It’s the Fed’s fault.

Over the past several years, the Federal Reserve has forced interest rates lower in an all-out assault on “cash.”

The theory was simple. Make returns on “cash” so low it is forced out of savings account and into risk assets. 

It worked.

But here is the problem.

While the ongoing interventions by the Federal Reserve have certainly boosted asset prices higher, the only real accomplishment has been a widening of the wealth gap between the top 10% of individuals that have dollars invested in the financial markets and everyone else. This was shown by the Fed’s most recent consumer survey.

With the average American still living well beyond their means, the reality is that economic growth will remain mired at lower levels as savings continue to be diverted from productive investment into debt service. This skew in wealth, between the top 10% and bottom 90%, has distorted much of the economic data which suggests savings rates and incomes are rising across the broad spectrum of the economy. The reality, as shown by repeated studies and surveys, is an inability for many individuals to meet even small emergencies, must less being anywhere close to having sufficient assets to support a healthy retirement. To wit:

Take a look at that graphic carefully.

  • 33% of Americans have $0 saved for retirement.
  • 56% only have $0-$10,000
  • 66% have less than one-year of median income saved.
  • 74% have less than $100,000 saved for retirement.

With 3/4th’s of America dependent upon an already overburdened social security system in retirement, the “consumption function,” on which roughly 70% of the economy is dependent, is being grossly overestimated. 

The Risk Of Holding Cash

As I noted in this past weekend’s missive, the level of cash being held by individual investors currently is near record lows.

Of course, Wall Street, analysts and the media have been all complicit in the “war on cash.”

The argument against holding cash is simply this:

“Since there is “no yield on cash,” you MUST invest in the stock market otherwise you are losing money due to inflation and opportunity costs.”

This is a true statement ONLY IF you hold cash for an EXTREMELY long period. However, holding cash as a “hedge” against market volatility during periods of elevated uncertainty is a different matter entirely. 

It is relatively unimportant the markets are making new highs. The reality is that new highs only represent about 5% of the market’s action while the other 95% of the advance was making up previous losses. “Getting back to even” is not a long-term investing strategy.

In a market environment that is extremely overvalued, the projection of long-term forward returns is exceedingly low. I have discussed this previously, but this cannot be overstated enough. This, of course, does not mean that markets just trade sideways, but in rather large swings between exhilarating rises and spirit-crushing declines. This is an extremely important concept in understanding the “real value of cash.”

The chart below shows the inflation-adjusted return of $100 invested in the S&P 500 (capital appreciation only using data provided by Dr. Robert Shiller). The chart also shows Dr. Shiller’s CAPE ratio. However, I have capped the CAPE ratio at 23x earnings which has historically been the peak of secular bull markets in the past. Lastly, I calculated a simple cash/stock switching model which buys stocks at a CAPE ratio of 6x or less and moves back to cash at a ratio of 23x.

I have adjusted the value of holding cash for the annual inflation rate which is why during the sharp rise in inflation in the 1970’s there is a downward slope in the value of cash. However, while the value of cash is adjusted for purchasing power in terms of acquiring goods or services in the future, the impact of inflation on cash as an asset with respect to reinvestment may be different since asset prices are negatively impacted by spiking inflation. In such an event, cash gains purchasing power parity in the future if assets prices fall more than inflation rises.

While no individual could effectively manage money this way, the importance of “cash” as an asset class is revealed. While cash did lose relative purchasing power, due to inflation, the benefits of having capital to invest at lower valuations produced substantial outperformance over waiting for previously destroyed investment capital to recover.

While we can debate over methodologies, allocations, etc., the point here is that “time frames” are crucial in the discussion of cash as an asset class. If an individual is “literally” burying cash in their backyard, then the discussion of the loss of purchasing power is appropriate.

However, if cash is a “tactical” holding to avoid short-term destruction of capital, then the protection afforded outweighs the loss of purchasing power in the distant future.

Much of the mainstream media will quickly disagree with the concept of holding cash and tout long-term returns as the reason to just remain invested in both good times and bad. The problem is it is YOUR money at risk. Furthermore, most individuals lack the “time” necessary to truly capture 30 to 60-year return averages.

8-Reasons To Hold Cash

I’ve been managing money in some form coming up on 30-years. I learned a long time ago that while a “rising tide lifts all boats,” eventually the “tide recedes.” I made one simple adjustment to my portfolio management over the years which has served me well. When risks begin to outweigh the potential for reward, I raise cash.

The great thing about holding extra cash is that if I’m wrong, simply make the proper adjustments to increase the risk in my portfolios. However, if I am right, I protect investment capital from destruction and spend far less time “getting back to even” and spend more time working towards my long-term investment goals.

Here are my reasons having cash is important.

1) We are not investors, we are speculators. We are buying pieces of paper at one price with an endeavor to eventually sell them at a higher price. This is speculation at its purest form. Therefore, when probabilities outweigh the possibilities, I raise cash. 

2) 80% of stocks move in the direction of the market. In other words, if the market is moving in a downtrend, it doesn’t matter how good the company is as most likely it will decline with the overall market.

3) The best traders understand the value of cash. From Jesse Livermore to Gerald Loeb they all believed one thing – “Buy low and Sell High.” If you “Sell High” then you have raised cash. According to Harvard Business Review, since 1886, the US economy has been in a recession or depression 61% of the time. I realize that the stock market does not equal the economy, but they are somewhat related. 

4) Roughly 90% of what we’re taught about the stock market is flat out wrong: dollar-cost averaging, buy and hold, buy cheap stocks, always be in the market. The last point has certainly been proven wrong because we have seen two declines of over -50%…just in the past two decades! Keep in mind, it takes a +100% gain to recover a -50% decline.

5) 80% of individual traders lose money over ANY 10-year period. Why? Investor psychology, emotional biases, lack of capital, etc. Repeated studies by Dalbar prove this over and over again. 

6) Raising cash is often a better hedge than shorting. While shorting the market, or a position, to hedge risk in a portfolio is reasonable, it also simply transfers the “risk of being wrong” from one side of the ledge to the other. Cash protects capital. Period. When a new trend, either bullish or bearish, is evident then appropriate investments can be made. In a “bull trend” you should only be neutral or long and in a “bear trend” only neutral or short. When the trend is not evident – cash is the best solution.

7) You can’t “buy low” if you don’t have anything to “buy with.” While the media chastises individuals for holding cash, it should be somewhat evident that by not “selling rich” you do not have the capital with which to “buy cheap.” 

8) Cash protects against forced liquidations. One of the biggest problems for Americans currently, according to repeated surveys, is a lack of cash to meet emergencies. Having a cash cushion allows for working with life’s nasty little curves it throws at us from time to time without being forced to liquidate investments at the most inopportune times. Layoffs, employment changes, etc. which are economically driven tend to occur with downturns which coincide with market losses. Having cash allows you to weather the storms. 

Importantly, I am not talking about being 100% in cash. I am suggesting that holding higher levels of cash during periods of uncertainty provides both stability and opportunity.

With the fundamental and economic backdrop becoming much more hostile toward investors in the intermediate term, understanding the value of cash as a “hedge” against loss becomes much more important. 

As John Hussman noted in one of his past missives:

The overall economic and financial landscape, then, is one where obscene valuations imply zero or negative S&P 500 total returns for more than a decade — an outcome that is largely baked-in-the-cake regardless of shorter term economic or speculative factors. Presently, market internals remain unfavorable as well. Coming off of recent overvalued, overbought, overbullish extremes, this has historically opened a clear vulnerability of the market to air-pockets, free-falls and crashes.”

As stated above, near zero returns do not imply that each year will have a zero rate of return. However, as a quick review of the past 15 years shows, markets can trade in very wide ranges leaving those who “rode it out” little to show for their emotional wear.

Given the length of the current market advance, deteriorating internals, high valuations, and weak economic backdrop; reviewing cash as an asset class in your allocation may make some sense. Chasing yield at any cost has typically not ended well for most.

Of course, since Wall Street does not make fees on investors holding cash, maybe there is another reason they are so adamant that you remain invested all the time.

Over the past couple of weeks, the market has continued to remain overbought, extended and exuberant on “hopes” that Trump’s policies will be the ointment to cure the economy’s ills. As noted yesterday, exuberance has exploded in everything from consumer to investor to business optimism.

The explosion of optimism is interesting given the consistent diatribe over the last few years about how well the economy was performing under the previous administration. This is the equivalent of a company’s stock price surging when the previous CEO is replaced which doesn’t speak well of his “legacy of performance.” 

The question now is whether or not “hopes” will translate into “reality.”

Interestingly, since the beginning of the year, the rush to pile into “Trump Trades” has quickly evaporated as transaction volumes have plunged as “anticipation” has turned into “wait and see.” 

It is worth noting that previous, when transaction volumes have plunged to such low levels, the markets were generally at an inflection point of a correctionary process. With the markets currently extremely overbought and extended, the reality of a “sell the inauguration” trade is possible.

In the end, “anticipation” of better outcomes is one thing when it comes to the financial markets and your money, however, “reality” is quite another.

Here is what I am reading this weekend.

Fed, Economy & Trump


Interesting Reads

“Stock market bubbles don’t appear out of thin air. They have a basis in reality. But that reality is distorted by misconception” ― George Soros

Questions, comments, suggestions – please email me.

As Donald Trump assumes office as the 45th President of the United States of America, 50% of the country remain distraught. For the other 50%, it’s the dawning of a new age. However, when it comes to our money, all of us are ultimately affected by the success, or failure, of the political cycle. 

We will kick off the New Year’s Monthly Webinar Series with:

“How to Play the Trump Card in a New Presidential Cycle,”

  • When: Wednesday, January 25
  • Time:    11:30am. 
  • Where: At Your Desk

Contributing Editor, and Certified Financial Planner, Richard Rosso, and I are teaming up to discuss:

  • The history of Decennial & Presidential Stock Market Cycles
  • Identify how you and your money can be winners
  • Possible changes to taxes and Social Security
  • The coming tug-of-war between fiscal and monetary policies.
  • And more…

As always, it’s a free event and could give you a winning hand.

This is something you don’t want to miss.

Wed, January 25, 2017 11:30 AM CDT


Consumer Debt Surges In November

Last week, I addressed the issue with consumer spending and the issue of consumer debt. To wit:

“Given the lack of income growth and rising costs of living, it is unlikely that Americans are actually saving more. The reality is consumers are likely saving less and may even be pushing a negative savings rate.

I know suggesting such a thing is ridiculous. However, the BEA calculates the saving rate as the difference between incomes and outlays as measured by their own assumptions for interest rates on debt, inflationary pressures on a presumed basket of goods and services and taxes. What it does not measure is what individuals are actually putting into a bank saving or investment account. In other words, the savings rate is an estimate of what is ‘likely’ to be saved each month.

However, as we can surmise, the reality for the majority of American’s is quite the opposite as the daily costs of maintaining the current standard of living absorbs any excess cash flow. This is why I repeatedly wrote early on that falling oil prices would not boost consumption and it didn’t.”

As shown in the chart below, consumer credit has surged in recent months and exploded in November rising $24.5 billion in the month alone.

More importantly, while consumer credit continued to# expand, PCE and Wages remain primarily stagnant.

“Here is another problem. While economists, media, and analysts wish to blame those ‘stingy consumers’ for not buying more stuff, the reality is the majority of American consumers have likely reached the limits of their ability to consume. This decline in economic growth over the past 30 years has kept the average American struggling to maintain their standard of living.”

As more evidence of consumer’s struggling to maintain their standard of living, while consumer credit has continued to climb, retail sales remain weak as shown below.

And as the astute Greg S. pointed out yesterday:

Rising credit and delinquency rates combined with stagnant wage growth and you have a wicked brew being mixed for the economy. Furthermore, once you strip out surging health care related costs the strength witnessed in economic and inflation related reports as of late seem much less optimistic. (This is an issue I have repeatedly warned of over the past several years.)

Despite surges in optimism, with roughly 70% of the economy dependent upon the consumer, the ability of consumers to continue leveraging consumption is limited. As wage growth continues to stagnate, except for the top 20% of those employed, economic growth will likely remain sluggish which suggests the recent surges in optimism, as I will discuss in a minute, will likely fade as “Trump-uberence” reconnects with “economic realities.”

NFIB Optimism Explodes

Besides the surge in consumer debt, optimism has also exploded since the Presidential election. In the latest NFIB Small Business Survey, respondent’s confidence surged to levels only seen twice before in history. Interestingly, this surge comes nearer the end of a long economic cycle versus a more expected post-recessionary rise seen previously. (In many cases, as noted by the vertical dashed lines, sharp spikes in confidence have coincided with short to intermediate-term market peaks.)

However, while the spike in confidence is certainly encouraging there are a couple of aspects about the survey that should be considered.

  1. Small business owners TEND to be more conservatively biased politically speaking. Therefore, it is not surprising the “Trump win” has lifted their spirits.
  2. Given that regulations, taxes and the Affordable Care Act have weighed heavily on small business owners, the “hope” for any relief is certainly reason for a rise in expectations.
  3. The survey sample was the smallest of the entire year consisting of just a little more than 600 respondents.

Furthermore, if we use a 12-month average of the survey to smooth out the volatility, a very different picture emerges and one that is likely far more consistent with the current state of the economy.

Importantly, “expectations” have tended to run well ahead of reality. As shown below while spikes in expectations have corresponded to short-term rises in economic activity, such increases have generally been very short-lived. This time around a much stronger dollar, rising interest rates, and plenty of potential policy missteps could quickly reverse “exuberance” back to “reality.” 

Increases in confidence are one thing, but actually committing capital to projects, expenditures, equipment and further employment are based on actual increases in demand, not hope.

For evidence of demand, we can look at sales “expectations” versus actual “sales.” Not surprisingly, since the election, “expectations” of increased sales have surged. However, “actual sales” have been on the decline for several months due to the constriction of consumer demand due to increased debt and weak wage growth as noted above. 

This also shows up in actual real, inflation adjusted, retail sales data which shows little momentum.

While the surge in “optimism” is certainly welcome, there is a function of an economic cycle that must be dealt with. As I discussed previously:

“It is not just tighter monetary policy weighing on fiscal policy changes but the economic challenges as well. As my partner Michael Lebowitz recently pointed out – ‘this ain’t the 1980’s.’

‘Many investors are suddenly comparing Trump’s economic policy proposals to those of Ronald Reagan. For those that deem that bullish, we remind you that the economic environment and potential growth of 1982 was vastly different than it is today.’

This also isn’t 2009 where economic activity and consumption is extremely depressed which gives tax cuts, incentives and regulatory reforms have a much bigger impact on economic and earnings growth.

Will “Trumponomics” change the course of the U.S. economy? I certainly hope so.

However, as investors, we must understand the difference between a “narrative-driven” advance and one driven by strengthening fundamentals. The first is short-term and leads to bad outcomes. The other isn’t, and doesn’t.”

So Does Policy Uncertainty

While optimism and confidence has certainly surged over the last couple of months, something else has as well – policy uncertainty.

As I stated above, the surge in optimism from consumers, investors, and business owners has certainly lifted spirits, it hasn’t translated into fuel for economic growth as of yet. Interestingly, as Nick Timiraos from the WSJ notes, with free-trade adversaries on one side of his economic team and market-oriented advisers from the Washington and Wall Street establishments on the other, Donald Trump has charted an unpredictable course.

A flat organizational structure could set these and other individuals against each other as they compete for Mr. Trump’s support. Uncertainty about his economic agenda is heightened by how Mr. Trump, who has never held public office, has changed his mind on some policy issues while saying little about others.

Tensions are already surfacing now that Mr. Trump must translate campaign promises into a governing agenda. Mr. Trump, and other Republican lawmakers, are voicing concerns over how quickly to advance a repeal of Mr. Obama’s health-care overhaul, which could boost deficits and leave millions without health insurance. The new administration also may ask for billions of dollars for border security after Mr. Trump repeatedly promised to make Mexico shoulder the cost of new security measures.

The nucleus of Mr. Trump’s economic team consists of two financiers, Mr. Cohn and Treasury secretary-designate Steven Mnuchin, who in 1994 both became partners at Goldman. They haven’t weighed in on the pitched partisan policy battles of the past decade, making them more of a tabula rasa who advisers say can translate into policy Mr. Trump’s fusion of traditional GOP support for lower taxes and fewer regulations with his calls to brand China as a currency manipulator and spend more on infrastructure.

The elevation of Goldman Sachs alums also stands in contrast to Mr. Trump’s pointed attacks on the investment bank in last fall’s campaign. In addition to Messrs. Cohn and Mnuchin, the transition team is considering Jim Donovan, a senior Goldman executive, to serve as undersecretary of domestic finance, a top Treasury Department post.

Perhaps the starkest example of policy idiosyncrasy comes with Mr. Trump’s pick for budget director, Rep. Mick Mulvaney (R., S.C.), a committed deficit hawk. He has been deeply critical of Republicans who have sought higher spending and spoke skeptically of Mr. Trump’s infrastructure-spending push just weeks after the November election.

Throughout the campaign, Mr. Trump championed more spending on everything from the military to infrastructure, veterans’ health care and border security while he also brushed aside calls to address to long-run solvency of popular benefit programs such as Medicare and Social Security.

One question now is whether Mr. Mulvaney will prevail on Mr. Trump to rein in his big-spending agenda, or whether he might be tasked by Mr. Trump to sell a short-term boost in federal outlays to his fellow, skeptical House conservatives.

The organizational structure ‘may leave everyone guessing about who holds ultimate sway,’ said Jeb Mason, a Treasury Department official in the George W. Bush administration.”

Importantly, with economic growth anemic, consumers stretched and an economy heading into one of the longest post-recessionary expansions on record, there is little room for a policy misstep at this juncture.

Maybe Trump will be wildly successful and the economy will come roaring back. That is a possibility.

But there is also the risk it won’t.

Optimism is one thing. Your personal capital and financial health is quite another.

Just some things I am thinking about.






I just wanted to send out a “THANK YOU” to all of you who continue to visit the Real Investment Advice blog site and read the weekly newsletter.

As noted above, Feedspot continues to rank financial blog sites on a weekly basis. This past week, Real Investment Advice crawled its way into the list debuting at #27.

All of us at Real Investment Advice, (Richard, Michael, Jesse and myself), are always trying to improve the content we deliver to you. We look forward to continuing to bring you thought provoking, non-mainstream analysis during 2017 as well.

Again, thank you for your readership.

In 1930, Herbert Hoover signed the Smoot-Hawley Tariff Act into law. As the world entered the early phases of the Great Depression, the measure was intended to protect American jobs and farmers. Ignoring warnings from global trade partners, the new law placed tariffs on goods imported into the U.S. which resulted in retaliatory tariffs on U.S. goods exported to other countries. By 1934, U.S. imports and exports were reduced by more than 50% and many Great Depression scholars have blamed the tariffs for playing a substantial role in amplifying the scope and duration of the Great Depression. The United States paid a steep price for trying to protect its workforce through short-sighted political expedience.

On January 3, 2017 Ford Motor Company backed away from plans to build a $1.6 billion assembly plant in Mexico and instead opted to add 700 jobs at a Michigan plant. This abrupt reversal followed sharp criticism from Donald Trump. Ford joins Carrier in reneging on plans to move production to Mexico and will possibly be followed by other large corporations rumored to be reconsidering outsourcing. Although retaining manufacturing and jobs in the U.S. is a favorable development, it seems unlikely that these companies are changing their plans over concerns for American workers or due to stern remarks from President-elect Trump.

What does seem likely? Big changes in trade policy occurring within the first 100 days of Trump’s presidency. The change in plans by Ford and Carrier serve as clues to what may lie ahead and imply a cost-benefit analysis.  In order to gain better insight into what the trade policy of the new administration may hold, consideration of cabinet members nominated to key positions of influence is in order.

Trump’s Trade Appointments

As we close in on Trump’s inauguration, his cabinet and team of advisors is taking shape.  With regard to global trade, there are three cabinet nominations that most capture our attention:

  • Peter Navarro is a business professor from the University of California-Irvine. Mr. Navarro has been very outspoken about China and the need to renegotiate existing trade deals in order to put America on a level playing field with global manufacturers. The author of the book, “Death by China”, will lead the newly created White House National Trade Council.
  • Wilbur Ross is a billionaire investor who made his fortune by resurrecting struggling companies. In the words of Donald Trump, Mr. Ross is a “champion of American manufacturing and knows how to turn them around”. The long time trade protectionist will now serve as Commerce Secretary.
  • Robert Lighthizer is currently a lawyer with a focus on trade litigation and lobbying on behalf of large U.S. corporations. Earlier in his career, he served as deputy U.S. Trade Representative under President Ronald Reagan. Mr. Lighthizer has been very outspoken about unfair trade practices that harm America. In his new role he will serve as Trump’s U.S. Trade Representative.

Donald Trump said that Mr. Lighthizer will work “in close coordination” with Wilbur Ross and Peter Navarro. The bottom line is that these three advisors have strong protectionist views and generally feel that China, Mexico and other nations have taken advantage of America.

Gettysburg and Other Rhetoric

On October 22, 2016 in Gettysburg Pennsylvania, Donald Trump delivered a litany of goals that he hopes to accomplish in his first 100 days of office. Within the list are seven actions aimed at protecting American workers. Four of them deal with foreign trade. They are as follows:

These four proposals and other trade-related rhetoric that Donald Trump repeatedly stated while running for president suggest that he will take immediate steps to level the global trade playing field. At this point, it is pure conjecture what actions may or may not be taken. However, the article, “We need a tough negotiator like Trump to fix U.S. trade policy”, penned by Peter Navarro and Wilbur Ross from July 2016 offers clues.

In the article, Navarro and Ross took the World Trade Organization (WTO) to task for being negligent in defending the United States against unfair trade. Additionally, they note the WTO “provides little or no protection against  four of the most potent unfair trade practices many of our trade partners routinely engage in — currency manipulation, intellectual property theft, and the use of both sweatshop labor and pollution havens”.

They also note that the U.S. does not have a Value-Added Tax (VAT). Heavily used in the European Union and much of the rest of world, a VAT is a tax imposed at various stages of production where value is added and/or at the final sale. The tax rate is commonly based on the location of the customer, and it can be used to affect global trade. Manufacturers from countries with VAT taxes frequently receive rebates for taxes incurred during the production process. Because the U.S. does not have a VAT, the WTO has denied U.S. corporations the ability to receive VAT rebates. In fact, the WTO has rejected three congressional attempts to give American companies equal VAT rebate treatment. By denying VAT rebates the WTO is “giving foreign competitors a huge tax-break edge.” 

It is possible that, within weeks of taking office, President-elect Trump may threaten to leave the WTO. In what is likely a negotiating tactic, we should expect strong proposals from Trump and his team with the goal of forcing the WTO to alter decisions more to the favor of the United States. Among the actions the Trump administration may take, or threaten to take, is the pulling out of prior trade agreements and/or establishing tariffs on imports into the United States. Because of its efficiency and simplicity, border tax adjustments, which are similar to VAT, seem to be a more logical approach as they would effectively assess a tax on importers of foreign goods and resources without affecting exporters.  Border tax adjustments seem even more plausible when considered in the context of a recent Twitter message that Donald Trump posted: “General Motors is sending Mexican made model of Chevy Cruze to U.S. car dealers-tax free across border – Make in U.S.A. or pay big border tax!

Ramifications and Investment Advice

Although it remains unclear which approach the Trump trade team will take, much less what they will accomplish, we are quite certain they will make waves. The U.S. equity markets have been bullish on the outlook for the new administration given its business friendly posture toward tax and regulatory reform, but they have turned a blind eye toward possible negative side effects of any of his plans. Global trade and supply chain interdependencies have been a tailwind for corporate earnings for decades. Abrupt changes in those dynamics represent a meaningful shift in the trajectory of global growth, and the equity markets will eventually be required to deal with the uncertainties that will accompany those changes.

If actions are taken to impose tariffs, VATs, border adjustments or renege on trade deals, the consequences to various asset classes could be severe.  Of further importance, the U.S. dollar is the world’s reserve currency and accounts for the majority of global trade. If global trade is hampered, marginal demand for dollars would likely decrease as would the value of the dollar versus other currencies.

From an investment standpoint, this would have many effects. First, commodities priced in dollars would likely benefit, especially precious metals. Secondly, without the need to hold as many U.S. dollars in reserve, foreign nations might sell their Treasury securities holdings. Further adding pressure to U.S. Treasury securities and all fixed income securities, a weakening dollar is inflationary on the margin, which brings consideration of the Federal Reserve and monetary policy into play.

Investors should anticipate that, whatever actions are taken by the new administration, America’s trade partners will likely take similar actions in order to protect their own interests. If this is the case, the prices of goods and materials will likely rise along with tensions in global trade markets. Retaliation raises the specter of heightened inflationary pressures, which could force the Federal Reserve to raise interest rates at a faster pace than expected. The possibility of inflation coupled with higher interest rates and weak economic growth would lead to an economic state called stagflation. Other than precious metals and possibly some companies operating largely within the United States, it iummaryc or global assets that benefit. d to envision other assets lation, higher interest and stagnant economic growth would lis hard to envision many other domestic or global assets that benefit from a trade war.


We like to think that the lessons from the Great Depression would prevent a trade war like the one precipitated by the Smoot-Hawley Tariff act. We must realize, however, that nationalism is on the rise here and abroad, and America will soon have a president that appears more than willing to take swift and aggressive  action to ensure that it is not taken advantage of in the global trade arena.

It is premature to make investment decisions based on rhetoric and threats. It is also possible that much of this bluster could simply be the opening bid in what is a peaceful renegotiation of global trade agreements. To the extent that global growth and trade has been the beneficiary of years of asymmetries at the expense of the United States, then change is overdue.  Our hope is that the Trump administration can impose the discipline of smart business with the tact of shrewd diplomacy to affect these changes in an orderly manner. Regardless, we must pay close attention as trade conflicts and their consequences can escalate quickly.





It’s not the greatest time in the world for labor markets despite the excellent news which appears in the media.

To argue that jobs haven’t returned since the Great Recession is irresponsible. No matter how you slice it, regardless of how long it’s taken post-financial crisis, there has been job market recovery.

However, there are several points worth pondering including a sentiment that I believe now dominates senior management initiatives for corporations here and abroad.

First, keep in mind, the peak in non-farm payrolls was reached in early 2015.

Also, momentum in labor markets is waning per one of the Federal Reserve’s own metrics. The Labor Market Conditions Index is a statistical blend of the variation derived from 19 labor market indicators. Think of it as a health gauge for the overall labor market.

And let’s not forget that pesky lack of wage growth issue.

Not sure why anemic wage growth is such a conundrum for economists. You can hire as many bodies as you want, however as long as you believe in the rule I’m about to share and convince your staff to believe in it, there’s no need to increase wages at nothing but slower than a snail’s pace.

The financial crisis and subsequent weak anemic recovery dealt corporate leaders a valuable and painful lesson. An unspoken rule was forged. It remains so entrenched, it can’t easily be broken, regardless of the business cycle. Whether it’s expansion or contraction – There’s always a recession somewhere.

Unfortunately, this defensive mindset will continue to affect you and everybody you know who has a job!

Senior management lives and breathes this mantra every day (don’t be naïve and believe they don’t):

“Think, operate and respond to labor as if the Great Recession never ended.”

Think about it.

It’s happened to you or somebody you know.

Consider the temporary pay cut you took in 2009 “for the team,” that somewhere along the line became permanent.

Ponder how many times you’ve caught the management choir bellowing stale notes from the same old song book.

It’s tough to shake the overdone lyrics that are designed ironically to keep you motivated. Words that keep management guru and educator Peter Drucker spinning in his grave:

“Be lucky you have a job.”

Is that the best your HR department can do? Oh, and your human resources partners are not your allies, they exist to spin and regurgitate dire news that, like a stench, rises from the CEO’s office. More on this in a future blog post.

Don’t be fooled: An entrenched message of austerity, especially when it comes to human capital, keeps senior management constantly evaluating and finding ways to justify cutting the overhead cost of warm bodies in cubicles.

Not only that, management has been effective in convincing employees there’s nothing better out there, either. The mission is to wear down worker self-esteem slowly and relentlessly; much like a raging ocean weathers down a rock over time.

The world is a brutal place, don’t you know? After all, there’s that mortgage payment and the kids’ college to fund.

And the boss laments: “Please understand the grass isn’t greener anywhere else. Be a team player.”

So, it’s not surprising that retirement may be a life change that’s not adequately planned for. On occasion, it just happens. A new CEO has something to prove or cut the bottom line because top-line or revenue growth has not responded fast enough to appease shareholders.

Unfortunately, in the heart of a city like Houston, highly dependent on energy employment, this sudden retirement story is all too common.

As I’ve encountered numerous lives impacted by a sudden retirement or layoff, I created a list of ideas, a strategy to follow.

I thought it beneficial to share it with you.

First, do nothing. Let’s call the event what it is. A termination is a death. A personal loss. It’s a blow to self-esteem. After all, you’ve been cut away like a cancer to improve the health of the organization.

You will not think clearly for at least a week, perhaps longer. In the beginning, fear will invade every thought. They’ll be several unclear, potentially financially damaging actions you’ll seek to undertake immediately because you’ll feel the need “to do something.”

I suggest a time out.

I’ve witnessed extreme actions, most unnecessary. Like a father of 3 who after inflicted by “sudden retirement” syndrome, immediately head to Costco to purchase a six-month supply of toilet paper, even before talking to his spouse about what occurred at the office.

Or a mother who canceled her home alarm monitoring system an hour after she was let go from her job to reduce monthly expenses. In a frazzled state, she didn’t comprehend that she was breaking a 3-year contract.

Ostensibly she was hit with a bill for over $1,000. Once reality set in, she was able to re-establish her service, step back, clearly examine her expenses and made a money smart decision to cancel a monthly gym membership she rarely used.

The lesson – If you must undertake some form of fear-reflex action, head to a mid-day movie, go hit a few golf balls, get to the park for a brisk walk, instead. Any activity that distracts or veers you from the mental path you’re on is worth it. Refrain from financial decisions no matter how minor they appear to be at the moment.

It could take a few days, perhaps a week, to accept what’s occurred. Once your thinking is less overwhelmed by fear, you’ll be better equipped to formulate a survival strategy.

Second, go deep. Leave nothing in the household balance sheet unturned and go slow. Burn hours, become intimately acquainted with all things financial which apply directly to daily living.

Print every liability document (mortgage, auto loan, credit card, personal loans,) along with two months of bank checking account statements. Grab a highlighter, pen, and notepad.

Examine each expense considered discretionary. The fun stuff. Think regular dining out, movie nights, monthly, recurring subscriptions or memberships, cable or satellite television expenses. Place the outside activities on hold going forward and contact vendors to see if you can freeze memberships or subscriptions. Kill the premium channels or reduce to a cost effective television package if possible.

Next is to tackle services you need completed on regular basis. Pool and lawn maintenance for example. Reduce the number of monthly scheduled visits by half.

Make an effort to cut your mandatory cash outflow by 5-10%. Can you take on a less expensive wireless package or shop smarter for groceries by exploring deals on websites like

Identify every source of passive income and spousal income available to the household.

Calculate how long current emergency savings reserves will fill in income gaps considering the fiscal improvements you’ve calculated and the cuts to expenses you’re planning to undertake.

Consult your tax advisor or financial partner to help decide whether a spouse may reduce federal tax withheld from a paycheck per the reduction in joint income.

Third, study your exit package. Then study it again. A fortunate few will receive a severance package along with pay for untaken vacation days. If that’s the case, it’s best to leave your emergency reserves intact as long as possible and stretch after-tax severance dollars.

Healthcare coverage becomes a crucial issue, especially when the laid-off spouse is the sole source of coverage for the family. COBRA coverage provides employees the ability to keep their former employers’ group health insurance for up to 18 months from a termination date.

Premiums are not cheap. They encompass the full cost of group health coverage. In other words, COBRA recipients pay the employee AND employer-subsidized portion of their premiums.

Surprisingly, COBRA may be a cost effective option when compared to similar coverage in the healthcare marketplace. However, it’s worth the effort to compare COBRA cost and benefits to a policy available for your state of residence on

Regardless of plan choice, healthcare expenses are going to be one of the greatest financial pitfalls that you’ll experience in a “sudden retirement” situation pre-Medicare age (65 years old).

Next, don’t be too quick to roll money out of your qualified retirement plan into an IRA if you’re between the ages 55 and 59 and a half. The IRS allows a separation from service exception to premature distribution penalties from qualified retirement plans.

A qualified plan participant as an employee who separates from service during or after age 55, will not be subject to the 10% early distribution tax on withdrawals from company retirement plans. Income tax on distributions still apply.

If plan proceeds are rolled over to an IRA, the exception to the 10% penalty is forfeited if age 59 ½ has not been reached.

So, before a broker convinces you that an IRA rollover is the only and best solution, you must have a thorough understanding of how the cash flow deficit is going to be met. It may require a period of taxable distributions from a company retirement plan.

Last but not least is a game plan. Only after you’ve cleared your head, made it to a mental place of acceptance, and have worked through an exhaustive financial self-discovery period, is it appropriate to seek out a tenured, hourly-fee based Certified Financial Planner to help you pull all your investigative efforts into a workable, monitored game plan.

What you seek is validation of your cost cutting methods (and perhaps additional ideas), a second opinion on how the gap in household income will be met, and probability analysis of the longevity of your liquid assets through this life change.

A follow-up meeting schedule should be established to monitor deviations from the original plan. In addition, you may require a retirement savings catch-up plan depending on how long your “sudden retirement” period lasts.

As long as corporations have profit margins to maintain, shareholders to appease and are receptive technological breakthroughs that lower costs and head count, “sudden retirement” conditions are not going away anytime soon.

The perspective that labor is more liability than asset will be one of the long-tenured after effects of the Great Recession and employees will continue to pay dearly for it.

As we enter into the first full week of trading since Christmas, the Dow Jones has been unable to attain the magical 20,000 level. While I still suspect this will eventually occur, the challenge has been more difficult that I expected.

I noted in last weekend’s newsletter, “The Problem With Forecasts,” the Dow is currently working on completing an advance of 5000 points over a 24-month span. The last time such a compressed advance occurred was during the 1998-1999 period.

But what about the S&P 500?

Following the 1994 market lull, the S&P 500 began its first serious bull market advance as a wave of investors flooded into the market due to the introduction of online trading and the official opening of the “Wall Street Casino.” From 1995 to its peak in March of 2000 the market advance (whole number basis only) by 1000 points over that 60-month period. 

Of course, the subsequent correction of the “” mania reset the market by roughly 50% of that previous advance.

Following the crash, investors reluctantly began to return to the markets in mid-2003. As the Federal Reserve, and deregulation of Wall Street advanced, so did investors speculation in the markets as a real estate sub-prime lending took hold. Beginning in 2003, the market began a 60-month trek higher of 700-points before once again finding the limits of “fantasy and reality.”

So, here we are once again. Over the last 60-months the markets have advanced by 1100-points, and 1400-points over the last 84 months, as Fed-induced monetary stimulus and suppression of interest rates have once again led investors to believe “this time is different.” 

Throughout history, as shown in the chart below, prices have ALWAYS, and I repeat ALWAYS, eventually found their limits. There has never been a “permanently high plateau” that inoculated investors from devastating consequences of misconceived and poorly managed investments.

Importantly, as you will note above, whenever prices have had extreme deviations from the underlying long-term growth trend, as we have currently, the resolution of those excesses were never accomplished by just a “reversion TO the mean.” 

With the markets, and the economy, currently pushing the historical limits of time and distance, the reality of an unexpected mean-reverting event has risen in recent months. While such a statement does not imply that a correction will occur immediately, or even within the next few months,

Since I covered “Curing The Trading Addiction” yesterday, which were more general concepts of money management, I wanted to follow up with the specific actions we take which lead us to poor outcomes over time.

Common Trading Mistakes

Many of these are related and are part and parcel of the same refusal to pay proper attention to risk management. If you recognize your own actions in some of these, join the club. Over the years, I’ve committed every sin on the list at least once. Still do on occasion.

1) Refusing To Take A Loss – Until The Loss Takes You.

When you buy a stock it should be with the expectation that it will go up – otherwise, why would you buy it?. If it goes down instead, you’ve made a mistake in your analysis. Either you’re early, or just plain wrong. It amounts to the same thing.

“There is no shame in being wrong, only in STAYING wrong.”

This goes to the heart of the familiar adage: “let winners run, cut losers short.” Nothing will eat into your performance more than carrying a bunch of dogs and their attendant fleas, both in terms of actual losses and in terms of dead, or underperforming, money.

2) The Unrealized Loss

From whence came the idiotic notion that a loss “on paper” isn’t a “real” loss until you actually sell the stock? Or that a profit isn’t a profit until the stock is sold and the money is in the bank? Nonsense!

“Your portfolio is worth whatever you can sell it for, at the market, right at this moment. No more. No less.”

People are reluctant to sell a loser for a variety of reasons. For some it’s an ego/pride thing, an inability to admit they’ve made a mistake. That is false pride, and it’s faulty thinking. Your refusal to acknowledge a loss doesn’t make it any less real. Hoping, and waiting, for a loser to come back and save your fragile pride is just plain stupid.

Losses are a cost of doing business, a part of the game. If you never have losses, then you are not trading properly. Most pros have three losers for every winner. They make money by keeping the losses small and letting the profits build. You should be almost happy to take a loss. It means that you have jettisoned an underachiever stock and have freed up that dead money to put to better use elsewhere. Take your losses ruthlessly, put them out of mind and don’t look back, and turn your attention to your next trade.

3) If I Bet Big – I Win Big

You also lose big.

Preservation Of Capital Is Paramount. If you run out of chips, the game is over. Most professionals will allocate no more than 2-5% of their total investment capital to any one position.

Even when your analysis is overwhelmingly bullish, it never hurts to have some cash on hand, even if it earns ZERO in money markets. This gives you liquid cash to buy opportunities, but also keeps you from having to liquidate a position at an inopportune time to raise cash for the “Murphy Emergency” (the emergency that always occurs when you have the least amount of cash available – Murphy’s Law #73)

As the market becomes more overbought, overextended, and overvalued, your cash level should rise accordingly. Then as the market gets more oversold and undervalued, you have cash to raise your market exposure. Or rather, “sell high so you can buy low.”

4) Bottom Feeding Knife Catchers

Don’t ANTICIPATE bottoms. It’s almost always better to let the stock find its bottom on its own, and then start to nibble. Just because a stock is down, doesn’t mean it can’t go down even more. Let stocks and markets bottom and top on their own and limit your efforts to recognizing the fact “soon enough.”

“Nobody, and I mean nobody, can consistently nail the bottom tick or top tick. Anyone who says they do, is probably lying.”

5) Dollar Cost Averaging

Don’t do it. For one thing, you shouldn’t even have the opportunity, because you should have sold that dog before it got to the level where averaging down is tempting. The pros average UP, not down. They got to be pros because they added to winners, not losers.

Only advisors without a real investment discipline or strategy, or those just collecting fees for assets under management, promote dollar cost averaging.

6) You Can’t Fight City Hall OR The Trend

The vast majority of stocks, roughly 80%, will go with the market flow. And so should you.

It doesn’t make sense to counter trade the prevailing market trend. Don’t short stocks in strong uptrends and don’t buy stocks in strong downtrends. Remember, real investors don’t speculate – “The Trend Is Your Friend”

If you’re worried about a short-term pullback, simply cut back on your trading, take a few profits, and build up your stash of cash until the squall has passed. There is “NO RULE” that says you have to be invested “all the time.” 

7) A Good Company Is Not Necessarily A Good Stock

This is, at heart, a problem with fundamental analysis which will identify great companies but doesn’t take into account market, and investor, sentiment. Combining fundamental analysis, which tells you “what” to buy, with technical analysis, to determine “when” to buy, will help you own a great company which is also a great stock. 

8) Chasing Performance

Yes, you can make a quick buck chasing momentum, but you can lose it even quicker. You can never be sure there’s a greater fool coming in after you, and that could make you the “greatest fool” of all.

9) Technically Trapped

Amateur technicians regularly fall into periods where they tend to favor one or two indicators over all others. No harm in that, so long as the favored indicators keep on working.

However, market conditions change which also means the efficacy of your indicators will change. Indicators which work in one type of market, may lead you badly astray in another. You have to be aware of what’s working now and what’s not, and be ready to shift when conditions shift.

There is no Holy Grail indicator that works all the time and in all markets. If you think you’ve found it, get ready to lose money. Instead, take your trading signals from the “accumulation of evidence” among ALL of your indicators, not just one.

10) The Tale Of The Tape

I get a kick out of people who insist that they’re intermediate or long-term investors, buy a stock, then anxiously ask whether they should bail the first time the stocks drops a point or two. More likely than not, the panic was induced by watching the tape, or hearing some talking head on CNBC.

Watching the ticker can be dangerous. It leads to emotional and often hasty decisions. Try not to make trading decisions when the market is in session. Do your analysis and make your plan when the market is closed, then calmly execute your plan the following day.

11 ) Worried About Taxes

Don’t let tax considerations dictate your decision on whether to sell a stock. Pay capital gains tax willingly, even joyfully. The only way to avoid paying taxes on a stock trade is to not make any money on the trade.

“If you are paying taxes – you are making money…it’s better than the alternative”

12) Leave The Guru’s In India

They are everywhere – television, print, radio (including me) and everyone has an opinion. You should not be letting some self-appointed market expert dictate or dominate your trading decisions. 

“The media is there to sell advertising not make you money – it is for entertainment.”

The most you should expect, or accept, from folks like me, are market analysis, some tidbits of trading strategies, and a bit of guidance in maintaining a solid trading discipline.

13) Everybody’s A Genius

Don’t confuse genius with a bull market. It’s not that hard to make money in a roaring bull market. Keeping your gains when the bear comes prowling is the hard part.

“The market whips all of our butts now and then, and that whipping usually comes just when we think we’ve got it all figured out.”

Managing risk is the key to survival in the market and ultimately in making money. Leave the pontificating to CNBC. Focus on managing risk, market cycles and exposure.

In the long-run, you will likely be better off.






Those who’ve had any brush with addiction know an addict will go to any length to support the habit, including stealing, lies and deception. The addict is aided and abetted by co-dependent friends and family members who cover up for the addict’s bizarre behavior and pretend nothing’s wrong. Breaking the addiction starts with the co-dependents recognizing their role and refusing to provide support to the addict.

Investors have been turned into stock market addicts with their addiction aided and abetted by the media, the financial community, analysts, neighbors, friends and the local checkout clerk. Since 1990, when the Internet began to mainstream investing to the average investor, millions have been lured by the promise of the lifestyles of the rich and famous by simply playing “the game.”

Now, after eight years of a bull market, investors are piling into the market for their next fix, living from one headline to the next looking for reassurance “this time is different.”

But why wouldn’t they considering they have been repeatedly told the stock market is a “sure thing”, a near guaranteed way to make money. It’s so easy, after all. You just “buy and hold” stocks and the market will return 10% a year just as it has over the last 100 years.

This fallacy has been repeatedly espoused by pundits, brokers, financial advisors, and the media. Even Dave Ramsey, the famous debt counselor, espouses buying and holding four mutual funds (25% in each of growth, growth & income, aggressive growth and international) and then bingo – you will make 12% per year.

If it were true, then explain why roughly 80% of Americans, according to numerous surveys, have less than one years salary saved up on average? Furthermore, no one who simply bought and held the S&P 500 has ever lost money over a 20-year time span. Right? 

Not exactly.


Here is the problem.

No matter how resolute people think they are about buying and holding, they usually fall into the same old emotional pattern of buying high and selling low.

Investors are human beings. As such we gravitate towards what feels good and we seek to avoid pain. When things are euphoric in the market, typically at the top of a long bull market, we buy when we should be selling. When things are painful, at the end of bear market, we sell when we should be buying.

In fact, it’s usually the final capitulation of the last remaining “holders” that sets up the end of the bear market and the start of a new bull market. As Sy Harding says in his excellent book “Riding The Bear,” while people may promise themselves at the top of bull markets they’ll behave differently:

“No such creature as a ‘buy and hold’ investor ever emerged from the other side of the subsequent bear market.” 

Statistics compiled by Ned Davis Research back up Harding’s assertion. Every time the market declines more than 10% (and “real” bear markets don’t even officially begin until the decline is 20%), mutual funds experience net outflows of investor money.

Fear is a stronger emotion than greed.

Most bear markets last for months (the norm), or even years (both the 1929 and 1966 bear markets), and one can see how the torture of losing money week after week, month after month, would wear down even the most determined “buy and hold” investor. This is also why the next true “bear market” will demolish the “RoboAdvisor” industry as “buy and hold” once again reverts to “get me the #&%@ out!” 

But the average investor’s pain threshold is a lot lower than that. The research shows that it doesn’t matter if the bear market lasts less than 3 months (like the 1990 bear) or less than 3 days (like the 1987 bear). People will still sell out, usually at the very bottom, and almost always at a loss.

So THAT is how it happens.

And the only way to avoid it – is to avoid owning stocks during bear markets. If you try to ride them out, odds are you’ll fail. And if you believe that we are in a “New Era,” and that bear markets are a thing of the past, your next of kin will have my sympathies.

10-Step Process To Curing The Addiction

STEP 1: Admitting there is a problem 

The first step in solving any problem is to realize that you have a “trading” problem. Be willing to take the steps necessary to remedy the situation

STEP 2: You are where you are

It doesn’t matter what your portfolio was in March of 2000, March of 2009 or last Friday.  Your portfolio value is exactly what it is, rather it is realized or unrealized. The loss is already lost, and understanding that will help you come to grips with needing to make a change. Open those statements and look at them – shock therapy is usually effective in bringing about awareness.

STEP 3:  You are not a loser

Most people have a tendency to believe that if they “sell a loser,” then they are a “loser” by extension. They try to ignore the situation, or hide the fact they lost money, which in turn causes more mistakes. This only exacerbates the entire problem until they then try to assign blame to anyone and anything else.

You are not a loser. You made an investment mistake. You lost money. 

It has happened to every person that has ever invested in the stock market, and there are many others who lost more than you. Anyone, and I do mean anyone, who tells you that they have never lost money in the markets, is a liar!

STEP 4:  Accept responsibility

In order to begin the repair process, you must accept responsibility for your situation. It is not the market’s, current advisor’s or money manager’s fault. It is not the fault of Wall Street, nor is it the fault of the demon breed of corporate executives.

It is your fault.

Once you accept that it is your fault and begin fixing the problem, rather than postponing the inevitable and suffering further consequences of inaction, only then can you begin to move forward.

STEP 5:  Understand that markets change

Markets change due to a huge variety of factors from interest rates to currency risks, political events to Geo-economic challenges. Does it really make sense to buy and hold?

If the markets are in a constant state of flux and your portfolio remains in a constant state then the law of change must apply: 

The law of change:  Change will occur and the elements in the environment will adapt or become extinct and that extinction in and of itself is a consequence of change. 

Therefore, if you are a buy and hold investor then you have to modify and adapt to an ever-changing environment or you will become extinct.

STEP 6:  Ask for help

This market has baffled, and confused, even the best of investors and will likely continue to do so for a while. So, what chance do you have doing it on your own?

Don’t be afraid to ask, or get help, if you need it. This is no longer a market which will forgive mistakes easily and while you may pay a little for getting help, a helping hand may keep you from making more costly investment mistakes in the future.

STEP 7:  Make change gradually

No one said that change was going to easy or painless. Going against every age old philosophy and piece of advice you have ever been given about investing is tough, confusing and froth with doubt.

However, make changes gradually at first – test the waters and measure the results. For example, sell the positions that are smallest in size with the greatest loss. You will make no noticeable change in the portfolio right away, but it will make you realize that you can actually execute a sell order without suffering a negative consequence.

Gradually work your way through the portfolio on rallies and cleanse the portfolio of the evil seeds of greed that now populate it, and replace them with a garden of investments that will flourish over time.

STEP 8:  Develop a strategy 

Now that you have cleaned everything up you should be feeling a lot more in control of your portfolio and your investments. Now you are ready to start moving forward in the development of a goal-based investment strategy.

If your portfolio is a hodge-podge of investments, then how do you know whether or not your portfolio will generate the return you need to meet your goals. A goal-based investment strategy builds the portfolio to match investments, and investment vehicles, in an orderly structure to deliver the returns necessary with the least amount of risk possible. Ditch the benchmark index and measure your progress against your investment destination instead.

STEP 9:  Learn it. Live it. Love it.

Once you have designed the strategy, including monthly contributions to the plan, it is time implement it. This is where the work truly begins.

  • You must learn the plan inside and out so every move you make has a reason and a purpose. 
  • You must live the plan so that adjustments are made to the plan, and the investments, to match performance, time and value horizons.
  • Finally, you must love the plan so that you believe in it and will not deviate from it. 

It must become a part of your daily life, otherwise, it will be sacrificed for whims and moments of weakness.

STEP 10:  Live your life 

That’s it.

You are in control of your situation rather than the situation controlling you.

The markets will be continue to remain volatile, a major “bear market” is coming at some point, and there will be lot’s of opportunities to make money along the way.

But that is just how it works. As long as you work your plan, the plan will work for you and you will reach your goals…eventually. There is no “get rich quick” plan.

So, live your life, enjoy your family and do whatever it is that you do best. Most importantly, make your portfolio work as hard for you as you did for the money you put into it.

A few week’s ago I discussed the post-election surge in the market based on rather optimistic outlooks as opposed to the technical underpinnings that currently exists. As I specially stated in the weekend newsletter entitle “Dow 20,000” the market was beginning to take on an eerily similar feeling:

“If this market rally seems eerily familiar, it’s because it is. If fact, the backdrop of the rally reminds me much of what was happening in 1999.


  • Fed was hiking rates as worries about inflationary pressures were present.
  • Economic growth was improving 
  • Interest and inflation were rising
  • Earnings were rising through the use of “new metrics,” share buybacks and an M&A spree. (Who can forget the market greats of Enron, Worldcom & Global Crossing)
  • Stock market was beginning to go parabolic as exuberance exploded in a “can’t lose market.”

If you were around then, you will remember.”

With Janet Yellen and the Fed once again chasing an imaginary inflation “boogeyman” (inflation is currently lower than any pre-recessionary period since the 1970’s) the tightening of monetary policy, with already weak economic growth, may once again prove problematic.

“But Lance, this is the most hated bull market ever?”

If price acceleration in the market is a sign of investor optimism, then the chart recently published by MarketWatch should raise some alarm bells.


The only other time in history where the Dow advanced 5000 points over a 24-month period was during the 1998-1999 period of “irrational exuberance” as the Fed was fighting the fears an inflationary advance, while valuations were rising and GDP growth rates were slowing.

Maybe it’s just coincidence.

Maybe “this time is different.”

Or it could just be the inevitable beginning of the ending of the current bull market cycle.

Here is what I am reading this weekend.

Fed, Economy & More Trump


Interesting Reads

“Do. Or Do Not. There Is No Try” ― Yoda, Empire Strikes Back

Questions, comments, suggestions – please email me.

Tax Cut Rainbows

Can we slow down for just a minute and let a little bit of logic prevail. The exuberance by Wall Street over the election of Trump, which is ironic because these were the same guys saying his election would crash the market, has gotten a little heated. In particular, is the repeated impact of tax cuts on earnings over the next year as recently reiterated by Bob Pisani:

“Even before the election, analysts were anticipating a roughly 9 percent increase in earnings for the S&P 500, from roughly $118 in 2016 to $131 in 2017. But I noted back on Dec. 1 that Thomson Reuters estimated that every 1 percentage point reduction in the corporate tax rate could “hypothetically” add $1.31 to 2017 earnings. So with a full 20 percentage point reduction in the tax rate (from 35 percent to 15 percent), that’s $1.31 x 20 = $26.20.

That implies an increase in earnings of close to 20 percent, or $157. Of course, this is a hypothetical and because most corporations do not pay the top rate, we won’t get this kind of boost. No matter: Even a modest boost to, say, $140, would bring the S&P to 2400 at the current 17 multiple, nearly 7 percent above where it is now.”

There is a raft of issues with this analysis which investors have taken to heart since Reuters first trotted this idea a little over a month ago.

First, as noted by the Government Accountability Office, the average tax rate paid by U.S. corporations is not 35% but closer to 12.5%.

“Large, profitable U.S. corporations paid an average effective federal tax rate of 12.6% in 2010, the Government Accountability Office said Monday.

The federal corporate tax rate stands at 35%, and jumps to 39.2% when state rates are taken into account. But thanks to things like tax credits, exemptions and offshore tax havens, the actual tax burden of American companies is much lower.

Even when foreign, state and local taxes were taken into account, the companies paid only 16.9% of their worldwide income in taxes in 2010.”

Therefore, the reduction in the legislative tax rates to 15-20% is likely to be far less impactful to earnings growth than what is currently estimated by Reuters.

Secondly, the expectations of a $1.31 boost to earnings for each percentage point of reduction in tax rates is also a bit “squishy.”

The premise is based on the currently expected earnings in 2017 of $131.00 for the entirety of the S&P 500. The $1.31 increase is simply 1% of $131.00 in total operating earnings. However, given the fact that earnings are consistently overestimated historically by roughly 33%, as shown in the chart below, and are grossly affected by “one-time” repeating write-offs, accounting gimmickry, and a variety of other issues, the assumption of effective impact of a tax rate change of 1% of face value of earnings is awfully presumptive.

Given the strong rise in the U.S. Dollar as of late, along with the incremental increase in borrowing costs from higher Treasury rates, it is quite likely the drag on earnings from the reduction in exports will offset much of the impact of any tax rate changes that come about. With the Federal Reserve once again chasing an “inflation monster,” much as they did in 1999, the tightening of monetary policy will also further offset much of the benefit of tax rate changes.

As we saw with the Bush tax cuts in 2001, and the repatriation holiday in 2004, the impacts from policy changes are more “psychological” short-term boosts which are quickly absorbed by economic realities.

Consumer Spending Puppies

Keeping the tax cut meme going for a minute, it is hoped tax reform for individuals, along with the recent surge in optimism, will lead to a sharp increase in consumer spending. Maybe it will.

It is also important to remember that “Revenue” is a function of consumption. Therefore, while lowering taxes is certainly beneficial to the bottom line of corporations, it is ultimately what happens at the “top line” where decisions are made to increase employment, increase production and make investments.

In other words, it remains a spending and debt problem.

“Given the lack of income growth and rising costs of living, it is unlikely that Americans are actually saving more. The reality is consumers are likely saving less and may even be pushing a negative savings rate.

I know suggesting such a thing is ridiculous. However, the BEA calculates the saving rate as the difference between incomes and outlays as measured by their own assumptions for interest rates on debt, inflationary pressures on a presumed basket of goods and services and taxes. What it does not measure is what individuals are actually putting into a bank saving or investment account. In other words, the savings rate is an estimate of what is ‘likely’ to be saved each month.

However, as we can surmise, the reality for the majority of American’s is quite the opposite as the daily costs of maintaining the current standard of living absorbs any excess cash flow. This is why I repeatedly wrote early on that falling oil prices would not boost consumption and it didn’t.”

As shown in the chart below, consumer credit has surged in recent months.

Here is another problem. While economists, media, and analysts wish to blame those “stingy consumers” for not buying more stuff, the reality is the majority of American consumers have likely reached the limits of their ability to consume. This decline in economic growth over the past 30 years has kept the average American struggling to maintain their standard of living.

As shown above, consumer credit as a percentage of total personal consumption expenditures has risen from an average of 20% prior to 1980 to almost 30% today. As wage growth continues to stagnate, the dependency on credit to foster further consumption will continue to rise. Unfortunately, as I discussed previously, this is not a good thing as it relates to economic growth in the future.

“The massive indulgence in debt, what the Austrians refer to as a “credit induced boom,” has likely reached its inevitable conclusion. The unsustainable credit-sourced boom, which led to artificially stimulated borrowing, has continued to seek out ever diminishing investment opportunities.”

While lower tax rates will certainly boost bottom line earnings, particularly as share buybacks increase from increased retention, as noted there are huge differences between the economic and debt related backdrops between today and the early 80’s. 

The true burden on taxpayers is government spending, because the debt requires future interest payments out of future taxes. As debt levels, and subsequently deficits, increase, economic growth is burdened by the diversion of revenue from productive investments into debt service. 

This is the same problem that many households in America face today. Many families are struggling to meet the service requirements of the debt they have accumulated over the last couple of decades with the income that is available to them. They can only increase that income marginally by taking on second jobs. However, the biggest ability to service the debt at home is to reduce spending in other areas.

While lowering corporate tax rates will certainly help businesses potentially increase their bottom line earnings, there is a high probability that it will not “trickle down” to middle-class America.


Hopefully Hopeful

While I am certainly hopeful for meaningful changes in tax reform, deregulation and a move back towards a middle-right political agenda, from an investment standpoint there are many economic challenges that are not policy driven.

  • Demographics
  • Structural employment shifts
  • Technological innovations
  • Globalization
  • Financialization 
  • Global debt

“In the latest report from the Institute for International Finance released on Wednesday, total debt as of Q3 2016 once again rose sharply, increasing by $11 trillion in the first 9 months of the year, hitting a new all-time high of $217 trillion. As a result, late in 2016, global debt levels are now roughly 325% of the world’s gross domestic product.”

All of these challenges, and particularly the debt, will continue to weigh on economic growth, wages and standards of living into the foreseeable future.  As a result, incremental tax and policy changes will have a more muted effect on the economy as well. 

This was also noted by the Fed in their most recent release of the December meeting minutes:

However, the staff noted that the impact of easier fiscal policy was ‘substantially counterbalanced by the restraint from the higher assumed paths for longer-term interest rates and the foreign exchange value of the dollar.’ The offset from tighter financial conditions may also explain why median forecasts for GDP growth were little changed in participants’ Summary of Economic Projections (SEP).”

It is not just tighter monetary policy weighing on fiscal policy changes but the economic challenges as well. As my partner Michael Lebowitz recently pointed out“this ain’t the 1980’s.”

“Many investors are suddenly comparing Trump’s economic policy proposals to those of Ronald Reagan. For those that deem that bullish, we remind you that the economic environment and potential growth of 1982 was vastly different than it is today.


This also isn’t 2009 where economic activity and consumption is extremely depressed which gives tax cuts, incentives and regulatory reforms have a much bigger impact on economic and earnings growth.

As Michael concludes:

“As investors, we must understand the popular narrative and respect it as it is a formidable short-term force driving the market. That said, we also must understand whether there is logic and truth behind the narrative. In the late 1990’s, investors bought into the new economy narrative. By 2002, the market reminded them that the narrative was born of greed, not reality. Similarly, in the early to mid-2000’s real estate investors were lead to believe that real-estate prices never decline.

The bottom line is that one should respect the narrative and its ability to propel the market higher.

Will “Trumponomics” change the course of the U.S. economy? I certainly hope so as any improvement that filters down to the bottom 80% of the country will be beneficial.

However, as investors, we must understand the difference between a “narrative-driven” advance and one driven by strengthening fundamentals. The first is short-term and leads to bad outcomes. The other isn’t, and doesn’t. 

Just some things I am thinking about.






One of the most challenging yet exhilarating obstacles we tackle at Real Investment Advice is chipping away at the financial services dogma that is firmly entrenched through traditional channels of advice and guidance.

Once a planning or investment concept take holds, it never gets challenged by upper management (even if those in charge hold planning certifications) at brokerage firms.

If a stale rule isn’t broken, why contest it? And if it is busted, why bother to fix it? Candidly, if it places obstacles in the way of organizational sales goals or directs employee effort away from selling, well then forget it.

That’s reality. As harsh as it is.

I know. In September of 2007, I went to those in charge of ‘advice’ at my former employer with a great concern. This isn’t some fly-by-night operation either. It’s known as a financial services behemoth that spends a fortune to vigorously promote an image of ‘client first’, although superiors ignored my pleas to adjust the stock return projections for their planning software.

I provided reams of back-up documentation to validate how planning results were not going to be as successful as projected. I was concerned that I was placing clients in jeopardy with overoptimistic outcomes when in reality, there were serious portfolio longevity risk issues.

My fiduciary mentality and actions got me in hot water and placed my health and finances at risk. Everything happens for a reason. Daily, I feel fortunate to be part of a team that lives and breathes a great responsibility to report pros and cons of every investment, any account vehicle that you access to build wealth, and question the effectiveness of all planning concepts based on the market cycle you’re living through or retiring in.

So, it’s with an objective nature, I plan to stick a needle in the eye of the revered, never-challenged, investment vehicle panacea of the ages – the 401(k) plan. Yes, the primary source of your wealth building is flawed. It’s far from perfect.

So let’s call it out for what it is.

However, before I do, let’s return to September 1980 when an unknown workplace benefits consultant for a mid-sized company based out of suburban Philadelphia, stumbled upon a sub-section of the U.S. tax code – 401(k) that was designed primarily to replace or limit the use of executive cash-deferred plans and thought it could benefit employees and their companies.

Why not replace a limited corporate tax-sheltered saving plan with a vehicle which would allow a majority of employees to save more than they could in traditional IRAs and at the same time, employers would save Social Security and other payroll taxes by creating and contributing? Win-win.

You see, Ted Benna had a noble intent. He had a vision to help American workers EXPAND the limited retirement savings vehicles available to SUPPLEMENT pensions. You see that? SUPPLEMENT pensions.

Mr. Benna figured the costs of converting old savings plans were marginal, partially offset by payroll tax savings and employees would be provided an another saving and investment alternative.

At the time, Mr. Benna’s company became record keepers (for a nominal fee) for organizations converting to 401(k) plans. He was ahead of his time as he suggested his employer, The Johnson Companies, outsource investment responsibilities to a company still in its infancy – the Vanguard Group.

According to Mr. Benna in an interview from 2011, he began to think 401(k)s may not be the right thing and lamented how he created a monster that should be “blown up.” He felt his original concept had deviated from its intention and had become proficient at enriching the financial services industry and not the savers.

What a surprise.

I’ll also throw in how a majority of corporations ultimately decided to replace pensions with these plans, not utilize them as another choice to build wealth, as the most egregious deviation from Mr. Benna’s vision.

So, with that out there, I’ll outline the reasons why I’m not the biggest fan of 401(k)s. Perhaps you’ll better contemplate their limitations.

1). Please don’t classify a 401(k) plan as a benefit. They’re provided in trade for having you as an employee.

Remember – you provide human capital, sweat equity, in return. That’s worth something.

There are plenty of alternative, lower-cost investments and vehicles for retirement savings available today. Even a plain-vanilla brokerage account will do. In other words, a 401(k) shouldn’t be a “make or break” when it comes to considering an organization for employment.

To me, benefits provided by an employer are those subsidies or dollars provided which reduce the pressure of daily living, enhance a lifestyle, or reduce dramatically, the odds of financial devastation. Think health insurance, disability coverage, a robust earned income or salary package. Frankly, you pay me enough and I can save for retirement on my own, thank you very much.

And speaking of saving for retirement on your own.

2). All the investment, savings and performance risk in a 401(k) is taken on by you, the employee, NOT the employer.

In the good old days, in the ancient times of pensions (first time I heard the word ‘pension’ was during a rerun of an episode of The Little Rascals from the mid-1930s), the employer solely bore the risk of saving and investing for a worker’s retirement. In other words, you were provided an income for life in retirement as an employee of the organization for a specific period of time.

As the bookkeeping burden and costs expanded to provide pensions and technology made employees less of an asset and more of a liability, the responsibility of saving for retirement was placed one-hundred percent on the shoulders of the employee.

In a 401(k), you take on the risk of high fees, limited investment selections and possible devastating stock losses, especially if you’re over-allocated to company stock (a common pitfall).

3). That target date mutual fund may not have a target at all.

In 2007, the Department of Labor placed a stamp of approval on target-date fund choices in 401(k) plans so plan providers have been quick to embrace them.

A target date fund is a mix of asset classes – large, small, international company stocks and fixed income that is adjusted over time or allocated conservatively the closer an employee is to the ‘target date’ identified.

For example, the Vanguard Target Retirement 2020 Fund is designed to increase its exposure to bonds the closer it gets to 2020. Let’s be clear – this is NOT a maturity date, which is part of the confusion of a target-date fund. The target never gets reached. The fund doesn’t go away. It’s always out there.

Also, as a rational human, in 2020, the so-called retirement or target year, wouldn’t you intuitively think this fund should be a conservative allocation? Perhaps 30% equities and 70% fixed income? Well, it all depends on a target date fund’s ‘glide path,’ or method of how the allocation is reshuffled the closer the time to the target date. Every fund group differs in philosophy so you must read the fine print.

For example, the Vanguard Fund takes seven years AFTER 2020 to shift from a 60/40 stock & bond allocation to a 30/70 bond & stock mix. In reality, this is a 2027 fund.

Target date funds are not the best, but suitable choices as most 401(k) participants treat their plans like pensions. In other words, they deposit money into them, ignore allocations and wish for the best. Once money is placed into 401(k) plans it seems to fall into a psychological dark hole and rarely monitored or rebalanced. At least target date funds allocate and rebalance on autopilot (employees don’t need to do anything).

4). Tax-deferred compounding isn’t what it used to be.

In the halcyon days of secular bull markets from 1982-2000 when money snowballed in value, especially sheltered from federal government taxation, tax-deferral was a powerhouse for returns.

However, secular or long-term times have changed.

The market as represented by the S&P 500 from March 2000 through December 30, 2016 returned 4.2% – accounting for inflation the real return was 2.09% annually (dividends included).

To put it in perspective, a thousand dollars placed into the market in March 2000 was worth $1,415 on a real return basis as of the end of December 2016. What a ride for $415 bucks. So, the fact that your allocation was tax-deferred didn’t do you much favors. Sure, it helps, but not the way it did in the past although brokerage house talking heads remain positively giddy over the panacea of ‘tax-deferred compounding.”

For simplicity sake, let’s say you had $40,000 in your company retirement plan in 2000, set it in an S&P Index fund and forgot it for 16 years. On a nominal return basis, your $40,000 would have been worth roughly $77,258 at the end of 2016. A total gain of $37,528, or $2,329 annually for 16 years.

According to the Joint Committee on Taxation, Americans that earn $75,000-100K pay an average tax rate of 18%.

If I had my original $40,000 in an after-tax account, naturally I would need to reduce it by 18% because 401(k)s are funded with pre-tax dollars. So, I net $32,800. If I placed that lump sum in an after-tax or brokerage account in a tax-efficient S&P Index investment like $SPY, my investment would have been worth $63,352. A tax-deferred option at this point does look appealing since I accumulated $13,906 more in my 401(k) over my brokerage option.

In 2017, I plan to retire and withdraw 4% a year from my accounts as part of my plan to re-create a paycheck. From my tax-deferred selection, I seek to withdraw $3,090 annually, all of it taxed as ordinary income.

A majority of clients I engage in planning, pay an effective tax rate between 12-15% in retirement. If I use 15% then that $3,090 nets $2,627. I give up $463 to taxes. If I withdraw 4% from an after-tax account, at least for a period, I have long-term capital gains to deal with. So, 4% of $63,352 is $2,534.

Remember, my original investment of $32,800 was post-tax however, I do have over $30,000 in gains that are subject to taxation. On a positive note, a married couple filing jointly with a marginal tax rate of 15%, pays 0% in capital gain taxes therefore the entire $2,534 may not be taxed at all depending on their overall tax situation. It’s also important to understand that capital gains are still income for tax purposes so they may still impact deductions and Social Security taxation.

Bottom line: Tax deferral provided me less than an extra 100 bucks a year. So, what’s the point? Where’s the payoff?

Obviously this is an overly-simplistic example and in-depth, personal calculation is required based on an individual’s tax situation. The point I am attempting to relay is the lower the earned or projected returns on investments happen to be, the less effective tax-deferred compounding becomes, and the trade-off between income tax and capital gain taxes becomes a significant point of focus.

Unlike through the greatest bull market from 1982-2000 when the S&P 500 annualized (with dividends) 15.3% when tax-deferred compounding held powerful significance. Capital gain rates varied from a maximum of 20% in the early 1980s, to max rate of 28% due to the Tax Reform Act of 1986 and a tiered rate structure as part of the Taxpayer Relief Act of 1997. Through this period, tax deferred compounding added greatly to a financial bottom line.

Most important to remember is that there’s a point when tax-deferred growth loses its firepower and an intelligent assessment needs to be made so that not every dollar saved gets funneled into tax-deferred accounts because….

5). You forfeit the ability to diversify from a tax perspective.

You see, once you intend to re-create a paycheck and focus on portfolio distribution vs. accumulation, having the ability to draw from various buckets that are taxed at different rates or not at all, provides tax control.

As opposed to having every dollar taxed as ordinary income and then forced to take large required minimum distributions at 70 ½ from retirement accounts, what if you had a bucket of after-tax dollars and Roth conversion IRA money to generate a retirement paycheck in the most tax-efficient manner?

Five years from retirement is an opportune time to stop funding a traditional 401(k) and investigate your employer’s Roth 401(k) alternative or reduce contributions to pre-tax accounts to fund the coffers of after-tax alternatives.

And finally.

6). An employer match isn’t ‘free money’ whatever that is. It may turn out to be a lid on earning potential and job satisfaction.

This may be a controversial point but my objective is to get you thinking. Yes, even I’ve been guilty in the past of calling an employer 401(k) match ‘free money,’ when I know (as well as you), nothing is free.

What I’ve realized is that in some situations, a match is a chain to a job or career that creates mental distress or inhibits an employee from reaching his or her greatest human capital earnings potential.

I hear it often: “I need to stay at my job. My reasons are blah, blah, blah, employer 401(k) match.” Your employer receives a tax deduction for retirement plan contributions. The incentive for you is to stick around through a vesting schedule to collect them.

The question is when you objectively assess where you are financially, the possibility of greater earnings potential (even if it means changing careers), and current job satisfaction, is a match truly worth it? Instead of considering what you gain from it, think about what you may be giving up.

I’m not a raving fan of 401(k) plans as a primary focal point of wealth accumulation.

In the financial services industry, we preach ad nauseum the diversification of investments but why do we rarely discuss the diversification of accounts?

Many professionals are failing to help clients understand how having every investment dollar in tax-deferred accounts can be detrimental to financial health in retirement.

It’s time they spent greater effort studying their craft and less time selling their wares which may mean financial experts need to consider a change of employment and join their brethren on the fiduciary side of the fence.

With the markets closed on Monday, there really isn’t much to update you on “technically” from this past weekend’s missive. However, I thought it would be useful to remind you of my “New Year’s Investor Resolutions” in case you missed it:

Investor Resolutions For 2017

Here are my annual resolutions for the coming year to be a better investor/portfolio manager:

  • I will do more of what is working and less of what isn’t. 
  • I will remember that the “Trend Is My Friend.”
  • I will be either bullish or bearish, but not “piggish.” (Pigs get slaughtered)
  • I will remember it is “Okay” to pay taxes.
  • I will maximize profits by staging my buys, working my orders and getting the best price.
  • I will look to buy damaged opportunities, not damaged investments.
  • I will diversify to control my risk.
  • I will control my risk by always having pre-determined sell levels and stop-losses.
  • I will do my homework. I will do my homework. I will do my homework.
  • I will not allow panic to influence my buy/sell decisions.
  • I will remember that “cash” is for winners.
  • I will expect, but not fear, corrections.
  • I will expect to be wrong and I will correct errors quickly. 
  • I will check “hope” at the door.
  • I will be flexible.
  • I will have the patience to allow my discipline and strategy to work.
  • I will turn off the television, put down the newspaper, and focus on my own analysis.

These are the same resolutions I attempt to follow every year. There is no shortcut to being a successful investor. There are only the basic rules, discipline and focus that is required to succeed long-term.

The biggest problem for investors is the bull market itself.

When the “bull is running” we believe we are smarter and better than we actually are. We take on substantially more risk than we realize as we continue to chase market returns and allow “greed” to displace our rational logic. Just as with gambling, success breeds overconfidence as the rising tide disguises our investment mistakes. 

Unfortunately, it is during the subsequent completion of the full-market cycle that our errors are revealed. Always too painfully and tragically as the loss of capital exceeds our capability to “hold on for the long-term.” 

So Goes January

There is an abundance of “Wall Street Axioms” surrounding the first month of the New Year as investors anxiously try and predict what is in store for the next twelve months. You are likely familiar with many of them from the “Superbowl Indicator” to “What Happens In The First 5-days Predicts The Month.”

Considering that trying to predict the markets more than just a few days in advance is mostly an exercise in “folly,” it is nonetheless a traditional ritual as the old year passes into the new. While Wall Street espouses their always overly optimistic projections of year-end returns, reality has often tended to be rather different.

However, from an investment management perspective, we can take a look at some of the statistical evidence for the month of January to gain some insight into performance tendencies looking ahead. From this analysis, we can potentially gain some respect for the risks that might lay ahead.

According to StockTrader’s Almanac, the direction of January’s trading (gain/loss for the month) has predicted the course of the rest of the year 75% of the time.

Furthermore, twelve or the last sixteen presidential election years followed January’s direction. Every down January on the S&P 500 since 1950, without exception, preceded a new or extended bear market, flat market or a 10% correction.

Starting from a broad historical perspective, the chart below shows the January performance going back to 1900.

You will note that most of those consecutive negative returns coincided with bear markets such as 2002-2003 and 2008-2009. With January 2015 and 2016 posting negative returns, the year-end gain for the S&P 500 in 2016 bucked the historical trend. The negative return in January of 2016 was the second largest on record.

The table and chart below show the statistics by month for the S&P 500.

The good news is the month of January has the highest average and median return of all months of the year. It also boasts the highest number of positive return months followed by December and April.

Furthermore, while January’s maximum positive return was just 9.2%, the maximum drawdown for the month was the lowest for all months at -6.79%.

While I don’t directly make asset allocation decisions based on monthly returns from a portfolio management perspective, the statistical weight of evidence suggests a couple of things worth considering.

The odds of January being a positive month greatly outweigh those of it being negative. Furthermore, given that January sported negative returns over the two previous years suggests this year will likely sport a positive return overall. February is potentially a different animal. Therefore, allocations should remain weighted more heavily towards risk currently but with attention paid to the overall risks.

However, given the length of the current bull market run from 2009 to present, the risks are mounting the current bull market cycle will end sooner rather than later and will most likely coincide with the onset of a recession. Such fundamental realities suggest a more conservative approach to investment allocations.

This dichotomy reminds me of the scene from “The Princess Bride” where the “Sicilian” is in a “Battle Of Wits” with “The Dread Pirate Roberts.” 

While it may seem confusing, for investors it comes down to time frames.

For short-term traders, the odds are high that January will post a positive trading month, therefore, allocations should remain tilted towards equity related exposure. If you are a nimble trader and can adjust for the swings in the market, the “odds are in your favor.” 

For longer-term investors, particularly those that are nearing retirement, risks are mounting to the downside. Such potential outcomes suggest a more cautious approach to equity allocations in portfolios.

While the majority of the financial media and blogosphere suggest that investors should only “buy and hold” for the long-term, the reality of capital destruction during major market declines is a far more pernicious issue.

It is ALWAYS okay to miss out on an opportunity, as opportunities come along as often as a taxi-cab in New York City. However, it is IMPOSSIBLE to make up losses as you can never regain the time lost getting back to even.

It only took six years for the markets to get back to where they were prior to the financial crisis. It took just about as long to get back to even following the “” crash in 2000.

Ladies and gentlemen – getting back to ‘even’ is NOT an investment strategy. It is a game that has been played out since the turn of the century and investors have lost out on time and inflation.

The problem for investors is 15 years to grow and compound your money for retirement is GONE. You can never regain that time. While the financial press is full of hope, optimism, and advice that staying fully invested is the only way to win the long-term investing game; the reality is that most won’t live long enough to see that play out.”

With market valuations elevated, leverage high, economic weakness pervasive and profit margins deteriorating, investors should be watching the month of January carefully for clues. The weight of evidence suggests that despite ongoing “bullish calls” for the markets in the year ahead, this could be a year of disappointment.

Pay attention, things are beginning to get interesting.





For the umpteenth year in a row, mainstream economists and analysts are once again planting the seeds of hope for a return to stronger GDP growth. The White House has hoped for it for the last 8-years, and now President-elect Trump is all but promising a surge in economic growth.

Unfortunately, while promises are great, we must analyze the reality of attaining such a lofty resurgence.

Let’s start with the Congressional Budget Office (CBO) and their projections for the next decade. This is shown in the chart below.

There are several very noteworthy observations which need to be made:

  1. Real potential GDP has been sharply reduced from the long-term exponential growth trendline (green dashed line) to close the gap between real GDP and “hope.”
  2. With the economy heading into its 8th year of growth without a recession, the CBO is currently projecting another 10-years of “recession-free” growth. The reality of such happening is very slim.
  3. While the output gap has closed, by reducing expectations, real GDP continues to underperform significantly against both reduced expectations and long-term reality.

While the data above tells us is that simply the economy is currently operating well below its potential level. While the most visible culprits are employment, wages, industrial production and consumption, these issues are byproducts of the 50-Trillion pound Gorilla sitting quietly in the corner. That seemingly invisible Gorilla is simply – debt.

To get a better idea of what I mean let’s take a look at economic growth in relation to debt levels. Prior to 1980, economic growth was entirely financed by economic activity as debt levels remained well below economic output.

Today, that same $1 dollar of GDP growth requires almost $3 dollars to finance it. That’s right – nearly $3 of debt to finance $1 of GDP.

Therein, of course, lies the problem of returning to 4% economic growth in the foreseeable future. With real GDP currently at $16.7 Trillion and debt estimated at $65 Trillion, the ratio is 3.9:1 debt to GDP.

In order for GDP growth to reach 4% in 2017 (assuming 2% growth in Q4) – GDP would have to expand to roughly $17.7 Trillion. Subsequently, the debt would need to expand to $67.6 Trillion or a whopping $2.6 Trillion in the coming year. So forth, and so on.

Are you seeing the problem here?

The problem is simply the math.

Furthermore, the current economic malaise is not something new that was caused by the financial crisis in 2008. The reality is that economic growth has deteriorated consistently since 1980. Economic growth cannot be supported by debt growth.  Increases in debt reduce savings and productive investment. Debt, like cancer, consumes income which detracts from consumption and investment. 

The larger the debt, the more consumption it requires.

As interest rates began their long march lower in the 1980’s so did economic growth. As growth rates began to slow, the need to maintain higher standards of living required a reduction in the personal savings rate and increases in debt. In turn, there was less available for productive investment. As each year passed quietly by the cancer of debt spread, undetected and ignored, until it became terminal.

What we now realize, yet still try to ignore, is at the very heart of Austrian economic theory.

As the inevitable consequence of excessive growth in bank credit, exacerbated by inherently damaging and ineffective central bank policies, which cause interest rates to remain too low for too long, resulting in excessive credit creation, speculative economic bubbles and lowered savings.”

In other words, the proponents of Austrian economics believe that a sustained period of low interest rates and excessive credit creation results in a volatile and unstable imbalance between saving and investment. Low interest rates tend to stimulate borrowing from the banking system which in turn leads, as one would expect, to the expansion of credit. This expansion of credit then, in turn, creates an expansion of the supply of money and, therefore, the credit-sourced boom becomes unsustainable as artificially stimulated borrowing seeks out diminishing investment opportunities. Finally, the credit-sourced boom results in widespread malinvestments.

Does any of this sound familiar?

The problem currently is exponential credit creation can no longer be sustained. The process of a “credit contraction” will occur in fits and starts over a long period of time as consumers, and the government, are ultimately forced to deal with the leverage and deficits. The good news is that process of “clearing”  the market will eventually allow resources to be reallocated back towards more efficient uses and the economy will begin to grow again at more sustainable and organic rates.


Most importantly, the demographic and structural shift in the economy remains a major headwind to stronger rates of economic in the future.

The current levels of anemic economic growth in U.S. remain dependent upon the consumer with roughly 70% of GDP tied to personal consumption. Unfortunately, roughly 22% of personal incomes which are used to reach those consumption levels currently comes from government transfers. 

Working to reduce the governmental assistance programs, when such a large portion of personal incomes depend on it, will not be a boon to creating the economic growth needed to make the plan work in the future. The problem lies in the demographics.

With over 70 million individuals currently moving into the retirement system, this demographic shift will further complicate the net drag on savings – which are integral to productive investment and the creation of an expanding economy – as well as the increased demand on welfare and healthcare programs. While Trump has proposed reforms to these systems, which are most definitely needed to keep them viable in the long-term, the near-term impact on economic growth will most definitely be felt.

The processes that fueled the economic growth over the last 30 years are now beginning to run in reverse, and when combined with the demographic shifts in the U.S., the impact could be far more immediate and prolonged than the media, economists and analysts are currently expecting.

Again, it is simply a function of math.

I recently penned a post discussing various data points which were hitting record levels. To wit:

“First, “record levels” of anything are records for a reason. It is where the point where previous limits were reached. Therefore, when a ‘record level’ is reached, it is NOT THE BEGINNING, but rather an indication of the MATURITY of a cycle. While the media has focused on employment, record stock market levels, etc. as a sign of an ongoing economic recovery, history suggests caution.  The 4-panel chart below suggests that current levels should be a sign of caution rather than exuberance.”


I want to add to the list above with 3-more indicators which are hitting historically high levels as well. Once again, while the mainstream media is touting exuberance over these high levels, my contention is they should be eliciting a sign of caution.

Consumer Confidence

There are many measures of consumer confidence but two of the most widely watched are the University of Michigan (UofM) and Conference Board (CB) surveys. Since the election both measures have independently soared sharply as “hope” has emerged that President-elect Trump can cause real economic change through tax reform, infrastructure spending and the return of jobs back to America. It’s a tall order to fill and there is much room for disappointment, but for now, “hope” is in the driver’s seat and according to the latest readings consumer sentiment has reached levels not seen since the turn of the century.

The chart below is a composite index of the average of the UofM and CB survey readings for consumer confidence, consumer expectations, and current conditions. The horizontal dashed lines show the current readings of each composite back to 1957.

Importantly, as noted above, high readings of the index are not unusual. It is also worth noting that high readings are historically more coincident with a late stage expansion, and a leading indicator of an upcoming recession, rather than a start of an economic expansion.

The next chart shows the same analysis as compared to the S&P 500 index. The dashed vertical lines denote peaks in the consumer composite index.

Again, not surprisingly, when consumer confidence has previously reached such lofty levels, it was towards the end of an expansion and preceded either a notable correction or a bear market.

Importantly, corrections did not always follow immediately after high levels were reached and that is not the point to be made. What is important to understand is all cycles have a beginning and an end and by the time any previous record has been broken, it has always marked the beginning of the end of the current cycle.

ECRI Leading vs. Lagging

A colleague and friend of mine is an avid follower of the Economic Cycle Research Institute (ECRI) data as it relates to economic cycles. While I don’t ascribe to the data as closely as he does, only because I use several other data sets that tell me roughly the same thing, I did note the ECRI Weekly Leading Index (WLI) just spiked to a peak not seen since 2007.

There is a very close correlation between the ECRI WLI and GDP as shown in the chart below. I have also included the Chicago Fed National Activity Index (CFNAI) which is a very broad measure of economic activity consisting of roughly 85 subcomponents.

Importantly, there is currently a rather significant divergence between the WLI and CFNAI measures. Historically, such divergences tend to correct themselves over the next several months with the WLI correcting back towards the CFNAI.

Furthermore, there is also a significant divergence in the ECRI leading and lagging data sets. These two data sets were very closely correlated until the turn of the century where they have become increasingly more detached. This is one reason, I suspect, the ECRI has struggled in recent years with its economic forecasts to some degree.

We can take these two indices and create an effective “book-to-bill” ratio by subtracting the lagging index (what actually happened) from the leading index (what we expect to happen). What we find is very interesting. The current level of the leading-lagging index has plummeted to the lowest levels on record with historical spikes lower associated with recessionary economic periods.

Of course, ongoing Central Bank interventions have seemingly prevented the onset of an economic recession in the U.S. currently. While this “time may be different,” I would remain exceedingly cautious betting on such an outcome.

10-Year Treasury Net Longs Suggest Retracement

Speaking of “contrarian” indications, there is an overwhelming consensus following the election the replacement of monetary with fiscal policy is the “cure to economic growth” which has been missing. As such, interest rates have risen giving rise to the belief the “30-year bond bull market” is finally dead.

This may be a bit premature.

First, the policies currently being proposed from tax repatriation (Bush, 2004), tax cuts (Bush, 2001, 2003. Obama, 2010, 2012) and infrastructure spending (Obama, 2009) have, as noted, all been done before. While these actions did lead to short-term increases in rates, these policies were more beneficial to corporate bottom lines than actual economic growth.

As discussed previously:

With global rates near zero or negative, money will continue to chase U.S. Treasuries for the higher yield. This will continue to push yields lower as the global economy continues to slow. What would cause this to reverse? It would require either an economic rebound as last seen in 50’s and 60’s, or a complete loss of faith in the U.S. to pay its debts through either default or the onset of the ‘zombie apocalypse.'” 

Secondly, and from a pure investment standpoint, the positioning in 10-year Treasuries has returned to more extreme levels. As noted by the vertical dashed lines, when the 4-week moving average of net positioning rises sharply it has typically denoted a short-term peak in rates.

Not surprisingly, with everyone on the “same side of the trade,” any exogenous event which triggers a movement in the opposite direction tends to result in a stampede. 

Furthermore, as I addressed in detail recently, a bulk of the rate rise since the lows has been directly related to rebalancing of holdings following Brexit and a fight by China to stabilize the collapse of the Yuan. To wit:

“It is important to understand that foreign countries “sanitize” transactions with the U.S. by buying treasuries to keep currency exchange rates stable. As of late, China has been dumping U.S Treasuries and converting the proceeds back into Yuan in an attempt to stop the current decline. The stronger dollar and weaker yuan increase the costs of imports into China from the U.S. which negatively impacts their economy. This relationship between the currency exchange rate and U.S. Treasuries is shown below. “

When this rebalancing ends, a potential reversal in rates back towards 2% would not be surprising. This will particularly be the case as deflationary pressures from the expected Trump policies take root over the next several quarters.

The next chart shows the weekly number of net contracts on the 10-year Treasury currently outstanding compared to the S&P 500.  At the second highest level on record, such a contrarian positioning should provide some pause. Peaks in net positioning have often been associated with short to intermediate-term corrections, or worse, in the markets. 

These are only a few of the indicators currently hitting more extreme levels. There are many more and they should not be dismissed in “hopes” things could be different this time. Maybe they will be, and the markets will rise indefinitely into the future. Since portfolios are already allocated to the markets, such an outcome will be welcome.

But, what if “this time is not different?”

Do you have the savings and investment time horizon to once again get back to even?

Do you have a plan of action to manage the unexpected?

“Hope” isn’t a plan to effectively deal with risks.

“It is always easier to regain a lost opportunity than trying to regain lost capital.” 

Just some things I am thinking about.






“Kids say the darndest things,” – Tammy Wynette

It’s fun to teach the future generations about money and investing.

Well, most of the time it is.

Those under thirteen tend to be an overly-excited group known to blurt out whatever is on their minds often at the surprise of adults in the room.

I always make sure to have plenty of treats for everyone at the end.

Since it was later in the day, the fourth grade class that made the journey to the office recently was especially ravenous, however I wasn’t going to change the routine-we learn at the beginning, ravage the cakes at the end.

This batch of cupcakes was especially fresh and frosty. But it didn’t matter: I wasn’t going to deviate from the plan I’ve used for years.

Out of the mouth of babes – lessons and behaviors we’ve clearly forgotten.  As adults we are relentlessly bombarded with the noise of daily living and sometimes we just don’t see things clearly based on our own biases. Children are overwhelmed with stimulus too, however they don’t have as entrenched a filter and they’re willing to see things as they are and happy to share an opinion.

There are wise words coming from the mouths of babes if you only listen.

1). Do homework first – Many of the kids believe that before you make an important purchase, you do your homework. Now, their homework may not be as sophisticated as yours, however investors tend to forget, especially when the markets are more erratic, that emotions can overwhelm the desire to dig into facts.

We take action first out of fear or panic and deal with the repercussions later. The kids always seem surprised how many adults will buy and sell investments based exclusively on what they see or hear on television and radio. Mind you, these young students think it’s perfectly ok to purchase a breakfast cereal based on media, however acquiring an investment or “something that can go down,” (their words not mine) requires more time and effort.

During market extremes it’s timely to take your portfolio’s pulse (and yours) to determine whether you’re comfortable with your asset allocation plan-the division of assets into stocks, fixed income, cash and other investments. If your portfolio is gyrating more than the market up or down and you’re uncomfortable, homework is required to narrow down the investments causing the turmoil.

From there, it’s time to decide (based on the homework not heartburn), to take one of three roads as you evaluate financial holdings: Stay the course, buy more, or sell the investments causing distress. Again, base these decisions on your tolerance for risk and then maintain that risk profile through good and bad cycles.

2). Buy low – I know this sounds flippant or simplistic-for the mature crowd, buying low is easier said than done. They children believe they should try their best after research, to buy low into investments or at least they hope to accomplish this on a consistent basis. We teach the kids patience when they want a new video game, it’s time we teach ourselves some patience and let asset prices come to us. I know. Good luck with this one, right?

3). Buy what you understand – Another easy one, (in theory anyway). The kids feel strongly about buying what they know or understand. Occasionally, we make a portfolio allocation too complicated by purchasing investments we don’t fully grasp. There are a plethora of vehicles on the marketplace that are based on currency movement, bet against the markets or particular industries, and promise appetizing returns when the market is directionless.

What is the impact to the overall portfolio? If the addition appears overly complicated and you can’t explain it to a listening party, you may be better off passing on it. A complicated strategy is not necessarily a better one. Your investment plan needs to be realistic, actionable and comfortable based on your personalized goals and aspirations.

4). A Sell Discipline? What’s that? – Children seem to embrace the idea of selling investments and moving on. For some of us grownups, this can be a challenge. We tend to be resistant to rebalancing or we allow one investment to swallow up a major portion of the portfolio, resulting in more risk. If you don’t have a discipline around buying and selling assets to restore your portfolio to an original target allocation, then ultimately you’re not controlling risk. Rebalancing requires a contrarian nature whereby you’re shaving down what’s done the best and adding dollars to those asset classes currently out of favor.

A concentrated position means that a stock, industry or sector makes up a disproportionate share of your total portfolio, usually 20% or more. The end results is more volatility in the portfolio as the key driver of returns, good or bad, depends on the performance of a large holding. Investors are sometimes reluctant to trim concentrated positions due to the tax implications of a large capital gain or an anchoring to a past price to minimize a loss. It’s important to maintain perspective on the risk as first priority.

Start talking with your child about investing sooner rather than later. Many parents find it awkward to discuss stock investing with young children because some parents don’t feel confident about their ability to do research. But what I’ve discovered is that the discussion with young children helps less-confident parents become better stock investors. The conversation also raises the bar for parents and children who are willing to learn.

Speaking of investing…

After the excitement of unwrapping gifts and the newness of the latest gadgets wear off (should take a couple of days), step back a moment to discuss the companies behind all that holiday joy.

The investment adventure begins with four steps:

Build excitement. Creating passion around the process of investing is important. Begin by talking with your child about brand loyalties, which start at an early age. When I was young, I remember driving my parents crazy with my demands for the latest Hot Wheels car or G.I. Joe action figure. And I would eat only Kellogg’s Frosted Flakes, not the store brand. My brand loyalty fever only grew hotter during the holidays.

What products are your children passionate about?

Create short-term activities to build interest and set a deadline for completion. For example, have your child keep a journal of the products and services he or she likes or uses. Then track the price of those items online or at local stores. Remind your child that the family is excited to hear about the research and plan a family meeting to talk about it.

One family created a big event around the journals. The children selected their own notebooks and personalized them with money-related stickers. The kids paid for the supplies out of their own allowances, which created a stronger connection to the project.

Plan a family discussion. After your child shares her research journal at a family gathering, expand the discussion to include the products and services your family purchases or uses each week. From soap to shoes, batteries to bandages, everything is open for investigation and nothing is off-limits as your child builds a research list.

Watch what you say. I’ll never forget when my uncle, who worked at the New York Stock Exchange, explained how I had the ability to own part of a large company. I was hooked: How could a poor kid from Brooklyn own a piece of McDonald’s?

The language used around stock investing is important to help your child gain a healthy perspective and a sense of pride in her selection and in the investment experience. The phrase “buying a stock” is confusing when compared with “ownership in a company,” which is what you’re trying to help your child embrace.

The concept of “stock” is difficult for a young child to comprehend, so it’s best to keep the language simple. If you use words to connect ownership to investing, this helps create a long-term investor mindset. You don’t want your child to focus only on stock-price movement; it’s best to provide perspective, which helps her build discipline by focusing on the long-term value of a business.

Talk about sales. It’s a good idea to introduce one simple concept before you begin specific stock-research homework. I’ve found kids relate well to the concept of sales. Whether you’re talking about Girl Scouts cookie sales or school-related fund drives, children have the uncanny ability to understand that sales lead to personal reward. It’s the same for businesses. Generally, the more goods or services sold, the more favorable it is to the stock price.

You don’t need to work through these initial four steps alone. Partner with a financial advisor to help guide the discussion or use books, apps and other resources to jump-start the process.

“Growing Money: A Complete Investing Guide for Kids,” by Gail Karlitz and Debbie Honig is an easy-to-understand book for children ages 8-12.

You don’t need to wait for verbal cues from your child to begin talking about investing. You can start a dialogue earlier than you think.

Wait patiently for cupcakes at the end – Investing takes patience and a willingness to be disciplined. There must be goals established and when those goals are met, the sweet reward is certain to follow.

It’s tough for the kids to focus on the lesson at hand with treats waiting; the children eventually learn that shortcuts to the baked goods don’t exist especially through my lessons! It’s similar with investing.

We too, as adults, want our dessert first or seek to get rich quick based on shortcuts.

Ostensibly, when the market are not cooperating, back-to-basic strategies like saving more, decreasing debt or extending the time needed to reach a financial goal are usually the best.

What will you learn from the children today?

Keep an open mind.

You may be surprised.

With the markets closed on Monday, there really isn’t much to update you on “technically” from this past weekend’s missive. The important point, if you haven’t read it, was:

“The stampede into U.S. equity ETFs since the election has been nothing short of breathtaking,” said David Santschi, chief executive officer at TrimTabs.  ‘The inflow since Election Day is equal to one and a half times the inflow of $61.5 billion in all of the last year.  One has to wonder who’s left to buy.’”

You can see this exuberance in the deviation of the S&P 500 from its long-term moving averages as compared to the collapse in the volatility index. There is simply “NO FEAR” of a correction in the markets currently which has always been a precedent for a correction in the past. 

The chart below is a MONTHLY chart of the S&P 500 which removes the daily price volatility to reveal some longer-term market dynamics. With the markets currently trading 3-standard deviations above their intermediate-term moving average, and with longer-term sell signals still weighing on the market, some caution is advisable.

While this analysis does NOT suggest an imminent “crash,” it DOES SUGGEST a corrective action is more likely than not. The only question, as always, is timing.  

However, this brings me to something I have addressed in the past but thought would be a good reminder as we head into the New Year.

“The most dangerous element to our success as investors…is ourselves.”

The 5-Most Dangerous Biases

Every year Dalbar releases their annual “Quantitative Analysis of Investor Behavior” study which continues to show just how poorly investors perform relative to market benchmarks over time. More importantly, they discuss many of the reasons for that underperformance which are all directly attributable to your brain. 

George Dvorsky once wrote that:

“The human brain is capable of 1016 processes per second, which makes it far more powerful than any computer currently in existence. But that doesn’t mean our brains don’t have major limitations. The lowly calculator can do math thousands of times better than we can, and our memories are often less than useless — plus, we’re subject to cognitive biases, those annoying glitches in our thinking that cause us to make questionable decisions and reach erroneous conclusions.

Cognitive biases are an anathema to portfolio management as it impairs our ability to remain emotionally disconnected from our money. As history all too clearly shows, investors always do the “opposite” of what they should when it comes to investing their own money. They “buy high” as the emotion of “greed” overtakes logic and “sell low” as “fear” impairs the decision-making process.

Here are the top-5 of the most insidious biases which keep you from achieving your long-term investment goals.

1) Confirmation Bias

As individuals, we tend to seek out information that conforms to our current beliefs. If one believes that the stock market is going to rise, they tend to only seek out news and information that supports that position. This confirmation bias is a primary driver of the psychological investing cycle of individuals as shown below. I discussed this just recently in why “Media Headlines Will Lead You To Ruin.”

The issue of “confirmation bias” also creates a problem for the media. Since the media requires “paid advertisers” to create revenue, viewer or readership is paramount to obtaining those clients.  As financial markets are rising, presenting non-confirming views of the financial markets lowers views and reads as investors seek sources to “confirm” their current beliefs.

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.

2) Gambler’s Fallacy

The “Gambler’s Fallacy” is one of the biggest issues faced by individuals when investing. As emotionally driven human beings, we tend to put a tremendous amount of weight on previous events believing that future outcomes will somehow be the same.

The bias is clearly addressed at the bottom of every piece of financial literature.

“Past performance is no guarantee of future results.”

However, despite that statement being plastered everywhere in the financial universe, individuals consistently dismiss the warning and focus on past returns expecting similar results in the future.

This is one of the key issues that affect investor’s long-term returns. Performance chasing has a high propensity to fail continually causing investors to jump from one late cycle strategy to the next. This is shown in the periodic table of returns below. “Hot hands” only tend to last on average 2-3 years before going “cold.”

I traced out the returns of the S&P 500 and the Barclay’s Aggregate Bond Index for illustrative purposes. Importantly, you should notice that whatever is at the top of the list in some years tends to fall to the bottom of the list in subsequent years. “Performance chasing” is a major detraction from investor’s long-term investment returns.

Of course, it also suggests that analyzing last year’s losers, which would make you a contrarian, has often yielded higher returns in the near future. Just something to think about with “bonds” as one of the most hated asset classes currently.

3) Probability Neglect

When it comes to “risk taking” there are two ways to assess the potential outcome. There are “possibilities” and “probabilities.” As individuals we tend to lean toward what is possible such as playing the “lottery.”  The statistical probabilities of winning the lottery are astronomical, in fact, you are more likely to die on the way to purchase the ticket than actually winning the lottery. It is the “possibility” of being fabulously wealthy that makes the lottery so successful as a “tax on poor people.”

As investors, we tend to neglect the “probabilities” of any given action which is specifically the statistical measure of “risk” undertaken with any given investment. As individuals, our bias is to “chase” stocks that have already shown the biggest increase in price as it is “possible” they could move even higher. However, the “probability” is that most of the gains are likely already built into the current move and that a corrective action will occur first.

Robert Rubin, former Secretary of the Treasury, once stated;

“As I think back over the years, I have been guided by four principles for decision making. First, the only certainty is that there is no certainty. Second, every decision, as a consequence, is a matter of weighing probabilities. Third, despite uncertainty we must decide and we must act. And lastly, we need to judge decisions not only on the results, but on how they were made.

Most people are in denial about uncertainty. They assume they’re lucky, and that the unpredictable can be reliably forecast. This keeps business brisk for palm readers, psychics, and stockbrokers, but it’s a terrible way to deal with uncertainty. If there are no absolutes, then all decisions become matters of judging the probability of different outcomes, and the costs and benefits of each. Then, on that basis, you can make a good decision.”

Probability neglect is another major component to why investors consistently “buy high and sell low.”

4) Herd Bias

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, they 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 the stampede.

5) Anchoring Effect

This is also known as a “relativity trap” which is the tendency for us to compare our current situation within the scope of our own limited experiences. For example, I would be willing to bet that you could tell me exactly what you paid for your first home and what you eventually sold it for.  However, can you tell me what exactly what you paid for your first bar of soap, your first hamburger or your first pair of shoes? Probably not.

The reason is that the purchase of the home was a major “life” event. Therefore, we attach particular significance to that event and remember it vividly. If there was a gain between the purchase and sale price of the home, it was a positive event and, therefore, we assume that the next home purchase will have a similar result.  We are mentally “anchored” to that event and base our future decisions around a very limited data.

When it comes to investing we do very much the same thing. If we buy a stock and it goes up, we remember that event. Therefore, we become anchored to that stock as opposed to one that lost value. Individuals tend to “shun” stocks that lost value even if they were simply bought and sold at the wrong times due to investor error. After all, it is not “our” fault that the investment lost money; it was just a bad stock. Right?

This “anchoring” effect also contributes to performance chasing over time. If you made money with ABC stock but lost money on DEF, then you “anchor” on ABC and keep buying it as it rises. When the stock begins its inevitable “reversion,” investors remain “anchored” on past performance until the “pain of ownership” exceeds their emotional threshold. It is then that they panic “sell” and are now “anchored” to a negative experience and never buy shares of ABC again.

This is ultimately the “end-game” of the current rise of the “passive indexing” mantra. When the selling begins, there will be a point where the pain of “holding” becomes to great as losses mount. It is at that point where “passive indexing” becomes “active selling” as our inherent emotional biases overtake the seemingly simplistic logic of “buy and hold.”  


In the end, we are just human. Despite the best of our intentions, it is nearly impossible for an individual to be devoid of the emotional biases that inevitably lead to poor investment decision making over time. This is why all great investors have strict investment disciplines that they follow to reduce the impact of human emotions.

Take a step back from the media, and Wall Street commentary, for a moment and make an honest assessment of the financial markets today. Does the current extension of the financial markets appear to be rational? Are individuals current assessing the “possibilities” or the “probabilities” in the markets?

As individuals, we are investing our hard earned “savings” into the Wall Street casino. Our job is to “bet” when the “odds” of winning are in our favor. Secondly, and arguably the most important, is to know when to “push away” from the table to keep our “winnings.”





I would like to take this opportunity to wish all of you, your family and loved ones a very merry and joyful Christmas. I also want to say “Thank You” for all of your support, loyal readership and the friends I have made through the sharing of ideas over the last year.

While it may be deemed to be “politically incorrect” these days to say such things – the meaning, and spirit, of Christmas should not be dismissed. Wishing someone “Merry Christmas” is not just the acknowledgment of the Christian belief in the birth of Christ, but what has been lost in the political crossfire, is the sharing of love, joy, happiness and the embracing of our fellow man regardless of faith, race or political leanings.

Currently, the world is seemingly spinning out of control as terrorism, mass killings, threats of war and political indigestion plaster the daily headlines. While consumerism and commercialization of the holiday season has displaced the celebration of the birth of Christ, it is up to each one of us to remember the true joy of this special time of year.

The Joy Of Christmas

The joy of Christmas is found in reconciliation. Christmas is a time to reach out, a time to forgive and a time to heal broken friendships, families, and relationships. 

The joy of Christmas is found in rejoicing.  This Christmas rejoice not only in the celebration of the birth of Christ but also rejoice for all of your good fortunes. Remember, that regardless of how hard life may be currently, we are blessed with our families, our spouses who love us, our health, and our children who depend on us. Don’t take lightly all that you have been given and rejoice in hope that tomorrow will be better than today.

The joy of Christmas is found in generosity. While Christmas is often associated with a time to share physical gifts – it is not the quantity of the gifts that fill the meaning of generosity. Christmas is when we should be generous in deed, spirit, time and love. 

Children feel neglected because we work too much. Most marriages end in divorce due to lack of communication, affection and commitment. Families become divided as they drift apart.  Small acts of kindness; words of love, affection and praise; and setting aside our most precious commodity of “time” will be the most generous, and appreciated, gift you can give this year.

The joy of Christmas is found in hope. It is in “hope” that we will find the joy, spirit, and meaning of Christmas. It is in “hope” that we find the strength rise above the challenges that face us. It is in “hope” that we are open to the possibilities of tomorrow.

For each one of us the spirit, and meaning, of Christmas is found within our hearts. However, Luke 2:8-14 says it best.

And there were in the same country shepherds abiding in the field, keeping watch over their flock by night.

And, lo, the angel of the Lord came upon them, and the glory of the Lord shone round about them: and they were sore afraid.

And the angel said unto them, 

Fear not: for, behold, I bring you good tidings of great joy, which shall be to all people.

For unto you is born this day in the city of David a Saviour, which is Christ the Lord.

And this shall be a sign unto you; Ye shall find the babe wrapped in swaddling clothes, lying in a manger.

And suddenly there was with the angel a multitude of the heavenly host praising God, and saying,

Glory to God in the highest, and on earth peace, good will toward men.”

This is my Christmas wish to you:

May you, your family, and loved ones be blessed with health, your hearts filled with love, your spirit overflowing with hope and your voices rejoice in the spirit of Christmas.


Questions, comments, suggestions – please email me.

I have written over the last couple of months the market was likely to rally into the end of the year as portfolio managers, hedge, and pension funds chased performance and “window dressed” portfolios for year-end reporting purposes. As I noted in this past weekend’s missive:

“I still suspect there is enough bullish exuberance currently to push the Dow to 20,000 and the S&P to 2,300 by the end of the year. However, I am more concerned about what I believe may occur after the inauguration in January.

I have discussed previously the importance of ‘price’ as an indicator of the market ‘herd’ mentality. One of the major problems with the fundamental and macro-economic analysis is the psychology of the ‘herd’ can defy logical analysis for quite some time. As Keynes once stated:

‘The markets can remain irrational longer than you can remain solvent.’

Many an investor have learned that lesson the hard way over time and may be taught again in the not so distant future. As shown in the chart below, the momentum of the market has decidedly changed for the negative. Furthermore, these changes have only occurred near market peaks in the past. Some of these corrections were more minor; some were extremely negative. Given the current negative divergences in the markets from RSI to Momentum, the latter is rising possibility.”


Despite this technical deterioration and excessive price extension, the “bullish vs. bearish” argument continues.

Let’s examine both arguments.

The Bullish Bias

The bulls currently have the “wind at their backs” as the exuberance mounts the new administration will foster in an age of deregulation, infrastructure spending and tax cuts that will be boost corporate earnings in the future. As Jack Bouroudjian via CNBC wrote:

“Let’s be clear, this market run up to the 20K level has a much more solid foundation for valuation. We are not looking at a P/E which has been stretched beyond historic norms as was the case in 1999, nor are we looking at a dot com bubble ready to implode. On the contrary, between digestible valuations and the prospects of real pro-growth policies, we have the foundation for a run up in equities over the course of the next few years which could leave 20K in the dust.

One of the great lessons in the market is that when ‘Animal Spirits’ take control, one must simply go with it. It’s not easy to recognize a paradigm shift, in fact many can only realize the phenomenon after the fact. The Trump victory coupled with the sweep in congress makes this a classic paradigm shift and the financial world needs to embrace it.

The dark days of wasted revenue and liberal tax and spend policies is giving way to an era of fiscal stimulus and pro-growth legislation not seen in 30 years. All this is coming at a time when corporate America, sitting on mountains of cash both domestically and overseas, find itself on the brink of a digital revolution.

Over the course of the next few years, corporations should see top line growth and expanding operating margins. With the understanding that equity prices move on expectations, one must conclude that the rally we have experienced over the last few weeks might be the ‘tip of the iceberg’ when it comes to the move we will see in the coming years.”

This, of course, is just the latest iteration of the “bull argument.”  Previously it was Federal Reserve liquidity, low interest rates, and low inflation were good for stocks. Now, it is higher interest rates and inflation is good for stocks. In other words, there is apparently no environment that is bad for stocks. Right?

As shown below, the bullish trend has remained firmly intact since the onset of QE1 which brings two Wall Street axioms into play:

1) Don’t Fight The Fed
2) The Trend Is Your Friend

Since the primary goal of the Federal Reserve’s monetary interventions was to boost asset prices, in order to stimulate economic growth, employment, inflationary pressures and consumer confidence, there is little argument the Fed achieved its goal of inflating asset prices. The “bulls” drank deeply from the proverbial “punch bowl.”

The continuous and uninterrupted surge in asset prices has driven investors into an extreme state of complacency. The common mantra is the “Fed will not let the markets fall” has emboldened investors to take exceptional risks. The chart of volatility shows again that bulls remain clearly in charge of the markets currently with the “fear of a correction” at near historic lows.

We can see the same level of bullishness when looking at the levels of “bearish” ratio of Rydex funds. (Bear Funds + Cash Funds / Bull Funds)

In other words, since investors have little fear of a correction, they have now gone “all in” following the election.

Lastly, since the election, investors confidence has soared as discussed by Evelyn Cheng via CNBC this week:

“Individual investor optimism jumped to a nine-year high in November, according to the Wells Fargo/Gallup Investor and Retirement Optimism Index published Tuesday.

The last time the index approached the November level was before the financial crisis, in May 2007 with a read of 95, the report said. The index was at 103 in January 2007.”

There is little doubt the “Bulls are back.” With the markets pushing all-time highs heading into the 9th year of a bull market, the belief is the momentum is set to continue. In fact, there isn’t a “bear” in sight:

“The unexpected election last month of Donald J. Trump as president has been a game changer for the 10 investment strategists whose market outlook Barron’s solicits twice each year. As stocks took off on Nov. 9 and thereafter, fueled by investors’ enthusiasm for Trump’s expected pro-growth agenda, even our group’s bears turned bullish.

The Bearish Perspective

While the bulls are pushing a continuation of the market based on “hopes” and “expectations,” the bears are countering with a more rational and pragmatic basis.

Valuations, by all historical measures, are expensive. While high valuations can certainly get higher, it does suggest that future returns will be lower than in the past.

That statement of “lower future returns” is very misunderstood. Based on current valuations the future return of the market over the next decade will be in the neighborhood of 2%. This DOES NOT mean the average return of the market each year will be 2% but rather a volatile series of returns (such as 5%, 6%, 8%, -20%, 15%, 10%, 8%,6%,-20%) which equate to an average of 2%.

Of course, as discussed previously, investor behavior makes forward long-term returns even worse.

The bulls have continually argued that the “retail” investor is going to jump into the markets which will keep the bull market alive. The chart below supports the bear’s case that they are already in. At 30% of total assets, households are committed to the markets at levels only seen near peaks of markets in 1968, 2000, and 2007.  I don’t really need to tell you what happened next.

The dearth of “bears” is a significant problem. With virtually everyone on the “buy” side of the market, there will be few people to eventually “sell to.” The hidden danger is with much of the daily trading volume run by computerized trading, a surge in selling could exacerbate price declines as computers “run wild” looking for vacant buyers.

This thought dovetails into the “hyperextension” of the market currently. Since price is a reflection of investor sentiment, it is not surprising the recent surge in confidence is reflected by a symbiotic surge in asset prices.

The problem, as always, is sharp deviations from the long-term moving average always “reverts to the mean” at some point. The only questions are “when” and “by how much?”

Managing Past The Noise

There are obviously many more arguments for both camps depending on your personal bias. But there is the rub. YOUR personal bias may be leading you astray as “cognitive biases” impair investor returns over time.

“Confirmation bias, also called my side bias, is the tendency to search for, interpret, and remember information in a way that confirms one’s preconceptions or working hypotheses. It is a systematic error of inductive reasoning.”

Therefore, it is important to consider both sides of the current debate in order to make logical, rather than emotional, decisions about current portfolio allocations and risk management.

Currently, the “bulls” are still well in control of the markets which means keeping portfolios tilted towards equity exposure.  However, as David Rosenberg recently penned, the markets may be set up for disappointment. To wit:

“In fact, despite base effects taking the year-over-year trends higher near-term, I think we will close 2017 with consumer inflation, headline and core, below 1.5% (though both will peak in the opening months of the year at 2.6% and 2.3% respectively).

The question is what sort of growth we get, and as we saw with all the promises from ‘hope and change’ in 2008, what you see isn’t always what you get.

There are strong grounds to fade this current rally, which has more to do with sentiment, market positioning and technicals than anything that can be construed as real or fundamental. There is perception, and then there is reality.”

Currently, there is much “hope” things will “change” for the better. The problem facing President-elect Trump, is an aging economic cycle, $20 trillion in debt, an almost $700 billion deficit, unemployment at 4.6%, jobless claims at historical lows, and a tightening of monetary policy and 80% of households heavily leveraged with little free cash flow. Combined,  these issues will likely offset most of the positive effects of tax cuts and deregulations.

Furthermore, while the “bears” concerns are often dismissed when markets are rising, it does not mean they aren’t valid. Unfortunately, by the time the “herd” is alerted to a shift in overall sentiment, the stampede for the exits will already be well underway. 

Importantly, when discussing the “bull/bear” case it is worth remembering that the financial markets only make “record new highs” roughly 5% of the time. In other words, most investors spend a bulk of their time making up lost ground.

The process of “getting back to even” is not an investment strategy that will work over the long term. This is why there are basic investment rules all great investors follow:

  1. Sell positions that simply are not working. If they are not working in a strongly rising market, they will hurt you more when the market falls. Investment Rule: Cut losers short.
  2. Trim winning positions back to original portfolio weightings. This allows you to harvest profits but remain invested in positions that are working. Investment Rule: Let winners run.
  3. Retain cash raised from sales for opportunities to purchase investments later at a better price. Investment Rule: Sell High, Buy Low

These rules are hard to follow because:

  1. The bulk of financial advice only tells you to “buy”
  2. The vast majority of analysts ratings are “buy”
  3. And Wall Street needs you to “buy” so they have someone to sell their products to.

With everyone telling you to “buy” it is easy to understand why individuals have a such a difficult and poor track record of managing their money.

As we head into 2017, trying to predict the markets is often quite pointless. The risk for investors is “willful blindness” that builds when complacency reaches extremes. It is worth remembering that the bullish mantra we hear today is much the same as it was in both 1999 and 2007.

I don’t need to remind you what happened next.






Janet Yellen

At the December 14, 2016 FOMC press conference, Federal Reserve Chairwoman Janet Yellen responded to a reporter’s question about equity valuations and the possibility that equities are in a bubble by stating the following: “I believe it’s fair to say that they (valuations) remain within normal ranges”. She further justified her statement, by comparing equity valuations to historically low interest rates.

On May 5, 2015, Janet Yellen stated the following: “I would highlight that equity-market valuations at this point generally are quite high,” Ms. Yellen said. “Not so high when you compare returns on equity to returns on safe assets like bonds, which are also very low, but there are potential dangers there.”

In both instances, she hedged her comments on equity valuations by comparing them with the interest rate environment. In May of 2015, Yellen said equity-market valuations “are quite high” and today she claims they are “within normal ranges”? The data shown in the table below clearly argues otherwise.

Interestingly, not only are equity valuations currently higher than in May of 2015 but so too are interest rates.

Further concerning, how does one define “normal”? Does a price-to-earnings ratio that has only been experienced twice in over hundred years represent normal? Do interest rates near historical lows with the unemployment rate approaching 40-year lows represent normal? Is there anything normal about a zero-interest rate monetary policy and quadrupling of the Fed’s balance sheet?

Does the Federal Reserve, more so than the collective wisdom of millions of market participants, now think that it not only knows where interest rates should be but also what equity valuations are “normal”?

One should expect that the person in the seat of Chair of the Federal Reserve would have the decency to present facts in an honest, consistent and coherent manner. It is not only her job but her duty and obligation.


On December 15, 2016, CNBC reported the following:The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) rose to 70, the highest level since July 2005. Fifty is the line between positive and negative sentiment. The index has not jumped by this much in one month in 20 years.”

The graph below shows how much house one can afford at various interest rates assuming a $3,000 mortgage payment.

Over the past two months U.S. mortgage rates increased almost a full percent from 3.50% to 4.375%. Given such an increase, a prospective homeowner determined to limit their mortgage payment to $3,000 a month would need to seek a 10% reduction in the price of a house. In the current interest rate environment, this equates to drop from $668,000 to $601,000 in order to achieve a $3,000 a month mortgage payment. One would expect that homebuilders temper their optimism, given that a key determinant of housing demand and ultimately their companies’ bottom lines is facing a sturdy headwind.


The point in highlighting these examples is to remind you that people’s opinions, especially those with a vested interest in a certain outcome, may not always be trustworthy. We simply urge you to examine the facts and data before blindly relying on others.

We leave you with historical insight from a few so-called experts:

  • “We will not have any more crashes in our time.”: John Maynard Keynes 1927
  • There is no cause to worry. The high tide of prosperity will continue” : Andrew Mellon 1929
  • Stock prices are likely to moderate in the coming year but that doesn’t mean the party is coming to an end.” : Phil Dow 1999
  • The Federal Reserve is not currently forecasting a recession.” : Ben Bernanke 2008