This is a Guest Blog post by Marty LeClerc, an experienced investor, portfolio manager, and investment adviser.
There is a mania hovering over the investment landscape. Bonds. Digital currencies. A large part of the stock market. Certain real estate sectors. All driven to bullish extremes. Priced for perfection. Priced for disappointment.
Someone tweeted. The only thing to fear in the financial markets is the lack of fear itself.
Bullishness seems the only option. Investors, prudent and otherwise, regret past cautiousness. A woulda, coulda, shoulda feeling…
In hindsight the past is obvious.
Regret can lead to fear-of-missing-out. Said fear leads to costly investment errors. Think Warren Buffett. What the wise do in the beginning, fools do in the end.
Big challenge for investors right now? Protect yourself. Avoid regret-induced foolishness. Avoid lasting errors.
Repeat a mantra. It is not how much money you make during a bull market, but how much money you keep once the tide turns. Make this your mantra.
Remember. No one regretted prudence going into last March. No fear-of-missing-out when liquidity dried-up and prices crashed. There was only fear itself.
That was last Spring. A time to be greedy. Today, warning signs abound. It is a time to be cautious.
Nearly everything indicates stock indices are overvalued. More so than even in 1999, the previous gold-standard for overvaluation. Only in relation to bonds is this not true. Interest rates were a lot higher then.
Speculation is rife. Take SPACs. Special purpose acquisition companies. These are blind pools of cash. Designed to take a company from private hands to a stock market listing. Call it an alternative to the traditional IPO, but with less investor protection.
SPACs ebb and flow with stock market sentiment. At tops they are enormously popular. During bear markets, no one wants them. Now they are the rage. Issuance uncontained. Setting all records. Everyone is involved. A-Rod. Colin Kaepernick. Billy Beane. Shaquille O’Neal. Some 300 companies. Raising over $100 billion. In real terms, on a par with both 1929 and 2007.
Maybe worse. One example. Churchill Capital Corp IV (NYSE: CCIV). It has cash worth a bit less than $10 a share. Only other asset some sexy plans from management. Nothing else. Currently costs $30 to own that $10. You would think paying $3 for $1 is self-evidently wacky. Not in this stock market.
Old thinking. Interest rates can only go to zero. Speculative bubbles do not happen during severe recessions. Prosperity equals a rising stock market.
New thinking. Everything is upside down.
Sobering thought-experiment by Horizon Kinetics. Assume the roaring ‘20s awaits us. Assume good times continue to roll through the ‘30s. Assume the economy expands 4% a year for 20 years.
Simple math. People will be twice as rich in 2040 as today.
Use the so-called Buffett Indicator. Assume the ratio contracts from today’s lofty levels. Down to a bit below its historic mean. By 2040.
Simple math. The S&P 500 Index experiences zero appreciation for 2-decades. Lesson. Prosperity might not translate into profits for passive investors after all.
Research Affiliates and GMO provide a public service. Excellent research for free. They follow the data. Do not trying to sell you anything. Both have arrived at the same conclusion for the S&P 500. Negative returns over the next 7 year period.
Bitcoin is not an investment. Does not generate income. Claims to be a store-of-value. Like the dollar. Except it relies on tokens. Professor Roubini says, “the Flintstones had a more sophisticated monetary system based on a benchmark: the cartoon cavemen used shells.”
No intrinsic value in a bitcoin. Only a promise of limited supply. One price-anchor. The cost of mining a coin. Runs into the several thousands of dollars. Depending on electricity rates.
Bitcoin is a haven for criminals. Tough luck if fraudsters steal it. Tough luck if you lose your key. Ledger erased. Bitcoin gone forever.
Bitcoin is bad for the environment. A rapacious energy user. BBC says mining it uses roughly the same amount of energy as Argentina, Norway or Switzerland.
Promoters say digital currencies are a medium-of-exchange.
Everyone wishes they bought bitcoin when. Up 9-fold in less than a year. Up 100-fold in just over 3 ½ years. Up 1,000-fold in 8 years.
Bitcoin is off-the-charts volatile. More than doubled since December 2017. To get that return, you needed patience. Bitcoin crashed 80%. Rallied. Crashed 50%. Rallied. Crashed 25%. Last month. Rallied. Now up 50% in 2-weeks.
The bible says there is nothing new under the sun. In 1630s Holland people were concerned with currency debasement. They sought alternative stores-of-value. They discovered tulip bulbs. The rest is history.
Tulip bulbs differ from bitcoin. A tulip bulb is edible. It has intrinsic value.
The fuel for speculation is liquidity. Money supply expanded by 25% last year. A Fed-induced liquidity-run.
Some fear an out-of-control printing press. Claim it will generate consumer price inflation. Only discernable inflation is asset price inflation. So far.
Liquidity-runs defy logic. Until they do not. Past runs ended badly. Think 1974, 1987 and 1999.
Repeat the mantra. It is not how much money you make during a bull market, but how much money you keep once the tide turns.
Bonds have never been more expensive. The cost of money never cheaper. Not for four millennia. Everyone had to pay higher interest rates. Babylonians. Egyptians. Athenians. Romans. Byzantines. Everyone paid higher rates during long deflationary periods. Think 19th Century. When money was backed by gold.
Are bonds in a bubble? Economics professors might say no. Capital is no longer scarce. Traditional premium for owning “risk-less” bonds is evaporated. Rejoice at the euthanasia of the rentier.
Common sense says otherwise. Something like $17 trillion in government guaranteed bonds are assured to lose money, if held to maturity. Investment grade corporate bonds provide nominal income. Will lose money in real terms. Junk bonds yield less than many blue-chip stocks. Will get crushed in the next downturn.
Everything is compared to what is on offer in the bond market. Interest rates determine what people pay for real estate and businesses. Works like a lever. Rates fall, everything is worth more. Rates rise, everything is worth less.
Fed says rates will be low for a long time. Too much debt. There is no other option. Wall Street assumes rates will be zero forever. Too much debt. Rising interest rates is too painful to contemplate.
Big faith in Central Banks. They walk on water. They have all the power. Masters of debasement. Servants of markets. Call it a maestro bubble. Everyone is following the yellow brick road. Wizards of Finance becoming the Wizards of Oz is too painful to contemplate. No one is ready.
Take a reality check. Repeat the mantra. It is not how much money you make during a bull market, but how much money you keep once the tide turns.
Live outside the bubble.
There is no income in fixed income. Ditch longer-term bonds. Stay within 5 years. Not a random number. Ditch junk bonds. Credit standards are beyond lax. Ditch bond funds.
Stay clear of digital currencies. Traditional stores-of-value, like gold, are better. Unlevered precious metals royalty trusts are best. They produce income.
Live outside the bubble.
Avoid compelling stories. Pay attention to cash yields. Adopt a curator’s mindset. Pick and choose securities that can prosper outside the bubble. Be idiosyncratic. Do not be a mindless price-taker!
Everyone is focused on how the world will change in the next decade. Very sexy. Very bubbly. Bezos says this is stupid. Focus instead on what will remain the same.
Outside the bubble, the playing field is surprisingly large. Quality companies on offer at reasonable prices. Companies that will be around. Priced to deliver adequate returns. Growing dividends of 3 – 4%. Probable earnings growth of 3 – 7%. No sexy narratives. No bubble required for a happy ending.
Non-stretch predictions for 2030. America and China will be adversaries. Humans will eat food. Get sick. Consume financial services. Keep a clean body. Use energy. Invest in these areas.
Defense stocks are exempt from the business cycle. They are reasonably valued in real terms. Dirt cheap in relative terms. Less than 15X earnings. Growing dividends. Own Lockheed Martin LMT -0.4%. Own General Dynamics GD +0.8%. Own Huntington Ingalls HII +3.3%. China is not our bosom buddy. Never will be.
Shares in venerable consumer brands are outside the bubble. Big powerful companies. Can weather harsh storms. Coca-Cola. Kellogg K +0.7%. Kimberly-Clark KMB 0.0%. PepsiCo. If interest rates remain low, their well-covered dividends are too juicy to ignore. If interest rates rise, they will fall less.
Keep high cash reserves. Current risks in the system are ungaugeable. Be patient. The bubble will end. Some day.
The author owns shares in Coca-Cola, General Dynamics, Huntington Ingalls, Kimberly Clark, Lockheed Martin, and PepsiCo Marty Leclerc manages the Barrack Yard Global Core Portfolio. Identifying businesses of lasting value that will benefit from major long-term trends, but that are resilient enough to navigate an uncertain future, is my goal.I choose companies from the world’s stock markets; attempting to mitigate risk by relying on a robust investment process, by focusing on valuations, and by anchoring decision-making in “predictive factors.” I am a graduate of the College of William and Mary in Virginia and an Investment Advisory Representative of Barrack Yard Advisors llc., a Registered Investment Advisor in Washington, DC.