Over the last 30-years, I have endeavored to learn from my own mistakes and, trust me, I have paid plenty of “stupid-tax” along the way. However, it is only from making mistakes, that we learn how to become a better investor, advisor or portfolio manager.

The following is a listing of investing tips, axioms and market wisdoms from some of the great investors of our time. Importantly, as you review these wisdoms, compare how these investing legends approach investing as compared to your methodologies, those of your advisor or what you are told daily by the media.

Can you spot what’s missing?

12 Market Wisdoms From Gerald Loeb

1. The most important single factor in shaping security markets is public psychology.

2. To make money in the stock market you either have to be ahead of the crowd or very sure they are going in the same direction for some time to come.

3. Accepting losses is the most important single investment device to insure safety of capital.

4. The difference between the investor who year in and year out procures for himself a final net profit, and the one who is usually in the red, is not entirely a question of superior selection of stocks or superior timing. Rather, it is also a case of knowing how to capitalize successes and curtail failures.

5. One useful fact to remember is that the most important indications are made in the early stages of a broad market move. Nine times out of ten the leaders of an advance are the stocks that make new highs ahead of the averages.

6. There is a saying, “A picture is worth a thousand words.” One might paraphrase this by saying a profit is worth more than endless alibis or explanations. . . prices and trends are really the best and simplest “indicators” you can find.

7. Profits can be made safely only when the opportunity is available and not just because they happen to be desired or needed.

8. Willingness and ability to hold funds uninvested while awaiting real opportunities is a key to success in the battle for investment survival.-

9. In addition to many other contributing factors of inflation or deflation, a very great factor is the psychological. The fact that people think prices are going to advance or decline very much contributes to their movement, and the very momentum of the trend itself tends to perpetuate itself.

10. Most people, especially investors, try to get a certain percentage return, and actually secure a minus yield when properly calculated over the years. Speculators risk less and have a better chance of getting something, in my opinion.

11. I feel all relevant factors, important and otherwise, are registered in the market’s behavior, and, in addition, the action of the market itself can be expected under most circumstances to stimulate buying or selling in a manner consistent enough to allow reasonably accurate forecasting of news in advance of its actual occurrence.

12. You don’t need analysts in a bull market, and you don’t want them in a bear market

Jesse Livermore’s Trading Rules Written in 1940

1. Nothing new ever occurs in the business of speculating or investing in securities and commodities.

2. Money cannot consistently be made trading every day or every week during the year.

3. Don’t trust your own opinion and back your judgment until the action of the market itself confirms your opinion.

4. Markets are never wrong – opinions often are.

5. The real money made in speculating has been in commitments showing in profit right from the start.

6. As long as a stock is acting right, and the market is right, do not be in a hurry to take profits.

7. One should never permit speculative ventures to run into investments.

8. The money lost by speculation alone is small compared with the gigantic sums lost by so-called investors who have let their investments ride.

9. Never buy a stock because it has had a big decline from its previous high.

10. Never sell a stock because it seems high-priced.

11. I become a buyer as soon as a stock makes a new high on its movement after having had a normal reaction.

12. Never average losses.

13. The human side of every person is the greatest enemy of the average investor or speculator.

14. Wishful thinking must be banished.

15. Big movements take time to develop.

16. It is not good to be too curious about all the reasons behind price movements.

17. It is much easier to watch a few than many.

18. If you cannot make money out of the leading active issues, you are not going to make money out of the stock market as a whole.

19. The leaders of today may not be the leaders of two years from now.

20. Do not become completely bearish or bullish on the whole market because one stock in some particular group has plainly reversed its course from the general trend.

21. Few people ever make money on tips. Beware of inside information. If there was easy money lying around, no one would be forcing it into your pocket.

21 Rules Of Paul Tudor Jones

1. When you are trading size, you have to get out when the market lets you out, not when you want to get out.

2. Never play macho with the market and don’t over trade.

3. If I have positions going against me, I get out; if they are going for me, I keep them.

4. I will keep cutting my position size down as I have losing trades.

5. Don’t ever average losers.

6. Decrease your trading volume when you are trading poorly; increase your volume when you are trading well.

7. Never trade in situations you don’t have control.

8. If you have a losing position that is making you uncomfortable, get out. Because you can always get back in.

9. Don’t be too concerned about where you got into a position.

10. The most important rule of trading is to play great defense, not offense.

11. Don’t be a hero. Don’t have an ego.

12. I consider myself a premier market opportunist.

13. I believe the very best money is to be made at market turns.

14. Everything gets destroyed a hundred times faster than it is built up.

15. Markets move sharply when they move.

16. When I trade, I don’t just use a price stop, I also use a time stop.

17. Don’t focus on making money; focus on protecting what you have.

18. You always want to be with whatever the predominant trend is.

19. My metric for everything I look at is the 200-day moving average of closing prices.

20. At the end of the day, your job is to buy what goes up and to sell what goes down so really who gives a damn about PE’s?

21. I look for opportunities with tremendously skewed reward-risk opportunities.

 Bernard Baruch’s 10 Investing Rules

1. Don’t speculate unless you can make it a full-time job.

2. Beware of barbers, beauticians, waiters — of anyone — bringing gifts of “inside” information or “tips.”

3. Before you buy a security, find out everything you can about the company, its management, and competitors, its earnings and possibilities for growth.

4. Don’t try to buy at the bottom and sell at the top. This can’t be done — except by liars.

5. Learn how to take your losses quickly and cleanly. Don’t expect to be right all the time. If you have made a mistake, cut your losses as quickly as possible.

6. Don’t buy too many different securities. Better have only a few investments which can be watched.

7. Make a periodic reappraisal of all your investments to see whether changing developments have altered their prospects.

8. Study your tax position to know when you can sell to greatest advantage.

9. Always keep a good part of your capital in a cash reserve. Never invest all your funds.

10. Don’t try to be a jack of all investments. Stick to the field you know best.

 James P. Arthur Huprich’s Market Truisms And Axioms

1. Commandment #1: “Thou Shall Not Trade Against the Trend.”

2. Portfolios heavy with underperforming stocks rarely outperform the stock market!

3. There is nothing new on Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again, mostly due to human nature.

4. Sell when you can, not when you have to.

5. Bulls make money, bears make money, and “pigs” get slaughtered.

6. We can’t control the stock market. The very best we can do is to try to understand what the stock market is trying to tell us.

7. Understanding mass psychology is just as important as understanding fundamentals and economics.

8. Learn to take losses quickly, don’t expect to be right all the time, and learn from your mistakes.

9. Don’t think you can consistently buy at the bottom or sell at the top. This can rarely be consistently done.

10. When trading, remain objective. Don’t have a preconceived idea or prejudice. Said another way, “the great names in Trading all have the same trait: An ability to shift on a dime when the shifting time comes.”

11. Any dead fish can go with the flow. Yet, it takes a strong fish to swim against the flow. In other words, what seems “hard” at the time is usually, over time, right.

12. Even the best looking chart can fall apart for no apparent reason. Thus, never fall in love with a position but instead remain vigilant in managing risk and expectations. Use volume as a confirming guidepost.

13. When trading, if a stock doesn’t perform as expected within a short time period, either close it out or tighten your stop-loss point.

14. As long as a stock is acting right and the market is “in-gear,” don’t be in a hurry to take a profit on the whole positions. Scale out instead.

15. Never let a profitable trade turn into a loss, and never let an initial trading position turn into a long-term one because it is at a loss.

16. Don’t buy a stock simply because it has had a big decline from its high and is now a “better value;” wait for the market to recognize “value” first.

17. Don’t average trading losses, meaning don’t put “good” money after “bad.” Adding to a losing position will lead to ruin. Ask the Nobel Laureates of Long-Term Capital Management.

18. Human emotion is a big enemy of the average investor and trader. Be patient and unemotional. There are periods where traders don’t need to trade.

19. Wishful thinking can be detrimental to your financial wealth.

20. Don’t make investment or trading decisions based on tips. Tips are something you leave for good service.

21. Where there is smoke, there is fire, or there is never just one cockroach: In other words, bad news is usually not a one-time event, more usually follows.

22. Realize that a loss in the stock market is part of the investment process. The key is not letting it turn into a big one as this could devastate a portfolio.

23. Said another way, “It’s not the ones that you sell that keep going up that matter. It’s the one that you don’t sell that keeps going down that does.”

24. Your odds of success improve when you buy stocks when the technical pattern confirms the fundamental opinion.

25. As many participants have come to realize from 1999 to 2010, during which the S&P 500 has made no upside progress, you can lose money even in the “best companies” if your timing is wrong. Yet, if the technical pattern dictates, you can make money on a short-term basis even in stocks that have a “mixed” fundamental opinion.

26. To the best of your ability, try to keep your priorities in line. Don’t let the “greed factor” that Wall Street can generate outweigh other just as important areas of your life. Balance the physical, mental, spiritual, relational, and financial needs of life.

27. Technical analysis is a windsock, not a crystal ball. It is a skill that improves with experience and study. Always be a student, there is always someone smarter than you!

James Montier’s 7 Immutable Laws Of Investing

1. Always insist on a margin of safety

2. This time is never different

3. Be patient and wait for the fat pitch

4. Be contrarian

5. Risk is the permanent loss of capital, never a number

6. Be leery of leverage

7. Never invest in something you don’t understand

But, did you spot what was missing?

Every day the media continues to push the narrative of passive investing, indexing and “buy and hold.” Yet while these methods are good for Wall Street, as it keeps your money invested at all times for a fee, it is not necessarily good for your future investment outcomes. 

You will notice that not one of the investing greats in history ever had “buy and hold” as a rule.

So, the next time that someone tells you the “only way to invest” is to buy and index and just hold on for the long-term, you just might want to ask yourself what would a “great investor” actually do. More importantly, you should ask yourself, or the person telling you, “WHY?”

The ones listed here are not alone. There numerous investors and portfolio managers that are revered for the knowledge and success. While we idolize these individuals for their respective “genius,” we can also save ourselves time and money by learning from their wisdom and their experiences. Their wisdom was NOT inherited, but was birthed out of years of mistakes, miscalculations, and trial-and-error. Most importantly, what separates these individuals from all others was their ability to learn from those mistakes, adapt, and capitalize on that knowledge in the future.

Experience is an expensive commodity to acquire, which is why it is always cheaper to learn from the mistakes of others.

Importantly, you will notice that many of the same lessons are repeated throughout. This is because there are only a few basic “truths” of investing that all of the great investors have learned over time. I hope you will find the lessons as beneficial as I have over the years and incorporate them into your own practices.

On March 10, 2017, 720Global introduced the Trump Range Chart. Developed to see several different markets on one page, this unique chart provides a composite perspective of many instruments at once.  Given the large post-election market gyrations across many asset classes, our concern was, and still remains, that those moves are transitory, reflective of extreme and possibly unwarranted optimism regarding the ability of the new administration to pass bold economic initiatives. For a broad discussion of the harsh economic landscape Trump faces, our cause for doubt, please read The Lowest Common Denominator: Debt.

Unbridled Enthusiasm

On May 17, 2017, the S&P 500 fell 1.82% on rumors that President Trump had tried to persuade former FBI Director James Comey to influence the FBI investigation into potential Russian interactions with the Trump campaign. This resulted in the largest equity market decline since March 21st, when healthcare legislation was being challenged and produced a surge in volatility as well. Outside of these two days, optimism has run rampant as witnessed by the daily gains and recurring all-time highs in many major equity indexes. As a result, equity volatility as discussed in Volatility: A Misleading Measure of Risk, has reached lows only seen on four other days since 1990.

Two important points: First, valuations are reaching levels akin with those preceding memorable market crashes and are concurrent with still weaker economic growth and a Federal Reserve (Fed) that is hiking interest rates. Secondly, at current valuations, prudence demands a defensive posture but watching the markets move higher when hunkered down in a conservative position is both frustrating and humbling. This counter-intuitive dynamic is always present in markets at points of extremes. Most move comfortably with the herd while only a few have the fortitude to break away from the misguided pack.

Clouds on the Horizon

It is growing more obvious by the day that the administration lacks the ability to enact much of the economic legislation that generated the surge of optimism reflected in post-election stock indexes.

As market participants who like to support assertions with data, we also prefer to talk about events in terms of their probabilities. We think about the current situation this way: since the election, the S&P 500 has gained 13% at its highs on May 16. Corporate earnings have improved, but economic growth has proven weaker than expected and the Fed has been more aggressive in raising rates than most thought last November. Therefore, we believe a large majority of the gain stems from non-domestic forms of liquidity emanating from Europe and Japan and a belief that Trump will be able to pass much of his economic agenda. Given the hostile political climate in Washington, the probability of Trump executing his plans is certainly lower than the market suggests. On what logical basis should the probabilities of passing aggressive, pro-growth legislation remain unchanged?

Markets/Range Chart

Despite these important considerations, the stock market exhibits little fear. The performance of other asset classes contradict the stock market. The graph below charts the percentage moves since the election of the S&P 500, Gold, U.S. Dollar and the 2year/30year Treasury yield curve. Despite widening significantly in the days following Trump’s victory, note that the yield curve is now flatter today than where it was on election-day. This is not a vote of confidence in the higher growth/reflation outlook that has bolstered stocks. The U.S. Dollar has also reversed the entirety of its post-Trump gains and gold is nearing breakeven over this period. While most investors pay close attention to stock prices and possibly bond yields, this analysis highlights other asset market signals that warrant attention.

Data Courtesy: Bloomberg

The chart above uses 4 pm closing prices for each day. The Range Chart, below, uses intraday prices including the extremely volatile night of the election.  Below the summary is a user guide for the Range Chart.

Data Courtesy: Bloomberg


Many mistakenly compare Trump’s proposals to those of Ronald Reagan. They correctly identify  similarities but few mention the stark differences between the economic landscapes of the two periods.

With the probability of successful and full implementation of Trump’s economic agenda declining, investors should question whether equity prices will be able to meet the lofty expectations currently set forth by current valuations.  

How to read the range chart

The data in the Trump range chart above is shown in a format that is quite different from what is commonly used to illustrate market changes. This format provides an easy way to view relative performance across a broad number of indexes and securities. It is intended to be a meaningful supplement and not a replacement to the traditional charts most investors review on a routine basis.

The base time frame captured by the graph reflects the market move for each index or security since Election Day, November 8, 2016. This change is represented by the 0% to 100% on the left hand axis. The 0% level reflects the intra-day low of the security since November 8 and the 100% level the intra-day high. For more clarity on the prices associated with the range, see the table below the chart for each respective index.

The (red/blue) bar reflects the price range of the past month relative to the base time frame.  The black “dash” within the 1-month bar reflects the previous week’s closing level (PWC) and the red dot highlights the closing level on the “as-of” date in the top left corner.

The diagram below isolates the chart and data for the Russell 2000 to further illustrate these concepts.





The financial services industry is headed for the greatest debate in recent history.

Regardless of what occurs from here –a continued stock market bullish trend or reversion to long-term averages which chronicles back to 2000 levels, the confines of discussion, the heated verbal and written volleys tossed deep from the roots of philosophical differences will forge a permanent rift between the steadfast buy-and-hold brethren and the stewards who manage risk by preserving capital (the dreaded group with a market escape plan), through the forthcoming bear cycle.

The stakes are higher than I can recall.

Future generations: Those we are depending on to lift the globe from the depths of a demographic malaise, groups nowhere near as ostentatious as Baby Boomers; generations that savor experience over product and have been wary of the risk in stocks, are beginning to relent and take notice of this bull market trajectory.

How they experience the ride in stocks and what occurs from here will shape their investment philosophy. I fear Millennials to Gen Y are going to get fooled, taken out. Smacked in the face.


The buy-and-hold side, ‘the setters and forgetters,’ which I’ll explain, appear to be winning this battle so far and that’s part of the reason for my concern and ironically, a matter-of-fact bullishness.

For now and the near future it’ll be hunky dory. You see, I think we are in the midst of witnessing the greatest market bull stampede since 1995 through 1999. I believe it’ll eventually make the tech bubble explosion sound and feel like a 5-year old throwing down in joy, a bang pop noise maker on hot cement through a humid-heavy July 4th.

However, this is just my humble opinion.

I hold the utmost respect for the market as it’s designed to fool me as much as possible and at every gyration. I’m open-minded and with the assistance of our no-spin, in-house data crunching at Real Investment Advice, I remain more eagle, or eye witness, as opposed to a ‘bull’ or ‘bear.’ And I observe here, the beginning of the “bubble’s bubble.”

The break out of a long-term sideways market cycle which began in 2013, stalled in early January 2015 when the S&P 500 closed at 2058. On November 9, 2016, it stood at 2163. Watching paint dry through the summer of ’16 would have been more exciting than the market action. It was torturous. I described it to Lance Roberts at the time as suspended animation.

Then the presidential election happened and the rest is history…

I’m hesitant to refer to the current market as a bubble. I refer to it as the boom that leads to a bubble. See, my definition, perception, differs from market soothsayers. It isn’t in a textbook. It emerges from my boyhood summer activities on a New York street. The greatest bubbles I recall were the largest ones, most magnificent, right before they burst in a soapy, rainbow mess, stung my eyes like slimy razors, and forced me to lament through a wince:

“Wow – that was freakin’ incredible!”

The current Shiller Price-Earnings Ratio stands at 29X; the tech-wreck Shiller was a hair short of 45X in December 1999. My definition of bubble begins at the apex of the ‘pop’ of the previous high. From there, I believe only if or when we exceed that limit, that the market should be deemed the “bubble’s bubble.”

For now, I’m going to outline the factors or input that is breathing sustainability into this phenomenon.

Don’t misunderstand: My belief is when this market adjusts, there’s going to be stinging eyes from tears spilled over brokerage statements and the mutter of “I got suckered again,” over and over.

You see, every bubble differs in composition. The boom-bust cycle feedback loop we’re traveling now isn’t fueled by an industry or sector. It’s greater in scope. The wind in the proverbial sails is a confluence of factors fueled by post-election animal spirits and a lower-than-longer interest rate environment which is the prime food source or hive for the bull.

Poor demographics, below-average productivity which keeps the Federal Reserve and yield curve captive in a flat wasteland of inertia, a new generation of financial professionals who never experienced a bear market, an overwhelming number of passive preachers who believe indexing (without regard to risk management), is some form of financial nirvana, a brokerage industry under pressure to comply with a looming Department of Labor fiduciary standard slated implementation on June 9, stirred with the hope of corporate tax reform ‘sometime in the future, (it’ll be big)’, boils a seductive porridge the bubble’s bubble can’t get enough of.

Regardless of the possible repeal or modification of the DOL ruling under the current presidential administration, investors are demanding a greater standard of care from those who assist them.

Big box financial retailers are desperately scrambling to create procedures designed to reduce possible liabilities that come from taking on fiduciary responsibilities. The last thing on their minds is to “do what’s in the highest best care of the client.” The paramount concern is to work with their cadre of lawyers to minimize business risk for themselves. The investment risk you absorb will remain of little concern except for how thinly they determine your ‘risk profile.’ As long as your responses to risk queries are recorded, you’re screwed.

A method I know is growing popular with several financial behemoths is to take the portfolio decisions out of the hands of otherwise knowledgeable employees and place them with a group in a centralized location thus creating a homogenized, factory assembly-line process allegedly for closer monitoring.

Strangely, and perhaps insidiously, I wholeheartedly believe the intention is to build closer ties to the firm thus severing the relationship with the adviser, who is always deemed a flight risk. This method also frees up frontline professionals to sell more packaged asset-allocation product or you got it, feed the profit-margin beast.

The next bubble pop may be a game changer for the industry again and motivate financial professionals who do a magnificent job of selling products or outsourcing money management which ostensibly distances themselves from ground zero of an imminent explosion (hey, it’s the market, not me), to possibly re-think their careers. Take on a fiduciary calling.

Perhaps a bubble or at the least, a severe bear market is required to cleanse the system, drain the swamp, by migrating miscreants to more fitting livelihoods like pushing phone service deals at T-Mobile or taking roles as activities directors for Carnival Cruise Lines. We’re due.

The best activities director on a cruise ship: Julie from The Love Boat.

It’s a romantic notion. A nice thought. Meh, it keeps me motivated to consistently provide what I consider ‘full circle’ financial guidance, the complete story, pros & cons, and planning for risk markets that we strive for at Real Investment Advice.


While we await comeuppance, let’s review what stirs inside the bubble’s bubble.

The ‘passive’ revolution we’re witnessing is to provide a portfolio solution which is based on the demand for the products, regardless of how expensive the products may be.

To be clear, I’m an advocate for index investments and lower internal portfolio costs. I was one of the first financial professionals at my former employer to use market cap weighted exchange-traded funds in client portfolios to replace mutual funds.

My beef is how indexing is perceived by unsuspecting investors as safe and insidiously branded or allowed to be positioned by the buy-and-hold faction, as the ultimate never-sell strategy.

Not because it’s best for the investor; well, that’s a convenient half-truth. Mostly, it’s optimum for the adviser under pressure who can offer a pretty asset allocation solution in a package and move on to the next notch on the sales belt.

The front-line consultant of a publicly-traded big box financial retailer is under never-ending intense pressure to increase margins for shareholders. The performance of the stock price is the priority. I was provided this wisdom, which I have never forgotten, from a former regional manager at Charles Schwab – “It’s shareholders first; then follows the rest of us, including clients.”

If passive is what clients want, passive is what they shall receive, but in a manner that can be delivered and scalable by a financial retailer in a CYA/fiduciary manner. It’s time efficient to get cash fully invested in an asset allocation at once; buy full in to the story that it’s time in the market not timing the market, regardless of current valuations         or expected returns, especially as corrections appear more as distant memory than reality. READ: The Deck is Stacked: Putting Risk and Reward into Perspective.

Here’s how I see it as the bull rages on:

The asset allocator factory box designers are diligent at work, creating neat, easy-breezy investment packages positioned as products or “solutions,” thus forging a path perhaps we haven’t walked so passionately before.

The demand for these attractive boxes filled with a colorful palate of panacea in the form of passive investments, may drive valuations higher than we’ve seen, even greater than the tech bubble, which will leave investment veterans perplexed.

Market this sausage to a new breed of adviser who perceives passive as safe, has rarely witnessed a correction or bear market working in the trenches with clients, and serve it up on the finest wrapper Wall Street marketing has to offer, and God help us.


The investment vs. valuation connection is aggressively being severed. Asset-allocation solutions are being positioned to ‘pros’ as simple, third-party adjuncts to an overall financial planning experience. The intoxicating promise of ease and low cost which places what you pay in the form of valuations in a clean-up spot, or makes it an afterthought (if that), is incredibly alluring. Buy it up now, let it grow, harvest later. Simple.

After all, stock valuations are as easy to comprehend as nebulae millions of light years away.

So why bother?

Just buy the box. Open in 20 years. Hopefully, just hopefully, there’s something in there to show for it.

The demand for the product of stocks to market and maintain aggregate static asset allocation programs overrides the price paid for that product.

One of the best blogs I’ve read about “earningless” bull markets and the overall demand for stocks comes from www.philosophicaleconomics.com in a piece penned The Single Greatest Predictor of Future Stock Market Returns.

At this juncture, a lack of viable alternatives, the massive growth of robotic allocations of passive investments packaged and sold, and the aversion of the corporate sector to issue new equity has created a demand for stocks similar to the demand for a product, like an IPhone. Regardless of price, if the IPhone is in demand, you’ll stand on line for days to get it. It doesn’t need to make sense, don’t try to rationalize it.

From the blog post:

Ultimately, the price of equity is determined in the same way that the price of everything is determined–via the forces of supply and demand.  For any given stock (or for the space of stocks in aggregate), price is always and everywhere produced by the coming together of those that don’t own the stock and want to allocate their wealth into it, and those that do own the stock and want to allocate their wealth out of it.  

It’s all up to the allocators–they decide how much of their wealth they are going to allocate into stocks, how much exposure they are going to take on.  Their preferences–or rather, their efforts to put those preferences in place, by buying and selling–set the price.  Valuation is a byproduct of this process, not a rule that it has to follow.  

Buy-and-hold is painted as the informed, responsible, pro-American thing to do with a portfolio.  But, in terms of financial stability, it can actually be a very destructive behavior.  Consider the classic buy-and-hold allocation recommendation: 60% to stocks, 40% to bonds (or cash). What rule says that there has to be a sufficient supply of equity, at a “fair” or “reasonable” valuation, for everyone to be able to allocate their portfolios in this ratio?  There is no rule.  

If everyone were to jump on the buy-and-hold bandwagon, and decide to allocate 60/40, but equities were not already 60% of total financial assets, then they would necessarily become 60% of total financial assets.  The excess bidding would not stop until they reached that level.  It doesn’t matter that the associated price increase would cause the P/E ratio to rise to an obscenely high value.  The supply-demand dynamic would force it to go there.  

If aggregate demand for stocks continues, then valuations will be an afterthought. However, there is a risk to this rosy scenario. Currently, household equity percentages among individual investors stand at their highest level in two years at 67.6% per the March AAII Asset Allocation Survey. Prior bull cycles have seen equity allocations exceed 70%. Granted. Yet, consumer sentiment or the ‘feel good factor’ is at thresholds we haven’t crossed since 2004. Confusing.

Keep in mind, stocks don’t need to correct exclusively in price, they can in time. In other words, the higher valuations our team calculates for stocks can even out over the next few years ostensibly pulling down the long-term averages of stocks to 2%, maybe less.

And the reward for stock risk flies in the face of Warren Buffett’s commentary that “bonds are lousy investments.” Let’s see – 2% with 100% probability of recovering my principal at the end of a period or 2% return with a tremendous chance of loss at the roulette wheel. Hmm…

The demand for risk assets is going to require several conditions to remain consistent. I’ll cover what I consider the most important.

Which gets me to:

Passive investing is exploding in popularity. I’m concerned about the true reasons why.

From a recent article in the L.A. Times:

When money flows into conventional index funds, they must buy the stocks in their index regardless of the underlying companies’ financial health or outlook.

“Of course it distorts things,” said Rob Arnott, who has pioneered a fundamentals-based form of indexing at Research Affiliates in Newport Beach. “Price discovery,” the term for research that gets to the heart of a stock’s relative value, “is diminished as fewer and fewer investors care about the fundamentals,” Arnott said.

The migration to passive investments is indeed exploding. Currently, 42% of all U.S. stock funds are in passive vehicles.

One reason is indeed lower costs. Indexing is definitely a bargain TYPE of investment (more on this coming), when compared to many actively-managed funds.  Low internal fees is a positive for investors.

Unfortunately, I believe the overwhelming reason for the massive popularity of passive investments is performance or outperformance when compared to their actively-managed colleagues; the market momentum we’ve been experiencing since 2009 fueled by strong tailwinds of prolonged low rates, multiple quantitative easing programs, corporate share buybacks, and companies that operate lean and mean (it’s always a recession in corporate America when it comes to employee headcount), have forged accelerants to market increases.

However, cycles do change. Yet, nothing about that fact from passive preachers. Zero about bearing the full brunt of stock market risk. Nada about the math of loss.

Which gets me to:

Passive investing is not safe. Not by a long shot. To clarify: Passive is an investment type. It is NOT an investing process nor a manner to which RISK is managed.

The clearest thought I can conjure up about passive investments and bear markets is I have the finest potential to lose money at low internal costs. Never forget – Once wealth is allocated to stocks, it’s active. On occasion, radioactive. Plain and simple. Index positions must be risk managed. They bear the full risk of markets. The highs and the lows. There’s no escape-risk-free card for you.

The passive preachers make it sound like once you’re indexing there’s no need to manage risk. Diversification is supposedly the only means to do so, but beware. How you define diversification differs from how your broker does. READ: Never Look at Diversification the Same Way Again.

The granddaddy of indexing Jack Bogle of Vanguard readily tells the media that stocks are ‘overpriced.’ Future returns will be below average. In the next breath, he’ll suggest go all in because there’s nothing else you can do. If anything, that’s a pretty dangerous passive attitude to have considering the wealth carnage from math of loss, which again, is a topic that is never discussed.

Go for it. Select your own index or exchange-traded funds or work with a fiduciary to create an asset allocation plan. Regardless, a rules-based approach to rebalance overheated asset classes or exit stocks surgically through market derails as identified in Lance Roberts’ weekly newsletter, should be part of the process. That’s a full-circle approach to investing – The buy, the hold and the other four-letter word – Sell.

I’d keep the “sell” word on the “down low” with your passive friends. Go slow. Perhaps you can enlighten them. Help them redefine how passive should be perceived in the real world.

The current economic conditions handcuff the Fed and holds captive an upside move in rates which in turn, makes the bubble’s bubble a closer reality.

I’m no Lance Roberts however, I do believe stocks and bonds do vie for capital attention. Not based on an interest rate vs. equity earnings yield comparison, mind you. That’s just an ingenious Enron-like mathematical travail financial analysts devised to lead your portfolio into a high-risk, low-return trap and appear intelligent doing it. READ: Do Low Rates Justify Higher Valuations?

I am referring to the enduring nature of TINA, or “There Is No Alternative,” to stocks when the hefty lid on bond yields is considered. Warren Buffett on CNBC a few weeks ago called bonds “a lousy investment.” Why? Because who wants to extend their financial neck for a U.S. Treasury Note paying 2% plus for a decade?

No doubt interest rates can remain low for extremely long spans. Several prolonged periods are mind boggling to comprehend as outlined in this chart from Lance Roberts.

Some wines are shorter to age.

From the 1981 peak to 2003, yields of prime corporate and long duration government bonds declined by a thousand basis points.

Intermediate and long-term interest rates are a function of economic growth and inflation. As economic activity heats up, so does the demand for credit. As wages increase, so does the ability of a household to meet or take on additional monthly debt obligations. Unfortunately, wage growth has been stubbornly stagnant for 17 years.

Sentier Research, a powerhouse of information which reflects the financial state of the American household, offers a monthly data for household incomes.

Adjusted for inflation which is most important, median household real income peaked at the beginning of the Great Recession. Sadly, inflation-adjusted income is still .7% below the beginning of the year 2000.

Inflation has been trending at roughly 2%; GDP growth which was disappointing for Q1 2017 is due for a big pick up in Q2 per the Atlanta’s Fed GDP Now’s forecasting model which is estimating as of May 16, a 4.1% annual rate. We’ll be monitoring at Real Investment Advice as this model is updated six or seven times a month with at least one update following seven economic data revisions from the BEA.


The Real Investment Advice estimate for GDP growth isn’t as optimistic as the Atlanta Fed’s. In addition, we have witnessed how the GDPNow forecast gets revised lower repeatedly as economic data is released.

In the United States, we have experienced a prolonged period of below-average economic growth since 2000 that may endure through 2022, when a positive demographic cycle emerges. Read: The Long View – Rates, GDP & Challenges.

Structural headwinds will keep longer duration yields subdued and the Fed handcuffed to raise short-term rates as quickly as they prefer. I’ve been a broken record with this commentary since I began to study Japan’s economy in 2009.

The book “The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession,” by economist Richard Koo, enlightened me to the similarities between the U.S. and Japan. The aftermath of deep recessions where household balance sheets are damaged combined with poor demographics, is a lethal structural blow to economic prosperity.

Overly accommodative central bank policies attempt to accelerate (they’re far from successful) or at the least, don’t stand in the way of recovery, which comes down to, for the U.S., a continued period of low interest rates.

The environment is perfect, as long as economic conditions just trudge along and the Fed is stuck, for the TINA monster to feed. Blame it on the demographics of an aging population, not enough young people forming households, excess debt, or poor savings rates. Pick your position. The backdrop is perfect for stocks to continue higher with sights near of the bubble’s bubble.

The continued positive momentum for stocks is a poor reason to let your guard down. On the contrary. More than ever as an investor, one must remain vigilant to take profits and rebalance. Stay humble. Understand the territory your wealth travels today can fall into a sink hole real fast.

Every long-term market cycle forges a unique path. Who knows how this one will crescendo.  For now, I am sticking with the bubble’s bubble theory as I still observe too many Main Street investors who have some form of “spidey-sense” or talk doom when markets take in a short breath, which tells me after toiling in this industry since 1989, that the wall of worry that stocks climb, albeit aging like the nation’s infrastructure, is still intact.

However, when it crumbles, you can’t afford to get crushed.

I’m first and foremost a financial life planner, not a market analyst. However, when partnering with a client to create a retirement income distribution strategy, I fear now more than any other period since 2000, that sequence of return risk or a prolonged period of poor or zero portfolio returns, is a strong possibility in the future. After all, whether it’s through price or time, risk assets revert. It’s never different. As life goes, so do markets ebb and flow.

Oh, and the battle between the buy-and-holders and the risk managers?

It’ll be our financial civil war to fight; as an investor, whether choose to be or not, you will be pulled in unfortunately, by proxy. You see, your wealth will be on the line, the weapons chosen.

Yet again, we will fight.

You will bleed.

How much is up to you.

“Technically Speaking” is a regular Tuesday commentary updating current market trends and highlighting shorter-term investment strategies, risks, and potential opportunities. Please send any comments or questions directly to me via Email, Facebook or Twitter.

In this past weekend’s newsletter, I discussed the fact that despite the bullish “exuberance” of market participants, the underlying internal deterioration has continued. To wit:

“Furthermore, the underlying internals have continued to weaken over the last week which has remained a concern over the last couple of months.

The 10-year chart below, while a bit cluttered, shows several very important things worth considering currently. First, the top part of the weekly chart is essentially a buy/sell indicator. Each sell signal previously, has been indicative of a correction. The middle of the chart is a combination of internal strength indicators from the number of stocks on bullish buy signals, advancing vs declining issues and volume, and the percent of stocks above their 200-day moving average.”

“With all the internal indicators currently on the decline, when combined with a stochastic ‘sell signal,’ there is a higher probability of a correction in the weeks ahead. While this time could certainly be different, it is probably worth noting that making such a bet with your retirement money has not often ended well.”

As I stated, the chart above is a bit cluttered so I wanted to use today’s technical update to take a closer look at the internals supporting the current bull run.

Number Of Stocks On Bullish Buy Signals 

The number of stocks on bullish “buy” signals continues to wane despite the markets pushing all-time highs. This continues to suggest the underlying participation remains weak as the “breadth” of the advance has narrowed.

Number Of Stocks Above Their 200-Day Moving Average

The same can be seen in the number of stocks trading above their 200-day moving average. Deterioration in advance of a decline has historically been a good warning sign to scale back portfolio risk.

Number Of Advancing Issues (50-Day Moving Average)

The number of issues advancing on the NYSE has likewise deteriorated and has now diverged from the advance in the market. Participation is coincident with a rising “bull market, “ and deterioration of participation has also been a warning sign of forthcoming weakness. 

Volume Of Advancing Issues (50-Day Moving Average)

The same is true for the volume of advancing issues on the NYSE.

Price Momentum

Multiple measures of price momentum of the S&P 500, as shown below, also suggests a market that is currently extremely advanced and vulnerable to a corrective action. The dashed red lines denote when the price momentum oscillator has triggered a “sell” signal previously.

Yields Need To “Buy It”

Lastly, despite stocks pushing near all-time highs, the bond market continues to flirt with levels close to 2%. The continued move to “risk off” holdings, despite a rising stock market, suggests that ultimately either stocks OR bonds will be wrong. Historically, bonds have tended to be right more often than not.

The Yin & Yang Of It

None of the above should be construed that I am saying a “bear market” is fast approaching. For now, market prices remain elevated on the “hope” the “mythical tax cuts/reforms” will soon appear. If they do, great, as asset prices should get a temporary lift higher. The risk is the “swamp devours Trump,” and Washington gridlock keeps progress frozen until the 2018 election cycle.  The question is how long will “hope” hold out over legislative advancement?

However, there is a bigger issue on the horizon for the bulls and it can be summed up as follows:

“The longer a bull market exists, the more it is believed that it will last indefinitely.”

Unfortunately, as it is with all things in life, to each there is a cycle. The chart below shows the long-term view of the market with its inherent full-market (combined bull and bear) cycles exposed.

The idea of full market cycles is important to understand. “Where” you are within the current long-term investing cycle has everything to do with your long-term outcomes. The charts below take the classic investing psychology cycle (below) and overlays it with the long-term full market cycles driven by valuation cycles in the chart above.

The first full-market cycle lasted 63-years from 1871 through 1934. This period ended with the crash of 1929 and the beginning of the “Great Depression.”  If you invested in the financial markets at any point prior to 1920, you likely died much worse off than when you started.

The second full-market cycle lasted 45-years from 1935-1980. This cycle ended with the demise of the “Nifty-Fifty” stocks and the “Black Bear Market” of 1974. While not as economically devastating to the overall economy as the 1929-crash, it did greatly impair the investment psychology of those in the market. But even in this cycles, many individuals ran out of time long before achieving the financial goals they were promised.

The current full-market cycle is only 37-years in the making. Given the 2nd highest valuation levels in history, corporate, consumer and margin debt near historical highs, and average economic growth rates running at historical lows, it is worth questioning whether the current full-market cycle has been completed or not.

Importantly, considering most individuals didn’t start investing until near the turn of the century, much of the damage from the last two bear markets still remain. If the next down cycle completes the pattern, it is quite likely most investors won’t live long enough to be repaired by the first-half of the next cycle. 

The idea the “bull market” which begin in 1980 is still intact is not a new one. As shown below a chart of the market from 1980 to present, suggests the same.

The long-term bullish trend line remains and the cycle oscillator is only half-way through a long-term cycle. Furthermore, on a Fibonacci-retracement basis, a 61.8% retracement would current intersect with the long-term bullish trendline around 1000 suggesting the next downturn could indeed be a nasty one. But again, this is only based on the assumption the long-term full market cycle has not been completed as of yet.

I am NOT suggesting this is the case. This is just a thought-experiment about the potential outcome from the collision of weak economics, high levels of debt, and valuations and “irrational exuberance.”

Yes, this time could entirely be different.

It just never has been before. As I noted this past weekend, Rich Breslow summed the current environment up well, and is worth repeating in case you missed it.

“Markets can trend, range trade, and correct. But one thing they can’t do under the current scenario is time-correct. The minute they stop moving, a powerful, even if short-lived, impulse takes over to reevaluate, cherry-pick and average down. Even if you’re sure the story hasn’t run its course, it takes real moxie to remain exposed to the other side of trades you were very comfortably holding for the previous weeks and months.

We’re all leery of getting caught in over-crowded trades. Nothing feels more teeming than new trades predicated on emotion. Even if you feel very strongly about the subject. This is a be nimble, very nimble, environment when we’ve been rewarded time and again for buying and holding. Traders will need skills that have atrophied over years. Another reason we are years away from ‘normal.’”

I suspect he is right.

In the short-term, the market’s internals need to improve to support the ongoing bullish thesis. Our portfolios remain long-biased currently, but we have rebalanced by harvesting some profits and raising a little higher than normal cash levels.

However, in the longer-term as shown above, fundamental underpinnings continue to suggest the risk/reward ratio is heavily tilted against investors trying to “passively” index their portfolios. Such “armchair” approaches to investing are generally only seen in late stage bull market advances as “exuberance exceeds grasp.” The reason is it takes a very long period of a bullish advance to wipe-out the painful memories of the losses incurred by those same approaches previously.

The reminder will be just as painful.


In late 2016, OPEC, along with the Russian’s and other countries, agreed to cut production in order to try and “balance” the supply/demand imbalance that drove oil prices to the low $30’s at the nadir of the oil price crash.

As Brian Noble noted recently:

“In the past couple of weeks, crude oil futures really did a round trip. First, they took a beating. WTI futures fell on May 4th to $45.52 per barrel, coming down from an April peak of $53.40, hitting the lowest point since the deal between OPEC and non-OPEC oil producers was signed last November. Since then, WTI has rallied up above $49 on as confidence grows over an OPEC cut. So is this more noise or a portent of things to come?”

With OPEC meeting soon to discuss the extension of oil production cuts, the question is whether such actions have made any headway in reducing the current imbalances between supply and demand? This is an important consideration if we are going to see sustainably higher prices in “black gold.” 

With respect to the oil cuts, the current cut is the 4th by OPEC since the turn of the century. These cuts in production did not last long, generally speaking, but tend to occur at price peaks, rather than price bottoms, as shown below.

Brian hits on this exact point.

“Despite the occasional rally, it’s hard to see that the outlook for oil is encouraging on both fundamental and technical levels. The charts look to be screaming double top for WTI, while the fundamentals seem to be saying Economics 101: too much supply, too little demand. The parallel with 2014 is there if you want to see it.”

Brian is correct. The current levels of supply potentially creates a longer-term issue for prices globally particularly in the face of weaker global demand due to demographics, energy efficiencies, and debt.

Many point to the 2008 commodity crash as THE example as to why oil prices are destined to rise in the near term. The clear issue remains supply as it relates to the price of any commodity. With drilling in the Permian Basin expanding currently, any “cuts” by OPEC have already been offset by increased domestic production. Furthermore, any rise in oil prices towards $55/bbl will likely make the OPEC “cuts” very short-lived. 

As noted in the chart above, the difference between 2008 and today is that previously the world was fearful of “running out” of oil versus worries about an “oil glut” today.

The issues of supply versus price becomes clearer if we look further back in history to the last crash in commodity prices which marked an extremely long period of oil price suppression.

As Brian stated, ultimately, it is always about supply and demand.

Reviewing History

In 2008, when prices crashed, the supply of into the marketplace had hit an all time low while global demand was at an all-time high. Remember, the fears of “peak oil” were rampant in news headlines and in the financial markets. Of course, the financial crisis took hold and quickly realigned prices with demand.

Of course, the supply-demand imbalance, combined with suppressed commodity prices in 2008, was the perfect cocktail for a surge in prices as the “fracking miracle” came into focus. The surge of supply alleviated the fears of oil company stability and investors rushed back into energy-related companies to “feast” on the buffet of accelerating profitability into the infinite future.

Banks also saw the advantages and were all too ready to lend out money for drilling of speculative wells which was fostered by Federal Reserve liquidity.

As investors gobbled up equity shares, the oil companies chased every potential shale field in the U.S. in hopes to push stock prices higher. It worked…for a while.

Of course, lessons have not been learned as of yet, as banks and investors once again begin to chase speculative “shale” flooding capital into the Eagleford and Permian Basin fields.

The problem currently, and as of yet not fully recognized, is supply-demand imbalance has reverted. With supply now back at levels not seen since the 1970’s, and demand waning due to a debt-cycle driven global economic deflationary cycle, the dynamics for a repeat of the pre-2008 surge in prices is unlikely.

The supply-demand problem is not likely to be resolved over the course of a few months. The current dynamics of the financial markets, global economies and the current level of supply is more akin to that of the early-1980’s. Even is OPEC does continue to reduce output, it is unlikely to rapidly reduce the level of supply currently as shale field production increases.

Since oil production, at any price, is the major part of the revenue streams of energy-related companies, it is unlikely they will dramatically gut their production in the short-term. The important backdrop is extraction from shale continues to become cheaper and more efficient all the time. In turn, this lowers the price point where production becomes profitable increases the supply coming to market.

Then there is the demand side of the equation. For example, my friend Doug Short discussed the issue of a weak economic backdrop.

“There are profound behavioral issues apart from gasoline prices that are influencing miles traveled. These would include the demographics of an aging population in which older people drive less, continuing high unemployment, the ever-growing ability to work remote in the era of the Internet and the use of ever-growing communication technologies as a partial substitute for face-to-face interaction.”

The problem with dropping demand, of course, is the potential for the creation of a “supply glut” that leads to a continued suppression in oil prices.

Couple the weak economic backdrop with the slow and steady growth of renewable/alternative sources of energy as well as technological improvements in energy storage and transfer. Add to those issues that over the next few years EVERY major auto supplier will be continuously rolling out more efficient automobiles including larger offerings of Hybrid and fully electric vehicles. 

All this boils down to a long-term, structurally bearish story.

The Bets Are Heavily Bullish

Of course, the economic underpinnings certainly have not stopped Wall Street from jumping on the “bullish bandwagon” to lift oil prices over the last few months. Remember, while we talk about supply/demand as it relates to price in the long-term, it is “speculation” in the options market that sets price in the short-term. The problem, as shown by the net reportable crude oil contracts outstanding, is that “hope for higher oil prices” has kept speculation at levels not seen since the peak of the last crash.

It is also worth noting, with the S&P 500 index hanging near all-time highs, there is a fairly high correlation between the level of crude oil contracts and the financial markets.

The current deviation between the S&P 500 and oil contracts will likely not last long. Either the S&P 500 is due for a more meaningful correction or there is about to be a rapid rise in oil prices. The latter is unlikely.

The supply/demand dynamics currently suggest that oil prices and energy-related investments could find a long-term bottom within the next year or so following the next recession. However, it does not mean those investments will repeat the run witnessed prior to 2008 or 2014. Such is the hope of many investors currently as their “recency bias” tends to overshadow the potential of the underlying fundamental dynamics. 

Furthermore, prices of Energy stocks have been pushed to very oversold levels in recent weeks, but as noted in past weekend’s newsletter, but remain in a bearish trend.

While investors have chased energy stocks on expectations of minor production cuts from OPEC, little has been done to resolve the fundamental valuation problems which face a majority of these companies, and investors have paid the price as of late. Which is why I had suggested selling energy stocks in November of last year as noted below.

Importantly, note the weekly “sell signal” (vertical dashed red line) at very high levels currently for oil. While there is hope the production cuts will lift oil prices in the short-term, the longer-term technical backdrop suggests a bigger correction may already be in the works. 

With respect to investors, the argument can be made that oil prices could remain range-bound for an extremely long period of time as witnessed in the 80’s and 90’s. It is here that lessons learned in the past will once again be re-learned with respect to the dangers of commodities, fundamentals, leverage and greed.

For the Houston economy, there is likely more pain to go through before we reach the end of this current cycle. There are still far too many individuals chasing yields in MLP’s and speculating on bottoms in energy-related companies to suggest a true bottom has been reached.

Just something to consider.


For the last few months, there have been ongoing issues surrounding the “Russia Connection” and the underlying, and ongoing, investigations into the potential involvement/interference into the Presidential elections.

The market hasn’t cared.  Until Wednesday.

As I noted last Friday:


As suspected, it did end with a bang on Wednesday as markets dropped sharply on the news of a “leaked” memo to the New York Times. James Comey, former head of the FBI, will now be questioned by Congress next week and asked to provide that memo, but in the mean time the Justice Department has now appointed a special prosecutor to investigate the “Russia Connection.” 

While the Washington intrigue is certainly interesting, the question is “why after all these months did it matter to the markets now?” 

The answer is simple. It potentially stalls all the legislative actions the markets have been banking on for the “Trumpflation” trade from tax cuts to infrastructure spending. A look at the bond market gives you a clearer picture of the “fading” hopes on an inflation-driven economic boom.

Importantly, as shown in the chart of the S&P 500 above, the markets broke below the 50-dma on Wednesday and triggered a short-term “sell signal” as shown in the lower part of the chart. Importantly, these signals when previously triggered have denoted periods of increased volatility and corrective actions until they are complete. Despite the rally on Thursday, I suspect the “shot across the bow” on Wednesday was just that, a warning shot to investors which suggest reflexive rallies should be used to rebalance and de-risk portfolios for now. 

We need to see what happens over the next week to see if the markets can regain their footing. However, for now, holding a little dry powder continues to make some sense.

In the meantime, here is what I am reading this weekend.



Research / Interesting Reads

“The Market Will Always Tell You When You Are Wrong.” – Jesse Livermore

Questions, comments, suggestions – please email me.

Just recently my colleague Jesse Felder penned an excellent piece discussing the use of the “four most dangerous words” in investing: “this time is different.” The whole article is a must read, but he hit on a particular point that has become a mantra for speculative investors as of late:

“In other words, valuations don’t matter as much as they did in the past because ‘this time is different’ in that interest rates are so low.”

The basic premise of the interest rate/valuation argument has its roots in the “Fed Model” as promoted by Alan Greenspan during his tenure as Federal Reserve Chairman.

The Fed Model basically states that when the earnings yield on stocks (earnings divided by price) is higher than the Treasury yield; you should be invested in stocks and vice-versa. In other words, disregard valuations and buy yield.

Let me warn you now this will not end well.

There is an important disconnect that needs to be understood.

You receive the income from owning a Treasury bond, however, there is NO tangible return from the earnings yield. 

For example, if I own a Treasury bond with a 5% coupon and a stock with a 8% earnings yield, if the price of both assets don’t move for one year – my net return on the bond is 5% while the net return on the stock is 0%.

Which one had the better return?

Yet, analysts keep trotting out this broken model to entice investors to chase an asset class with substantially higher volatility risk and lower returns.

It hasn’t been just since the turn of the century either. An analysis of previous history alone proves this is a very flawed concept and one that should be sent out to pasture sooner rather than later. During the 50’s and 60’s the model actually worked pretty well as economic growth was strengthening.

Then, beginning in 1980, as Reagan and Volker set out to break the back of high-interest rates, the model no longer functioned. During the biggest bull market in the history of the markets, you would have sat idly by in Treasuries and watched stocks skyrocket higher.  

However, not to despair, the Fed Model did turn in 2003 and signaled a move from bonds back into stocks. Unfortunately, the model also got you out just after you lost all of your gains during the crash of the markets in 2008.

Currently, the model once again seems to be working. However, is the recent decline in interest rates, driven by massive global Central Bank interventions, should be sending a warning signal to investors. The chart below takes the interest rate argument from a little different angle. I have capped interest rates from their “low point” of each interest rate cycle to the next “high point” and then compared it to the S&P 500 index. (The vertical dashed lines mark the peaks in the S&P 500 Index)

In the majority of cases, the market tends to peak between the low point interest rates for each cycle and the next high point. In other words, a period of steadily rising interest rates is not conducive to higher equity prices. 

Cliff Assness, in his 2003 paper on the Fed Model, debunked the three primary arguments for the model as follows:

“Refuting Argument #1-The Competing Assets Argument: Argument #1 is that stocks and bonds are competing assets, and thus we should compare their yields. Now we see that the yield on the stock market (E/P) is not its expected return. The nominal expected return on stocks should, all else equal, move one-to-one with bond yields (and entail a risk premium that itself can change over time). But this is accomplished by a change in expected nominal earnings growth, not by changes in E/P.

Refuting Argument #2-The PV Argument. Argu­ment #2 is that when inflation or interest rates fall, the present value of future cash flows from equities rises, and so should their price (their P /E). It is absolutely true that, all else equal, a falling discount rate raises the current price. All is not equal, though. If when inflation declines, future nominal cash flow from equities also falls, this can offset the effect of lower discount rates. Lower discount rates are applied to lower expected cash flows.

The typical ‘common sense’ behind the Fed model ignores this powerful counter-effect, in effect trying to use lower nominal discount rates, but not acknowledging lower nominal growth. You would be hard pressed to find a clearer example of wanting to both have and eat your cake.

It is indeed possible to think of stocks in bond terms as the Fed model attempts. Instead of regarding stocks as a fixed-rate bond with known nominal coupons, one must think of stocks as a floating-rate bond whose coupons will float with nominal earnings growth. In this analogy, the stock market’s P/E is like the price of a floating-rate bond. In most cases, despite moves in interest rates, the price of a floating-rate bond changes little, and likewise the rational P/E for the stock market moves little.

Refuting Argument #3-Just Look at the Data: Historically, when interest rates or infla­tion are low, the stock market’s E/P is also low, and vice versa. This, Fed modelers say, shows that the market does in fact set the equity market’s P/E as a function of the bond yield, implying the Fed model is a good tool for making investment choices.

Pundits using this.argument assume that because they show that P/Es are usually high (low) when inflation or interest rates are low (high), the Fed model is necessarily a reasonable tool for making investment decisions. This is not the case. If investors mistakenly set the market’s P/E as a function of inflation or nominal interest rates, then the chart above is just documenting this error, not justifying it.

A simple analogy might be helpful. Say you can successfully show that teenagers usually drive recklessly after they have been drinking. This is potentially useful to know. But, it does not mean that when you observe them drinking, you should then blithely recommend reckless driving to them, simply because that is what usually occurs next. Similarly, the fact that investors drunk on low-interest rates usually pay a recklessly high P/E for the stock market (the Fed model as descriptive tool) does not make such a purchase a good idea, or imply that pundits should recommend this typical behavior (the Fed model as fore­casting/ allocation tool).

The pundits often confuse these two very different tasks put to the Fed model. They often demonstrate (each with a particular favored graph or table) that P/Es and interest rates move together contemporaneously. They then jump to the conclusion that they have proven that these measures should move together, and investors are thus safe buying stocks at a very high market P/E when nom­inal interest rates are low.

They are mistaken. The Fed model, in its descriptive form, documents a consistent investor error (or a strange pattern in investors’ taste for risk); it does not justify or recommend that error.

So, when pundits say it is a good time for long-term investors to buy stocks because interest rates are low, and then show you something like chart above to prove their point, please watch the tense of what they say, as what they often really mean is that it WAS a good time to buy stocks ten years ago, as investors are now paying a very high P/E for the stock market (perhaps fooled into doing so by low interest rates as I contend), and the story going forward may be painfully different.”

The last point is crucially important. As shown in the chart below, which compares earnings yield to forward 10-year real returns, when E/Y has been near current levels the return over the next 10-years has been quite dismal, to say the least.  (Read more on the Cyclically Adjusted Earnings Yield)

Importantly, it is imperative to remember that earnings yields, P/E ratios, and other valuation measures are important things to consider when making any investment as they are very predictive of long-term returns from the investment. However, they are horrible timing indicators.

As a long term, fundamental value investor, these are the things I look for when trying to determine “WHAT” to buy. However, understanding market cycles, risk/reward measurements, and investor psychology is crucial in determining “WHEN” to make an investment. 

In other words, I can buy fundamentally cheap stocks all day long but if I am buying at the top of a market cycle I will still lose money.

As with anything in life – half of the key to long term success is timing.

While there is much to debate about the current level of interest rates and future stock market returns, it is clear is the 30-year decline in rates did not mitigate two extremely nasty bear markets since 1998, just as falling rates did not mitigate the crash in 1929 and the subsequent depression.

Do low-interest rates justify high valuations?

History suggests not. It is likely a trap which will once again leave investors with the four “B’s” following the next recession – Beaten, Battered, Bruised and Broke.

“Never forget, things change – Lowell Miller

Credit card debt has morphed into a bona fide monster. 

Federal Reserve data on revolving debt as of April 2017, reflects how out of control the beast is.

Credit card debt has reached the $1 trillion mark, an increase of 6.2% over last year and at levels we haven’t witnessed since early 2009. The average monthly credit card balance is roughly $9,600 for those who don’t pay their balances in full.

The history of plastic is exclusively an American story; the origins are humble and good-intentioned enough.

The first bank card was named “Charg-It.” John Biggins a banker from Brooklyn, New York introduced it in 1946 as a method to create customer loyalty and convenience. Users were obligated to maintain an account at his bank and the card was only to be used for purchases from local merchants.

When Diner’s Club was introduced in the early 1950s, it was a charge card – the bill had to be paid in full every month. The American Express card, also a charge card, made its debut in the late 1950s.

In 1959, the method in which many consumers use credit cards today was introduced. Card holders were then able to maintain ongoing balances and charged an interest rate for the courtesy.

The revolving credit card balance method was born.

Today, credit cards are used for various reasons – convenience, cash back, travel reward points and the most unfortunate, to meet ongoing living expenses in the face of structural wage stagnation.

Ongoing credit card balances can weaken financial security. When you consider how anemically low interest rates are today, it seems downright criminal to charge users on average 15 percent interest compounded to infinity.

If you’re only making minimum monthly payments it’s going to take many years to exit this debt cavern. Frankly, there’s a solid chance of dying in the dark.

Let me be the light.

Here’s what to do. Each move is a step closer to an exit, and freedom.

Prioritize it: Treat the card with the highest balance as the greatest obstacle between you and escape. Do everything possible, think outside the box, to focus on the most onerous card first. Suspend contributions to retirement plans temporarily, cut expenses and target financial resources to battle this monster.

Consolidate it: Consider consolidating debt to one card with the most attractive balance transfer terms however, understand fees you may pay front for the privilege. The best cards will have attractive fees and a long-term 0 percent interest charge. A list is available at www.creditcards.com. Understand that the best cards require an excellent credit history. Also, don’t use consolidation as an excuse to begin racking up the debt again. The new card

should be considered a balance-transfer passport to eventual freedom, exclusively. That means no new purchases.

Pay it (aggressively): I’m going to let you slide if you have six-month’s worth of living expenses in an account that maintains emergency reserves, even though I generally recommend two years set aside. If you maintain a cash coffer in excess of six months sitting in a money market, checking or savings account and believe your job is secure, then go ahead and use the money to pay down or eliminate credit card debt.

Negotiate it: If you’re a long-standing customer with a solid track record of timely payments, then call your credit card issuers and attempt to negotiate lower rates. A good customer with a strong payment history is valuable these days, so use it to your advantage. Mention how you’ve received attractive credit offers but would like to stay where you are. Be professional, confident and odds are good that you’ll wind up with a deal.

Keep in mind a new credit scoring model is expected in the fall of this year. VantageScore is an innovative, predictive scoring model that’s giving the popular FICO® or “Fair Isaacs Corporation” score we are familiar with, a run for the money by claiming that it can assign scores to more than 30 million people in comparison to traditional models.

VantageScore, founded in 2006, will roll out VantageScore 4.0, a new model that excludes liens, civil judgments and medical collections (after six months of past due). The score will consider consumer behavior or a long-term relationship with credit. 

As opposed to a single snapshot, the algorithm examines how a consumer’s credit balance changes over time or the trend in the data. Naturally, the timely payment of bills remains crucial to a respectable score. However, your credit utilization ratio takes priority which means credit card balances need to remain low compared to credit maximums available.

We all know those people who heed “no trespass” signs and avoid the credit card debt cave altogether. If you’ve never ventured in, you’re probably never going to. Or at the least, there’s a clear direction to an exit.

So, how can credit cards be used to your advantage?

If you can’t beat ‘em, join ‘em (smartly):  If you must maintain ongoing credit card balances, create a rule, a boundary that can’t be breached to limit or monitor usage. For example, an effective rule is to keep balances at 5% or less of annual gross income.

Investigate cash back or rewards cards that suit your spending or travel preferences. The web hub www.comparecards.com does a respectable job with comparisons of reward cards.

My personal favorite is the Discover It® Cashback Match™ card. No annual fee with a dollar-for-dollar match of all rewards earned at the end of the first year, automatically as well as a 0% APR on purchases and balance transfers for the first 14 months.

There are bonus 5% cashback rewards (up to a quarterly maximum of $1,500), for specifically designated spending and product categories that change on a regular basis.

Cash back earned won’t expire as long as the account is open and in good standing. Accumulated rewards can be redeemed by making charitable contributions – a unique feature.

Card holders can receive a free FICO® credit score online, too.

Thinking of applying? Keep in mind you’ll require exemplary credit to receive this card.

Maintain the card with the longest credit history. The long-term, ongoing management of credit is an important addition to +790 credit score. It’s a track record of good habits.

There are people in our midst I call credit card hoarders. They feel better possessing a stack of major and department store plastic. I would winnow the number down to the three you use the most and close the rest.

Department store cards tend to have the most usurious of rates. Unfortunately, they also tend to hold the longest payment histories. It’s ok to maintain retail store plastic as long as balances are paid in full each payment cycle.

Mortgage Debt – Four Walls, a Roof and Perhaps a Mortgage That’s Dangerous to Financial Wellness:

Mortgage debt, if not reined in, is another channel in the cave of liabilities, although people are generally surprised by that revelation. Indeed, you can wander too far into the mortgage debt labyrinth and have a difficult time making it out.

Yes, real estate ownership can backfire, especially if a primary residence is wholesale classified as a wise “investment.”  And what I mean by investment, is a vehicle that increases in value over time and sold at a profit. Just because a house may comprise a significant portfolio of net worth, doesn’t make it a great investment. It makes it one of the largest purchases of your life. That’s true. However, investment? Well, that depends.

Per 2011 Census data, the median net worth for married couples age 65 and older is $284,790. Of this total, $192,532 is home equity which comprises two-thirds of total wealth.

Housing prices generally increase by the widely-accepted rate of consumer inflation or roughly 2 percent a year. Depending on location, price, duration of ownership, supply and demand, there’s no assurance that a house will increase in value.

For example, per Zillow, the Bureau of Labor Statistics and The Economist periodical’s interactive housing price chart, from Q1 1980 to Q2 2016, Houston housing prices decreased 17% in real terms (adjusted for inflation). From Q1 2006 to Q2 2016, Houston housing prices increased by 8.5%.

See? Everything exists in cycles – Human lives, stock prices, housing values.

A home purchase is more than a financial decision. The emotional impact is significant as a house is usually connected to major life events that cannot be discounted. Marriage, children, living, dying. Housing connects to who we are as Americans. However, emotions can blind consumers and lead them astray into long-term debt trouble. “House-poor” can be a stressful reality for unwary homebuyers.

What steps can be taken to be smart with mortgage debt?

Be choosy. Due to low inventory, it’s currently a seller’s market in several pockets of the country. However, mortgage rates should cooperate and remain low by historic standards for longer than expected. Keep a level head: It’s all about location when it comes to prospering in real estate.

Purchasing a tract home in a non-descript development with a catchy name should be considered a place to live and raise a family, not an investment. Quality neighborhoods with good schools and convenient to urban work locations are consistently popular. Quirky, eclectic, or artsy havens can work too although they may not be your preference.

Don’t listen to your realtor, well listen selectively. I have a realtor. She’s the best at what she does. However, she is not privy to my entire financial situation or my philosophy on mortgage debt, therefore she may recommend more house and mortgage than I’m emotionally willing to absorb. So, before you take the step to work with a real estate professional, create a personal mortgage-debt threshold as a first step and stick to it!

There’s that rule you’ve heard about how much to spend on an engagement ring based on three months’ salary. I’ve created a threshold that’s worked for me and clients for years. Feel free to enhance it to relate to your personal situation.

       House Mortgage = 2X Gross Salary

It’s simple. To the point. It gets to the heart of my comfort factor. It separates emotion from the decision.

For example, per the boundary, if you earn $50,000 a year, a mortgage obligation should not exceed $100,000. To be clear, this isn’t the house purchase price, it’s the mortgage or debt on the property. For most, it’s going to mean a reset of expectations, a greater down payment or a smaller abode. I would stray from the rule at great risk to your long-term financial health.

If you can’t stay for ten, wait until then. You don’t know how long I’ve waited to see that in print! If you’re not planning to stay in a home for at least ten years, hold off until you’re prepared to do so.

Flipping a primary residence can be a financially perilous tactic. Preparing to stay put longer than average can reduce risk of losing money when you decide to sell. You’ll be less susceptible to fall prey to lowball offers. There will be a greater chance of weathering through a dismal real estate cycle, too. 

Keep a vigilant eye out for refinancing opportunities. I know. Rates can only go higher. Not so fast. I’ve been hearing for years how low rates must be locked in just to experience yet another period of lower rates. Heck, it may not happen, but odds are at good that another refinancing window will open; remain vigilant and check rates every quarter for possible refinancing opportunities.

Match the duration on a mortgage to your period of ownership. It’s overwhelmingly popular to take on a 30-year fixed mortgage, when in practice it may not be the best debt obligation for your needs. Frankly, the odds of remaining in a residence for 30 years is rare. According to data from the National Association of Homebuilders, an average buyer stays in a home for 13 years so a 30-year mortgage may not be an optimal choice.

Choosing the proper mortgage requires a realistic assessment of how long you may reside in a home, the cash flow needs of your household and the opportunity cost of utilizing financial resources to make

mortgage payments as opposed to funding investments, retirement or college savings vehicles, or paying off high interest obligations like credit cards.

Consider an ARM or adjustable-rate mortgage. How can that be right? Why would you as a financial professional even suggest such a thing? I’ve been an advocate for ARMs since 2009 and if a lower mortgage payment is a priority, then a plain vanilla fixed-rate obligation may not be the best alternative. The media generally bellows how ARMs are dangerous. A mortgage provider will rarely if at all, bring up the topic. It’s like a strain of financial leprosy to discuss ARMs. It requires a discussion, planning, overcoming preconceived notions. So, why would a broker even bother? Too much trouble. Just go with what’s comfortable.

Yes, there were types of ARMs like “option” ARMs that did indeed crush homeowners but that was during the financial crisis. A hybrid adjustable-rate mortgage maintains a fixed rate for a set period like 5, 7 or 10 years. After that period, the rate can adjust higher. Indeed, that is a risk however it comes down to how long you plan to stay in a residence and household cash flow requirements.

If the plan is to plant yourself for three decades in the same house, which is incredibly rare, then knock yourself out. Stick with the traditional 30-year fixed. Otherwise, keep an open mind and explore ARMs. Have your mortgage professional run the numbers. You may be surprised.

Even the most diligent of financial stewards can find themselves lost in a debt cave. 

All is not hopeless.

Through the dark can shine the brightest light of valuable lessons.

These painful episodes are rarely forgotten; long after the escape, memories linger.

Thankfully, all debt caves have exits or may be avoided altogether.

If you heed the signs.

There always exists a way out.

“Technically Speaking” is a regular Tuesday commentary updating current market trends and highlighting shorter-term investment strategies, risks, and potential opportunities. Please send any comments or questions directly to me via Email, Facebook or Twitter.

In this past weekend’s newsletter, I discussed the fact this market has been “nothing short of boring” as of late, but remains on a “bullish buy signal” currently. To wit:

“Importantly, the ‘buy’ signal that was registered in late April is very close to tripping a short-term sell signal. These signals have usually been indicative of short-term correction actions which can provide for better entry points for trading positions and rebalancing.

However, as shown below, on a longer-term basis the backdrop is more indicative of a potential correction rather than a further advance. With an intermediate-term (weekly) ‘sell’ signal triggered at historically high levels, the downside risk currently outweighs the potential for reward.”

Of course, as has become a usual outcome, on Monday, the markets clung to an announcement that both Saudi Arabia and Russia had hinted at extended production cuts for a while longer. The announcement created a rush to close out oil shorts and lifted prices back above resistance at $48/bbl. The fundamental problem which remains is a world in which global demand is weakening and supplies are still rising as shale production continues to expand. Not surprisingly, this will end badly in the not so distant future as the realization of the supply glut comes to fruition against the backdrop of weaker economic demand.

The push higher in energy prices did energize the markets enough to push back up to the top of the current trading range and temporarily staving off an approaching “sell signal.” 

It is critically important the market rallies this week enough to push the markets out of the current trading range and move asset prices higher on a broader base of participation.

Portfolios should remain weighted to the long-side currently, but some caution should be exercised as we move into the historically more volatile summer months which tends to sport weaker performance. 

One Confused Market

As I stated above, the internal measures of the market have weakened substantially in recent months. As I showed previously, the problem is while the stock market has pushed higher, both the number of stocks on bullish buy signals and the number trading above their respective 200-day moving averages have continued to weaken.

This divergence will likely not last much longer, the only question is whether the internals will “catch up,” as the “bulls” currently hope.

Interestingly, the overall market seems more “confused” as ever as to its general investment thesis. Let me walk you back in history for a moment prior to the election last year. As shown in the chart below, the market was fairly concentrated moving into the election as fears of a “Trump Victory,” would elicit a major market route. 

Following the election, the attitude changed quickly as the “Trumpflation” trade set in pushing Financials, Industrials and Materials to extremes at the end of the year. It was at this point that we began recommending adding to the deeply out of favor sectors for a “risk off” rotation trade moving into the New Year. 

Of course, that was exactly what happened as the current Administration became quickly acquainted with Washington bureaucracy and political infighting. As hopes of a quick resolution to the health care debacle and tax reforms began to fade, the “Trumpflation” trade faded with it. 

Now, a new problem has emerged, “confusion.” With time wearing on, the hopes of a swift reform of the tax code, which would be the primary boost to the resurgence in profitability, has faded. Furthermore, the early surge in consumer confidence has yet to transform into stronger economic activity. As noted over the weekend Morgan Stanley’s Chief Economist Ellen Zentner wrote: 

“ARIA appears to have fallen off a cliff in April, with a 0.72% decline, the largest since December 2008.”

(Note: ARIA, is a monthly US macro indicator based on data collected through primary research on key US sectors such as consumer, autos, housing, employment, and business investment.)

This has shown up in a bit of a “cluster ****” as money is quickly jumping from once sector to the next trying to figure out what the next “trade” is going to be.

In the lead right now are sectors that are both “risk on” (ie Technology, Emerging Market and Discretionary) as well as the “risk off” sectors. (Utilities, Health Care and Staples).

Talk about confused.

The problem, of course, that both trades are unlikely to be right. Either the market is going to breakout to the upside with a clear participation in the “risk on” stocks, or money will begin a rotation into the “risk off” trade of bonds and defensive equities. 

Net Positioning Suggests Caution

I currently suspect, although the market has defied logic in recent weeks, the outcome will lean towards the latter as we move further into the summer months. I base that assumption on the net positioning of traders in the recent Commitment of Traders reports.

Currently, the net-short positioning on the Volatility Index suggests there is a substantial amount of “fuel” to sustain a market “sell off” if one gets started for any reason. 

The net-short positioning in the Euro-Dollar also suggests much the same. The reversals of such large net-short positions have been associated with a liquidation run in the markets. With a record net-short position currently, combined with the VIX, the amount of “fuel” for an unwinding/reversion event could be much larger than most currently anticipate. 

Of course, such an event would lead ultimately to inflows into the “risk off” trade which would primarily be U.S. Treasuries. The current net long positioning suggests “smart money” has already taken that bet and will use the rush of “panicked buyers” to “sell into” as gains are made. This would be the same as has been witnessed previously as rates have tended to fall (pushing bond prices higher) as the net positioning is reversed. (vertical dashed lines)

Let me repeat from this past weekend’s missive, the current advance has been driven by several artificial factors:

  • Central Bank policies are succeeding in encouraging risk takers to take more risks in long-duration financial assets.
  • Many U.S. corporations that face lackluster top-line growth are repurchasing stock in record amounts at record prices rather than doing capital spending to bolster their physical plant. 
  • Volatility-trending strategies, risk-parity trading systems, and other quant-programs, keep pushing stock prices to new all-time highs.

All this feeds on itself, but what’s surprising is that few question how the above factors contribute to higher asset prices. They fail to recognize that if there were no adverse consequences to low or negative interest rates, massive liquidity injections, and central banks buying stocks, these would have become permanent and continuous monetary-policy strategies decades ago.

However, in the short-term, we must recognize the potential for the markets to remain “irrational” longer than logic would currently dictate. This is why I am cautiously managing portfolio risk and allowing the markets to “tell me” what to do rather than guessing at it.

“What happens over the next few days to weeks is really anyone’s guess. But, over the longer-term time horizon, I am unashamedly bearish as the current detachment between prices and fundamental reality can not last forever.”

Eventually, something’s gotta give, but until then we must remember:

“A bull market lasts until it is over.” – Jim Dines


As I was writing the newsletter this past weekend, the following email rolled into my inbox:

“The S&P will double. And not just eventually. But over the next 5 years (or sooner). Sounds like a Herculean task on the surface, but it’s really not.

My 5-year doubling thesis also means that we won’t see another recession until stocks double again, nor will we see another bear market until stocks double again. Got it?”

The email goes on to make the case as to why the markets will do something that has never occurred before in history, or “why this time is different,” which can be summed up in one word – “Trumponomics”

“It’s no secret that the market has been re-energized this year on the Trump administration’s pro-growth agenda, which includes the highly anticipated corporate tax cuts.

There’s no doubt some of that will go to stock buybacks. But with the US suddenly becoming one of the most business-friendly countries in the world, you will see massive new corporate investment.

These tax cuts alone could usher in decades of new prosperity.

And it should be noted that these aren’t one-time stimulus packages that provide only temporary incentives and modest economic benefits. We’re talking about transformational growth due to long-term structural changes in how companies do business in America.

Instead of the subpar 1.5-2.0% annual GDP that the market has been struggling to achieve over the last 8 years, the economy is expected to double that pace to 3-4%. But even with the weaker than normal economic pace we have been going through, the market in just the last 5 years has produced a total compounded return of 98.2%.

So it’s not hard to imagine that if GDP were to double, earnings would soar, and stocks could easily gain another 100% over the next 5 years, and likely a whole lot more!” 

Pretty incredible.

Too bad it’s complete nonsense.

According, to the email, the longest bull market in history was between December 1987 and March 2000 as the market rallied for 12.3 years, gaining 582% along the way. But that’s not exactly true, because as shown in the table below, there was a recession in 1990-91 that lead to a 20% decline in stocks.

However, for the moment, let’s look at the drivers behind the “greatest bull market of all-time.” 

Beginning 1983, the secular bull market of the 80-90’s began. Driven by falling rates of inflation, interest rates, and the deregulation of the banking industry, the debt-induced ramp up of the 90’s gained traction as consumers levered their way into a higher standard of living.

While the Internet boom did cause an increase in productivity, it also had a very deleterious effect on the economy.

As shown in the chart above, the rise in personal debt, which was fostered by 30 years declining borrowing costs, to offset the declines in personal income and savings rates supported the “consumption function” of the economy. The “borrowing and spending like mad” provided a false sense of economic prosperity.

During the boom market of the 1980’s and 90’s consumption, as a percentage of the economy, grew from roughly 61% to 68% currently. The increase in consumption was largely built upon a falling interest rate environment, lower borrowing costs, and relaxation of lending standards. (Think mortgage, auto, student and sub-prime loans.)

In 1980, household credit market debt stood at $1.3 Trillion. To move consumption, as a percent of the economy, from 61% to 67% by the year 2000 it required an increase of $5.6 Trillion in debt.

Since 2000, consumption as a percent of the economy has risen by just 2% over the last 17 years, however, that increase required more than a $6 Trillion in debt.

The importance of that statement should not be dismissed.  It has required more debt to increase consumption by 2% of the economy since 2000 than it did to increase it by 6% from 1980-2000. 

The problem is quite clear. With interest rates already at historic lows, consumers already heavily leveraged and economic growth running at sub-par rates – there is not likely a capability to increase consumption as a percent of the economy to levels that would replicate the economic growth rates of the past.

“But tax cuts are going to give wage earners a huge boost, right?”


Despite tax cuts from previous administrations, as shown below, the surge in corporate profitability, particularly in recent years, is a result of a consistent reduction in wage growth. This has been achieved by increases in productivity, technology, and off-shoring of labor.

This drive to increase profitability did not lead to increased economic growth due to increased productive investment and higher savings rates as personal wealth increased. The reality was, in fact, quite the opposite as it resembled more of a “reverse robin-hood effect” as corporate greed and monetary policy led to a massive wealth transfer from the poor to the rich.

It is easy to understand the confusion the writer has from just looking at the stock market as a determinant of economic prosperity. Unfortunately, what was masked was the deterioration of prosperity as debt supplanted the lack of personal wage growth and a rising cost of living.

Most importantly, with respect to “Trumponomics,” as shown with the data above there is NO EVIDENCE tax cuts lead to increases in economic growth rates, higher levels of consumption or personal prosperity. As I noted just recently:

“The differences between today’s economic and market environment could not be starker. The tailwinds provided by initial deregulation, consumer leveraging and declining interest rates and inflation provided huge tailwinds for corporate profitability growth. The chart below shows the ramp up in government debt since Reagan versus subsequent economic growth and tax rates.

Of course, as noted, rising debt levels is the real impediment to longer-term increases in economic growth. When 75% of your current Federal Budget goes to entitlements and debt service, there is little left over for the expansion of the economic growth.”

“The tailwinds enjoyed by Reagan are now headwinds for Trump.”

Do not misunderstand me. Tax rates CAN make a difference in the short run particularly when coming out of a recession as it frees up capital for productive investment at a time when recovering economic growth and pent-up demand require it.

Where you are in the current macroeconomic cycle has everything to do with the benefit you receive from economic stimulus. Given we are in the third longest economic expansion in history, it is quite unlikely any type of tax reform will have much impact on creating higher rates of economic growth.

In other words, we are holding the wrong end of the stick.

While it is quite apparent the ongoing interventions by Central Banks have boosted asset prices higher, there has been little improvement in economic prosperity. The widening wealth gap between the top 10% of individuals that have dollars invested in the financial markets, and everyone else, continues to expand.

However, while increased productivity, stock buybacks, and accounting gimmicks can certainly maintain an illusion of corporate profitability in the near term, the real economy remains very subject to actual economic activity. The inherent inability to re-leverage balance sheets, to any great degree, to support further consumption provides an inherent long-term headwind to economic prosperity.

While the “bullish” mantra of an additional doubling of the S&P 500 is certainly appealing, from an economic perspective it is quite impossible to replay the secular bull market of the 80-90’s. While I would certainly welcome such an environment, the more likely scenario is a repeat of the 1970’s.  The trick will be remaining solvent for when the next secular bull market does indeed eventually arrive.


For almost a month now, the market has gone literally nowhere. Despite news of the passing of the American Health Care Act, the Continuing Resolution, or “stellar” earnings reports…nothing seems able to excite either the bulls or the bears.


The only thing more boring than the market over the past few weeks has been the volatility index which recently hit lows not seen in over a decade.

As was noted last week by John Mauldin:

“There have been only 11 days out of some 6900, going back almost 28 years, when we’ve had a sub-10 VIX. When I look carefully at those dates, the word complacency leaps to mind.”

He is right. And the problem with complacency, like everything else in the world, is that it comes and goes in cycles. The chart below is the MONTHLY read on the volatility index as compared to the S&P 500 index. I have marked the previous low levels of the volatility index and the subsequent corrections.

It should be noted the correction in 1994, while small was following the recession of 1991 as the market was just beginning to enter into the “dot.com” craze. The current environment more closely resembles that of 2007 as the market heads toward the END of a bullish phase with valuations extended, exuberance high and fear extremely low. (I have marked a similar correction back to the 2011 support levels.).

Like high levels of margin debt, low levels of volatility is not a problem…until it is. Falling levels of volatility, like rising levels of margin debt, are not good leading indicators to predict a change in market behavior. However, margin debt, corporate leverage, volatility, when eventually ignited by some catalyst, is the equivalent of throwing a stick of dynamite into a tanker of gasoline. 

But that is a story for another day.

For now, the market remains boring as investors rush to “buy in” to the bull market exuberance.

It seems as if investors will never learn.

In the meantime, here is what I am reading this weekend.



Research / Interesting Reads

“There is nothing riskier than the widespread perception that there is no risk.” – Howard Marks

Questions, comments, suggestions – please email me.

In 1976, a professor of economic history at the University of California, Berkeley published an essay outlining the fundamental laws of a force he perceived as humanity’s greatest existential threat: Stupidity.

Stupid people, Carlo M. Cipolla explained, share several identifying traits:

  • they are abundant,
  • they are irrational, and;
  • they cause problems for others without apparent benefit to themselves

The result is that “stupidity” lowers society’s total well-being and there are no defenses against stupidity. According to Cipolla:

“The only way a society can avoid being crushed by the burden of its idiots is if the non-stupid work even harder to offset the losses of their stupid brethren.”

Let’s take a look at Cipolla’s five basic laws of human stupidity as they apply to investing and the markets today.

Law 1: Always and inevitably everyone underestimates the number of stupid individuals in circulation.

“No matter how many idiots you suspect yourself surrounded by you are invariably low-balling the total.”

In investing, the problem of investor “stupidity” is compounded by a variety of biased assumptions that are made.  Individuals assume that when the media publishes something, the superficial factors like the commentator’s job, education level, or other traits suggest they can’t possibly be stupid. We, therefore, attach credibility to their opinion as long as it confirms our own.

This is called “confirmation bias.”

If we believe the stock market is going to rise, then we tend to only seek out news and information that supports our view. This confirmation bias is a primary driver of the psychological investing cycle of individuals as shown below. I discussed this previously in why “Media Headlines Will Lead You To Ruin.”

As individuals, we want “affirmation” our current thought processes are correct. As human beings, we hate being told we are wrong, so we tend to seek out sources that tell us we are “right.”

This is why it is always important to consider both sides of every debate equally and analyze the data accordingly. Being right and making money are not mutually exclusive.

Law 2: The probability that a certain person be stupid is independent of any other characteristic of that person.

Cipolla posits stupidity is a variable that remains constant across all populations. Every category one can imagine—gender, race, nationality, education level, income—possesses a fixed percentage of stupid people.

When it comes to investing, ALL investors, individual and professionals, are subject to making “stupid” decisions. As I discussed recently:

“At each major market peak throughout history, there has always been something that became “the” subject of speculative investment. Rather it was railroads, real estate, emerging markets, technology stocks or tulip bulbs, the end result was always the same as the rush to get into those markets also led to the rush to get out. Today, the rush to buy “ETF’s” has clearly taken that mantle, as I discussed last week, and as shown in the chart below.”

It isn’t the surge into equity ETF’s which should give rise to concern about future outcomes, but the components of “psychology” behind it.

Though we are often unconscious of the action, humans tend to “go with the crowd.” Much of this behavior relates back to “confirmation” of our decisions but also the need for acceptance. The thought process is rooted in the belief that if “everyone else” is doing something, then if I want to be accepted, I need to do it too.

In life, “conforming” to the norm is socially accepted and in many ways expected. However, in the financial markets, the “herding” behavior is what drives market excesses during advances and declines.

As Howard Marks once stated:

“Resisting – and thereby achieving success as a contrarian – isn’t easy. Things combine to make it difficult; including natural herd tendencies and the pain imposed by being out of step, since momentum invariably makes pro-cyclical actions look correct for a while. (That’s why it’s essential to remember that ‘being too far ahead of your time is indistinguishable from being wrong.’

Given the uncertain nature of the future, and thus the difficulty of being confident your position is the right one – especially as price moves against you – it’s challenging to be a lonely contrarian.

Moving against the “herd” is where the most profits are generated by investors in the long term. The difficulty for most individuals, unfortunately, is knowing when to “bet” against those who are being “stupid.”

Law 3. A stupid person is a person who causes losses to another person or to a group of persons while himself deriving no gain and even possibly incurring losses.

Consistent stupidity is the only consistent thing about the stupid. This is what makes stupid people so dangerous. As Cipolla explains:

“Essentially stupid people are dangerous and damaging because reasonable people find it difficult to imagine and understand unreasonable behavior.

Throughout history, investors are constantly drawn into investment strategies promoted by a wide variety of “industry professionals” which ultimately leads to losses in the end. This point was clearly made in a recent article by Jason Zweig entitled: “Whatever You Do, Don’t Read This Column.”

“Investors believe the darnedest things.

In one recent survey, wealthy individuals said they expect their portfolios to earn a long-run average of 8.5% annually after inflation. With bonds yielding roughly 2.5%, a typical stock-and-bond portfolio would need stocks to grow at 12.5% annually in order to hit that overall 8.5% target. Net of fees and inflation, that would require approximately doubling the 7% annual gain stocks have produced over the long term.

Individuals aren’t the only investors who believe in the improbable. One in six institutional investors, in another survey, projected gains of more than 20% annually on their investments in venture capital — even though such funds, on average, have underperformed the stock market for much of the 2000s.

Although almost nothing is impossible in the financial markets, these expectations are so far-fetched they border on fantasy.”

He is absolutely right, and despite the historical realities of investing, both the individual and the professional will ultimately suffer losses. As shown in the chart below, there is no evidence which shows markets can compound high levels of growth rates from current valuation levels. (For more detail on forward returns read “Valuations Matter”)

There is a massive difference between AVERAGE and ACTUAL returns on invested capital. The impact of losses, in any given year, destroys the annualized “compounding” effect of money.

Individuals who experienced either one, or both, of the last two bear markets, now understand the importance of “time” relating to their investment goals. Individuals that were close to retirement in either 2000, or 2007, and failed to navigate the subsequent market draw downs have had to postpone their retirement plans, potentially indefinitely.

But yet despite the losses incurred by both professionals and individuals, just eight short years after the largest financial crisis since the “Great Depression,” individuals are piling on excessive risk once again under the guise “this time is different.” 

Talk about stupid.

Despite the mainstream media’s consistent drivel investors should just “passively index” and forget about actually managing the risk of catastrophic capital loss, the reality is that investors “buy high and sell low” for a reason.

“Greed” and “Fear” are far more powerful in driving our investment decisions versus “Logic” and “Discipline.” 

As Jason states:

“The traditional explanations for believing in an investing tooth fairy who will leave money under your pillow are optimism and overconfidence: Hope springs eternal, and each of us thinks we’re better than the other investors out there.

There’s another reason so many investors believe in magic: We can’t handle the truth.”

All of which leads us to:

Law 4: Non-stupid people always underestimate the damaging power of stupid individuals. In particular non-stupid people constantly forget that at all times and places and under any circumstances to deal and/or associate with stupid people always turns out to be a costly mistake.

Lot’s of “non-stupid people” are currently suggesting the next correctionary event will be mild, most likely no more than 20%. The idea is based upon the belief the Federal Reserve, and Central Banks globally, will quickly come to the rescue of a failing market and investors will quickly react by once again jumping back into the market.

However, as we have seen repeatedly throughout history, “stupid” people tend to do exactly the opposite during a crisis than what “non-stupid” people expect.

Then there are the “perennial bulls” who keep telling investors to “hang on, keep putting money in, you’re a long-term investor, right?” These are the ones who never see the bear market destruction until well after the fact and then simply say “well, no one could have seen that coming.” 

Non-stupid people are conservative. They analyze the risk of loss and conserve capital during declines. Make sure you are surrounding yourself with those that understand the “math of loss.” 

As Howard Marks stated above, sometimes being a contrarian is lonely.

When we underestimate the stupid, we do so at our own peril.

This brings us to the fifth and final law:

Law 5: A stupid person is the most dangerous type of person.

Following the “herd,” has always ended badly for investors. In every full-market cycle, there is an inevitable belief “this time is different” for one reason or another.

It isn’t. It has never been. And this time will not be different either.

However, what has always separated out the great investors from everyone else, is they have acted independently of the “herd.” They have a discipline, a strategy and a driving will to succeed.

They don’t “buy and hold.” They buy cheap and sell expensive. They avoid losses at all costs and they deeply understand the relationship of risk to reward.

They are the “non-stupid.”

These are the ones you want to follow.

Not the ones screaming at you on television telling you to “buy, buy, buy.”

Just remember that for every full-market cycle our job is to not only participate in the first-half of the cycle as prices rise, but to avoid the avoid the devastation during the second-half.

“Non-stupid” investors don’t spend a bulk of their time getting back to even.

That is an investing strategy better left to the “herd.”

The individual investor should act consistently as an investor and not as a speculator. – Ben Graham.

We are frequently told that valuation analysis is irrelevant because fundamentals do not signal turning points in markets. Scoffers of valuation analysis are correct, as there is no fundamental statistic or for that matter, technical or sentiment indicator that can provide certainty as to when a market trend will change direction.

Despite being humbled by recent market gains and the difficulties associated with timing the market to call a precise top, we remain resolute about the merits of a conservative investment posture at this time. At some point, current equity market valuations will succumb to financial gravity and the upward trend of the last eight years will reverse. When that day arrives, it will not be because a valuation ratio hit a certain level or because the market formed a well-known technical pattern. It will simply be the day that selling pressure overcomes demand.

In prior articles, we compared the current economic landscape to the early 1980’s.  Let’s revisit that contrast to further quantify the risk and reward associated with the U.S. stock market during both time periods.

As Graham so eloquently stated, speculating and investing are two vastly different endeavors, and we prefer the practice of investing.

Risk-Return Tradeoff

Investors contemplating a new investment or evaluating an existing holding are typically faced with two basic but essential questions:

  • How much of my wealth am I willing to risk?
  • What returns do I expect in exchange for that risk?

When Ronald Reagan took office in 1981, investors needed to evaluate whether his fresh economic policies could spur sustainable economic growth. In the decade preceding his election, the economy was hampered by significant inflation, double-digit interest rates, and a steadily rising unemployment rate.  The Dow Jones Industrial Average (DJIA), essentially flat over the prior decade, was resting at levels similar to those seen 17 years earlier in 1964. Valuations over this period were equally stagnant, with the Cyclically Adjusted Price to Earnings (CAPE) ratio, as an example, ranging between 7 and 9.  Despite the bargain basement equity prices, few investors believed that market trends would reverse.  Equity valuations had been low and falling for so many years to that point, the trend became a permanent state in many investors’ minds by way of linear extrapolation.

Contrast that with today. As in early 1981, there is a new president in office with a non-typical background presenting non-conventional economic ideas to aid a struggling economy. Unlike Reagan, however, public support for Donald Trump is marginal. Trump was not elected by a majority, he lacks Reagan’s humility, optimism, good humor and diplomacy and his approval rating historically ranks among the worst of incoming presidents. Additionally, while Reagan’s and Trump’s economic policies may have similarities, there are stark differences between the economic landscapes that prevailed in the early 1980s and today. (Please read The Lowest Common Denominator for a full write up on what the current administration is up against.)

Equity investors betting on Reagan in 1981 were investing in an environment where the probabilities of success were asymmetrically high. With Cyclically Adjusted Price-to-Earnings (CAPE) ratios below 10, investors could buy in to a stock market whose valuation on this basis had only been cheaper 8% of the time going back to 1885. Given the likelihood of success as inferred from valuations, investors did not need much help from Reagan’s policies. Current equity market valuations require investors to believe beyond all doubt that Trump’s policies can produce strong economic growth and overcome hefty economic and demographic headwinds. More bluntly, the risk-return profile of 1981 is the polar opposite to that of today.  To highlight this stark difference, the following graph compares five-year average total returns and the maximum draw downs that have occurred over the last 60 years at associated CAPE readings.

Data Courtesy: Robert Shiller -http://www.econ.yale.edu/~shiller/data.htm

Based on the graph above, investors in the first years of Reagan’s presidency should have expected annual returns, including dividends, of nearly 20%, while simultaneously risking a maximum drawdown of less than 5%. Today, investors should expect returns over the next five years, including dividends, to be near zero. Worse, during the next five years the S&P 500 is likely to experience a drop of nearly 30%. That is quite a risk investors are shouldering for a return they can easily attain with a risk-free 5-year U.S. Treasury note.

Fire Sale

Beyond the obvious, there are a couple of problems with the current risk-return profile. In a best case scenario, it is likely an equity investor will earn a return that could be attained by putting cash under one’s mattress. Although it occurred an eternal nine years ago, the financial crisis of 2008, is still a faint memory for investors. If the market does indeed drop by 30%, will investors keep their cool and not sell? If they do sell, they will lock in a permanent loss.  One of the demographic headwinds we have discussed in prior articles is the growing number of retirees that are heavily reliant on their retirement accounts to meet their living expenses. Will they be able to keep their collective heads under the duress of a major correction? What if prices do not rebound as quickly as they did in the post-financial crisis years?

The hard truth of this scenario is that humans always panic when faced with severe market drawdowns. The back-testing of “what-if” scenarios for buy-and-hold analysis are irrelevant because investors do not HOLD – they sell, and usually at the worst time after abandoning all hope for a durable bounce. The anxiety that retirees will face in such a scenario, many of whom can barely maintain their standard of living on an optimistic outlook, will be paralyzing.


If someone were to offer you a unique investment opportunity forecast to pay 0% annual returns over the next five years, would you sign up? What if they added that, at some point over that period, the value of your investment may drop by 30%? High volatility, low return investments do not get serious attention among even the most foolish of investors, so we would venture to guess there would be very few takers.

Interestingly, based upon the CAPE analysis above, the U.S. stock market is currently offering that very same probability of return and risk and buyers cannot seem to get enough. Given these dynamics, not only is investor behavior perplexing, it seems to us altogether incoherent which in our view provides further evidence bubble behavior is upon us. For the sake of illustration, the graph below provides three random scenarios showing how such an expected return and drawdown could play out over the next five years.  None of these, nor the infinite myriad of other possible paths, appeal to us.

In a sinister rhyme to that of the early 1980’s, equity market valuations have been rising so steadily for so many years now that the trend has become a permanent state in many investors’ minds.  The “investors” identified in Ben Graham’s quote do not acquiesce to the crowd or bet on whims. Instead, they carefully assess an investment’s potential risk and expected return to make calculated decisions. The virtue of this time-honored practice of cost-benefit analysis does not reveal itself every day but avoiding the pitfalls, even if it means foregoing additional speculative gains, has a long and proven track-record of compounding wealth over time.






        The Financial Wellness Evolution: The Flow from Soil to Harvest

“The soil of a man’s heart is stonier, Louis. A man grows what he can, and he tends it. ‘Cause what you buy, is what you own. And what you own… always comes home to you.” – Jud Crandall, Stephen King’s Pet Sematary

More than almost anything else that defines you, financial choices made over a lifetime forge not only the path you travel today, but also the ongoing integrity (or lack thereof), of that road you take into the future.

Your overall financial health may flow through to multiple generations long after you’re gone, so it’s worth understanding that money – your actions, how you treat it, is much bigger than any one individual.

The ripples of your current decisions have potential to carry through and buoy the lives of others or act as an undercurrent and pull down everyone around you.

Your choice.

I define financial wellness as perpetual monetary success and pathos which leads to security and ostensibly generates inner peace; the flow is uneven as stages of wellness ebb and flow along channels of a human existence. It’s never perfect. However, there always exists a strong center or stasis that like a rubber band, an individual snaps back to after a deviation from self-defined financial norms.

In other words, wellness isn’t pretty, but there’s beauty in its consistency. It represents a tumultuous soup of philosophies, experiences, ego, habits, perceptions and attitudes. Finances bolster with the victories, falter with the setbacks. The challenge is to assess and maintain alignment over time.

As I pondered financial wellness and how to effectively communicate the concept, I thought of a message Randy Lemmon the legendary host of Houston’s KTRH 740am Garden Line, stresses to his audience almost every weekend mornings:

“All gardening success starts with healthy soil. You’ll never come to fruition by planting a $5 seed in a 25 cent hole, but you’ll always succeed with a 25-cent seed and a $5 dollar hole.”

Hmm. No wonder Randy helps people transform lawns and gardens into robust, thriving crosspatches of deep greens, vivid snaps of colorful flowers and healthy bounties of fruits and vegetables.

The genesis of abundance in all you seek to accomplish from a financial perspective, begins with a foundation, the soil, or the SOUL of who you are – inside thoughts and outside actions.

Beyond being dirty paper (did you know a paper currency carries more germs than a household toilet? A report from the Southern Medical Journal outlined that viruses and bacteria can live up to 17 days on bills), a relationship with money can be a source of values, good or bad, that evolve from a process I call Financial Wellness.

Financial Wellness represents a holistic state of being with money health at the core. From that core flows, sentient and intellectual, a process owned solely by the individual. It’s a make or break kind of relationship.

Either you respect money or you don’t. Either you’re a saver, or a big spender. On occasion, an effective planner can break through especially if it’s an educational deficiency, but it’s rare when the soil is poor because well, dead is dead.

“The barrier was not meant to be crossed. The ground is sour.” – Victor Pascow

In the late 1980’s movie “Pet Sematary” a well-meaning doctor relocates his young family to the bucolic small town of Ludlow only to discover that it holds a dark, disturbing secret.

A pet cemetery (spelled sematary on a faded sign painted by broken-hearted children and hung at the entrance), seems innocent enough. However, farther on the path lies an evil circle, an ancient burial ground once used by the Micmac Indians.

In this not-so-hallowed ground, it’s been documented by the town’s tender-hearted curmudgeon portrayed by Fred Gwynne of “The Munsters” fame, exists the spark to eternal life or something that resembles it. You see, throughout the years, adults have buried their loved ones, children interred their dead pets, only to witness their eventual resurrection.

However, those who did come back weren’t quite right.

As described – loved ones were malevolent carcasses of their former selves. They were just “a little dead,” and plenty violent.  Almost as if the primary mission of those revived from the soil was to punish the ones who buried them in that place and disturbed the natural order of things. It’s life and death. Not life, death and life again.

I’ve been fortunate to orchestrate and write character dialogue for several popular science fiction television dramas and movies, so Stephen King’s horror saga of an ancient burial ground ‘gone rogue’ has captured my attention for years. It made me realize how crucial soil quality is to everything, I guess. Even financial wellness.

“Well sometimes, dead is better. The person you put up there ain’t the person that comes back. It might look like that person, but it ain’t that person, because whatever lives on the ground beyond the Pet Sematary ain’t human at all.” – Jud Crandall (played by Fred Gwynne)

Really makes you think about Financial Wellness, doesn’t it? Well, it will. I promise (hope).

The process is a flow from soil to harvest with steps along the way.

But what defines them?

Let’s walk the path together (and avoid ancient burial grounds, if possible).

Step One: The Financial Wellness process starts with healthy soil:

Create or identify your core money philosophy and put it in writing.

Think back. What were your first lessons or observations about money? How have they affected your thoughts or actions? How have parents, grandparents, siblings filtered your perceptions?

Personally, my parents as spendthrifts, leaving nothing but liabilities upon their deaths, abject, chronic poor savers, and firm non-believers in mitigating risk through the use of insurance, left an impenetrable impression on me and how I address money issues with myself and my offspring.

In other words, their extremely poor money habits morphed into invaluable lifelong lessons. Enough to motivate me to be a polar opposite. In my family you weren’t allowed to question elders; unfortunately I never understood the origins of such negative behaviors outside of intelligent guesswork at best.

A relationship with money is an emotional, intimate construct. Good or bad. To understand the composition of fiscal soil, an individual must be willing to be brutally honest and document the inner- most thoughts about money and financial matters, otherwise nothing of value will germinate.

A core money viewpoint should be simple to follow and refer to often. It’s pretty much spilling your inner beliefs, how and which money habits stuck and what motivates you to follow or change them in the present.

Remember, I referenced that complication wasn’t a concern. Difficulty, which differs, is healthy par for the course. The exercise of outlining and cogitating over a personal money philosophy is far from a simple chore as it requires brutal self-honesty and awareness.

A personal philosophy about money comes down to one or two sentences replete with words that clearly outline your passion to protect you and your own, the tenets you feel most passionate about, and the quirks. There’s always the quirks.

What are the quirks around money that sour your soil?

Include in the body of the philosophy, a uniqueness or quirkiness you’ve observed about your personal money habits which differs from those around you. I call this an ‘imprint.’ For example, it could be an ongoing purchase rooted in family tradition or an experience you buy that connects you to a loved one or cherished memory.

For example, as a young boy raised in New York, my father had me experience some of the finest Italian restaurants in the city. On weekends, it was a long-term ritual to break bread at tables set with fine linens and surrounded by mahogany-laden walls. These establishments with their rich, ethnic aromas and magnificent meals (I was a healthy eater and required pants from the HUSKY department), left a lasting impression on me and my spending habits.

Every year, I assess my personal financial oddities. The worst was my irresponsible overspending on restaurants – a hefty $15,000 over 12 months which I immediately rectified three years ago. Today, I still enjoy eating out however, my costs have been reduced by two thirds and I’ve learned to remember my father but remain financially aware. You see, my dad was a respectable cook. I’ve learned to re-create most of his Italian recipes in my own kitchen and be fiscally responsible at the same time.

How can you assure that you and future generations maintain soil integrity?

Soil requires nurturing and cultivation to become and remain healthy. Per gardening expert Randy Lemmon, adding organic matter to soil characterized by poor aeration and inadequate drainage can work magic. In many areas of Houston where soil is more conducive to making clay pots than growing vegetables, soil health is crucial to their survival.

Children, even as early as the age of five, can be cultivated to learn smart money habits. Early on, we can teach the benefits of concepts like save, share, and spend to teach youngsters the benefits of allocating coins (at first), for now, for later, and for others.

My favorite products are available at www.moonjar.com.  The standard Moonjar Three-Part Money Box is an inexpensive teaching tool for youngsters. It works to help children understand that there’s a discipline to money and it isn’t all about saving.

As a small child, my daughter would love receiving three quarters to place in the money box compartments. There were several occasions she would add more to SAVE over SPEND and I’d ask her what motivated her to do so. From there, discussions, as easy as they can be for a child, blossomed and continue today, ten years later.

Step Two: Seeds are ready for planting:

Seeds are tiny powerhouse containers of life if handled properly; they spread roots deep into soil and allow growth to break above surface.

And with money, the seeds are ridiculously rudimentary.

They are sown with simple knowledge of the concepts of debt and saving.

The basics of saving:

Pay yourself first – This tenet is as basic as money skills get. Before bills are paid, before the fun stuff, set aside a percentage of your income in a savings or investment account. It’s Money 101.

Set it electronically – From each paycheck or a checking account on a monthly basis, establish electronic auto-pilot that debits directly and funds your emergency and long-term investment vehicles.

Create a savings rule and stick to it – I’ve always stuck with an age-based, tiered savings strategy. You should work with a Certified Financial Planner or fiduciary to create a personalized approach however, my rule has been used by clients and their children for over two decades:

Ages 20-30:  15% of gross monthly income electronically set aside first.

Ages 31-40:  25% of gross monthly income.

Ages 41-65 (or full retirement age): 30% of gross monthly income.

If or hopefully when you graduate to ‘empty nester,’ it may be necessary to accelerate savings to fund retirement.

The Tao of debt:

Think of excessive debt, especially auto, credit card and student loan obligations, as seed killers.

The rules you implement to contain debt are crucial, even mortgage.

I consider debt management of greater importance than saving as debt drains the soil of a wealth of essential nutrients.

Thankfully, I have had opportunities to reap the harvest of debt containment. Unfortunately, I’ve killed a wealth crop or two as well by allowing bad debt decisions driven by emotions, tempt me to stray from my boundaries.

Never again.

I understand mortgage debt is considered ‘good’ debt by the masses. However, never discount the distress that thrives from maintaining too much house, overall. When mortgage payments along with taxes and insurance, exceed 35% of monthly gross income, I witness households initiate spending reductions or worse, increase credit card usage to meet expenses which limits their ability to enjoy their lives or force them to stick with jobs they dislike. It’s like they’re held captive financially by four walls and a roof.

That’s why I believe a mortgage debt should rarely exceed twice annual gross salary. For example, a couple earning $100,000 a year has a $200,000 upper mortgage limit. Establishing boundaries allows breathing room for seeds of wealth to take root.

Non-mortgage debt bandwidth requires attention, too. If you can’t avoid auto or credit card liabilities, attempt a rules-based approach to keep debt manageable. Maintain the monthly outflow on these expenses to 10% or less than monthly gross (before taxes) income.

Step Three: Monitor and Celebrate Growth:

At this stage, green shoots emerge. Hard work and discipline are beginning to show rewards. Your money philosophy supports a strong saving and debt management regimen. Here’s your growth or accumulation cycle to nurture, fine-tune and celebrate.

But how?

Get to know who you are from a risk perspective; understand the forces that jeopardize wellness:  There are market cycles which warrant caution. Like today where stock market valuations as represented by the Shiller P/E ratio stand at over 29X, a level that compares only to the tech bubble of 2000 when real price/earnings steeped at close to 44X.                                                               

A balanced portfolio approach where you invest in a mix of stocks, bonds and cash will be easier to stomach than a 100% stock portfolio, especially now.

How do you feel in your gut about risk? Do monetary losses make you queasy? How are you with risk in your daily life? Do you always buckle up? Are you adventurous on vacations? Naturally, a financial partner can help you narrow your feelings down to a portfolio that suits who you are. However, there’s an internal barometer to attend to and never ignore regardless of how much risk the financial experts recommend you take on.

Proper insurance planning is important to care for others who would be negatively impacted financially in the case of your death or disability. In many cases, you’ll require additional coverage in addition to the benefits offered by an employer. A Certified Financial Planner practitioner can assess your current coverages and suggest recommendations to protect you and loved ones.

Listen, a living thing can die planted in the best of environments. We just need to make certain it doesn’t take everything else with it if it does.

Segment the crops: By crops I mean account types. The financial services industry favors tax-deferred accounts more than any other. It’s like some sort of magical beanstalk is going emerge from them and send you straight to the golden goose. In process, the strategy lays an egg.

Tax diversification will be important during your last step or harvest time where rewards are reaped from the rich soil of your financial well-being and disciplines. I’ll explain further in the next stage.

It’s acceptable to contribute to your employer provided retirement account, especially if a match to your payroll contributions is provided. However, it’s not the only game in town. The richness of your bounty prospers from the varied hues of what you seed and grow.

If you’re a young person and expect to be a prospering, future earnings machine (thus in a higher marginal tax bracket), contribute to a Roth IRA if you’re within the adjusted gross income limits to do so. At retirement your earnings can be distributed tax free.

Consider your company retirement plan up to the match, then open a Roth IRA with a full-service brokerage firm or Vanguard and invest the maximum allowable in a Roth IRA. To learn more investigate www.rothira.com or sit with a qualified, objective financial partner to determine whether a Roth is right for you.

An emergency cash reserve that stockpiles three to six months’ worth of living expenses is crucial to the integrity of your wellness. Virtual banks like www.allybank.com and www.synchronybank.com are FDIC insured and offer attractive yields when compared to the stodgy, brick and mortar brethren.  A vehicle like this is a perfect avenue for Step Two of this process, too.

Never disregard funding an after-tax brokerage account in addition to a tax-deferred option. A wide selection of investments are available, whether exchange-traded funds, individual stocks and bonds and upon selling, holds the possibility of lower tax implications of long-term capital gains compared to ordinary income tax rates for tax-deferred retirement accounts and traditional IRAs.

Those may not be weeds you’re pullin’: A huge misunderstanding exists about how annuities or lifetime income options fit into a philosophy. They fit. As much as you’re made to believe that annuities are like an invasive weed designed to destroy your efforts out in the field, an appropriate lifetime income option can be used to create a pension or income you or you and a spouse cannot outlive. The right choice may serve as a supplement to Social Security and variable rates of income and gains characteristic of risk assets like stocks.

Unfortunately, annuities get a bad rap as they’re marketed inappropriately and without financial planning to determine whether an individual’s human longevity risk requires mitigation. Not every investor requires a bolster to lifetime income and the ones who do can do without the variable annuity option which provides hefty commissions to brokers and generally confusing to understand.

Step Four: Don’t fear the harvest:

I feel your pain. We can grow the best, healthiest crops and feel strange about pulling them from the vine. It’s a learned discipline to harvest. I’m not sure why; perhaps it’s rooted deep in human behavior. Maybe it’s because we were in the growth and nurturing stage for so long that it’s tough to switch gears. It can be challenging to separate from the hard work and accomplishments when in fact, harvesting is the greatest compliment of all to a well-played Financial Wellness plan.

In other words, you need to learn to let go to fully embrace Financial Wellness.

Taking profits from a position is healthy: We’re beat over the head to hold everything. For example, sell is the most evil four-letter word in the financial industry bible. We train investors to feel bad, (overt or not), when they sell because there’s this false impression they’re going to miss out on something BIG. Or worse – look stupid.

Trimming profits from a winning position or limiting losses are successful risk management practices. You’re going to suffer losses and setbacks practicing Financial Wellness. The key is to recognize and limit them and work as diligently as possible to return to stasis or a healthy middle ground.

Generating a paycheck in retirement in the most tax-friendly manner requires multiple crops or account types to harvest. The proper blend of pre-tax, after-tax and Roth distributions can effectively smooth out tax implications throughout retirement or possibly minimize the taxation of Social Security benefits.

Harvesting is the ultimate reward for hard work and sacrifice: There will be a time in the future when your Financial Wellness strategy will change in scope. A new breed of visions, needs, wants and wishes will emerge and you’ll look to begin this process over again with fresh definitions, new soil, and crops you couldn’t imagine tackling a decade earlier. Through this round there may be other generations who you’ll look to transfer bounty.

Converting illiquid assets into precious water to drink in retirement, reducing the chains of physical possessions, giving to others and to share bumper crops with those less fortunate, are all benefits of the harvest.

Money that flows through your personal Financial Wellness continuously evolves. It’s about you and like a ripple, your relationship with money will affect others, perhaps a society.

Overall, this flow represents the circle of Finology – a blend of money and psychology as coined by one of the founding fathers of financial planning, Richard B. Wagner, JD, CFP, who recently passed.

“An individual’s relationship with money is a lifelong dance, a dance taking each of us from the most macro of sociopolitical realities to those relationships of exceeding intimacy – those with our Selves, our spouses and our families.”

This concept of Financial Wellness I dedicate to a true financial planning visionary – Richard B. Wagner.

“Technically Speaking” is a regular Tuesday commentary updating current market trends and highlighting shorter-term investment strategies, risks, and potential opportunities. Please send any comments or questions directly to me via Email, Facebook or Twitter.

In this past weekend’s newsletter, I discussed the relatively “weak” breakout of the market to new record highs. To wit:

“Over the last few weeks, I have been discussing the ongoing consolidation process for the S&P 500 from the March highs. (For a review read: “Oversold Bounce Or Return Of The Bull,” and “Return Of The Bull…For Now.”) As the expected rally in stocks, and reversal in bonds, took shape as the S&P 500 was finally able to ratchet a record close at 2399.29. (Read: 10/2016 – “2400 Or Bust”)

“With the market on a short-term ‘buy signal,’ deference should be given to the probability of a further market advance heading into May. With earnings season in full swing, there is a very likely probability that stocks can sustain their bullish bias for now.

The market did do exactly that this past week, and while hitting a new high, as noted above, it was a ‘weak’ breakout as volume contracted.”

The question for the bulls, of course, is whether the current “breakout” is sustainable, or, is it a “fakeout” that reverses back into the previous trading range? As Steve Reitmeister from Zack’s Research suggested on Monday:

“I would say it all depends on investor confidence that tax breaks are on the way.”

It all hangs on just one issue.

As I have discussed previously, there is a huge risk with respect to the timing and extent of tax reform there will be.

“Given the current problems in Washington D.C. in getting legislative agenda agreed to by Congressional Republicans, delays should be expected.”

“The question, of course, is just how much time the markets will give Washington to make progress on legislative agenda? As noted above, the estimates currently driving stocks were based on tax cuts being brought through to boost bottom line profitability. If those cuts don’t happen soon, earnings disappointments may bite investors.”

It is that potential for disappointment given the overly bullish earnings estimates which poses the greatest risk to investors given the currently elevated levels of valuations.

There is no arguing corporate profitability improved during 2016 as oil prices recovered. The recovery in oil prices specifically helped sectors tied to the commodity such as Energy, Basic Materials, and Industrials.

Currently, while earnings have ticked up modestly with the recovery in oil prices, the price of the S&P 500 has moved substantially more than the earnings recovery would justify.

Furthermore, the recovery in earnings, without the direct bottom line impact from tax cuts, may be fleeting as the dollar remains persistently strong. 

Of course, we already know much of the rise in “profitability,” since the recessionary lows, has come from a variety of cost-cutting measures and accounting gimmicks rather than actual increases in top line revenue. As shown in the chart below, there has been a stunning surge in corporate profitability despite a lack of revenue growth.

Since 2009, the reported earnings per share of corporations has increased by a total of 221%. This is the sharpest post-recession rise in reported EPS in history. However, that sharp increase in earnings did not come from revenue which is reported at the top line of the income statement. Revenue from sales of goods and services has only increased by a marginal 28% during the same period.

In order for profitability to surge, despite rather weak revenue growth, corporations have resorted to four primary weapons: wage reduction, productivity increases, labor suppression and stock buybacks.  The problem is that each of these tools creates a mirage of corporate profitability which masks the real underlying weakness of the overall economic environment. Furthermore, each of the tools used to boost EPS suffer from both being finite in nature and having diminishing rates of return over time.

Of course, given the weakness in revenue growth, it is not surprising the markets are anxiously awaiting “tax cuts” which are a direct injection into bottom line earnings per share.

Importantly, it should be remembered that “tax cuts” will impact “earnings growth” rates for JUST ONE YEAR.

Let me explain:

  • Year-1 earnings = $1.00 per share.
  • Tax cuts add $0.30 per share in bottom lines earnings.
  • Year-2 earnings = $1.30 per share or 30% growth.
  • Year-3 earnings growth (assuming no organic growth) = $1.30 per share or 0% growth.

While tax cuts are certainly welcome as a boost to bottom line earnings, it should be remembered earnings growth must be sustained indefinitely to justify valuations at current levels.

Such is unlikely to happen.

With the Senate getting ready to scrap Congresses “AHCA” bill, and write their own plan which will then have to go back to Congress where the debates will begin again, it will likely take MUCH longer to get to tax reform than currently expected.

The problem, technically is that while the stock market is continuing to push higher, the internal strength continues to diminish as shown by both the number of stocks on bullish buy signals and the number trading above their respective 200 day moving averages.

Furthermore, with the volatility level now pressed to its lowest levels since 2007, combined with an extreme overbought condition, a sell signal at a high level, and a large deviation from the 200-dma, the risk of a short to intermediate-term correction has risen markedly.

S&P 3000…Or 1500

It would not surprise me to see the markets break out and attempt to push higher in the current environment. This is particularly the case as the confluence of Central Banks continue to buy assets, $1 Trillion since the beginning of the year, increased leverage and the embedded belief “There Is No Alternative (TINA).”  

It would be quite naive to suggest otherwise.

The chart below is a Fibonacci retracement/extension chart of the S&P 500. I have projected both a 123.6% advance from the 2009 lows as well at a standard 50% retracement using historical weekly price movements.

From the bullish perspective, a run to 3000, after a brief consolidation following an initial surge to 2500, is a distinct possibility. Such an advance is predicated on earnings and economic growth rates accelerating with tax cuts/reform being passed.

However, given the length of the economic and market cycle, there is a significant bear case being built which entails a pullback to 1543. Such a decline, while well within historical norms, would wipe out all gains going back to 2014. 

Just for the mathematically challenged, this is NOT a good risk/reward ratio.

  • 3000 – 2399 (as of Monday’s close) =  601 Points Of Potential Reward 
  • 2399 – 1543 = -856 Points Of Potential Loss

With a 1.3 to 1 risk/reward ratio, the potential for losses is far more damaging to your long-term investment goals than the gains available from here.

Moreover, the bearish case is also well supported by the technical dynamics of the market going back to the 1920’s, it would be equally naive to suggest that “This Time Is Different (TTID)” and this bull market has entered a new “bull phase.” (The red lines denote levels that have marked previous bull market peaks.)

Of course, as has always been the case, in the short-term it may seem like the current advance will never end.

It will.

And when it does the media will ask first “why no saw it coming.” Then they will ask “why YOU didn’t see it coming when it so obvious.” 

In the end, being right or wrong has no effect on the media as they are not managing money nor or they held responsible for consistently poor advice. But, being right or wrong has a very big effect on you.

Yes, a breakout and a move higher is certainly viable in the current “riskless” environment that is believed to exist currently.

However, without a sharp improvement in the underlying fundamental and economic back drop the risk of failure is rising sharply. Unfortunately, there is little evidence of such a rapid improvement in the making. Either that, or a return to QE by the Fed which would be a likely accommodation to offset a recessionary onset.

In either case, it will likely be a one-way trip higher and it should be realized that such a move would be consistent with the final stages of a market melt-up.

Just as a reminder…“gravity is a bitch.”


Last week, I discussed the issues behind President Trump’s announced “tax plan” and why, due to the increase in the national debt, that it may not spur the economic growth that has been promised. This week, I want to look at the issue from the personal income tax view.

In the economy today, personal consumption expenditures make up roughly 70% of the economic equation as shown in the chart below.

Of course, given that wage growth has been on the decline since the 1980’s, it is no surprise debt has been used to supplant the differential between incomes and the “expected” standard of living.

Currently, it is widely espoused that tax reform/cuts delivered to the middle class will spur economic growth. This assumption is based upon the post-Reagan tax cut history as a baseline for what to expect in the future.

However, as I discussed last time, there is a massive difference between the economy today and that of Reagan. As shown in the chart below, total debt and leverage has surged to levels that have become a sustainable economic drag. (The dashed black line was the demarcation point where living beyond our means became the standard mentality.)

At nearly $4.00 of debt for each $1 of economic growth, there is little ability to spur higher rates of economic growth when productive investments are diverted by rising levels of debt service.

But to understand the problem, let’s look at the state of the middle class.

Why Giving The Middle-Class A Tax Cut May Not Work?

Just recently NerdWallet took a look at consumer debt:

“Debt is a way of life for Americans, with overall U.S. household debt increasing by 11% in the past decade. Today, the average household with credit card debt has balances totaling $16,748, and the average household with any kind of debt owes $134,643, including mortgages.”

Key findings

  • Why debt has grown: The rise in the cost of living has outpaced income growth over the past 13 years. Median household income has grown 28% since 2003, but expenses have outpaced it significantly. Medical costs increased by 57% and food and beverage prices by 36% in that same span. 
  • How much debt we have: Total debt is expected to surpass the amounts owed at the beginning of the Great Recession by the end of 2016. Americans will soon owe more than they did in December 2007 — but that doesn’t mean another recession is looming.
  • The cost of debt: The average household with credit card debt pays a total of $1,292 in credit card interest per year. This could increase to $1,309 after the Federal Reserve voted on a rate hike of a quarter of a percentage point.

As I noted above, Nerd Wallet also noted the same:

“Household income has grown by 28% in the past 13 years, but the cost of living has gone up 30% in that time period. Some of the largest expenses for consumers — like medical care, food, and housing — have significantly outpaced income growth.

Many people assume that credit card debt is the result of reckless spending and think that to get out of debt, people need to stop buying designer clothes and eating at five-star restaurants. But many people use credit cards to cover necessities when their income just doesn’t cut it.”

This explains why, according to CNN, almost six out of every ten Americans do not have enough money saved to even cover a $500 emergency expense.

Okay, you get the point. Roughly 80% of Americans are living paycheck-to-paycheck and are carrying enough debt that interest payments consume a bulk of actual disposable income.

So, here is the issue of! tax cuts for the middle class. The ch!art below shows “who pays what in Federal taxes.”

You will note that roughly 50% of ALL taxes paid are paid by the Top 10% of income earners. The other 50% of all taxes are paid by remaining 90% of which, according to recent studies, 67% have less than $500 in savings. In fact, the bottom 80% only pays 36% of all tax revenue collected.

Of course, those in the top 20-30% of income earners are likely already consuming at a level with which they are satisfied. Therefore, a tax cut which delivers a few extra dollars to their bottom line, will likely have a negligible impact on their current levels of consumption.

However, for the bottom 70% of the income earners, any tax relief will most likely evaporate into the maintaining the current cost of living and debt service and will have an extremely limited, if any, impact on fostering a higher level of consumption in the economy.

The current problem facing the economy, and the Administration in its quest to create economic growth, remains the overwhelming debt burden that currently exists. While Reagan received the benefit from the deregulation of banks which allowed for the debt-driven expansion of the economy, unfortunately, Trump is faced without such a tailwind.

As Dr. Lacy Hunt recently noted in his quarterly outlook:

“Considering the current public and private debt overhang, tax reductions are not likely to be as successful as the much larger tax cuts were for Presidents Ronald Reagan and George W. Bush. Gross federal debt now stands at 105.5% of GDP, compared with 31.7% and 57.0%, respectively, when the 1981 and 2002 tax laws were implemented. Additionally, tax reductions work slowly, with only 50% of the impact registering within a year and a half after the tax changes are enacted. Thus, while the economy is waiting for increased revenues from faster growth from the tax cuts, surging federal debt is likely to continue to drive U.S. aggregate indebtedness higher, further restraining economic growth.

However, if the household and corporate tax reductions and infrastructure tax credits proposed are not financed by other budget offsets, history suggests they will be met with little or no success. The test case is Japan. In implementing tax cuts and massive infrastructure spending, Japanese government debt exploded from 68.9% of GDP in 1997 to 198.0% in the third quarter of 2016. Over that period nominal GDP in Japan has remained roughly unchanged. Additionally, when Japan began these debt experiments, the global economy was far stronger than it is currently, thus Japan was supported by external conditions to a far greater degree than the U.S. would be in present circumstances.”

The U.S. faces similar problems as Japan with about an 11-year lag which has now come home to roost. From demographics to debt, incomes to economic growth, the similarities are all far to deep to dismiss.

As Dr. Hunt concludes the consumption driven dynamic of economic growth, which is currently being bet on by the market for a continued rise in profitability, is likely to remain extraordinarily weak. To wit:

“Over time, birth, immigration, and household formation decisions have been heavily influenced by real per capita income growth. Demographics have, in turn, cycled back to influence economic growth. If they are both rising, a virtuous long-term cycle will emerge. Today, however, a negative spiral is in control. In the ten years ending in 2016, real per capita disposable income rose a mere 1%, less than half of the 50-year average and only one-quarter of the growth of the 3.9% peak reached in 1973. In view of the enlarging debt overhang, which is the cause of these mutually linked developments, economic growth should continue to disappoint. There will likely be intermittent spurts in economic activity, but they will not be sustainable.”

We are clearly in a late stage expansion and, as I discussed recently, the pent-up demand for big-ticket items, like autos, has been exhausted.

“Economic cycles do not last indefinitely. While fiscal and monetary policies can extend cycles by “pulling forward” future consumption, such actions create an eventual “void” that cannot be filled. In fact, there is mounting evidence the “event horizon” may have been reached as seen through the lens of auto sales.

Following the financial crisis, the average age of vehicles on the road had gotten fairly extended so a replacement cycle became more likely. This replacement cycle was accelerated when the Obama Administration launched the “cash for clunkers” program which reduced the number of “used” vehicles for sale pushing individuals into new cars. Combine replacement needs with low interest rates, easy financing, and extended terms and you get a sales cycle as shown below.” 

(Note: When auto sales are reported each month they are annualized. The bar chart shows the over/underestimation of auto sales each month as compared to what actually occurred on an annual basis.)

With the current expansion now in its 83rd month, it is more than 20 months longer than the average since the end of World War II. Pent-up demand has been exhausted, and the future demand void created by the Fed’s monetary interventionism the economy is in the opposite condition of what is found during a recession or an early stage expansion. The waning of demand, which made a visible presence in Apple’s Q1 iPhone sales, makes the economy susceptible to either slower growth or to the risk of an outright recession.

In fact, just like in 2008, debts are going bad at a very alarming pace. In fact, things have already gotten so bad the IMF has issued a major warning about it

“In America alone, bad debt held by companies could reach $4 trillion, or almost a quarter of corporate assets considered. That debt could undermine financial stability if mishandled.

The percentage of ‘weak,’ ‘vulnerable’ or ‘challenged’ debt held as assets by US firms has almost arrived at the same level it was right before the 2008 crisis.”

Such can be clearly witnessed by low productivity, weakness in auto sales and most discretionary goods, and the rising delinquency rates, and fall in demand, across major loan types.

The impact of tax cuts, both at the corporate and personal levels, is likely far less impactful than the markets are currently expecting. This keeps the risk of disappointment very high.

“At this stage of the cycle, setting new records is a reason for caution, not optimism.” – Dr. Lacy Hunt

With a continuing resolution for $1 Trillion passed this week, which will fund the government for 5-whole months, there seems to be little consideration given to the disconnect between increase debt levels and slower economic growth. The chart below shows the growth of total debt as compared to GDP growth since 1966.

Not surprisingly, as the system becomes inherently more leveraged (as corporations issue debt to buy back stock and investors lever up) there rise in asset prices is not surprising.

The problem, however, is that rising asset prices and surging debt levels, despite rumors to the contrary, do not translate into stronger economic growth. As shown below, the transition to leverage starting in the early 80’s was the turning point for the growth rate of the economy.

To put this into economic terms, it currently requires almost $4.00 of debt to create $1.00 of economic growth. This is a problem when 70% of the economy is driven by consumption and there is a finite limit to the amount of debt that can ultimately be taken on by households.

I know. It’s crazy talk.  But I see two options for Congress here:

  • If you want 3-4% economic growth in the future, you can start taking some fiscal responsibility and pay attention to the “debt elephant” in the room.
  • Or, you can pass a health care bill that will hit taxpayers for another $250 Billion in subsidies over the next decade along with continued high costs of insurance for individuals. 

One of those isn’t going to work. 

In the meantime, here is what I am reading this weekend.

Tax Plan/Politics


Research / Interesting Reads

“It’s fine to celebrate success but it is more important to heed the lessons of failure.” – Bill Gates

Questions, comments, suggestions – please email me.

“3 Things” is a weekly post of thoughts I am pondering, usually contrarian, with respect to the markets, economy or portfolio management. Comments and thoughts are always welcome via email,  Twitter, and/or Facebook.

Peak Exuberance

There have been numerous articles out as of late emphatically stating this cannot be a bubble as valuations are not as elevated as they were in 1999 nor are investors as “giddy” about investments as they were then.

While it is easy to point at the exceedingly high valuations of the late 90’s as a benchmark for a “bubble,” that just happened to be the case in history that “blew the curve.”  If we look at a 10-year median of monthly P/E ratios, we get a different picture of the price individuals are paying for stocks today.

It was recently stated:

“Trying to judge whether a market is overvalued is a fool’s errand. Pricey stocks can and do get pricier, often for years. If your strategy is to wait for prices to decline to where you think they should be before buying, the market might very well outlast your patience.”

There are two huge fallacies with that statement:

  1. If you waited until stocks went from 15x to 25x earnings before thinking about buying stocks, there is your first problem. 
  2. Valuations have EVERYTHING to do with your forward returns. The more you pay today, the less you will earn tomorrow.  

At 18.85x trailing 10-year median valuations it is hard to suggest that investors are paying rational prices for future cash flows.

But “exuberance” is not measured by valuations paid but rather by the psychology behind it.

At each major market peak throughout history, there has always been something that became “the” subject of speculative investment. Rather it was railroads, real estate, emerging markets, technology stocks or tulip bulbs, the end result was always the same as the rush to get into those markets also led to the rush to get out. Today, the rush to buy “ETF’s” has clearly taken that mantle, as I discussed last week, and as shown in the chart below.

It isn’t the surge into equity ETF’s which should give rise to concern about future outcomes, but the components of “psychology” behind it. The following charts clearly “tell the tale.”

As discussed recently, the combined surge of both visible and “shadow” leverage suggests that investors have once again thrown caution to the wind. While margin debt is NOT a leading indicator of future declines, it is the fuel that magnifies the inevitable reversion as forced liquidation occurs. 

The surge in investor confidence is also pushing levels that can only be described as “exuberant.” The chart below is the difference between the number of people “confident” the markets will be higher in 12-months versus those who are confident in current valuations. (Data source: Dr. Roberts Shiller/Yale)

In other words, investors have bought into the media driven mindset that “valuations no longer matter” and the market can only “go up” from here.

The chart below is my composite Market Greed/Fear Indicator. The chart displays the 4-week average of the composite index comprised of the AAII Bull/Bear Ratio, MarketVane Bullish Indicator, Institutional Investors Bull/Bear Ratio, National Association Of Active Investment Managers Exposure Index and the Volatility Index.

Lastly, it isn’t just investors that are all “levered up with nowhere to go,” but corporations as well.

Yes, this time is different. The catalyst and culprit will be different but the end result will be the same as it always has been.

Peak Expectations

Following along with the “peak exuberance” meme, Jason Zweig published a fantastic article in the WSJ last week entitled: “Whatever You Do, Don’t Read This Column.”

I highly suggest you do.

“Investors believe the darnedest things.

In one recent survey, wealthy individuals said they expect their portfolios to earn a long-run average of 8.5% annually after inflation. With bonds yielding roughly 2.5%, a typical stock-and-bond portfolio would need stocks to grow at 12.5% annually in order to hit that overall 8.5% target. Net of fees and inflation, that would require approximately doubling the 7% annual gain stocks have produced over the long term.

Individuals aren’t the only investors who believe in the improbable. One in six institutional investors, in another survey, projected gains of more than 20% annually on their investments in venture capital — even though such funds, on average, have underperformed the stock market for much of the 2000s.

Although almost nothing is impossible in the financial markets, these expectations are so far-fetched they border on fantasy.”

He is absolutely right.

THE battle I consistently fight regarding the “buy and hold/passive indexing” media driven commentary that over the long-term investors can earn 7%, 8%, 10%, or 12% (if you’re a Dave Ramsey fan) on your investments.

You won’t for the following three reasons:

  1. Markets Do Not Compound Returns: The biggest mistake you are making in your retirement planning by buying into the “myth” that markets “compound returns” over time. They don’t. They never have. They never will.I have adjusted the chart I showed you last week to show a compound return rate of 6%, $5000 annual, made monthly, contributions (10% of $50,000 which is roughly the median wage) and using variable rates of return from current valuation levels. (Chart assumes 35 years of age to start saving and expiring at 85)As you can see, markets do not compound average returns over time.Most importantly, just as with “pension funds,” the issue of using above average rates of return into the future suggests one can “save less” today because the “growth” will make up for the difference.

2. You Don’t Live That Long:

Unfortunately, while the science of health care continues to extend our life expectancy rates, there has yet to be a solution for immortality. So, the next time that someone shows you a chart of 130-year stock market returns and suggesting that “you too can get those returns,” just remember you will die long before you get there.

Your expected rate of return is clearly defined by the valuation level you pay for an invest today versus what you will receive in the future between now and the time you expire. 

3. Psychology Kills:

Despite the mainstream media’s consistent drivel investors should just “passively index” and forget about actually managing the risk of catastrophic capital loss, the reality is that investors “buy high and sell low” for a reason. “Greed” and “Fear” are far more powerful in driving our investment decisions versus “Logic” and “Discipline.” 

As Jason states:

“The traditional explanations for believing in an investing tooth fairy who will leave money under your pillow are optimism and overconfidence: Hope springs eternal, and each of us thinks we’re better than the other investors out there.

There’s another reason so many investors believe in magic: We can’t handle the truth.”

Newton’s Law Of Gravity

Irrational exuberance and unrealistic expectations are extremely dangerous when combined together. But they are always found “hanging out” at the peaks of previous major bull market cycles. A recent article by Vishal Khandelwal discussed an interesting point in this regard:

“During bull markets, or when bubbles are building up, most people come to the stock market because they desire to earn money fast because they are envious of seeing others doing so.

If geniuses like Druckenmiller and Newton couldn’t stand to watch as others made money, and they carried on with full knowledge that they were purely speculating, what chance do we non-geniuses have to survive a bubble and its subsequent and certain burst?”

“You see, the real tragedy of our life is not that someone else is getting richer or healthier than us, but that he is getting there faster than us.

Another tragedy is that when we fall into this comparison trap, it’s hard to stop.

Look at fund managers. Most of them have similar stocks in their portfolios, and most still claim to have the skills to outperform others.

Read stock forums. Most of them are filled with the noise of people comparing their portfolios with others’.

This habit of unintelligently buying things because someone else is making fast money on them comes to the fore when the markets have been rising for some time.

So, even as people know that things are not right around them, they keep dancing to the bubble’s music because everyone else is dancing and making merry.

But if you can’t ignore and avoid the temptation that comes from watching other people get rich due to a sharp rise in stock prices, it’s best to know sooner than later that that’s often a path to destruction.”

As Citigroup’s Chuck Prince said to a newspaper in July 2007, shortly before the subprime bubble burst…

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

If you are just now showing up to the dance….you are already too late.

Just some things I am thinking about.

“History has not dealt kindly with the aftermath of protracted periods of low risk premiums” – Alan Greenspan

The ability to see beyond the observable and the probable is the most important and under-appreciated characteristic of successful investors. For example, visualize a single domino standing upright. With this limited perspective, one can establish what the domino is doing in the present and form expectations around what might happen if the domino falls. However, by expanding one’s viewpoint, you may discover the domino is just one in a long line of dominoes standing equidistant from each other. The potential chain of events caused by the first domino falling now offers a vastly different outcome. Many investors myopically focus on the trends of the day and fail to notice the line of dominoes, or what is technically known as multiple-order effects.

Since the Great Financial Crisis of 2008, maintaining animal spirits has been a primary goal of the world’s central banks. The crisis proved a brutal reminder that, in this new era of significant leverage, a loss of investor confidence can result in violent reactions that ripple throughout the financial markets and the global economy. By employing extraordinary policies and optimistic narratives, the central banks have persuaded the public to believe that all is well. They have successfully focused the investor on one domino.

As investors, we are negligent if we follow the Fed’s lead into this complacent stupor. By prodding economic growth with unproductive debt and reigniting asset bubbles, the central banks have simply done more of what created the spasms of 2008 in the first place. Despite the markets calm facade and historically low perception of risk, the vast chasm that lies between perceived risk and reality is troublesome.

Implied Volatility

Implied volatility is a well-followed measure of expected price change. The metric, derived from the prices of put and call options, can be thought of as the amount of risk that investors expect to occur between today and a specified expiration date. Bullish periods are most frequently categorized by low implied volatility, while bearish periods tend to have elevated levels of implied volatility.

Chris Cole of Artemis Capital has a broader definition of volatility – “(volatility) is the difference in the world as we imagine it to be and the world that actually exists.”

Think about his quote carefully before reading on.

In the investment sphere, Cole’s statement can be boiled down to the contrast between the consensus mindset investors hold to explain the current state of economic activity, fundamentals, market valuations and implied risks versus the reality encapsulated by those metrics. While no one can quantify “the reality”, the wider one perceives the difference between implied volatility and reality, the greater the opportunity present in the market.
Since the 2008 crisis, and especially over the last three years, implied volatility has been abnormally low more often than not. In other words, investors believe the risks of a significant downdraft in stock prices is relatively minimal. This by no mean indicates that the actual risks investors face have decreased per se, just that the financial gauges constructed on investor positioning claim that to be the case.

The graph below plots implied volatility (VIX) for the S&P 500 since 1990.

Data Courtesy: Bloomberg

Currently implied volatility is at a level that has only been experienced 0.22% of the time since 1990 and is almost half of its longer term average.

Some of the primary reasons for this abnormally low level of implied volatility are:

Monetary Policy and the Federal Reserve (FED):

The FED’s recent monetary policies, including a near zero percent Federal Funds rate, have resulted in increased financial leverage and increased demand for securities. This occurred as the Fed removed $3.5 billion of U.S. Treasury securities from the market through Quantitative Easing (QE), further affecting supply-demand curves. As a consequence, the prices of many fixed income securities have risen sharply and yields and yield spreads hover near all-time lows.

It is worth mentioning that, at times when the stock market has dipped, the Fed has been vocal about their ability to take more aggressive action. As a result, investors believe the Fed will “not allow” the equity market to decline by much. The “buy the dip” strategy reflects this mindset.

Share Buybacks:

Since 2012, 94% of S&P 500 companies participated in buybacks while all U.S. corporations spent over $2 trillion in precious cash over that time period. Meanwhile, total U.S. corporate profits over the same time frame rose only $14 billion. Reinforcing the “buy-the-dip” mentality, corporations tend to increase their pace of repurchases during periods when the market pulls back. An additional benefit of share repurchases is the purely optical effect on valuation measures like price-to-earnings. Although nothing material about a company’s long-term growth prospects change (indeed, prospects are arguably hurt by imprudent use of cash), buybacks afford the cosmetic appearance of improved operating performance which triggers additional demand or eases investor concerns.

Volatility Trading:

Through VIX futures contracts and a multitude of long and short volatility ETF’s, the popularity of volatility as an asset class has increased dramatically in recent years. VIX traders are emboldened that volatility has risen for short periods of time but regresses toward or below its mean. This predictable behavior has made shorting volatility an attractive trade, especially during market drawdowns when VIX spikes higher. Again, such action strengthens the buy the dip reflex. Contributing to lower than average VIX levels is the upward sloping term structure of forward VIX futures contracts (known as contango). Trades which take advantage of this upward slope have made shorting volatility profitable even when the VIX is not elevated. An important dynamic in VIX trading is that as volatility falls, profit-seeking traders must increase the size of their positions to generate the same income as they did when the VIX was at a higher level. Doing so, however, clearly raises the potential risk of loss for these positions.

Passive Mentality:

Historically-low fixed income yields have tempted investors to take on more risk. In part, this so-called “chase for yield” has led to a herding mentality. Investors have been flocking to securities, industries and indices that exhibit strong momentum, not necessarily commensurate fundamentals. Also growing is the popularity of passive investment styles. As we discussed in Passive Negligence and Passive Negligence II, the overwhelming demand for passive index funds has led many investors to eschew appropriate security evaluation. As a result, investors have bid up prices of some stocks to valuations that are well above historical norms.

Noted value investor Seth Klarman described it this way in his recent letter to clients: “One of the perverse effects of increased indexing and ETF activity is that it tends to ‘lock in’ today’s relative valuations between securities. Thus today’s high-multiple companies are likely to also be tomorrow’s, regardless of merit, with less capital in the hands of active managers to potentially correct any mispricing’s.”

The factors listed above, coupled with cheerleading from the media, Wall Street and the Fed, have led to a behavioral state best labeled as “animal spirits.” The term, introduced by John Maynard Keynes, is a way to say that human emotions have resulted in greed. When animal spirits run rampant, confidence trumps fundamentals, historical valuations, and poor risk/reward profiles. Janet Yellen’s husband, George Akerlof, literally wrote the book on animal spirits. Along with fellow author Robert Shiller, he wrote Animal Spirits to document how important human psychology is in driving desired market and economic results. In Fed Up, by Danielle DiMartino Booth, the Dallas Fed insider stated the following: “and yet here was the Fed, with Yellen as its biggest cheerleader, once again trying to build an economic recovery on the back of frenetic animal spirits.”

Our review of Danielle’s book can be found here (LINK).

The four broad factors discussed above coupled with low but stable economic growth have temporarily sated investors’ desire for economic stability and, in turn, market confidence. While this may appear well and good, we must consider what lies underneath the cloak of stability.

The Unseen Dominoes

While low levels of implied volatility may comfort investors for the moment, it seems prudent to contemplate current factors that run counter to low levels of implied volatility:

Debt Outstanding: The total amount of U.S. debt outstanding, including Federal, personal and corporate debt, is greater than $60 trillion and over three times U.S. GDP. More concerning, much of this debt is unproductive as it has not been employed towards productive investments which generate economic growth to service and retire the debt. Debt used solely for consumption, as has largely been the case, allows for the purchase of more goods and services today that otherwise would have been consumed in the future. This leaves a consumption void tomorrow, as demand is satisfied and marginal consumption is restricted by debt payments.

“To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about.” – Friedrich Hayek – Monetary Theory and the Trade Cycle

Interest Rates: Interest rates have been on a 35-year path lower. This is partially the result of decades of demand-focused monetary policy designed to incentivize debt-fueled consumption. With interest rates at unprecedented low levels and a limited ability for many to continue borrowing, the marginal benefit of lower interest rates is minimal. Additionally, investors are being forced to take outsized risks due to paltry returns offered by most fixed income securities.

Productivity: Productivity growth in the U.S. and most developed economies has slowed sharply from prior decades and in many cases has begun to decline. Without productivity growth, economic growth can only occur with increased debt and/or favorable demographics. Given poor demographics and record debt levels, relying on either is a highly questionable strategy.

New York Times author and economist Paul Krugman said: “productivity isn’t everything, but in the long run, it’s almost everything.”

Economic Trends: GDP growth in the U.S. has been in secular decline for over forty years. The rate of real economic growth is projected to be below 2% for the years ahead. This assumes the productivity, demographic, and debt landscape referenced above. Secular GDP per capita, a better measure of true output, is growing well below 1% annually and could decline in the years ahead.

Trump, Brexit, and Nationalism: Donald Trump, BREXIT and a growing worldwide nationalist movement raises concerns that global trade may become compromised. The Great Depression was, in part, due to a reduction in global trade as a result of protectionist actions. See Hoover’s Folly for more information.

China: The significant growth of China has played an outsized role in supporting global growth over the past fifteen years. The combination of cheap labor and a surge in debt is rapidly losing its effectiveness in China. Massive debt loads, rapidly declining productivity growth and competition is resulting in financial instability.

Rising Social Instability: Donald Trump, Bernie Sanders, BREXIT and other recent events serve as clear signals that voters are demanding change. The financial effects of consumerism are finally forcing people to bear an unacceptable weight. Social instability is on the rise as can be attested to by the recent riots at Berkley, the post inauguration women’s march on Washington, and racially oriented riots in Baltimore and St. Louis. While these events have different themes, causes and flag bearers, they are indicative of inequality.


The prolonged monetary exertions of the Federal Reserve and global central banks have put investors into a complacent trance. Implied volatility appears tame but a regime shift, when it arrives, will test even the most seasoned managers.

Volatility has not been mastered. The powerful forces that have suppressed it will turn, and the dormant but still present fundamental forces that few seem to consider will not fade away. The recognition of reality may occur slowly and provide watchful investors ample warning. However, the vast chasm that lies between reality and implied risk could make such a turn explosive and will certainly catch the unprepared off-guard.


Fixing the world’s economic and financial problems will be arduous and steps taken to date have done nothing to abrogate those issues. Durable solutions require time, discipline, sacrifice and a return to sound fiscal and monetary policy. Throughout the last 30 years, mounting economic problems have been consistently ignored. The overriding goal of economic policy makers has been to keep near-term economic growth on par with the seemingly arbitrary goals of the day. Economic policy has focused on immediate gratification and avoidance of pain at the expense of long-term economic health. This adolescent logic stimulates short-term growth as desired, but more importantly, it fosters boom-bust cycles and long term instability.

Successful investors understand that optimism, momentum and hope, the first order movements, the emotions that currently fill the media and Twitter-sphere, are most responsible for driving prices on a day-to-day basis. There is no doubt that such animal spirits could easily send the market even higher. That said, investors would be well-advised to devote significant time toward considering the multiple order effects. It is those effects, the emblematic line of forgotten dominoes, which will ultimately drive prices. When the entirety of the current situation begins to more fully reveal itself, investors are likely to find that the difference between esoteric measures of implied volatility and their very tangible perception of reality could not be more different.





“I was taken by darkness, but there was light all around, inside me. I never felt such utter peace, clarity and sobriety.” – Johnny Cash

As explained it to his wife June Carter what it was like to be wrapped in the suffocating black embrace of Nickajack Cave.

As referenced in Escaping Debt Darkness – Part 1, the passageways of debt lead trespassers astray and tempt them to head so deep into the cave, they may not be as fortunate as Johnny Cash to escape.

The lingering effects of debt can cast an insidious shadow over a personal balance sheet for years; like a murky, stealth thief, it’ll creep into your finances and slowly erode net worth.

Taming debt demons can be as difficult as securing great beasts using shoelaces. However, the lingering effects of excess debt on your ability to reach financial life benchmarks like retirement, shouldn’t be underestimated.

Think prevention; it’s much easier to heed the warning signs. Avoid the cave altogether. Once too far in, a rescue may be necessary.

If you’ve strayed too far into the cave, best not take another step. A way out still exists. However, you’ll require assistance. Let me be your guide. Or seek an objective financial partner to help you shine a light on a path to freedom.

If you have a successful track record of managing debt, I commend you. You’ve kept your guard up. I so hope you’ve shared with others how you did it. How you managed to remain so disciplined.

After all, living above financial means utilizing credit is an all-American seductress. We’re bombarded 24 hours a day by lenders, retailers, you name it, (more than any other country). These entities tempt us to part with our money, whether it’s earned in present or stolen from the future through the use of credit.

American consumerism is relentless and smart. Always seeking new ways to capture our attentions. The overwhelming messages synthesize powerfully to cajole us into spending more than we earn.

Go on, take a bite and feel the warm, delicious high from owning stuff you can’t pay for today.

Similar to Johnny Cash and those little white pills he believed helped him to focus, write songs and perform. The end result of such actions ostensibly turns out to be a dead end.

Those who succumb to the sound of the credit clarion and stumble eventually discover that taking on excessive debt creates long-lasting devastation similar to an addiction that’s gotten out of control.

Falling for the low monthly-payment mindset over a how much am I paying in interest and charges for the courtesy of taking on this new obligation?” method of thought may lead to forever lost in the cave.

So-called “good debt” such as mortgage debt can be misused if not handled correctly, too.

It comes down to boundaries. Rules that are rarely taught but can be created, one consumer at a time.

Yes, you have the power to set boundaries. Take control.

Let’s explore a passage in the debt cavern in this post. I’ll share my own rule, too. See what you think. There are two more roads we need to explore in a future writing.

Let’s tackle the worst, first.

Student Loan Debt

First the scary facts. Like that feeling of falling from a 30-ft ledge into an airless cavern of Nickajack, student loan debt is one of the most serious epidemics we face in the United States.

Total outstanding student loan debt, whether it’s Federal or private, stands at $1.3 trillion, behind only mortgage debt. Greater than credit card and auto loan debt.

According to attorney and student loan specialist Adam S. Minsky, roughly 1 out of 9 Americans hold student loans and 70% of students graduate with debt.

The average 2016 undergraduate student debt stood at $37,000. In 2013 it was $30,000.

The percentage of borrowers in delinquency or default stands at a hefty 25%.

Amazingly, many students don’t even know how much they owe!

It’s a wealth destroying “I’ll worry about it later,” mind set.

Let’s say you and your children are not in fiscal danger, yet. Set your rule. Don’t stray from it.

Here’s mine:

Keep loans limited to one year’s worth of total expense, tuition, room & board, everything.

You can divide the money across the full experience, 4-5 years, or all at once. However, no more than a year’s worth of expenses should be taken in the form of student loans. I’ll probably catch slack for this, but so be it. All I seek to do is get you thinking boundaries.

My daughter is fully aware of my personal rule and the following steps. Fortunately, her dad has been a Certified Financial Planner since 1998, the year she was born, and began a 529 plan before she arrived home from the hospital. It was funded by monthly auto-pilot for 15 years. Currently, we have six figures set aside for her continued education.

Besides rules, what other methods can you employ to avoid the cave? What if you haven’t been fortunate enough to accumulate over time in a 529 college savings plan?

Consider the following but first, let me be as clear as I can:

Never, I mean NEVER use 401(k) loans, retirement assets, or forsake saving for retirement entirely to fund college. I can’t be too serious about this point. There are numerous funding options, public and private, for higher education. You however, are solely responsible for retirement. Nobody is going to grant you a scholarship for that goal. If you must choose, always choose retirement over college.

Don’t discount work experience – Insist a child work for two years at a job that places them in direct contact with the public before considering a college education. Real life before book strife!

Understanding human dynamics, the art of service, and dealing with people in general can help a young adult learn to sell themselves to future employers after college.

I honed my human connection skills working the housewares department at Macy’s. I maintained a small notebook with customer names and preferences. I would contact them proactively when we ran sales on items I thought they’d like to purchase.

Then create a blog – Have your offspring consider establishing a blog about their work and job interview experiences. The lessons will be indispensable for others doing the same. Writing a daily blog will sharpen core writing skills and help prospective students outline their thoughts about a career they’d like to pursue. A blog can be easily established in minutes through a website like www.wordpress.com.

What’s wrong with a community college first? – This is the avenue my daughter is pursuing. There once was a stigma surrounding community colleges. No longer. Curriculums are challenging and forge a path to future educational pursuits at less than half the cost of tuition at a public university.

A community college can be a practical step to completing basic educational requirements including advanced mathematics and sciences. It’s an opportunity to increase GPA so students may gain a greater chance of earning a scholarship or getting into another college of choice. Consider community college a “booster shot” to a more successful overall college experience.

Sell the idea of a trade or vocational education – All except for the very elite graduating from Ivy League choices, the romance around graduating college and landing a cushy job is pretty much dead. There’s a great opportunity for employment by seriously considering vocations like dental assistant, plumber, electrician, heating and refrigeration expert, iron, metal worker, welder and pharmacy technician.

One of the most comprehensive websites I’ve investigated for all topics vocational, is www.educationguys.com. It’s important that schools considered are accredited. Institutions that have been through the accreditation process will offer degrees that most employers will recognize.

So what if you’ve already ventured into the student loan debt cave. What steps can children take to work their way out? Now, it may be a bit unnerving, but a plan can be forged.

Forget saving for retirement. For now. If you’re a recent graduate put the idea aside. For five years. If you have Federal-based student loans (and Federal should be your FIRST path to securing a student loan), consider the Standard Repayment Plan initially, which will have your loans paid off in ten years, if your employment income is sufficient to handle it. Of course, if your employer provides a match to retirement plan contributions, go ahead and defer enough income to receive it. No more than that.

Consider an income-driven repayment plan that sets your monthly student loan payment at an amount that is affordable based on income and family status.

A Repayment Estimator for the best income-based plan for your needs (you must apply for a plan), is available at www.studentaid.ed.gov.

Now, these plans can get complicated. It’s a smart investment of time and money to sit with a Certified Financial Planner who understands the pros and cons of various income-driven repayment plans or consider hiring a Student Loan Lawyer (not kidding) who can create a customized loan approach for parent and student.

Keep in mind, these plans are not available for federal loans made to parents, only students. Also, loans from private lenders have various refinancing options. Online lenders are available and will not have as flexible terms. Also, there’s no such thing as forgiveness, which I explore in greater detail.

Income-Driven or Income-Based Repayment Plans may only cover loan interest for a limited number of years (if government subsidized). After that, interest will be added to the amount owed. Or if a loan is discharged after a period of years, keep in mind the discharge may count as taxable income or constructive receipt by the borrower.

Bottom line – Income-based repayment plans can lessen the burden on a new graduate’s strained budget and cash flow by making payments more affordable and aligned with current income, as compared to the Standard Repayment Plan. However, you must understand the mechanics, tax and liability repercussions of each plan.

For example, IBRs are determined by a formula of 15% of “discretionary income,” which is the difference between adjusted gross income and 150% of the federal poverty level. Generally, these loans go out 25 years.

The PAYE or Pay-As-You-Earn Plans are a newer option of income-based plans for student borrowers of federal loans incurred after October 1, 2011 and who first borrowed federal student loans after September 30, 2007. Think of those eligible as 2012 graduates who began taking out loans in the midst of the financial crisis in 2008. Obviously, the feds understood the difficult challenge new graduates would face finding gainful employment after the Great Recession.

PAYE Plans are always 10% of the difference between monthly income and 150% of the poverty line, regardless of whether future income increases or decreases.

These plans are confusing, but be patient; they usually result in the lowest monthly payments for borrowers. A grad’s calculated payment under PAYE must be less than what would be paid under a Standard Repayment Plan with a 10-year repayment period.

However, PAYE Plans result in forgiveness which means after 20 years, there could be a hefty tax liability as the remaining loan balance is forgiven and treated as income to the borrower.

A thorough overview of federal student loan and forgiveness programs are available at www.ibrinfo.org, an independent, non-profit source.

Even if you’ve secured employment, live at home longer to get a jump start on reducing debt. Well, this is already a common occurrence.

According to www.pewresearch.org, for the first time in longer than 130 years, young adults are likely to be living with their parents than in any other living arrangement.

Since multiple generations co-existing under the same roof is becoming all too common, it’s time for parents to redefine the scope of the arrangement with newly-minted grads. Establish clear boundaries up front.

Kids – Take the initiative to heart. Create a written debt repayment agreement for your parents to prove how serious you are about debt reduction. Outline and be specific as to how you’re going to become financially healthier and focus the majority of your efforts on paying off liabilities in exchange for living quarters.

Lay out a time line. Share with your parents how remaining under their roof for an additional three to five years will afford you an incredible financial edge.

It’s similar to creating a business agreement. You’ll need to sell your proposal and estimate the end result of your efforts. Open up your entire financial picture to your parents and meet with them monthly to discuss progress.

How serious are you? Sign the agreement and provide them a copy.

Include specifics, bullet points, regarding how you will assist the household on a regular basis. Whether it’s taking on a share of the time-consuming chores, paying rent or a share of utility bills, these actions will express your sincerity and gratefulness for the generous opportunity to get fiscally fit.

The student loan debt epidemic is difficult to fathom.

A majority of borrowers hold $10-$25,000 in loan balances by graduation. Naturally, we always hear in the media about those borrowers who accumulate six-figure loan balances. Fortunately, that’s not the norm.

The third and last blog installment will tackle the subjects of credit card and mortgage burdens.

And Johnny Cash?

He indeed made it out of Nickajack Cave.

The experience forever changed his life.

He discovered his wife June and Carrie Cash, his mother, waiting for him outside the entrance.

Cash’s mother made the trip too because she felt something was very wrong with her son.

It’s important as parents that we help our children avoid or navigate the student loan channel of the debt cave as best we can. Help them find a way out.

At the least, we should have the common sense to employ financial or legal professionals to act as lighted, educated guides along the way when the time to pursue higher education draws closer.