Invest or Die!
This is the fourth article in a four-part series.
THE SOLUTION *
A New Hope
I conclude this series with this final article fully cognizant that it's been a grind for us all. If it's been hard for you to read and digest all of this, trust me that it was even harder to organize and articulate, still harder to conceive and hardest of all to experience first-hand. For most readers this is just a irreverent blog post with lots of grammar errors. But interpreting the culture, economy and markets through this
madness special lens is my daily existence. As the woke kids like to say, this is my lived truth (suggesting that reality is subjective, which is both immensely hilarious and tailor-made for the techno-narcissist Instagram generation frustrated they can't apply their filters to real life.)
In Part I of this series, we discussed the political and economic background of our current situation, and in Part II we addressed the COVID pandemic and the actions taken thus far by our government. In Part III, we reviewed the most significant effects of these causes, not only what we've already felt but also what we may still have yet to experience in the ensuing recovery. I threw in some graphics, jokes and provocative statements to disrupt the easily-triggered, but it all comes down to this: after we either celebrate or denounce the state of our nation's economy, how do we then make an honest assessment of the landscape and develop a plan of action for success?
The first step is recognizing that there actually is a path of success, as in all of life's predicaments. While our children are often told otherwise and our adults prone to forget, there is opportunity in all crisis. Most are aware that the Chinese translation of the word "crisis" is a combination of "dangerous" and "change point," an opportunity to pivot away from previous actions towards new ones, ideally more productive and rewarding. A chance to make the necessary changes that we are otherwise resistant to make when our lives run smoother.
While our society typically chooses to use these moments to trade a few more liberties for a false sense of security (9/11, COVID, etc.), we as individuals don't have to go this route forcibly (at least not yet); today we still have the agency to instead accept and harness these uncomfortable psychological dislocation to make the improvements in our lives that we know we ought but rarely do.
If you've made it through this entire series, it may seem at times that there are no options and no hope. But that is an inaccurate premise and I apologize. I am probably more hopeful for the future than most. I firmly believe there is always hope and there are always options. I actually root for more and greater insanity because I know that only accelerates the conclusion of this enervated era of humanity. This country has faced far worse, though I'm unsure whether we've ever been this unprepared.
Unfortunately, so often the options that we want are not the options that we need, and many Americans- especially the young- have become conditioned to fear failure, especially specific political persuasions and users of social media. That why they often fail to risk it, and thereby fail to learn from it. This is why they are unsuccessful in general, and feel compelled to blame others for what their parent(s) and schools have done to them.
That, of course, is why we are an empire in decline. Because the destruction of family and community is always the main reason and has been throughout millennia. An elevation of both is why you're not seeing this self-victimization, social justice and cancel culture nonsense in places like Japan. It's why our allies and enemies are laughing at us, or terrified of us (and not in a good way).
The innate spirit of self-reliance, entrepreneurship, adventure and innovation that has made America great for so much longer than any past republic has become subsumed by an adherence to and dependence on the state. Mostly in place of strong fathers. If you missed that in 2020, then you missed a lot. It's no accident that we've replaced young, famous and temporary "failures" like Jobs, Gates, Buffett and Musk with... well, nobody. There will be no more true historic innovators in America until we reset our current trajectory, and society learns to embrace and celebrate defeat.
Adversity builds strength, and challenges beget grit. But it's hard to be bold when a single tweet from a decade ago when you were in high school can cost you your job and get you cancelled, and still harder to be driven and patriotic when so many seem to hate success and unity. I believe that someday (far, far away..) the COVID pandemic will be perceived as a blessing for those of us who can proactively maintain the perspective that hard times make us strong. But today, developing a sense of antifragility runs counter to far more intoxicating and prominent counter-narratives that aim to break down the individual in place of the collective and make us weak.
Many will respond to our current predicament by clinging steadfast to their victimhood status- encouraged to remain in this condition by all the usual suspects that I've disemboweled in previous articles- and therefore never develop the skillset to outlast and overcome. Safe spaces, participation trophies, jazz hands, lax standards, banned books, struggle sessions and therapy animals will continue to be the solution of choice for educators, corporations and leaders intent on priming a large serf class for their collectivist utopian future vision of America.
In 2020, a culture who rarely if ever hears "no" anymore was finally told "no" by the universe- no work, no income, no school, no travel, no freedom, no outside exercise, no social interaction and no vacations. Unlike in the past, this time we had no one to blame or shame online and we couldn't handle it. For me and most of my social network, it was our best year ever, and that had nothing to do with the external. It was an internal decision (it also helps to live in Texas!)
A shocking portion of our population now seems to embrace their helplessness - almost akin to a codependent addiction - especially if they were still getting paid. (Hence the point of this entire series). We've never encountered a failure of this type, so we didn't know how to react. It's safe to say COVID uncovered a discouraging lack of societal resilience and capability to adapt - two of the most important characteristics of success in life.
In an attempt to protect us from having to finally face a generational challenge, leaders took the easy and politically expedient path, and neutered an entire country. Like a youth baseball game where they don't keep score. We weren't alone, of course, because bondage and dependence are hardly uniquely American qualities- we are no longer Reagan's "Shining City on a Hill" and voluntary servitude has reasserted itself into a full-blown worldwide pathology.
Indeed, that is the whole point of money-printing. It's the ultimate cop-out. Wouldn't it be great if we could just buy ourselves out of trouble like Hunter Biden. When things got tough, history's greatest helicopter parents (Congress and the Federal Reserve) swooped in to drop helicopter money on struggling (and not-so-struggling) Americans, thereby robbing an entire generation of the opportunity to fail, learn, re-evaluate, improvise, improve, grow and adapt. Now investors are now left trying to determine how to navigate this
not-so-unprecedented event, protect their wealth and improve their financial situation.
Fortunately, I'm here to help!
* There is no solution (a footnote to the title of Part 4) If you've read this far looking for a solution, then I'm sorry... a.) you've come to the wrong place and b.) you're asking the wrong question.
Man, if that's not modern America in two acts, then I don't know what it.
Are there really no solutions? Well, yes and no- and the reason is the same. It's critical when solving problems of any magnitude, but especially in the financial realm, to recognize there is no perfect solution because we rarely enjoy access to perfect information. My crystal ball is routinely in the shop, and there are billions of participants in the global game of finance.
While we are often chronically predictable as a group, we're more commonly emotional and irrational when left to our own devices. As a result, determining the best course of action today to protect our financial tomorrow is like trying to guess the weather in six months- you can never know for certain, and it's beneficial to arrive at that realization as fast as possible. To try otherwise is both foolish and dangerous, which is why I never prognosticate out more than 6 months. Anyone who does is usually trying to sell you something.
During this series, I've led you through the entire lifecycle of grief: denial, anger, bargaining, depression and now we've reached acceptance. As an investor, it's crucial to free yourself from the constraints of trying to be perfectly right or even mostly right. In my experience, those who try to beat index returns, uncover the next big sector or time market tops and bottoms, instead of focusing on their personal financial habits- living beneath your means, maxing out both Roths, funding your kid's college account, getting and staying out of debt, picking the right spouse - are frequently the clients mostly likely to fail or burn out in the long-run.
Instead of trying to guess the future, my professional advice is to strive to employ your best judgment given the information you do have at hand, and commit to developing a reliable and repeatable process of absorbing new (and even better, conflicting) information as a lifelong habit, and acting on it.
You can take this concept even further when you strive to contemplate the possibility that you might be wrong (and secretly hope that you are). We don't do that much anymore, people seem so convicted in their righteousness because they are so rarely humbled. Yet it's the very effort of flexing your discernment and judgment muscles- consistently over time- that can be your most valuable asset and produce the best returns. If you can do that, then arriving at the actual answer to problems ends up as kinda' a drag, man. You learn to enjoy the journey more than the destination, because the journey is the destination. More often than not, the destination is met with sadness unless it represents a new starting point.
“Nobody knows anything...... Not one person in the entire motion picture field knows for a certainty what's going to work. Every time out it's a guess and, if you're lucky, an educated one.”
― William Goldman, American novelist, playwright, and screenwriter
Just as important to one's success in the markets is recognizing that no one knows anything. No really, I mean it... not me, definitely not the investment advisor down the street trained what to think by their mega-investment firm, not the talking heads on the TV, not the financial journalists, not the monthly newsletter author and definitely not your brother-in-law who day trades in retirement and made a $5,000 profit trading options last month, from a course he took online in a market that has only gone up for 12 years.
Trying to derive insight from participants and spectators is like trying to derive wisdom from most of today's universities- it's a waste of time at best, and potentially counterproductive at worst. You best route is almost always to jump into the ring and learn for yourself, and do it fast. You really don't need Sallie Mae for that.
The only valuable component these other parties clamoring for your attention offer the intelligent investor is practice material from which to absorb, synthesize and act on or reject. And if you thought that "no one knew anything" before COVID, look around... I estimate our country is at least 20-25% mentally damaged than they were a few years ago. At least. I'm not being a jerk, "COVID brain" is real and if you're not nodding your head at this, then maybe... well, you know how the end of that sentence goes. Common sense is going through it's own market correction.
Life is easier and generally more successful if you can maintain a healthy sense of skepticism in all things, but especially with the thoughts and opinions of "experts" you see and hear in media. If you are taking investment cues from experts on cable television and savants selling subscriptions on YouTube, then you deserve to be poor and probably soon will be. If you are consuming purely for entertainment, then you're starting to move in the right direction, but God (or whomever you believe in) is obviously still going to judge quite harshly the time ignorant people spent on social media and cable news, it's going to be hard to justify one was a good steward of the most valuable currency in life (time) if you're sitting down consuming anything through a screen.
As a result, if you can ignore virtually everything these folks are spouting and instead focus on how they think, and more importantly why they think the way they do, then you are much more likely to progress towards a path of enlightenment. I fully recognize that it takes more time and is always harder to make your own meals than be spoon-fed, but it's worth it. With 10-20 years of constant practice, you'll soon be ready to trade in the markets effectively because you will have formed your own process based on who you are, and not have adopted someone else's strategy that you've never even met.
While discussing the merits of financial journalism, my strongest advice is to run in the opposite direction. If you're think I'm joking, I'm serious as a heart attack. Think about anyone you knew growing up who became a journalist. Specifically for employers with cities and states in their employer name. Ask yourself if they felt they possessed superior intellect or whether they are themselves a paragon of financial success, you know, only moonlighting in financial journalism to keep themselves busy in their early FIRE retirement. If the answer is probably not, then you should reconsider how much value to attach to what you read in the mainstream media (MSM). I promote a couple of assumptions:
Not only are these folks usually wrong, but their opinions and advice are usually the exact opposite of what you should think, say or do. I won't say they are always wrong... but I will say you could make a living by investing (and frankly, living) the polar opposite of whatever the New York Times Finance department is pushing. These people make politicians look prescient.
Time Magazine is arguably the most famous publication at calling the top and bottoms of markets incorrectly, with The Economist coming in a close second. In 2000, The Washington Post predicted the Dow would hit 36,000, a few months before the dotcom implosion sent it down below 8,000 (it now sits around 32,000 over two decades later). Fortune magazine voted Enron “America’s Most Innovative Company” for six consecutive years from 1996 to 2001, just before they collapsed in 2002 from accounting fraud.
One of CNBC's favorite guests, Marc Faber, predicted the market would fall by 50% after President Obama was elected. Paul Krugman, arguably the NY Times' most celebrated financial columnist, predicted as late as 1998 that the Internet was a fad that would be less impactful than the fax machine. On the night of Trump's 2016 election victory, he posited "a global recession, with no end in sight" and suggested "the markets would never recover." The markets went straight up almost immediately and stayed their for four years.
Of course, I would be remiss if I didn't call out the infamous Jim Cramer, host of CNBC's wildly popular “Mad Money," who's previous occupation was running his hedge fund straight into the ground. With his advice widely panned as one of the most contrarian indicators in the market, Cramer responded dismissively to a viewer’s concern over Bear Stearns’ liquidity problem on air in late 2008, three days before their stock fell 92% on news of a federal bailout.
Four years later, he urged his audience to get out of Hewlett-Packard, six months before it rose 100%. His show is basically 'finance meets WWF' and yet everyday investors still hang on his every stock pick. All of the people and publications above are not only still employed, but still revered.
The simple truth is that, as with many professors in higher education, if any of these financial journalists were any good, they would most likely be working in the business instead of reporting on it. Unlike higher education, however, most financial journalists aren't enriching themselves lavishly on the backs of their customers like deans, professors and heads of DEI offices.
In far too many instances, financial news is actually weaponized against the investing public by clever Wall Street and hedge fund money managers who exploit naïve writers to 'talk their book' (i.e. promote holdings after they've already bought them) or promoting opinions and moves they hope to trade against. Goldman Sachs is perhaps the most-famous firm to engaging in a practice of purposely trying to deceive not only the public, but it's own clients.
The Robinhood saga- in which their corrupt business relationship with Citadel was uncovered in which the former was paid the latter to trade against their own customers- was just a modern sequel of a century-old practice of putting their interests ahead of the retail investor. This is a big reason why I believe no investor should work with an advisor with any name but theirs on the front door- the systemic conflicts are deep and persuasive.
Obviously, highly quality journalism is going to naturally decline in an era where their product is mostly free and commoditized, and consumers are loathe to pay for quality, and for that I am genuinely saddened. But I also suspect you like you job, at least a little. How much would you like it if your income went down by 90%? How long would you keep doing it? What would it communicate about those who did stay? And why? And would you take their advice on anything?
I generally assume one of three things when reading most investment-related journalism:
- They are completely wrong
- They are correct (or at least not wrong), but Wall St. enjoys makes a sport out of making them look wrong
- They have been assigned a story and an agenda (by an editor working for a billionaire, also with a defined agenda), they need to feed their family, they are under a tight deadline, they have little or no practical background in the field they cover and they really don't know what they are talking about
Despite these reservations, if you insist on exposing yourself to financial news, my advice is to skim through the article (which is usually not difficult because it's written for the American public) and focus all your effort on the comments section. I've learned so much more from astute reader comments than I ever did in college.
I'm also going to let you in on one of the biggest secrets in investing: the market never goes down because of what the MSM is reporting, predicting or warning. If you observe them warning about a specific risk in the market- especially if you see similar warnings from multiple propaganda news outlets in the same week, it's likely a form of collusion to spin a desired narrative you may not understand yet.
In this case, when you read about it on the [TV/internet/newspaper], say to yourself "Bart says 'dismiss the risk.' I'm being played by the man!" If you understand that everything you consume coming out of the TV is either an outright lie, a lie of omission or massive conditioning that is never an accident, than a.) you'll be branded a conspiracy theorist, b.) that is also part of the conditioning and c.) you are far closer to the truth than people who watch news to be informed.
CNN Technical Director Charlie Chester, "We were creating a story there that we didn't know anything about. That's what -- I think that’s propaganda. It's going to be our [CNN’s] focus. Like our focus [in 2020] was to get Trump out of office, right? Without saying it, that's what it was, right? So, our next thing is going to be climate change awareness.”
Undercover Journalist: “So, that's like the next--”
Chester: “Pandemic-like story that we’ll beat to death, but that one's got longevity. You know what I mean? Like there's a definitive ending to the pandemic. It'll taper off to a point that it's not a problem anymore. Climate change can take years, so they'll [CNN will] probably be able to milk that quite a bit.”
Undercover Journalist: “So, climate change overload.”
Chester: “Be prepared, it's coming. Climate change is going to be the next COVID thing for CNN.”
Undercover Journalist: “You think it's going to be just like -- a lot of like, fear for the climate?”
Chester: “Yeah. Fear sells.” (Project Veritas April 13, 2021)
The truth is that major catalysts of market corrections won't be written about or prophesized in advance, and certainly not by MSM journalists. Of course, this is both good and bad news. the good news is that if you are reading it online or in print, then it's likely no longer an issue and you should go on about your life with the peace of mind that it's not a threat. Either they don't know what they're talking about, they're selling doom and fear for clicks or (more prevalent of all), Wall St is- or has already- adjusted to assimilate this new information and act upon it.
The bad news, of course, is that the really big risks- the kind that cause major corrections- will never be seen until it's too late. Very few predicted the Crash of 1987, the Dotcom bust, Enron's failure or the twin collapses of Lehman Bros and AIG- all were "black swans" missed by virtually all experts and market participants and introduced by someone on the outside- the same man, Nassim Nicholas Taleb, who incidentally coined the term antifragility above.
Not surprisingly, moving contrary to the prevailing wisdom of the MSM can be similarly beneficial for the rest of society as well. My clients know I have a penchant for promoting the concept of a "2/3rd contrarian." Plenty of investors and people consider themselves contrarians but few truly are in their own lives- we're a fairly conformist culture. Being a "2/3 contrarian" means thinking, acting and behaving in the exact opposite manner as the vast majority of Americans in everything. I am convinced that if you do that, you almost cannot avoid falling into incredible and inevitable success.
I'll prepare some real-world examples sure to offend some folks:
- 2/3 of Americans could not cover a $1,000 emergency. Do the opposite and you will be FINANCIAL successful.
- 2/3 of Americans are clinically diagnosed as fat or obese, most often (and simply) due to an inability to expend more energy (measured in kcal) than they consume. They consume too many calories, the wrong type (too many carbs) and at the wrong times. The difficulty with weight loss is not solved with more money nor more information, although I wish they were. Do the opposite and you will be PHYSICALLY successful.
- 2/3 of Americans are unhappy in their current jobs and would leave if they could. Many spend the majority of their waking hours doing something they hate for someone they hate. They should be working for themselves, become a contractor or a consultant or at least be moving in that direction in their prime side-hustle hours (8 pm - 2 am). Do the opposite and you will be PROFESSIONALLY successful.
- 2/3 of Americans are taking at least one prescribed pharmaceutical drug, almost all with some psychotropic or neurological effects. Don't kid yourself, many are behavior-altering. Do the opposite (but talk to your doctor first!) and you have a good chance of being MENTALLY and EMOTIONALLY successful.
- More than 2/3 of American college graduates work in jobs unrelated to their college degree, yet we continue to not only allow them to go to college, but borrow our money to do so. They'd be better off spending at least two years in community college before transferring to a school that has the preferred major they changed to three times, get out in 4-5 years and take a gap year once they graduate, and maybe before. I know that means they don't get to go to 5-6 home football games each year, but with the money they save they can buy a couple suites, hang out in the lobby and meet the people that will give them their next job, since it won't be their resume that gets them hired anyways. Do the opposite and you will be ACADEMICALLY more successful.
- Almost half of marriages in North America now end in divorce, and studies show that plenty more of the those who do remain married are unhappy and would leave without the traditional constraints (kids, financial consequences, .gov benefits). I suspect we might be at 2/3 if the rates of marriage weren't falling off a cliff. I believe most young people would benefit from waiting until later in life to tie the knot, invest more in marital counseling in advance and seek out programs of study to be an effective partner, before jumping into what is largely a contract with their state and arguably the most important decision they will ever make. Do the opposite and you will be DOMESTICALLY more successful.
- More than 1/3 of all American children are growing up without a father in the home, including 2/3 of Black Americans. And yet we still want to blame the patriarchy, racism and the President for our problems. JFK and MLK wouldn't belong to either party today and will almost certainly be cancelled within a few years (because great men have great flaws), you heard it here first. And police brutality from that lunatic bully cop against that meth-head convict who beat up that women from that place last year?.. It isn't even in the top 25 most important issues in a single American's life. Unless you're a racist yourself.
- Pick any aspect of America, and I bet somewhere between half and 2/3 of people are their biggest "nazi."
- And I can do this all day.
As you can see, we do a lot of things wrong in this culture, no one knows exactly why, no one is talking about it and no one is proposing the obvious solutions. And deep down we all know why. I could spend all day harshing your mellow with grim statistics across every aspect of our society- including how we invest our eight hours a day of disposable time and our saving and investing habits. But I will show mercy on you. Let's just agree that our generation - in general, obviously not you and me - makes some poor decisions, and virtually none of these are problems that money can fix. And certainly not grotesque money printing. So ignore the temptation to try, and focus instead on doing the opposite of what everyone else is doing. And this includes listening to others.
Except me, because I'm so brilliant and humble. (Cue circling buzzards and crow caw.)
"Only a virtuous people are capable of freedom. As nations become corrupt and vicious, they have more need of masters."
- Ben Franklin
The point is that in addition to ignoring financial journalism (or at least consuming it from an antithetical perspective), I believe that if you reject virtually anything and everything that is considered standard or normal in America today, you will almost assuredly and eventually fall into success. That's unfortunate for America, but can be a liberating concept and technique for the individual American. It's also terrifying to our opponents, both external as well as internal. And what's great is going against the grain of the mob also works for investing.
Hey, I don't make the rules. I just break them. Every day. As a matter of principle. And things have worked out pretty well.
Investing Principles - The Soft Stuff
Now that I've offended at least 2/3 of everybody for 2/3 of their daily decisions, this is a perfectly awkward segue into the crux of what you as an investor can do to protect your life savings and build wealth in this specific market environment.
You thought we'd never get here. You thought this was going to be like all the other financial articles on MarketWatch.com or the Facebook. You've already taken a bathroom break since you started, checked your phone and we're not even done yet. I get it. Don't worry, we're heading toward the money shot.
The high-level principles of investment management in a MMT world aren't so different than the real world. Stop me if you've heard some of these:
Don't do anything. No, really. Close your twitter feed, shut down your computer, destroy the freakin' TV with a sledge hammer and step away from day trading app. (BTW: If you are still consuming cable news in 2021- much less paying for it- a.) you probably stopped reading an hour ago and b.) do you also drink your own bathwater? How bad does it have to get before you find yourself laughing out loud and making elitist Pravda references?)
There's an old saw in the investing world that goes, "Don’t just do something, sit there!" It's at the heart of behavioral finance and asserts that people's personal finances are vastly more influential on their long-term financial success than their investment prowess - namely, trying to match or beat the market. People that complain they're not keeping up with Amazon stock or the Motley Fool guys but still have car payments, fail to max out both Roths and haven't funded their kid's college amuse me to no end. I'm always wondering if they're pranking me when they complain, but sadly that's never the case. And it's always an awkward moment, me waiting for them to laugh. And them just getting mad because they know someone that is "beating the market by 2x."
In addition, scores of reality-based research (I'm patenting that term to combat people who use the term 'lived truth') confirms that our behavior is way more important than our thoughts, words and best intentions. This applies to all life, not just investing, yet we somehow still attribute maximum value to what people say... that I'll never understand.
Lastly, in my personal experience and with guiding a couple thousand families with their investments, it's rarely the plays you make on the field of life that make the most impact on your life, it's the errors you don't commit that make it easy to thrive (spouses and divorce, debt and bankruptcy, college majors and student loans, substance abuse and friends, etc.) Like with our poverty example earlier, the formula of life is remarkably easy to understand and follow. Like with modern public school math, we think we can just re-arrange the order, variables and relationships to arrive the same outcome, but in a novel way no one has ever discovered before.
While big ideas, risks and leaps of faith often separate the exceptional from the merely awesome, very few people (especially in our success-loathing culture) are going to rise to become the next Kris Jenner or Elon Musk. And that's okay- I wouldn't trade places with 99% of celebrities. I doubt you would either. For the rest of us, just living a decent, comfortable middle-class life with sound decision-making will entrench us within the top .01% of humans that ever lived and the top 1% of current inhabitants on this 5.972 × 10^24 kg spaceship we ride around the sun each year at 67,000 miles per hour.
In the investing world, doing something (anything!)- especially if it's rash, illogical or emotional- it's almost always a recipe for disaster. We all know very smart people that jumped out of the market in 1987/1994/2001/2008/2020 and never got back in, or waited 6-12 months later when 'the waters looked safe," our friends were up 30% or CNN told us the economy "was coming back."
Unfortunately, those handful of months are usually when the bulk of gains accrue. You would think with this reliable 7-10 year market cycle (the post-GFC run being a historical exception), we would have learned by now. But many of us don't, mostly because of recency bias, an over-estimation of our own intelligence (or timing), DIY investing tendencies and... wait for it... our cultural conditioning. Specifically, media's need to get clicks. (You knew that was coming!)
When faced with an event that screams for the need to [do something], my advice is to [do nothing.] Tell yourself now, "I will do the opposite of what I think is obvious. Bart says that's the secret to success in the markets." Make sure you call me first, though, because it's always possible the world is actually coming to an end, and you're gonna want hear it from me first. I will confirm if you'll need inflated US dollars on the other side of Armageddon so you can buy Mai-Tai's on your secluded beach compound from your trained monkey-waiters.
Do some research - It's 2021 and these are not your father's markets. You probably look at me and think I'm all you ever need to be successful with money. That's probably accurate, but even I have been known to be wrong from time to time (and sometimes hour to hour). You have to be informed, even if you work with a professional advisor or delegate to others. I suggest asking around to identify people that are clearly winning with money, and I don't mean they're making payments on an expensive car. (That might have been an indicator of wealth in the 20th century but now it's usually the opposite.) Winning with money is defined by net worth: assets - liabilities. That means they have little to no debt (unless it's currently generating profits), their primary residence and vehicles are paid off and they living off their investments (also known as "financially independent" or FIRE)
Don't stop with one or two people, don't be afraid to trust in others, but never go off the advice of just one person. When you begin to hear the same advice repeated from smart people, then make a note to prioritize it. Invest the time to understand the foundational concepts, at least at a high level. Stay away from any news source with 3-5 letters in their title- we've confirmed that this news is not for you, this is for the lowest common denominator. And that's not you.
Like a food buffet, quantity and speed are usually at the expense of quality. I recommend all-time bestseller books as the best resource, but I know many are unlikely to do that. Certain online resources do maintain high-quality research. Investopedia is not a bad place to start. I'm admittedly partial to Dave Ramsey or Crown Financial Ministries. Any financial expert with more than 2M subscribers on YouTube is probably legit.
Diversify - Never go all-in on anything. Ever. Unless you've achieved genuine mastery of a given topic- defined (by me) as at least a decade of dedicated experience, or 10,000 hours of application- then you're likely playing with fire. The rest of us mere mortals should settle for spreading our bets, because that's our punishment. For protecting wealth at the most general level, you could do worse than holding around 1/3 of your assets in securities, 1/3 in paid-off real estate (primary residence and either income generating and/or vacation property) and 1/3 in a vocation outside of work (unless your vocation is your day job).
Note that a vocation is not necessarily the same as self-employment, although it can be. It could also involve contract work, a consultancy or a side hustle that actually achieves profit (for most of us, that excludes Tik Tok. Sorry). If you're not taking advantages of the myriad opportunities available through income outside of a J-O-B (passive or active), then you could be fighting the IRS with one hand tied behind your back. Talk to a qualified accountant to check me on that.
I'm prevented from delving into specifics online, but suffice to say that you should maintain a prudent balance between emergency funds and retirement funds, and that can only be determined by you and/or someone intimate with your personal situation. I know people earning more than $400K who can't afford to fund their Roth IRAs and I know multimillionaires who literally can't spend more than $2K in a month, so your mileage may (and will) vary- and have nothing to do with your siblings.
Similarly, you should have and review a defined objective for how much you put in domestic (American) investments compered to international. Same with stocks and fixed income. Growth and value. Small cap, mid cap and large cap. Traditional and alternative. Liquid and illiquid. The list goes on and on. This is what professionals do, including some of the world's most successful pensions and university endowments.
Some investment gurus like Warren Buffett promote the benefits of concentration in a small handful of holdings. But Buffett is an extreme outlier, so if no one has written an article about your investing skillz in the last day, you are mostly likely not in his league. My experience suggests that financial success 'for the rest of us' is not about hitting home runs, it's about not striking out. And the easiest way to keep moving forward is to get (and stay) on base. And the best way to do that is have all your bases covered.
Don't get caught (investing) naked - University endowments, pensions, hedge funds and mutual fund titans all hedge their bets, meaning they take largely identical but opposite sides of the same trade. They do this to profit off of small moves without leaving themselves exposed- they never 'pull the goalie.' Not surprisingly, it's common to read dramatic headlines from the MSM about some massive bet taken by "a big whale" in the futures, currency, crypto, derivatives or options market.
What usually isn't reported (because financial journalists rarely think on those deeper levels) is whether the big money also has trades on the other side. They usually do- often represented by puts, calls and other sophisticated instruments that prevent investors from being all kinds of wrong at the expense of being completely right. The Oracle of Omaha, Warren Buffett, calls them 'protection bands' to adhere to his most important goal: Never lose money.
More often than not, they have a similar position of slightly reduced size to the publicized position that will protect them in cases of extreme volatility or black swans. That's generally what people do when they manage other people's money. When they don't- or when they get especially greedy- they get run train on by a bunch of unemployed day traders buying up GameStop stock and who think a 10-K is a race and a 1099 is the year the Germans bombed Pearl Harbor.
Control your emotions - One of my favorite literature genres, as well as an increasingly popular field of study and a growing trend in our current culture, involves the interaction between the emotional and rational sides of our brains. New research suggests that most human decision-making starts first from an emotional side and then rationalized from our analytical side. We like to think it's the other way around, but- like multitasking- it's a myth we tell ourselves when no one close to us is around to laugh in our face.
Famed author, Jonathon Haidt, has introduced this ancient dynamic into the modern era through his viral YouTube videos and his seminal book, The Righteous Mind, by representing this dichotomy as an elephant and a rider to demonstrate how the two interact with each other and battle with each other in virtually every decision we make, from what we eat to how we vote.
I leave it up to interested readers to explore further, but that book and his other, The Coddling of the American Mind, will do more to accelerate your comprehension of the current state of affairs in this country than five years of MSDNC or Faux News commentary, and for about 1/100th of the cost. I know, I know, books are scary. But Haidt is a politically left-leaning professor (but I repeat myself), so presumably this book will still be legal for a few more months.
Like Haidt, I have found in my short career that the vast majority of one's success with money, and investing, is their control over their emotions. Maybe I've mentioned that, you're sensing a theme emerging and this is not a new concept for humanity as well. The stock market is a well-known pendulum that swings back and forth between essentially two polarities: fear and greed. This is universal and constant, it is usually only the timing and amplitude that vary.
We all understand the stock market performs relatively similarly to most markets, in that buying opportunities typically arise in periods of massive fear and anxiety, while those of collective greed tend to serve as selling signals. The years 1999 and 2007 are perfect examples of peak greed, while 2000 and 2008 peak fear. And what any of us wouldn't do to board a time machine back to any of those years with a suitcase full of cash!
Real estate performs similarly (see chart below comparing to US median income), with clearly more volatility in the 21st century. In 2006, few saw the coming reckoning for the housing market that was underway, and this is understandable because, while real estate doesn't compete with the stock market in terms of performance over the long-term (3.7% vs. 9.5%), it has been much more reliable and consistent, provides way more tangible benefits and almost never loses value (as opposed to the stock market which does on a weekly basis!)
While no one loves real estate more than me- especially paid off real estate!- it's always useful to consider how influential the Baby Boomer generation's impact on residential homes as a store of wealth has impacted what for hundreds of years was considered an asset more than an investment. Their love-affair with property really took off in the 90's and most of our collective experience of our culture doesn't consider much before that era.
If you're starting to feel like home prices are becoming a bit unmoored from fundamentals, you are not alone. While I personally suspect this will become the new normal in the MMT era, I can almost guarantee that there will be tough societal conversations- many with generational undertones- in the ensuing years. Younger people today tend to prefer debt, renting and virtual wealth (NFTs, crypto and online virtue signaling) instead of assets and ownership (based on their behavior anyways), but they are also expressing increasing frustration with being left out of "The American Dream." I'm trying to help, but as mentioned in Parts 1, 2 and of this manifesto... no one ever listens to me. Basically, it's just you, my mother (she claims) and my financial therapist (Amazon Alexa).
A thorough examination of this topic is way beyond the scope of this article, but suffice to say that it is very easy to observe the chaotic rhythm of modern life, the corruption of religious, corporate and political entities and the incompetence of our leaders and be tempted to react emotionally with our savings and investments. According to Ivy League university research, the media is more than happy to supply us with an endless narrative of doom-porn to nudge us in that direction.
We are all familiar with the tactic "if it bleeds, it leads," leaving many to wonder if and how our modern media will survive and evolve without a 24-7-365 rotating psyops campaign to manipulate us. I still know plenty of people who believe Russia (a country with a GDP roughly the size of just the state of Texas) is a legitimate threat to our democracy because of some Facebook posts.
To date, the US Capitol is still surrounded by National Guard and fencing with plans to remain at least until Fall 2021, while our borders are left completely open. It's one thing to be comfortable with destroying the country, but at some people these people have to see that they are staging their own political suicide. They were warned in 2020, and yet they persist with doubling down on crazy. Such is the neurological malleability of even our most prominent leaders.
Somewhat cynically, it's easy to believe that Wall Street benefits from our outrage culture, collective gullibility and growing lack of critical thought. Far be it for me to comment on all that (cough*cough), but the future direction of the US economy seems pretty obvious for those who can tune out the noise, keep emotions in check and stay focused on the long-term. I'm biased, however, since I have a neither a newsletter nor a advertising sponsor to sell you.
I think most of us know intuitively where the market is going over the long-term. But sometimes in the heat of a major market move, we can get caught up, go against our better judgment based on some misunderstood instinct (and what we're consuming from outside sources). In those moments, our rider (the rational side) gets thrown off the elephant (the emotional side). When thousands of dollars are disappearing overnight from our account statement, it's one of the most jarring experiences in life. I literally don't even look a my statements for months after a correction. What's the point?
We can become convinced - by ourselves and others- that 'this time is different,' the four most dangerous words in our vocabulary. In the worst-case scenario, some jump out at or near the bottom "just to make the pain stop." They say they literally don't care if they are making a mistake or not, it's not about finance or economics or history or even facts at that point, it's pure emotion.
I fear we've all become so soft (no one more than me)- with the last recession so far off, and the next cable-news market report so recent- that when markets turn, we become convicted that it will never recover and as a result we could lose it all- decades of past savings and decades of future retirement income. We think about all the other things - anything- we could do with that money rather than just watch it evaporate into thin air.
People often ask me, "I don't understand... where did the money go? Who has my money?" Investors who sell out don't realize that they are implicitly instituting a new plan- far different from the one a few months back- to 'double-down' by waiting the market out and get back in at the bottom. There is always someone on the other end of that trade, and I suspect they look like a Goldman Sachs broker. But no one knows when that will be- presumably they assume (usually wrongly) that they will just know it in their heart. Those are the conversations the advisor never forgets.
I spend far more of my time talking clients out of destroying themselves financially than I do picking great investments. Honestly, I think it helps that it's not my money, which removes (some of) the temptation to react emotionally. (This is another reason that I only look at my accounts every few months.) I think that separation is why Wall Street always does so well, along with the endowments and hedge funds. Because when the world seems especially scary or stressful, our ability to think, speak and behave rationally and accurately diminishes.
Maybe that's why our current situation seems on the surface to be spinning out of control. Perhaps that's also why our weakest minds are the ones fomenting class, race and gender conflict. Our ability to view the market accurately has been shown to decrease the further it drops...
The critical point is that lack of market knowledge is rarely our biggest problem, nor is it lack of resources. It's usually our behavior..
The best defense against this "feature" (not a defect!) in the human investor condition is to a.) work with someone you trust who can hold you accountable and talk you off ledges; b.) make decisions on your strategy when things are calm and stick to them; and c.) develop systems to prevent you from acting on your worst impulses during times of intense stress. To do otherwise is to assume you are the exception to some fairly ironclad rules of behavioral finance. Wall Street loves that mentality, and they want to meet with you tomorrow at 8 AM.
Don't be fooled. We all know now that BLS's inflation is playing it modest, human emotion is by far the 'Biggest Loser' in the investing game
I'm concerned that our society is moving away from logic and reason and toward emotion. I know why but can't state it publicly, and would encourage you to contemplate yourself. Allowing the most damaged and unhinged degenerates to hijack our national discourse and direction hasn't been working out so well. The question is, 'Where have all the adults gone?"
Don't react all (at once) - If you've reviewed the market landscape and determined that a change is necessary to protect and build wealth in an environment that might turn inflationary, going "all in" on a single bet or even a single diversified strategy more often than not can end up backfiring. We've discussed how markets can be irrational, "virtual certainties" can take longer than planned to manifest, faulty information can mislead you and your perceptions may be distorted (or even wrong.) Sometimes you discover you're just not that smart.
If not, you're probably not taking enough risks in your life.
When you make a bet on the direction of a market or investment, there are three primary outcomes: you can guess right, you can guess wrong or the market/investment can go nowhere. The first two options are fairly self-explanatory but some people are surprised that third option, neutral, is really also a negative specifically because you've in effect squandered the opportunity cost to do something more productive with your money, as well as giving up a little (or a lot) to inflation.
Investing a large amount in just one investment or moving in just one direction without diversifying is already a low-probability bet. But when you do so all at once, you compound your odds of failure even more. As with diversifying by investment, it's also prudent to consider diversifying by time. The investing world refer to this as Dollar-Cost Averaging (DCA), a $5 word for a very simple concept: spreading a specific investment strategy over a certain period of time.
A popular example of DCA in action is someone (under age 50) contributing and investing $500/month over 12 months to max out their Roth IRA at $6,000 (investors over age 50 can contribute $7,000 in 2021). That investor might have had the ability and conviction to invest the full amount in a single bet, but by spreading out their bets over time, multiple studies show this can produce exceptional returns for most investors, compared to the fallacy of trying to time the market for the absolute best day to buy or sell. Some investors dismiss DCA as an inferior or cowardly strategy but in my experience it achieves three desirable benefits:
- It removes the temptation to try to time the market, and makes it easier to stick to a plan
- It avoids the risk of being completely wrong, and the heavy psychological toll it can enact
- It can condition an investor to be more favorable towards declining markets, or at least not apoplectic
As a general rule and for these reasons and more, I'm a big fan of Dollar-Cost Averaging for newer investors, those with moderate or lower-risk tolerances and for markets that appear overly volatile or unpredictable from a historical perspective. And I would certainly say that applies to our current markets more than any time in my career. Stocks are selling at all-time highs rates are at historic lows and Uncle Sugar is behaving unusually generously. For a large subset of clients, adjusting portfolios a small amount at a time to where we ultimately want to be seems like an intelligent step.
“Markets can remain irrational longer than you can remain solvent.”― John Maynard Keynes
Find an advisor or financial counsel - You're shocked to see this one and we've already touched on it previously, but I never try to be self-serving. In all seriousness, there are aspects of this market that are truly unprecedented and most would agree that the country is going through a very weird and chaotic period, in which traditional pillars of society are compromised, not the least of which include my Big Three: government, business and religion.
Because of the collusion of the multiple impacts of money-printing referenced in Part 3, few Americans were alive the last time we went though a global pandemic while Western developed countries are engaging in such 'accommodative' policies, both fiscal and monetary. We are looking at major changes to the worldwide financial structure that crypto-currency and other wacky alternative investments are not so much the solution for but the logical symptoms.
At the same time, quality advice has never been better, easier to find or more affordable. While I would argue no Certified Financial Planner (or ever non-fiduciary advisor) in my local community has lower fees than our firm, there are certainly plenty of options online at discount brokers for those investors for that are highly budget-conscious; dismissive of customer service; have the time, expertise and demeanor to manage their own money; or who simply consider gross cost of advice as their top priority. I won't belabor this point, it's fairly obvious where I would fall on the issue, but if anything in the Cash Is Trash series was new to you, confusing or intimidating, then consulting with an expert before making any major maneuvers with your portfolio may make sense.
Stick to the plan - If you work with an advisor or investment group, at some time in the past a holistic investment strategy was likely agreed upon and implemented. Whether formal or informal, we often refer to this as an Investment Policy Statement (IPS) and it usually outlines at a high-level how the client's money will be managed. When faced with a capricious, volatile or pernicious economic environment or market, I find it's always beneficial to refer back to the original investment plan for a few reasons. It's easy to abandon or even forget in times of stress.
Reviewing your investment plan aids in determining whether the actions being considered- for instance a new asset allocation or investment idea- aligns with your model, IPS or investor profile. Second, it serves as yet another opportunity to review whether the original client-advisor arrangement is still relevant and beneficial to this investor.
Oftentimes, changes in personal life (marriage, divorce, children, career) can warrant an update that alters the trajectory and destination an investor aspires to. Because people change. Third, and most importantly, the process of establishing and maintaining plans is a destination into itself. Mike Tyson famously said, "Everybody has a plan until they get punched in the mouth." Prussian Field Marshal Helmuth Karl Bernhard Graf von Moltke once said similarly, "No plan survives contact with the enemy."
We make plans, and sometimes those plans fail. Other times, we realize our plans were flawed from the outset. But as with the rest of life and discussed previously, most times the process or journey of plan construction is itself the destination. The objective should not be to build and execute the perfect plan, because the economy and markets are far from perfect, nor static or even predictable.
In the case of a era of massive money printing and inflationary behavior, if your financial objectives have not changed materially on account of recent developments and all available information, then you should fight the temptation to abandon the original blueprint at first engagement and recognize that the course of your life has very little to do with the decisions being made in Washington DC. You may think they do now, but how many horrific decisions have been made at the federal level in your lifetime that a.) required an immediate response and b.) caused you to make a major change to your finances and investment strategy? So while I think alterations to portfolios are often warranted, they're usually more subdued than many of my clients expect.
Well when events change, I change my mind. What do you do?
- Paul Samuelson, Nobel laureate from the Massachusetts Institute of Technology
Always bet on America - In Warren Buffet's most recent newsletter to investors of his company, Berkshire Hathaway, he exhorted them to “Never bet against America... an unrivaled incubator for unleashing human potential.” He cited companies nationwide that were overcoming the odds to thrive in an uneven economy. This echoed his famous article written in October 2008, in the darkest days of The Great Financial Crisis (GFC). Right now, it's easy to be worried and cynical about America's ability to recover from the pandemic and the response of government at the state and federal levels. But the truth is that we've been here before and we'll be here again.
When it comes to investing in the world's best companies, the majority based in the United States, our winning percentage still stands at 100% success. That's because, despite the growing drumbeat for inferior and failed models and ideologies with 0% success ratios, American capitalism- as flawed as it is- is still the best economic model ever created. Undefeated over almost 250 years is hard to argue against.
This track record is largely due to the fact that it's hard to keep the American consumer down for long. I believe that will remain constant as our society, culture and economy evolve. If you're only investing for the next few years, then yes you may be disappointed. You may not, no one knows. But if your goals extend out past the next Presidential election, and you are not planning to cash out completely and walk way, then I think there is a lot to be excited about, including three major tailwinds:
- Almost universal availability of the new vaccine, and even talk of possibly herd immunity down the road
- A stimulus bill (and more to follow) that- while extraordinarily dangerous in the long-term and not my favorite choice- could generate an immediate revival of the 'animal spirits' that have always buttressed the average American's insatiable addiction to spending money and participating in capital markets
- Significant geopolitical support for the new administration to succeed and look competent, from foreign trading partners like China to long-time adversaries like Russia, along with powerful economic heavyweights like George Soros and Carlos Slim. Few organizations outside the United States ever want to see a populist leader like former President Trump again. If you believe the world economy is greatly influenced by these national and supranational entities, politics aside it seems more than reasonable to assume they will dismiss or even support some of the extraordinary policies currently being enacted at the federal level in order to provide an implicit backstop to any economic slowdown that might be brought on by said measures
So before you think that inflation necessarily spells immediate and sustained disaster for the U.S. economy and it's various financial markets, it's worth asking yourself why? Could it be influenced by emotions and politics? Concerns about social and cultural trends, destruction of the cis-family and impoverishment of future generations?
As hard and awkward as it may be to accept, my advice is to reflect deeply on whether any of these have, or have ever had, a major influence on America's largest corporations. Is it possible that what's bad for people and families in the long-term could actually be good for Big Business and the government today? If so, then are you willing to take a stand and "bet against the Fed' at the expense of your investment portfolio?
When many investors consider this, they often find that their general discomfort with the direction of the country or certain political trends they disagree with overwhelm their ability to look at the facts and the current market environment and react accordingly. They recognize that their original premise may be flawed.
“Contradictions do not exist. Whenever you think that you are facing a contradiction, check your premises. You will find that one of them is wrong.”― Ayn Rand
Investing Adjustments - The Soft Stuff
It might seem surprising that after such a long series, I would keep this final section so brief. Truthfully, it's important from a regulatory perspective to minimize any specific investment advice or predictions. You should just come see me. And bring your checkbook!
In addition, I would be remiss if I just gave away all of our super-secrets at Stevens Wealth Management. Irreverent online ramblings are one thing, but when it comes to custom financial advice, no one rides for free around here! Regardless, here are some investment categories and types that could offer principle protection or possibly even growth opportunities in an hyper-simulative, hyper-accommodative environment we currently find ourselves in.
Cash - I bet you didn't see that one coming... from a series titled Cash is Trash! I go on record early as acknowledging that I don't like the situation, but it's the one we've got, so best make the best of it...
While I generally recommend no more than 3-6 months of living expenses in the bank at all times, the truth is that cash is always an important component of any financial plan. For one, in a market with this level of elevated risk, pockets of overvaluation malinvestment and concerning behavior (recently inverted yield curve, stock buybacks, excessive margin trading, aggressive day trading, etc.), there has never been a more important time to have a healthy quantity of cash and similarly stable instruments on hand in case an investor has to ride out a correction or even a recession.
Three straight rounds of unprecedented stimulus have prevented the natural, cyclical and healthy recessionary environment that typically serves as the fertile ground for the next great American bull market, but as discussed in depth in Part 1, our politicians are intensely focused on creating safe spaces for all Americans so as to ensure their next re-election. Their financial acuity is low and their knowledge of markets, economies and history in general is subordinate to their lust for power.
It's entirely possible that the only guaranteed loser of 2021 will be cash because the Fed has communicated not-so subtly that it wants savers to suffer. Regardless, cash and cash-like instruments should always be present in any portfolio, if for no other reason than to assume some of the assets that were previously devoted to fixed income (i.e. bonds).
The Fed has announced its intention to keep rates extraordinarily low indefinitely, and is even willing to implement an unprecedented and extraordinary campaign called yield curve control (YCC) to do so if it deems it necessary. This scheme extends the same influence it can apply to short-term bonds onto longer-term bonds as well, in order to keep rates from rising.
This scenario could be detrimental to existing bond prices, potentially bringing down the entire world economy. While we believe the odds of that eventuality are low and permanently maintain a reticence toward fighting them, we also must be cognizant that a possibility exists- albeit miniscule- that they do lose control of the environment and/or are forced to raise rates for other reasons.
For this reason, increasing a cash position, even at the expense of certain loss of future purchasing power, could be warranted at this point in the cycle. Cash can still be trash, but not all trash is trash is created equal and sometimes you have to do things that are uncomfortable in the short-term to win in the long-term. We like cash as a temporary refuge for investments in categories even more vulnerable...
Bonds - Bonds currently occupy a challenging space in any modern investment portfolio. Wall Street is clearly concerned about this asset class more than most others, with the 10-year yield rising sharply in the past year (from near .5% to now over 1.6%), and heavily impacting investor sentiment. This marker represents an important component in the economy, because it impacts mortgages and other consumer and business loans. .
Some bond strategists believe the move in yields has opened the door for yet another move higher, and a next logical target for the 10-year is over 2%. Others believe the yield is unlikely to go much higher in the near term unless inflation picks up or there is a signal from the Fed that it is ready to enact a more aggressive policy, which I suspect is highly improbable.
After an impressive 2020, renewed fears about bond's historic ability to provide reliable income and protect against shocks in the equity markets is being tested. In the best scenario for the economy, renewed growth allows for an orderly and well-controlled rise in rates by the Fed, one that does not threaten the equity markets. Worse case is that too much growth or too much inflation (or both) accelerates this trend, punishing bonds.
For the past forty years, a consistent (though hardly uninterrupted) drop in rates has buoyed bonds and positioned them as an attractive category for investors throughout most market cycles, especially down markets. As yields dropped, prices rose. If the stock market did well, bonds did okay and if the market stumbled, bonds offered a reassuring respite from equity chaos.
However, with the Fed funds rate effectively at zero, it's feared there is nowhere to go but up. Trying to predict interest rates, however, is usually a futile endeavor. This is especially true with the Fed's veiled threats of YCC. Given the situation, and the asymmetric rate environment, an argument can be made to divert some portion of fixed income exposure to other categories, namely cash and equities.
For the portion allocated to bonds, our recommendation is maintain the majority of holdings in very short-term duration. That way, if rates were to rise, ones does not find themselves unnecessarily vulnerable to the kind of losses displayed in the chart below, losses that would be unknown to most of today's investors and could be crushing and with little sign of recovery. This is why you might consider cash even while you hold your nose and curse at the Gods of global finance (as I do on the weekends).
“This rise in the S&P 500 isn’t a rally based on company fundamentals, this rally is the result of the devaluing of the dollar,” he said. “There’s so much cash in the market that everyone is loaded even though they’re poor. That’s the kind of stuff you see down in Venezuela and Brazil when inflation gets out of control.”
- Mike Willis, founder and lead portfolio manager of Index Funds.
If you don't think bonds carry risk (primarily because you've never seen it in your lifetime), then consider the impact of a 1-5% increase in interest rates on bonds of 1-10 years duration. This is as sobering a chart is a bond fan is likely to see in their lifetime. That's why it pays to practice an abundance of caution and monitor the market closely (or pay someone to do it for you.)
Stocks (Value) - A growing drumbeat has been building about the long-predicted, long-awaited “Great Rotation” back into Value, after well over a decade of Growth domination. Right now, growth stocks are selling at historic valuations and none more than the technology. Low rates, COVID fallout and unsophisticated Robinhood investors enamored with well-known, popular stocks have driven this unprecedented momentum.
While there are many influences to growth’s most recent plateau, the most important one is rising rates (or more accurately, the fear of them, as they are only now starting to edge up.) As mentioned previously, I'm not convinced that rates will rise as dramatically as some believe, nor that they predict the end of growth. No one knows for sure which category is set to outperform over the next few years. And I don't play the guessing game.
The argument against growth is that “trees don’t grow to the sky” and we may be in the early innings of a long overdue retrenchment. Value investors believe that the pendulum must swing back sometime, but have also been waiting on this transition to occur for well over a decade and this may continue to be wishful thinking. For now, all eyes are on rising rates, and therefore, inflation.
As a result, it may make sense to begin adding a larger portion of one's portfolio to the long-unloved value sector but at a fairly muted pace, only for specific high-ROI opportunities and nothing in knee-jerk fashion. However, even what constitutes ‘value’ is now even being confused, with some arguing that it's not even relevant anymore.
If you are contemplating a transition into more value positions, it's imperative to understand what you are actually accumulating, as well as why and whether a rotation (that many in the MSM are promoting for their daily clickbait) is a fundamentally sound possibility. From my perspective, I see several Blue-Chip Value companies that are starting to look attractive from a price perspective and it's a category we will continue to watch with close attention.
International - Very similar to the dynamic between Growth and Value is that between the U.S. ("domestic") stocks that have outperformed their global competitors handily over the last few years. This has been due primarily to three factors:
- A fairly tough stance (for better or worse) from former President Trump
- A strong US dollar
- The outperformance of the U.S. Growth sector, specifically in technology and even more isolated to the FAAMGs.
For almost a decade, most international indexes and funds have been flat or down compared to their U.S. counterparts, and not even by a little. President Trump's attempt to end trade and tariff abuses yielded big gains for the domestic market, and left international companies- namely in Asia- swimming against a rising tide. When U.S.-based investors participate in a foreign market, at some point they are required to convert foreign currencies back into dollars, so a stronger dollar adversely impacts their returns. During that same time (and for related reasons), the US dollar soared more than fifteen percent.
As it became more and more obvious the United States would see a transition to the Biden administration, one that appears far more accommodative to our trading partners and (current) enemies, we are starting to see what may be a return to a weakening dollar. Moreover, the Federal Reserve has pegged short-term interest rates firmly near zero with no plans to let them "off the mat" anytime soon.
As has been the theme throughout the Cash Is Trash series, our exploding budget deficit and national debt also weigh heavily on dollar strength. MMT won't change that, in fact it is far more likely to exacerbate the situation because outsiders aren't as willing to entertain our desperate national attempts to defy financial gravity.
The U.S. Dollar is experiencing a pullback we've not seen in several years. This is not necessarily a bad thing but deserves our attention.
The perception from abroad seems to be that the United States is dealing with increasing dissolution of racial and gender cohesion, social unity and political cooperation, which started out as more of an election strategy last summer but now threatens to reemerge as the weather warms again this year (social justice for Millennials being almost exclusively a summer phenomenon).
All these factors may point to a weakening dollar and act as a tremendous tailwind for U.S. investors wanting to increase international exposure to pre-Trump levels. The aforementioned potential rotation back to value stocks could also produce new outperformers within those sectors, including global conglomerates in financials, industrials, and materials
Precious metals - Of course, no conversation on inflation and a weakening U.S. dollar would be complete without mentioning precious metals (PMs), specifically gold and silver. Exploding debt — both global and domestic, sovereign and corporate — as a result of multiple stimulus packages and near-zero interest rates could result in a general hike in the price of goods and services coupled with negative growth. All against the backdrop of inflation.
While this could hold grave consequences for the health of he U.S. economy, precious metals markets could likely benefit. And if we were to experience another recession in the near-term, this time we would have no brakes, having already exhausted most of our the normal fiscal and monetary defense mechanisms. Our ability to control the next economic cycle has therefore become increasingly limited, a scenario that would only support more and deeper inflation.
To make matters worse, we discussed in Part 2 that unemployment from the federal lockdowns is severe and unlikely to subside until generous benefit payments are rolled back. This suggests that additional relief- I personally would not be surprised to see an early version of Universal Basic Income (UBI)- on the way and even perpetual.
Gold, and to a lesser degree, silver, are often perceived as not only a store of value during periods of economic stress, but also a hedge against the kinds of inflation we could face. During the 1970s, costs and services in the US more than doubled amid crippling inflation. At the same time, gold prices went almost parabolic—rising by an almost inconceivable 950%.
Moreover, gold’s run was realized in both nominal price rise and inflation-adjusted standards. At that point, gold seemed to establish itself as a reliable medium for hedging against severe inflation and a fundamentally sound investment. It's (somewhat) finite supply and resistance to government intervention (LOL) contrasts dramatically with unabated global money printing and stimulus. The more stimulus that is injected into the economy (and therefore markets), gold could respond favorably. The roughly $3T printed in 2020 led to gold hitting a 7-year high, but so far in 2021, the sector has been a dud. It's a ponderous conundrum.
However, there are new (and old) risks in the shiny metal. First, the newly printed money had to go somewhere and as alluded to earlier in this series, starting in the fall increasingly larger quantities of dollars that would have normally ended up in gold (thanks to the trickle-down effect of stimulus, and especially amid a pending economic catastrophe), was redirected to crypto-currency, namely Bitcoin and a handful of other competing tokens.
In addition, there is no guarantee that inflation is at our doorstep already. While I like to believe I'm seeing prices rise faster than wages, a.) I am often wrong and b.) I can only trust the numbers "as far as I can throw them." Said differently, I can only speak to my personal situation, what I am told by business owners and what is available from objective sources. My lens of the situation could be cracked or distorted.
The other major challenge with investing in precious metals is the enormous but poorly understood and unknown influence of the government and the Federal Reserve in the market, via their proxies, the primary dealer banks. Anyone with any experience in the metals markets knows all to well what it feels like to be "stomped out of a position" in a sudden raid on [pick your commodity.] Many banks, namely the notorious Deutsche Bank are well-known to engage in rampant collusion, spoofing and other sophisticated forms of manipulation in order to fix the price.
There are many benefits to this kind of chicanery, most beyond the scope of this series, but it's important to appreciate that precious metals are a commodity, and unlike more traditional instruments, they can behave in ways that are unnatural because their supply (and that of derivative instruments) are easily gamed- as anyone old enough to remembers the Hunt Brothers cornering of the silver market in 1980 can attest.
As a result, while we appreciate the premise behind PM's hedging capabilities, we also recognize that a market this ripe for abuse can confound and frustrate the most astute investor. Many economic analysts anticipate the inflation from money printing - if there is any - to become apparent in the fall or winter of this year. Time will tell whether gold and silver reassert themselves as reliable hedges to a falling U.S. dollar, rising rates and inflation. For now, we believe a small portion of a portfolio in precious metals may warrant a second look.
Treasury Inflation Protection Securities (TIPS) - In an economy that looks primed for inflation, one of the other popular instruments for combating it is Treasury Inflation-Protected Securities (TIPS). TIPS behave like bonds but are indexed to the CPI. The return is measured in terms of the “real yield”. Since the nominal yield of regular Treasuries is made up of the real yield plus other components — i.e. inflation expectations, liquidity premiums, etc. — a widely followed metric of expected inflation is the spread between a regular (nominal) Treasury, and the real Treasury yield of the same maturity. In the past, investors could rely on this marker to determine inflation expectations. This is because in a presumably free capitalist market such as the US Treasury market, the transaction behavior of investors can yield extremely value information such as the "insurance" cost of protecting against inflation.
I am unconvinced, however, that TIPS still represent an accurate and reliable metric of inflation because a.) the government is incentivized to downplay the true extent of inflation, as we showed conclusively in Part 2 of this series, and b.) the Fed has purchased more TIPS since the coronavirus crisis started last year than the total amount issued.
Yes, I said that correctly: the Fed bought over $175 billion of TIPS in the last year, but only about $150 billion or so of new TIPS were issued. In percentage terms, they have increased holdings from 10% to over 20%. Of the more than $1.5 Trillion dollars of outstanding TIPs in existence, the Fed owns over $300 Billion of them. And yes, the Fed has also bought a very large amount of ordinary, nominal Treasuries as well. How is this possible?
What this means is that the Federal Reserve can accumulate enough TIPS and Treasuries, in just the right amount, to ensure their target inflation rate is equal to 2%. We can easily see that this economic metric, like many from the Federal Reserve and various economic departments like the Bureau of Labor Statistics is dubious and therefore the investment underpinning them is also suspect.
If inflation were actually occurring simultaneously with economic growth, then real yields would have to rise, and negative returns would be the logical outcome. If inflation rose, but growth stagnated, it would be safe to assume that smart investors would reasonably expect more return on assets than the guaranteed 2% that TIPS offer. As it stands today, no sophisticated investor would do that and their best option may be just to consider some of the assets above whose price is not being artificially managed by the government and the Federal Reserve.
Money-printing has been considered immoral and foolish across every civilization in history and is hardly unprecedented in American history. While it may seem that we are on a collision course with economic reality, all is not lost in such an environment, as real assets like stocks and real estate tend to rise in value, as well as other instruments that either benefit from "the rising tide" or are in and of themselves reliable sources of income and capital appreciation. Most investments can thrive in various environment, but sometimes it's more a function of increased dollars and not an actual representation of a true increase in value.
I've been somewhat opaque and arguably ambiguous through this last part of Cash Is Trash, and that is not on accident. The current investing environment is complicated, confusing and unconventional. It requires a keen eye, diligent study and shrewd asset allocation to capture as much opportunity as possible. Our strategy must be nimble, unencumbered by emotion and other distractions and willing to adjust quickly and effectively.
My intention in this series was not to lay out a defined portfolio or custom one-size-fits-all solution for all investors. As many components as there are in the markets that can cause them to move in one direction or another, there are equally as many investors with unique risk tolerances, time horizons and objectives. As such, I simply strive to highlight the situation we're in, how we got here, what it means and how one should think about this complex, integrated system.
My ultimate objective is to inject knowledge, inspire questions and stimulate all investors to reach out to their financial counsel to review their portfolio, ensure it is balanced appropriately for this current environment and if not, make the adjustments now to ensure they have the best chance of success moving forward.
I also aspire to motivate all readers to begin to think differently, in order to improve the lens by which they view the markets and the economy. If at any point, you feel overwhelmed, insecure or unprepared for what comes next, I am always happy to serve as a transparent (and loquacious!) sounding board to flush out and galvanize your thoughts, hopes and ultimately financial goals.
Thanks for reading!
This is the fourth article in a four-part series.
I don't have a comment section. If you'd like to discuss the subjects above or anything else, feel free to contact me like a grownup through phone or email. At Stevens Wealth Management, we still rock it old school. Thanks!