutual funds, we own baskets of stocks, and for better and for worse those stocks eventually own something real. When you buy a share of Apple you are buying the profit stream from all Apple products and you own a tiny share of all the assets of Apple: factories, bank accounts, and whatever else is real. When you own Bitcoin you own…well, what DO you own? Clearly you own something or bitcoin wouldn’t exist. Nobody can agree on what the “something” is.
Meanwhile, some researchers are estimating that the odds of a downturn in bitcoin are now quite large: Read here!
Stay tuned. This IS something completely different.
At the moment I’m not making any changes to our portfolios due to this information. As I’ve mentioned before, by classic standards, I’ve been advocating relatively conservative portfolios of mutual funds. And, as I’ve said before, I’ve been mildly wrong for the past three years: the markets have continued to rise despite all our fears. So the balance of proof is now weighted in favor of a continuing bull market, and staying invested anyway is a decent strategy. Nobody really knows what will happen. Staying diversified is a proven tactic. But but but…there’s this. So I’m going to post it for our later review. Happy weekend.
I’m back from a week in Maui with the family, with sun-browned skin despite the twice-daily application of reef-friendly sun block, and with my head brimming with fascinating ideas.
Such as how Kamehameha, a relatively minor chief, was able to conquer all the islands between the years 1789 and 1810, because of a new technology: the flintlock musket.
And how, after his death, the ali’i…the nobility…of Hawaii sold out their own nation’s resources and financial stability to foreign nationals to enrich themselves.
And how foreign governments, including the United States, were inexorably drawn to take advantage of imperial Hawaii’s weaknesses.
Yet individual families survived and even thrived, despite government.
Now, here I am, sitting at my desk, contemplating that the current state of national and state governance is in fact somewhat normal, in the long term. Kleptocracy by whoever is in power is inevitable. Under the veneer of culture and rationality, we live in a world in which people will exploit weakness and take what they can. The assumption that things are different because we are equipped with cell phones and the Internet may or may not be correct.
You and I, like the families of Hawaii, are mice among the elephants. We must continue to create success, health, and wealth in our own relatively small ways despite what the oligarchs may do.
It seems likely that the Trump Presidency will accomplish much less than expected. It seems likely that the major goal of Congress is to enrich itself at the expense of the rest of us. All this will happen despite the political party in power. All the political words which empower and energize us are simply tools to enlist us to their fight, for their benefits.
With this in mind, we need to continue to save, continue to nurture our families, and press onward regardless of all the social and governmental chaos. What happens in Washington or Brussels or Beijing will probably not define our lives. In the long term, people seem to thrive DESPITE government, and not because of it. On we go.
A recent analysis by Goldman Sachs does a rather good job of summarizing the challenges of our current over-valued stock markets. Read it here.
Essentially, domestic stock markets are overvalued, but supported by very low interest rates and a perception that central banks will forever intervene in any downturn. International stock markets are less expensive but subject to some unusual geopolitical risk.
Watching the recent news with President Trump’s new unnecessary squabble and insult-trading with Morning Joe talk show hosts reminds me that U.S. political risk remains large. I’ve never seen a presidency as vulgar, scattered, and puzzling as this, and I doubt you have either. So our executive branch may self-immolate at any time. Or not. We honestly don’t know. It’s also worth reflecting that the recent trend to off-the-charts anger and crudeness in public discourse probably reflects our society’s inner turbulent personality in some way. What does that imply?
It’s entirely possible that overvalued conditions in our stock markets could go on for years, and still possible that the Trump Presidency could get its act together. For us, the bottom line is that stock markets may continue to rise for years, until something external derails upward momentum. For that reason, attempting to dodge out of the way, beyond our current level of diversification, doesn’t seem to add value.
Happy 4th of July! It’s a great time to reflect on why we are all here, and what we want to accomplish.
Legendary investor Jim Rodgers has often been right, and often been wrong, about the future of U.S. financial markets. He’s completely bullish on the future of Asia, and in fact now lives officially in Singapore.
Now he’s calling for the worst stock market crash in our lifetime. Read more here.
He may be right. Or not.
It’s worth noting that when the stock markets first began flashing indications of overvaluation, they were at about half their current levels. Had we gone to cash in 2013 as the statistics suggested, we would have missed out on at least 1 of every 4 dollars in our diversified portfolios.
Why didn’t the financial markets crash after 2013? The unexpected happened: the Fed and other central banks of the world intervened to support financial markets.
I have my own emotional reservations about that: when governments intervene in markets as the mood strikes them, then markets become unquantifiable. But the money which has been made is quite real.
So now Jim Rogers says that the biggest stock market crash in our lifetime is imminent, he may be right. Stock markets ARE very overvalued, and have been for years. My response for all of us has been to stay very diversified and be a bit cautious. The result has been that our investment returns haven’t beaten the stock markets, but we’ve at least participated while remaining realistic about genuine dangers out there.
I also remember that the Financial Panic of 2008 was followed by a market boom.
Genuinely, we don’t know what will happen. Let’s also keep in mind that we want to buy low, and sell high, and we want to persist. Investing is a marathon, not a sprint.