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Dimon’s View Of Economic Reality Is Still Delusional

“This is the most prosperous economy the world has ever seen and it’s going to be a very prosperous economy for the next 100 years.” – Jamie Dimon

That’s what the head of JP Morgan Chase told viewers in a recent “60-Minutes” interview.

“The consumer, which is 70% of the U.S. economy, is quite strong. Confidence is very high. Their balance sheets are in great shape. And you see that the strength of the American consumer is driving the American economy and the global economy. And while business slowed down, my current view is that, no, it just was a slowdown, not a petering out.” – Jamie Dimon

If you’re in the top 1-2% of income earners, like Jamie, I am sure it feels that way.

For everyone else, not so much.

This isn’t the first time that I have discussed Dimon’s distorted views, and just as we discussed then, even just marginally scratching the surface on the economy and the “household balance sheet,” reveals an uglier truth.

The Most Prosperous Economy

Let’s start with the “most prosperous economy in the world” claim.

As we recently discussed in “Socialism Rises,” 

“How did a country which was once the shining beacon of ‘capitalism’ become a country on the brink of ‘socialism?’

Changes like these don’t happen in a vacuum. It is the result of years of a burgeoning divide between the wealthy and everyone else. It is also a function of a 40-year process of capitalism morphing an entire population into ‘debt slaves’ to sustain economic prosperity. 

It is a myth that the economy has grown by roughly 5% since 1980. In reality, economic growth rates have been on a steady decline over the past 40 years, which has been supported by a massive push into deficit spending by consumers.”

With the slowest average annual growth rate in history, it is hard to suggest the economy has been the best it has ever been.

However, if an economy is truly prosperous it should benefit the majority of economic participants, which brings us to claim about “household balance sheet” health.

For Billionaires, The Grass Is Always Green

If you are in the upper 20% of income earners, not to mention the top .01% like Mr. Dimon, I am quite sure the “economic grass is very green.”  If you are in the bottom 80%, the “view” is more akin to a “dirt lot.” Since 1980, as noted by a recent study from Chicago Booth Review, the wealth gap has progressively gotten worse.

“The data set reveals since 1980 a ‘sharp divergence in the growth experienced by the bottom 50 percent versus the rest of the economy,’ the researchers write. The average pretax income of the bottom 50 percent of US adults has stagnated since 1980, while the share of income of US adults in the bottom half of the distribution collapsed from 20 percent in 1980 to 12 percent in 2014. In a mirror-image move, the top 1 percent commanded 12 percent of income in 1980 but 20 percent in 2014. The top 1 percent of US adults now earns on average 81 times more than the bottom 50 percent of adults; in 1981, they earned 27 times what the lower half earned.

The issue is the other 80% are just struggling to get by as recently discussed in the Wall Street Journal:

The American middle class is falling deeper into debt to maintain a middle-class lifestyle.

Cars, college, houses and medical care have become steadily more costly, but incomes have been largely stagnant for two decades, despite a recent uptick. Filling the gap between earning and spending is an explosion of finance into nearly every corner of the consumer economy.

Consumer debt, not counting mortgages, has climbed to $4 trillion—higher than it has ever been even after adjusting for inflation. Mortgage debt slid after the financial crisis a decade ago but is rebounding.”WSJ

The ability to simply “maintain a certain standard of living” has become problematic for many, which forces them further into debt.

“The debt surge is partly by design, a byproduct of low borrowing costs the Federal Reserve engineered after the financial crisis to get the economy moving. It has reshaped both borrowers and lenders. Consumers increasingly need it, companies increasingly can’t sell their goods without it, and the economy, which counts on consumer spending for more than two-thirds of GDP, would struggle without a plentiful supply of credit.” – WSJ

I show the “gap” between the “standard of living” and real disposable incomes below. Beginning in 1990, incomes alone were no longer able to meet the standard of living, so consumers turned to debt to fill the “gap.” However, following the “financial crisis,” even the combined levels of income and debt no longer fill the gap. Currently, there is almost a $2600 annual deficit that cannot be filled. (Note: this deficit accrues every year which is why consumer credit keeps hitting new records.)

But this is where it gets interesting.

Mr. Dimon claims the “household balance sheet” is in great shape. However, this suggestion, which has been repeated by much of the mainstream media, is based on the following chart.

The problem with the chart is that it is an illusion created by the skew in disposable incomes by the top 20% of income earners, needless to say, the top 5%. The Wall Street Journal exposed this issue in their recent analysis.

“Median household income in the U.S. was $61,372 at the end of 2017, according to the Census Bureau. When inflation is taken into account, that is just above the 1999 level. Without adjusting for inflation, over the three decades through 2017, incomes are up 135%.” – WSJ

“The median net worth of households in the middle 20% of income rose 4% in inflation-adjusted terms to $81,900 between 1989 and 2016, the latest available data. For households in the top 20%, median net worth more than doubled to $811,860. And for the top 1%, the increase was 178% to $11,206,000.

Put differently, the value of assets for all U.S. households increased from 1989 through 2016 by an inflation-adjusted $58 trillion. A third of the gain—$19 trillion—went to the wealthiest 1%, according to a Journal analysis of Fed data.

‘On the surface things look pretty good, but if you dig a little deeper you see different subpopulations are not performing as well,’ said Cris deRitis, deputy chief economist at Moody’s Analytics.” – WSJ

With this understanding, we need to recalibrate the “debt to income” chart above to adjust for the bottom 80% of income earnings versus those in the top 20%. Clearly, the “household balance sheet” is not nearly as healthy as Mr. Dimon suggests.

Of course, the only saving grace for many American households is that artificially low interest rates have reduced the average debt service levels. Unfortunately, those in the bottom 80% are still having a large chunk of their median disposable income eaten up by debt payments. This reduces discretionary spending capacity even further.

The problem is quite clear. With interest rates already at historic lows, the consumer already heavily leveraged, and wage growth stagnant, the capability to increase consumption to foster higher rates of economic growth is limited.

With respect to those who say “the debt doesn’t matter,” I respectfully argue that you looking at a very skewed view of the world driven by those at the top.

Mr. Dimon’s Last Call

What Mr. Dimon tends to forget is that it was the U.S. taxpayer who bailed out the financial system, him included, following the financial crisis. Despite massive fraud in the major banks related to the mortgage crisis, only small penalties were paid for their criminal acts, and no one went to jail. The top 5-banks which were 40% of the banking system prior to the financial crisis, became 60% afterwards. Through it all, Mr. Dimon became substantially wealthier, while the American population suffered the consequences.

Yes, “this is the greatest economy ever” if you are at the top of heap.

With household debt, corporate debt, and government debt now at records, the next crisis will once again require taxpayers to bail it out. Since it was Mr. Dimon’s bank that lent the money to zombie companies, households again which can’t afford it, and took on excessive risks in financial assets, he will gladly accept the next bailout while taxpayers suffer the fallout. 

For the top 20% of the population that have money actually invested, or directly benefit from surging asset prices, like Mr. Dimon, life is great. However, for the vast majority of American’s, the job competition is high, wages growth is stagnant, and making “ends meet” is a daily challenge.

While Mr. Dimon’s view of America is certainly uplifting, it is delusional. But of course, give any person a billion dollars and they will likely become just as detached from economic realities.

Does America have “greatest hand ever dealt.”

The data certainly doesn’t suggest such. However, that can change.

We just have to stop hoping that we can magically cure a debt problem by adding more debt, and then shuffling it between Central Banks. 

But then again, such a statement is also delusional.

The One Chart Every Millennial Should Ignore

The media is full of articles about the financial situation of Millennials in today’s economy. According to numerous surveys, they are saddled with too much debt, can’t secure higher wage-paying jobs, and are financially distressed on many fronts. Moreover, this is occurring during the longest financial and economic boom in the history of the United States.

Of course, the media is always there to help by chastising boot-strapped Millennials to dump their savings into the financial markets to chase overvalued, extended, and financially questionable stocks.

To wit:

“Only about half of American families are participating in some way in the stock market, according to research from the St. Louis Fed. When it comes to millennials (ages 23 to 38), about 60% have no direct or indirect exposure to the stock market.

Of course, you don’t definitely don’t have to invest, Erin Lowry, author of ‘Broke Millennial Takes on Investing,’ tells CNBC Make It. It’s not a life requirement. But you should understand what you’re losing out on if you avoid the markets. It’s a shocking amount, Lowry says. ‘You’re going to have to save so much more money to achieve the same goals because the market is helping do some of the work.’”

Great, you have a person with NO financial experience advising Millennials to put their “savings” into the single most difficult game on the planet.

Of course, this is all dependent on the same “myth” we just addressed last week:

“That’s because when you use a high-yield savings account or an investment account with higher returns, you put the magic of compound interest to work for you. When your money earns returns, those returns also generate their own earnings. It’s that simple.”

Here’s the math they use to prove their point.

“Let’s say you have $1,000 and add $100 a month to your savings over the course of 35 years. At the end, you’d have $43,000. Not bad. But if you had invested that money and earned a 10% rate of return, which is in line with average historic levels, you’d have over $370,000.”

Of course, you have to have a cool chart to go along with it.

Here’s a little secret.

It’s a complete fallacy.

From CNBC:

“Of course, investing is not risk-free. Typically, investors see some years where they earn double-digit returns and other years where they experience a loss. Losses happens, on average, about one out of every four years, and can be bad. During a bear market — which is when stocks fall by at least 20% — research shows that the market drops by an average of 30%. That condition typically lasts for about 13 months.

That means if you invested $1,000 and the market lost 30%, your investment would be worth $700. And it may take you more than 13 months to recover the $300 you lost.”

The importance of that statement is that “losses” destroy the “power of compounding.”

Let’s assume an investor wants to compound their investments by 10% a year over a 5-year period.

The ‘power of compounding’ ONLY WORKS when you do not lose money. As shown, after three straight years of 10% returns, a drawdown of just 10% cuts the average annual compound growth rate by 50%. Furthermore, it then requires a 30% return to regain the average rate of return required. In reality, chasing returns is much less important to your long-term investment success than most believe.”

When imputing volatility into returns, the differential between what investors were promised (and this is a huge flaw in financial planning) and what actually happened to their money is substantial over long-term time frames.

Here is another way to look at it.

If you could simply just stick money in the market and it grew by 6% every year, then how is it possible to have 10 and 20-year periods of near ZERO to negative returns?

Morgan Stanley just recently published research on this exact issue:

On our estimates, the expected return of a US 60/40 portfolio of stocks and government bonds will return just 4.1% per year over the next decade, close to the lowest expected return over the last 20 years, and one that has only been worse in 4% of observations since 1950.”

4.1% isn’t 6, 8 or 10%.

There went your savings plan.

The level of valuations when you start your investing journey is all you need to know about where you are going to wind up. Based on current valuations, if you are betting on the last decade of returns to continue 30-years into the future, you are likely going to be very disappointed.

Don’t Forget The Impact Of Inflation

Here’s the second problem.

A recent article from MarketWatch pointed out how much it would cost to retire in each state. Using data from the BLS, Howmuch.net created the following visual.

“The average yearly expenses across the country for someone over the age of 65 is $51,624, but that figure comes in at $44,758 in the low-cost-of-living Mississippi and a whopping $99,170 on the other end of the spectrum in the Aloha State. ‘

This is misleading as the amounts shown above are based on TODAY’s data and what is required if your want to RETIRE TODAY.

What happens if you are a Millennial wanting to retire in 30-years? While $1 million sounds like a lot of money today, and might net you a comfortable retirement in Colorado ($1 million at a 3% annual withdrawal rate nets you $30,000 plus social security), will it be enough in 30-years?

Probably not. Let’s run it backwards.

In 1980, $1 million would generate between $100,000 and $120,000 per year while the cost of living for a family of four in the U.S. was approximately $20,000/year. Today, there is about a $40,000 shortfall between the income $1 million will generate and the cost of living.

This is just a rough calculation based on historical averages. However, the amount of money you need in retirement is based on what you think your income needs will be in the future, not today, and how long you have to reach that goal.

For most, there is a desire to live a similar, or better, lifestyle in retirement. However, over time, our standard of living will increase to reflect our life-cycle stages. Children, bigger houses to accommodate those children, education, travel, etc. all require higher incomes. (Which is the reason the U.S. has the largest retirement savings gap in the world.)

If you are like me with four kids, “a million dollars ain’t gonna cut it.”

The problem with Erin Lowry’s advice to her “millennial cohorts,” is not just the lack of accounting for variable rates of returns, but impact of inflation on future living standards.

Let’s run an easy example.

  • John is 23 years old and earns $40,000 a year.
  • He saves $14 a day 
  • At 67 he will have $1 million saved up (assuming he gets the promised 10% annual rate of return)
  • He then withdraws 4% of the balance to live on matching his $40,000 annual income.

That’s pretty straightforward math.

The problem is that it’s entirely wrong.

The living requirement in 44 years is based on today’s income level, not the future income level required to maintain the SAME living standard. 

Look at the chart below and select your current level of income. The number on the left is your income level today and the number on the right is the amount of income you will need in 30-years to live the same lifestyle you are living today.

This is based on the average inflation rate over the last two decades of 2.1%. However, if inflation runs hotter in the future, these numbers become materially larger.

The chart above exposes two problems with the entire premise:

  1. The required income is not adjusted for inflation over the savings time-frame, and;
  2. The shortfall between the levels of current income and what is actually required at 4% to generate the income level needed.

The chart below takes the inflation-adjusted level of income for each brackets and calculates the asset level necessary to generate that income assuming a 4% withdrawal rate. (For comparison purposes, the red bar is the “F.I.R.E. Movement” recommendation of 25x your income.)

If you need to fund a lifestyle of $100,000, or more, in today’s dollars, as Sheriff Brody quipped in “Jaws,”

“You are going to need a bigger boat.”

Not accounting for the future cost of living is going to leave a lot of people short, even including social security. 

While authors like Ms. Lowry are creating a nice income for themselves by selling books to “broke Millennials,” the content is only as good as the current market cycle you are in. Ms. Lowry, and her cohorts, have never been through a bear market.

Mean reverting events expose the fallacies of “buy-and-hold” investment strategies. The “stock market” is NOT the same as a “high yield savings account,” and losses devastate retirement plans. (Ask any “boomer” who went through the dot.com crash or the financial crisis.”)

Unfortunately, for individuals, the results between what is promised and what occurs continues to be two entirely different things, and generally not for the better. 

Technically Speaking: 7-Deadly Investing Sins


As I noted in this past weekend’s newsletter, I am on a much-needed family vacation this week. However, I would be remiss if I did not relay some of my thoughts in reference to the Monday’s market action as it relates to our current portfolio positioning.

As I stated on Saturday:

“As we discussed previously, what happens in the middle of the week is of little consequence to us. We are only truly interested in where the week ends. In that regard, the bulls remained stuck at the ‘Maginot Line’ which continues to keep the majority of our models on hold for now.”

The one thing that keeps us a bit more bullishly biased at the moment is the flood of earnings coming in as we progress into the Q2 reporting season. Google reported better than expected numbers (of course, that’s not saying much since estimates are always lowered so companies can beat them) which will give a lift to market today at least at the outset of the session.

However, as shown below, the bulls have cleared resistance momentarily. It is important the bulls are able to maintain control above 2800 through the end of the week. A failure of that level will likely result in a correction back to 2700.

If these current levels hold through the end of the week, the intermediate-term “buy signal” will also be triggered. (While it may seem to already have been triggered, this is a weekly signal so it requires a full week’s of data to confirm.) This signal will be supportive of current equity allocation levels and will suggest that a move higher in the short-term is likely.

The risk, in the short-term, remains the White House and geopolitical policy which could disrupt the markets. Longer-term it remains a story about valuations, economic cycles, and interest rates.

This is why I noted this past weekend that “with our portfolios are already mostly exposed to equity risk, there isn’t much for us to do currently. Our main job now is to focus on the risk of what could wrong and negatively impact portfolio capital.”

This morning I was sitting on the beach with my lovely wife having a cup of coffee when a prayer group formed on the beach. They sat in a circle as the sun crested the horizon. As streams of sunlight glinted off of the crystal blue waters, they read scripture and prayed. As my wife and I watched, and listened, a very peaceful feeling fell across us both.

As they finished, I looked down at my laptop with a blank page staring back at me. At that moment, I begin thinking about the risks which currently face us as investors and the sins we repeatedly commit as individuals which keep us from being successful over time.

If you were raised in a religious household, or were sent to a Catholic school, you have heard of the seven deadly sins. These transgressions — wrath, greed, sloth, pride, lust, envy, and gluttony — are human tendencies that, if not overcome, can lead to other sins and a path straight to the netherworld.

In the investing world, these same seven deadly sins apply. These “behaviors,” just like in life, lead to poor investing outcomes. Therefore, to be a better investor, we must recognize these “moral transgressions” and learn how to overcome them.

The 7-Deadly Investing Sins

Wrath – never get angry; just fix the problem and move on.

Individuals tend to believe that investments they make, or their advisor, should “always” work out. They don’t. And they won’t. Getting angry about a losing “bet” only delays taking the appropriate actions to correct it.

“Loss aversion” is the type of thinking that can be very dangerous for investors. The best course of action is to quickly identify problems, accept that investing contains a “risk of loss,” correct the issue and move on. As the age-old axiom goes: “Cut losers short and let winners run.”

Greed – greed causes investors to lose more money investing than at the point of a gun. 

The human emotion of “greed” leads to “confirmation bias” where individuals become blinded to contrary evidence leading them to “overstay their welcome.”

Individuals regularly fall prey to the notion that if they “sell” a position to realize a “profit” that they may be “missing out” on further gains. This mentality has a long and depressing history of turning unrealized gains into realized losses as the investment eventually plummets back to earth.

It is important to remember that the primary tenant of investing is to “buy low” and “sell high.” While this seems completely logical, it is emotionally impossible to achieve. It is “greed” that keeps us from selling high, and “fear” that keeps us from buying low. In the end, we are only left with poor results.

Sloth – don’t be lazy; if you don’t pay attention to your money – why should anyone else?

It is quite amazing that for something that is as important to our lives as our “money” is, how little attention we actually pay to it. Not paying attention to your investments, even if you have an advisor, will lead to poor long-term results.

Portfolios, like a garden, must be tended to on a regular basis, “prune” by rebalancing the allocation, “weed” by selling losing positions, and “harvest” by taking profits from winners.

If you do not regularly tend to a portfolio, the bounty produced will “rot on the vine” and eventually the weeds will eventually reclaim the garden as if it never existed.

Pride – when things are going good don’t be prideful – pride leads to the fall. You are NOT smarter than the market, and it will “eat you alive” as soon as you think you are.

When it comes to investing, it is important to remember that a “rising tide lifts all boats.” The other half of that story is that the opposite in also true.

When markets are rising, it seems as if any investment we make works; therefore, we start to think that we are “smart investors.” However, there is a huge difference between being “smart” and just being “along for the ride.” 

Ray Dalio, head of Bridgewater which manages more than $140 billion, summed it up best:

“Betting on any market is like poker, it’s a zero-sum game and the deck is stacked against the individual investor in favor of big players like Bridgewater, which has about 1,500 employees. We spend hundreds of millions of dollars on research each year and even then we don’t know that we’re going to win. However, it’s very important for most people to know when not to make a bet because if you’re going to come to the poker table you are going to have to beat me.”

Lust – lusting after some investment will lead you to overpay for it.  

“Chasing performance” is a guaranteed recipe for disaster as an investor. For most, by the time that “performance” is highly visible the bulk of that particular investments cyclical gains are already likely achieved.  This can been seen in the periodic table of returns below from Callan:

I have highlighted both the S&P 500 and U.S. Bond Market indexes as an example. Importantly, you can see that investment returns can vary widely from one year to the next. “Lusting” after last year’s performance leads to “buying high” which ultimately leads to the second half of the cycle of “selling low.”

It is very hard to “buy stuff when no one else wants it” but that is how investing is supposed to work. Importantly, if you are going to “lust,” lust after your spouse – it is guaranteed to pay much bigger dividends.

Envy – this goes along with Lust and Greed

Being envious of someone else’s investment portfolio, or their returns, will only lead to poor decision-making over time. It is also important to remember that when individuals talk about their investments, they rarely tell you about their losers. “I made a killing with XYZ. You should have bought some” is how the line goes. However, what is often left out is that they lost more than what they gained elsewhere.

Advice is often worth exactly what you pay for it, and sometimes not even that. Do what works for you and be happy with where you are. Everything else is secondary and only leads to making emotional decisions built around greed and lust which have disastrous long-term implications. 

Gluttony – never, ever over-indulge. Putting too much into one investment is a recipe for disaster.  

There are a few great investors in this world who can make large concentrated bets and live to tell about it. It is also important to know that they can “afford” to be wrong – you can’t. 

Just like the glutton gorging on a delicious meal – it feels good until it doesn’t, and the damage is often irreversible. History is replete with tales of individuals who had all their money invested in company stock, companies like Enron, Worldcom, Global Crossing; etc. all had huge, fabulous runs and disastrous endings.

Concentrated bets are a great way to make a lot of money in the markets as long as you are “right.” The problem with making concentrated bets is the ability to repeat success. More often than not individuals who try simply wind up broke.

Heed Thy Warnings – the path to redemption is rife with temptation

Regardless of how many times I discuss these issues, quote successful investors, or warn of the dangers – the response from both individuals and investment professionals is always the same.

“I am a long-term, fundamental value, investor.  So these rules don’t apply to me.”

No, you’re not. Yes, they do.

Individuals are long-term investors only as long as the markets are rising. Despite endless warnings, repeated suggestions, and outright recommendations – getting investors to sell, take profits and manage portfolio risks go unheeded.

With the markets currently rising, it is easy to ignore the warning signs. The “devil on your shoulder” is very convincing and keeps whispering in your ear to take on more risk with comments like: “This market has nowhere to go but up,” “the yield curve doesn’t matter this time,” “Fed rate hikes don’t cause recessions,” and “it’s still not to late to jump on this bull train.”

The hardest thing for individuals to overcome in investing is their own emotional biases. This is why laying out a strict written discipline, having a sound investment strategy and keeping a journal of your trading are key elements in winning the long-game. Investing, like religion, requires a belief system that you follow even when it doesn’t seem to work.

But that is incredibly difficult to do.

S&P 500 Monthly Valuation & Analysis Review – 12-31-17

Real Investment Advice is pleased to introduce J. Brett Freeze, CFA, founder of Global Technical Analysis. Going forward on a monthly basis we will be providing you their valuable S&P 500 Valuation Chart Book. This unique analysis provides an invaluable long term perspective of equity valuations.

If you are interested in learning more about their services, please connect with them.


We believe that the chief determinant of future total returns is the relative valuation of the index at the time of purchase. We measure valuation using the Price/Peak Earnings multiple as advocated by Dr. John Hussman. We believe the main benefit of using peak earnings is the inherent conservatism it affords: not subject to analyst estimates, not subject to the short-term ebbs and flows of business, and not subject to short-term accounting distortions. Annualized total returns can be calculated over a horizon period for given scenarios of multiple expansion or contraction.

Our analysis highlights expansion/contraction to the minimum, mean, average, and maximum multiples (our data-set begins in January 1900) . The baseline assumptions for nominal growth and horizon period are 6% and 10 years, respectively. We also provide graphical analysis of how predicted returns compare to actual returns historically.

We provide sensitivity analysis to our baseline assumptions. The first sensitivity table, ceterus paribus, shows how future returns are impacted by changing the horizon period. The second sensitivity table, ceterus paribus, shows how future returns are impacted by changing the growth assumption.

We also include the following information: duration, over(under)-valuation, inflation adjusted price/10-year real earnings, dividend yield, option-implied volatility, skew, realized volatility, historical relationships between inflation and p/e multiples, and historical relationship between p/e multiples and realized returns.

Our analysis is not intended to forecast the short-term direction of the SP500 Index.  The purpose of our analysis is to identify the relative valuation and inherent risk offered by the index currently.


Natural Time Cycles: A Dow Forecast For 2018-2020

“TIME is the most important factor in determining market movements and by studying the past records of averages or individual stocks you will be able to prove for yourself that history does repeat and that by knowing the past you can tell the future.”  W.D. Gann, 1939

The analysis and forecasts presented in this article are based on the analytical framework of W.D. Gann.  Gann is an investing legend, labeled as genius by many financial historians.  He reportedly accumulated $50 million in profits during his trading career.  His superior track record and those of others using his methods argues that, regardless of our opinion of his methodology, we should heed the advice of his work.

A more detailed explanation of his analytical framework is included in the last section of this article.

Forecast: 2018-2020

The Dow Jones Industrial Average forecast, in the graph above, is based upon the natural 20-year cycle that Gann identified.  The lines in the graph show the projected monthly cumulative percentage returns from the peak level.  The yellow line is the average scenario and the aqua line is the pessimistic scenario.  The graph provides monthly estimates for 2018.  The last data point represents June 2020, which covers the entire 30-month period from December 2017.

My average scenario forecasts a -15.29% price return for 2018.  The cumulative price return is forecast to bottom in June 2020 at -20.39%, at which time an extended rally should ensue.

My pessimistic scenario forecasts a -32.90% price return for 2018.  The cumulative price return is forecast to be little-changed in June 2020 at -31.23%, at which time an extended rally in should ensue.

20-Year Cycle: Timing Analysis

The New York Stock Exchange (NYSE) began trading operations in 1792.  However, the natural cause of the 20-year cycle first occurred in 1801.  Accordingly, a proper analysis of the 20-year cycle must begin with 1801 as a starting point.  The explanation for this is provided in the section entitled The Natural Cause of the 20-Year Cycle.

The 20-year cycles, from the inception of the NYSE, consist of the following time periods: 1. 1801-1820, 2. 1821-1840, 3. 1841-1860, 4. 1861-1880, 5. 1881-1900, 6. 1901-1920, 7. 1921-1940, 8. 1941-1960, 9. 1961-1980, 10. 1981-2000, and the current cycle 11, 2001-2020.  Due to limitations of acquiring historical data, the data set of the Dow Jones Average used in this analysis consists of monthly closing prices beginning in January 1901, the sixth 20-year cycle.

To use the data effectively and prepare a forecast, I compare the progression of the current 20-year cycle (2001-2020) with the previous five 20-year cycles, beginning in 1901.  The following five graphs display the comparisons.  Price levels are indexed to 1.00 in month 1 of the cycles and, although not labeled on the graphs, that is the scale of the Y-axis.

As seen in the preceding graphs, the current 20-year cycle has some similarities and some differences with the five previous 20-year cycles.  Based on that visual analysis alone, the individual correlations are not strong enough to base investment decisions on.

Undeterred by the results from the individual comparisons, I built a composite 20-year cycle.  The components of the composite 20-year cycle are the five historical individual 20-year cycles shown in the preceding graphs.  The composite 20-year cycle averages those five cycles and, importantly, does not include data from the current 20-year cycle.  The following graph displays the composite 20-year cycle overlaid with the current 20-year cycle.  Price levels are indexed to 1.00 in month 1 of the cycles and, although not labeled on the graphs, that is the scale of the Y-axis.  Significant peaks and troughs are labeled as points 1-7 on both cycles.

While the correlation of the current 20-year cycle to the composite 20-year cycle is strong, you may have noticed that the current 20-year cycle is progressing faster through peaks and troughs than the composite 20-year cycle.  As a result, I “shift forward” (move to the right) the line of the current 20-year cycle by 22 months.  With the data shifted, the timing of the peaks, troughs, and congestions are virtually identical.  As displayed, the graph and data suggest that December 2017 is the peak of the current 20-year cycle.

20-Year Cycle: Price Return Analysis

The second step in this analysis is to compare the actual price returns for the identified 20-year cycles.  To do so, I identified the seven peaks and troughs within each respective 20-year cycle (points 1-7).  This allows for the comparison of the differences in duration between the pivot points of the composite 20-year cycle and the current 20-year cycle.  The following table maps points 1-7 with the appropriate month in the cycle and with the actual months for individual 20-year cycles:

With the actual dates signifying the composite peak and trough for each historical cycle, I then calculated the percentage price returns between each point in the composite 20-year cycle for each historical cycle.  This allows for comparison of differences in the magnitude of the price moves from point to point.  The following table contains the results.

The final step in this analysis and, the most important in preparing my forecast, is to identify what happened once point 7, the final peak of each 20-year cycle, was reached.  Not only did I look at the following twelve months, but I continued the analysis into the beginning of the ensuing cycle (point 2 of the new 20-year cycle).

Using the dates identified as point 7 in the preceding tables, I calculated cumulative percentage returns from the peak price level for each 20-year cycle.  For the first year, these are calculated monthly.  The final observation is labeled “Average Peak + 30 Months”, which is point 2 of the following cycle.  Historically, after the low at point 2 is reached a rally begins which is extended in both price and time.  The following table contains the results.

In 4 out of 5 historical 20-year cycles, 80% of the sample, the cumulative percentage returns from the peak price level is negative in every month of the first 12 months following the peak.

In 5 out of 5 historical 20-year cycles, 100% of the sample, the cumulative percentage returns from the peak price level is negative 30 months following the peak.

One historical 20-year cycle, 1961-1980, stands out in the forward-return table due to its positive returns.  The forward returns in this period include the months from January 1980 to June 1982.  Five unique factors contribute to these positive returns:  1. demographic tailwind (the baby boomers were entering their prime earning and spending years), 2. tax-deferred retirement savings accounts were legally created in 1978, 3. mutual funds were relatively new and experiencing tremendous growth, 4. financial deregulation and, 5. consumer credit expansion was beginning in earnest.

To prepare my Dow Jones Industrials forecast, the average scenario uses the average historical experience, excluding the 1961-1980 20-year cycle.  The demographic and legislative factors listed above that bolstered returns in the early 1980’s are now largely turning into headwinds.  Also, I hold the belief that financial deregulation and the resulting financial engineering has reached its zenith.  Additional financial deregulation will have minimal benefits going forward.  Lastly; consumers, state governments, and the federal government have accrued outstanding debt levels so large that make the continued growth of debt increasingly challenging.

My pessimistic scenario uses the minimum percentage returns identified in the preceding table.  Arguably, that may turn out to be conservative as my fundamental valuation model, alone, suggests a -65% decline is warranted.

Scientific & Mathematical Foundation:

Standing on the Shoulders of Genius

In his book How To Make Profits in Commodities, W.D. Gann makes the statement that everything in existence is based on exact proportion and perfect relation.  He also states that, in nature, there is no chance because mathematical principles of the highest order are at the foundation of all things.  “As Faraday said, there is nothing in the universe except mathematical points of force.”

Michael Faraday (1791-1867) was one of the most influential scientists in history.  He discovered the principles underlying electromagnetic induction, diamagnetism, and electrolysis.  Faraday also established that magnetism could affect rays of light and that there was an underlying relationship between the two.  This led him to study the magnetic properties of the Earth’s atmosphere.  Faraday realized that magnetic energy emerges from the Sun and each of the planets in our solar system.  Further, he explained how these planetary magnetic energies interact with one another, directly affecting how much of the Sun’s magnetic energy reaches the Earth’s atmosphere.  He referred to these magnetic energies as “magnetic lines of force”.  These lines are similar to the idea of Pythagoras’ strings.

Pythagoras of Samos (570 BC-495 BC) was a Greek philosopher and mathematician.  He is credited with many mathematical and scientific discoveries including the Pythagorean Theorem, Pythagorean Tuning, the five regular solids, the Theory of Proportions, the Sphericity of the Earth, and the identity of the planet Venus.  He exerted a profound impact on the philosophies of Plato, Aristotle, and, through them, Western philosophy.  Pythagoras believed that the universe was connected by strings.  The strings were connected to the spirit world at the top and to the Earth below.

W.D. Gann studied the works of both Pythagoras and Faraday.  He frequently referred to “natural law” in his writings.  For example, in his 1929 Stock Forecast Gann stated:

“It is natural law.  Action equals reaction in the opposite direction.  We see it in the ebb and flow of the tide and we know from the full bloom of summer follows the dead leaves of winter.”

What Gann was referring to was his belief, based upon the work of Faraday (which was influenced by Pythagoras), that as the planets in our solar system move through their orbits around the sun, the interaction of their magnetic lines of force changes the amount of magnetic energy from the Sun that reaches the Earth’s atmosphere.  These changes affect every naturally occurring event on Earth, including weather, crop growth, and human psychology.  Because of his belief, Gann spent his life researching how the positions of the individual planets and how the angular relationships of the planets relative to one another affected financial markets.  Gann is also well known for his use of his number sequences in the form of squares, circles, and hexagons.  These number sequences follow a defined mathematical relationship to one another.  It is apparent from this discussion that Gann was both a scientist and a mathematician.  He was financially successful in the application of his research, as evidenced by his published books, students of his correspondence courses, and his now famous 1909 interview in Ticker and Investment Digest.  He reportedly accumulated $50 million in profits during his trading career.

The Natural Cause of the 20-Year Cycle

As I stated on page three, the 20-year cycle has a natural cause.  This natural cause is the conjunction of the planets Jupiter and Saturn.  A planetary conjunction occurs when the difference in longitude between to planets is zero degrees.  If you were looking up into the night sky, the Earth, Jupiter, and Saturn would appear to be in a straight line.  The actual amount of time between the conjunction of Jupiter and Saturn varies from slightly under 20 years to slightly over 20 years.  From the list of historical 20-year cycles presented on page three, a conjunction occurred in the first year of the cycle every time.  This explains why I used 1801 as the starting point of the first 20-year cycle.  Using an ephemeris you can identify the location of each planet, and their angular relationships to one another, throughout history and infinitely forward in time.  The next conjunction of Jupiter and Saturn will occur on December 21, 2020, signifying the start of the twelfth 20-year cycle.


The power of technical analysis is in its ability to reduce multi-dimensional markets into a filtered two-dimensional space of price and time.  Our methodology applies a consistent framework that identifies key measures of trend, distinct levels of support and resistance, and identification of potential trading ranges.  Our methodology can be applied to any security or index, across markets, for which we can attain a reliable price history.  We look forward to bringing you our unique brand of technical analysis and insight to many different markets.  If you are a professional market participant, and are open to discovering more, please connect with us.

We are not asking for a subscription, we are asking you to listen. 

S&P 500 Monthly Valuation & Analysis Review – 11-30-17

Real Investment Advice is pleased to introduce J. Brett Freeze, CFA, founder of Global Technical Analysis. Going forward on a monthly basis we will be providing you their valuable S&P 500 Valuation Chart Book. This unique analysis provides an invaluable long term perspective of equity valuations. 

If you are interested in learning more about their services, please connect with them.


We believe that the chief determinant of future total returns is the relative valuation of the index at the time of purchase. We measure valuation using the Price/Peak Earnings multiple as advocated by Dr. John Hussman. We believe the main benefit of using peak earnings is the inherent conservatism it affords: not subject to analyst estimates, not subject to the short-term ebbs and flows of business, and not subject to short-term accounting distortions. Annualized total returns can be calculated over a horizon period for given scenarios of multiple expansion or contraction.

Our analysis highlights expansion/contraction to the minimum, mean, average, and maximum multiples (our data-set begins in January 1900) . The baseline assumptions for nominal growth and horizon period are 6% and 10 years, respectively. We also provide graphical analysis of how predicted returns compare to actual returns historically.

We provide sensitivity analysis to our baseline assumptions. The first sensitivity table, ceterus paribus, shows how future returns are impacted by changing the horizon period. The second sensitivity table, ceterus paribus, shows how future returns are impacted by changing the growth assumption.

We also include the following information: duration, over(under)-valuation, inflation adjusted price/10-year real earnings, dividend yield, option-implied volatility, skew, realized volatility, historical relationships between inflation and p/e multiples, and historical relationship between p/e multiples and realized returns.

Our analysis is not intended to forecast the short-term direction of the SP500 Index.  The purpose of our analysis is to identify the relative valuation and inherent risk offered by the index currently.

Why You Are Like The Astros

You’re the Astros, not the Dodgers, Yankees or Red Sox

The city of Houston is elated, tired and relieved today with the close of an epic World Series and our team coming out on top. This has been a long time coming, 56 years to be exact and it almost feels surreal. Houston is a tough city, not in the way of these streets are tough-though some are. More in a way that we’re resilient, diverse and have that never say never attitude. Yes, baseball is just a game, but this year it’s provided some much needed reprieve from daily life in a region devastated from Hurricane Harvey.

Look back a couple of years and this is a team that endured 3 consecutive 100 loss seasons. A starting over, if you will from being a once competitive staple in the National League Central Division. This organization has had to pick itself up from bouncing around on rock bottom. They could have easily tried to spend their way out of the hole or they could very strategically and patiently draft and develop talent little by little, year by year. This is a roster that until recently was void of any top earners and really the last bet Jeff Lunhow the Astros general manager made was one of risk/reward in Justin Verlander and boy did that pay off in ways only imaginable for the Astros fans. This team is now set up for years to come, by not taking the easy way out, by sticking to their plan and enduring the process knowing that these days will come. Is this a Dynasty? Only time will tell, but they are set up for the next several years with players under contract and a clubhouse that appears to love each other’s company.

The Dodgers, Yankee’s and Red Sox have the highest payrolls in baseball and have a collective 40 World Series Championships. In retrospect, they are your too big to fail banks. You and I we’re just mere mortals. Championships were bought and paid for long ago for times just like this week. They can afford to swing and miss because they’ll just step back up in the batter’s box with more money to offer and the promise of chasing a ring to superstar free agents. Most people, companies or teams don’t have that luxury.

In a lot of ways, we’re just like this Astros team, our financial wealth generally didn’t appear from thin air. Rather it was worked on, sacrifices and plans were made. There are times life throws us curve balls in the form of sickness, job loss, natural disaster, children, death or just unexpected expenses. This is when one must remember to stay the course, market returns help grow your money, but you and your good saving and spending habits will get you to your destination.  Risk management is now key, especially when you accumulate assets or when you reach your goal. For most, that goal is retirement. Find a Jeff Lunhow or in our case an advisor to help chart your course, you see you don’t have to be the Dodgers, Yankees or Red Sox to get the prize.

The road isn’t straight nor is it easy, but just like these Astros showed a little planning, nurturing, patience, sound defense and a double or home run every now and then can get you a long way.

Should You Pay Off Your House? 7-Things To Consider

“If I have the cash should I pay my mortgage off early?”

That is a regular question we are asked.

While it might seem to be the simple answer of “yes,” such is not always the case. Like anything, when it comes to making decisions for an individual, or family, a plan and some sound advice is always beneficial when facing these tough decisions.

Since we can’t do a plan, here’s some advice.

Everyone’s scenario is different and I do mean everyone. You may be able to pay your mortgage off and still have millions in the bank. Maybe you have enough guaranteed income and additional savings that paying the house off earlier won’t cause you to skip a beat. Or maybe you need all additional liquidity, flexibility and income you can get.

Regardless of your scenario, I believe everyone can take something from these 7 considerations.

Let’s set the record straight. I’m not opposed to paying your home off early when given the right scenario. In fact, there are times that paying your home off early can provide great peace of mind. First, I would go through this exercise:

1) Have a sounding board- No, not your neighbor

This should be your advisor, CPA and/or attorney. If you were my client, I’d prefer it be me. We’d build a team of professionals or work with your existing accountants and attorneys. Your team should be constructed of a group of individuals that have your best interest at heart, a fiduciary is a good start.

The only reason it shouldn’t be your neighbor is they generally have a biased opinion based on what they did. For every one good piece of advice I’ve heard a client gleam from a neighbor there are 9 bad ones.

I’m sure your neighbor is a great guy, extremely smart and successful, but odds are they don’t know your full financial situation. It’s not that your neighbor isn’t smart or even that it’s bad advice, it’s just that it’s not good advice for you.

Gathering information from a number of people may be helpful for you to digest the magnitude of such a decision.  Remember to take that advice with a grain of salt and don’t get paralysis by analysis. Sometimes too many differing opinions can cause us to shut down or put decisions on the back burner.

Unfortunately, there are times we find out clients have paid their home off early after the fact.

For most, paying your home off early is more of an emotional decision than a planning decision. We need to reverse this aspect, just like when investing in markets we need to be as my partner Lance Roberts says “void of emotion.”

This is why it’s important to have someone on the outside looking in. Someone who has seen the triumphs, trials and tribulations of others, experiences that are sometimes priceless and can evaluate your scenario holistically.

2) How long do you plan to live in your home?

The amount of time you plan on living in your home could alter the decision to put your mortgage to bed.

Less than 5 years?

Keep your hard-earned cash on hand. Housing markets, like stock markets move in cycles. I’d hate to have to move and not have the necessary liquidity to put down on a new home or have to sell in a down or slow market.

5-15 years?

Maybe you pay it off? I end that last sentence with a question mark, because this time frame is a bit trickier.

If you find yourself in position to pay your home off early I would hope you could weather any recessionary period even after making that last home payment.

You must have enough in emergency funds and not pull from other assets that are designated to other goals. If you lost your job tomorrow could you still pay your bills and for how long?

This now becomes a best use of capital question. How much interest are you paying and how much can you earn in a relatively safe investment. In today’s environment taking advantage of lower borrowing rates doesn’t seem like such a bad idea.

This is your “forever home.”

Meaning you plan to stay there until you can no longer care for yourself. I really have a hard time with changing your liquid asset (cash) and turning it into a hard asset (your home.) As my partner, Richard Rosso calls it “turning water into ice” I think the analogy fits considering you’re taking your hard-earned cash and putting it into something that’s difficult to “chip” away at. Rule 6 can also play a role in this decision, sometimes when you need senior care you don’t have the luxury of funding it once your home sells.

There is always an exception to the rule, in this instance it’s if the money is going to burn a hole in your pocket. Pay it off, lower your expenses and at least you will have put the cash into something worthwhile, your home.

3) Tax Deductibility

Itemize your taxes? If you itemize many consider the interest tax deduction as the “end all be all” when considering paying off your home. The truth is the majority of people that are paying off their homes typically are in the last years of payments and have little interest to write off.

When considering the deduction of interest one must remember that it’s not 1 for 1. What do I mean by that? The deduction doesn’t reduce your tax burden 1 for 1, it reduces your adjusted gross income by the amount of deductible interest or overall deductions.

For example,

Your Adjusted Gross Income (AGI) is:      $100,000

Itemized Deductions are:    $15,000

Taxable Income:   $85,000

Yes, it does reduce your taxes. No, it’s not the reduction most think.

4) Best use of funds

What are the best use of funds? With current interest rates still near all-time lows, it would suit most to borrow money and use your cash in another way to get more bang for your buck. For most people leverage and credit is not your friend, however when used properly it’s a great tool.

Can you make more on your money investing semi conservatively? For instance, we can currently find investment grade bonds with a coupon of 5% with a 5-7 year duration, buying them at a bit of a premium you may see a 3-4% YTM return on your money.

The other argument is if you do pay your home off early and you’re in retirement the amount needed for expenses will decrease which will in turn decrease the amount you will need to pull from your investment accounts to live.

If you’re in the accumulation (working) mode paying off the home early would increase the amount you could put aside monthly.

Enter, the 5th consideration, liquidity.

5) Liquidity=Flexibility=Options

How much is liquidity worth to you? Having liquidity gives you options.

It’s likely you don’t fall into this category since you’re still reading and considering options. Congrats, you’re in an enviable situation to the majority of your peers. The liquidity you possess is powerful.

According to a Bankrate study 69% of Americans don’t have enough saved to meet 6 months of expenses.

When disaster strikes or opportunity knocks I don’t know about you, but I want cash in hand or liquid assets.

Natural disaster, take Hurricane Harvey and all the Houstonians (roughly 70-80%) without flood insurance.  There are some very tough decisions to be made by many, but in the end cash is certainly king.

Business opportunity or real estate deal you can’t pass up?

Need to move quickly, medical or family emergency or would just like to generate additional cash flow?

Cash flow is an important part of the equation. Can these funds generate some type of income for you and your family and you still retain a degree of flexibility? Go back to #4, best use of funds.

6) Do you have Disability or LTC Insurance?

While in your working years disability insurance is a must. If you use a substantial portion of your liquid assets to pay your home off it could be even more important.

How will you maintain the lifestyle your family is accustomed to if something were to happen such as a car accident or a health scare that kept you or your spouse from working for an extended period of time? A large part of financial planning is the risk management of protecting your family. Make sure you’re protecting your most precious asset.

Long term care insurance, do you, have it? Can you get it? Can you afford it without disrupting your cash flow? Do you need it? I could write a whole article on just these topics, but this should certainly be a consideration when paying off your home.

Remember, in your retirement years getting access to funds can be extremely important and when the funds are tied up in a home, access is limited and can take time.

If you do pay your home off early in retirement, having a home equity line of credit ready and available to use may mitigate some of that risk. I would also recommend having a Power of Attorney who can help in the event you’re incapacitated.

7) But my house has gone up so much in value!

For starters, if you have been in your home for any period of time I’d hope that to be the case. You’ve been socking money away in the form of your monthly payment year after year now add a little inflationary growth and I think you get my point.


Have you ever stopped to calculate how much you’ve actually put into your home in maintenance and improvements? And don’t forget to add those pesky property taxes and HOA fee’s.

Most find that after a similar exercise they come to realize that maybe their home isn’t the investment they thought it was.

The following two charts show prices in real terms and the percentage change.

Price in real terms indicate prices in $’000 at 2015 prices (deflated by CPI) and the percentage change shows the change in inflation adjusted prices between the two selected dates of 1980 to Q2 of 2016

These charts indicate that if you weren’t living in New York, San Francisco, Los Angeles, Miami, Boston or a handful of other offshoots the average American or Houstonian for that matter didn’t see substantial or real growth in their home valuations.

Unless you’re finding a home in foreclosure, at a heck of a discount or buying in one of the above valley’s I suspect that if we were as diligent about funding our other goals we may have a different outlook on what’s really our best investment.

Another consideration if you’re truly treating your home like an investment is you must actually sell it to realize any so called gains, after all you will always need someplace to live.

In conclusion:

Paying off your home early is a very personal decision. It’s a decision that’s best evaluated if you can take a step back and look at the big picture. Personally, I don’t like much debt, but debt can be a powerful tool when used correctly or a disastrous enabler.

There are so many sides to this coin, I feel like I could write for days, analyze every scenario and consideration, but then we’d have a book. This is only meant to be a template or guide for things to consider should you find yourself in this scenario.

Consider your circumstances, plan accordingly and make the right decision.  Find or use your resources to make decisions you feel confident in and don’t look back. Learn from your mistakes, don’t dwell on them.

There is no one size fits all.

The 5 Myths of Diversification

5-Myths Of Diversification

Warning: You’ve Been Sold A Bill Of Goods

They tell us that diversification is a ‘free lunch…’ a way to effectively manage risk.

But is it?


  • Diversification is just a pacifier for your concerns.
  • Diversification is just an all-day sucker to provide a false sense of comfort.

Do you know how the financial industry’s definition of diversification can destroy your wealth?

In our next webinar on August 17, Certified Financial Planner Richard Rosso and I will provide the The 5 Myths of Diversification That Can Destroy Your Wealth, including:

  • What diversification, post Great-Recession, really is, and how you can benefit from it;
  • How your portfolio may be a wolf in lamb’s clothing, and more dangerous than you think;
  • What you need to know now about real diversification to manage risk and lower fees;
  • Why your thinking about diversification differs from your broker’s, and why it can cost you thousands.

We’ll share this, and more, on”

  • WHEN: Wednesday, August 17th
  • TIME: 11:30am – 12:15pm
  • WHERE: At Your Desk

If you would like to access this recorded webinar please click here.

5 Strategies For A Successful Retirement


Are you getting close to OR have retired?

  • Recently had a job change?
  • Experienced a layoff?
  • Had an unexpected life event that has changed plans?

Those issues alone are enough to overwhelm most individuals, but combine that with:

  • A Weak Economic Environment
  • A Change In The Presidency
  • Extremely Overvalued and Extended Markets
  • Surging Debt Levels
  • And, Central Bankers Gone Wild…

Well, you get the idea….

Risk has risen markedly for something to derail your retirement plans – permanently.

5 Strategies For A Successful Retirement 

This webinar covers the strategies and concepts you need to consider to have a secure and successful retirement.

Richard will take the time to walk you trough:

  1. How to avoid the dogma of old portfolio distribution rules.
  2. What investments should you avoid at all costs? We’ll tell you.
  3. Learn how to fine-tune your savings and spending strategies to wind up with more dollars down the road.
  4. Are your plans realistic or are you cruisin for a bruisin?
  5. Have you considered getting the most out of Social Security and tax-smart strategies to get the most out of your money in retirement?

This presentation could save you thousands of dollars in retirement and keep you from making critical mistakes with your money.

If you would like to access this recorded webinar please click here.

The Great American Economic Growth Myth

Since the end of the financial crisis, economists, analysts, and the Federal Reserve have continued to predict a return to higher levels of economic growth. As I showed in my discussion of the Fed’s forecasts, these predictions have continued to fall short of reality.

“Besides being absolutely the worst economic forecasters on the planet, the Fed’s real problem is contained within the table and chart below. Despite the rhetoric of stronger employment and economic growth – plunging imports and exports, falling corporate profits, collapsing manufacturing and falling wages all suggest the economy is in no shape to withstand tighter monetary policy at this juncture.”


“Of course, if the Fed openly suggested a ‘recession’ could well be in the cards, the markets would sell off sharply, consumer confidence would drop and a recession would be pulled forward to the present. This is why “what the Fed says” is much less important than what they do.”

Importantly, this point was not lost even on the most bullish minded of individuals, David Rosenberg, who just penned the same for Business Insider:

“I have been in this business for 30 years and have never seen a central bank chief slip the word “uncertainty” into the headline.

Not just that, but she invoked the term no fewer than 10 times to describe the domestic and global macro and market backdrop — this even as we pass seven years since the worst point of the Great Recession and seven years into the most radical easing of monetary policy in recorded history.

It begs the question: what has gone wrong?”

However, the issue is much greater than just what has gone wrong in recent months. Since 1999, the annual real economic growth rate has run at 1.86%, which is the lowest growth rate in history including the ‘Great Depression.’  I have broken down economic growth into major cycles for clarity.


While economists, politicians, and analysts point to current data points and primarily coincident indicators to create a “bullish spin” for the investing public, the underlying deterioration in economic prosperity is a much more important long-term concern. The question that we should be asking is “why is this happening?”

From 1950-1980 nominal GDP grew at an annualized rate of 7.55%. This was accomplished with a total credit market debt to GDP ratio of less 150%. The CRITICAL factor to note is that economic growth was trending higher during this span going from roughly 5% to a peak of nearly 15%. There were a couple of reasons for this. First, lower levels of debt allowed for personal savings to remain robust which fueled productive investment in the economy. Secondly, the economy was focused primarily on production and manufacturing which has a high multiplier effect on the economy. This feat of growth also occurred in the face of steadily rising interest rates which peaked with economic expansion in 1980.


However, beginning in 1980 the shift of the economic makeup from a manufacturing and production based economy to a service and finance economy, where there is a low economic multiplier, is partially responsible for this transformation. The decline in economic output was further exacerbated by increased productivity through technological advances and outsourcing of manufacturing which plagued the economy with steadily decreasing wages. Unlike the steadily growing economic environment prior to 1980; the post-1980 economy has experienced a steady decline. Therefore, a statement that the economy has had an average growth of X% since 1980 is grossly misleading. The trend of the growth is far more important, and telling, than the average growth rate over time.

This decline in economic growth over the past 30 years has kept the average American struggling to maintain their standard of living. As their wages declined, they were forced to turn to credit to fill the gap in maintaining their current standard of living. This demand for credit became the new breeding ground for the financed based economy. Easier credit terms, lower interest rates, easier lending standards and less regulation fueled the continued consumption boom. By the end of 2007, the household debt outstanding had surged to 140% of GDP. It was only a function of time until the collapse in the “house built of credit cards” occurred.


This is why the economic prosperity of the last 30 years has been a fantasy. While America, at least on the surface, was the envy of the world for its apparent success and prosperity; the underlying cancer of debt expansion and declining wages was eating away at the core. The only way to maintain the “standard of living” that American’s were told they “deserved,” was to utilize ever-increasing levels of debt. The now deregulated financial institutions were only too happy to provide that “credit” as it was a financial windfall of mass proportions.


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. Ultimately these diminished investment opportunities repeatedly lead to widespread mal-investments. Not surprisingly, we clearly saw it play out “real-time” in everything from subprime mortgages to derivative instruments which were only for the purpose of milking the system of every potential penny regardless of the apparent underlying risk. We see it playing out again in the “chase for yield” in everything from junk bonds to equities. Not surprisingly, the end result will not be any different.


When credit creation can no longer be sustained, the process of clearing the excesses must be completed before the cycle can resume.  It is only then, and must be allowed to happen, can resources be reallocated back towards more efficient uses. This is why all the efforts of Keynesian policies to stimulate growth in the economy have ultimately failed. Those fiscal and monetary policies, from TARP and QE to tax cuts, only delay the clearing process. Ultimately, that delay only potentially worsens the inevitable clearing process.

The clearing process is going to be very substantial. The economy currently requires nearly $3.00 of debt to create $1 of real (inflation adjusted) economic growth.  A reversion to a structurally manageable level of debt* would require in excess of $35 Trillion in debt reduction. The economic drag from such a reduction would be dramatic while the clearing process occurs.


*Structural Debt Level – Estimated trend of debt growth in a normalized economic environment which would be supportive of economic growth levels of 150% of debt-to-GDP.

Rosenberg is right. It is likely that “something has gone wrong” for the Federal Reserve as the efficacy to pull-forward future consumption through monetary interventions has been reached. Despite ongoing hopes of “higher growth rates” in the future, it is likely that such will not be the case until the debt overhang is eventually cleared.

Does this mean that all is doomed? Of course, not. However, we will likely remain constrained in the current cycle of “spurt and sputter” growth cycle we have witnessed since 2009. Such will be marked by continued volatile equity market returns and a stagflationary environment as wages remain suppressed while costs of living rise. Ultimately, it is the process of clearing the excess debt levels that will allow personal savings rates to return to levels that can promote productive investment, production, and consumption.

The end game of three decades of excess is upon us, and we can’t deny the weight of the debt imbalances that are currently in play. The medicine that the current administration is prescribing is a treatment for the common cold; in this case a normal business cycle recession. The problem is that the patient is suffering from a “debt cancer,” and until the proper treatment is prescribed and implemented; the patient will most likely continue to suffer.

Has something gone wrong? Absolutely.

Lance Roberts


Lance Roberts is a Chief Portfolio Strategist/Economist for Clarity Financial. He is also the host of “The Lance Roberts Show” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, and Linked-In

The Illusion Of Permanent Liquidity

It’s been more than seven years since the financial crisis and Central Banks globally have kept their rates at record lows, and have even ventured into negative rate territory, to stave off the threat of a recessionary relapse and boost anemic economic growth. While such policies have failed to spark inflationary pressures or boost economic growth, the “illusion of permanent liquidity” has spurred investors to make risky bets and push up asset prices.

This “illusion” has not only been driving investors to make risky bets across the entire spectrum of asset classes; it has also led to the illusion of economic stability and growth. For example, in 2014, financial analysts started pushing the idea of a “new generational cycle” of growing earnings driven by a stronger economic growth that would last for another decade.  Unfortunately, as we are now witnessing, such rosy projections have fallen far short of reality.


Even the Federal Reserve’s own forecasts have fallen well short of reality. As I discussed previously:

“As shown in the chart below, once again the Fed lowered expectations further for economic growth and reduced the number of rate hikes this year from 4 to 2. Yep, ‘accommodative policy’ is here to stay for a while longer which lifted stocks yesterday’s close.”


“Besides being absolutely the worst economic forecasters on the planet, the Fed’s real problem is contained within the table and chart above. Despite the rhetoric of stronger employment and economic growth – plunging imports and exports, falling corporate profits, collapsing manufacturing and falling wages all suggest the economy is in no shape to withstand tighter monetary policy at this juncture.”

While Central Banks globally are working to “repeal” the economic cycle, the continued deterioration in economic growth has become more prevalent as even ongoing accounting manipulations, share buybacks, and cost cutting are no longer boosting bottom-line earnings.  


Of course, such an outlook was ALWAYS overly optimistic and fraught with peril as such an economic expansion would rival the longest previous period on record (119 Months) from March of 1991 through March of 2001 during the “technological revolution.”


Such a prolonged expansion will be quite a feat if it were to occur, particularly given an economy growing at half the rate it was during the 1990’s. Furthermore, given that a bulk of the economic expansion during the 1980-90’s was driven by an $11 Trillion dollar increase in consumer credit, there is little ability to repeat such a “tailwind” currently.


However, the idea of “permanent liquidity,” and the belief that economic growth can be sustained by monetary policy alone, despite slowing in China, Japan, and the Eurozone, has emboldened analysts to continue to expect a resurgence of profit growth in the months ahead. As I noted in this past weekend’s newsletter:

From BCA Research:

“However, leading economic indicators remain bearish, and the slide in the monetary base warns that the path of least resistance for GDP growth is lower. History shows that once GDP growth dips below the level of 10-year Treasury yields, a prolonged slump in stocks typically ensues.

This outlook contrasts starkly with current expectations. The Chart below shows that an aggressive recovery in S&P 500 earnings is expected this year.”


Importantly, these expectations are not simply a reflection of hopes for a recovery in resource prices, but are broad-based across sectors. That is wildly optimistic, underscoring that disappointment will remain a key risk.”

It is unlikely given the current scenario of sub-par economic growth, excess labor slack globally and deflationary pressures rising, that such lofty expectations will be obtained. Importantly, it will be the consequences of such a failure that will be the most important as the longer the music plays the more deafening the silence will be that follows. 

There is a rising realization by Central Banks these excess liquidity flows have failed to work as anticipated. The Bank of Japan’s foray into a “quantitative easing” program nearly 3x the size of that of the Federal Reserve’s last endeavor, or a relative basis, was met with nothing but an ongoing drop in economic growth. Domestically, the Federal Reserve’s program has boosted asset prices that has inflated the wealth of the top 10% but left the bottom 90% in arguably a worse financial position today than five years ago. (see “For 90% of Americans There Has Been No Recovery”)

But what ongoing liquidity interventions have accomplished, besides driving asset prices higher, is instilling a belief there is little risk in the markets as low interest rates will continue or only be gradually tightened.


However, it is a common mistake is to take unusually low volatility and risk spreads as a sign of low risk when, in fact, they are a sign of high risk-taking.

The ongoing mistake currently being made by the vast majority of Wall Street analysts is two-fold. The first is the assumption that the Federal Reserve can normalize interest rates given the underlying deterioration in global growth currently. The second is that increases in interest rates will have ZERO effect on future earnings or economic growth.

As I discussed repeatedly in the past, there has been no previous point in history where rising interest rates did not only slow the economy, but eventually led to an economic recession, market dislocation or both.

“While rising interest rates may not “initially” drag on asset prices, it is a far different story to suggest that they won’t. This is particularly the case when those rate increases are coming from a period of very low economic growth.

What the mainstream analysts fail to address is the ‘full-cycle’ effect from rate hikes. The chart and table below address this issue by showing the return to investors from the date of the first rate increase through the subsequent correction and/or recession.”


The “Illusion of Permanent Liquidity” has obfuscated the underlying inherent investment risk that investors are undertaking currently. The belief that Central Banks will always be able to jump in and avert a dislocation in financial or credit markets is likely deeply flawed.

The problem is these excessive liquidity flows have only impacted the economic surface by dragging forward future consumption. Eventually, the ability to fill the future economic void through monetary policies will fail as the efficacy of liquidity interventions fade. It is only then that investors will come to understand the gravity of the “risks” they have undertaken as the illusion of permanent liquidity fades.

Lance Roberts


Lance Roberts is a Chief Portfolio Strategist/Economist for Clarity Financial. He is also the host of “The Lance Roberts Show” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, and Linked-In

Is Trump’s “Recession Warning” Really All Wrong?

Over the weekend, Donald Trump, in an interview with the Washington Post, stated that economic conditions are so perilous that the country is headed for a “very massive recession” and that “it’s a terrible time right now” to invest in the stock market.

Of course, such a distinctly gloomy view of the economy runs counter to the more mainstream consensus of economic outlooks as witnessed by some of the immediate rebuttals:

Here is the problem.

Ben is correct. There is CURRENTLY no evidence of a recession now, or even in the few months ahead. There never is.

A Funny Thing Happened On The Way To The Recession

The majority of the analysis of economic data is short-term focused with prognostications based on single data points. For example, let’s take a look at the data below of real economic growth rates:

  • January, 1980:        1.43%
  • July, 1981:              4.39%
  • July, 1990:              1.73%
  • March, 2001:          2.30%
  • December, 2007:    1.87%

Each of the dates above show the growth rate of the economy immediately prior to the onset of a recession.

You will remember that during the entirety of 2007, the majority of the media, analyst and economic community were proclaiming continued economic growth into the foreseeable future as there was “no sign of recession.”

I myself was rather brutally chastised in December of 2007 when I wrote that:

“We are now either in, or about to be in, the worst recession since the ‘Great Depression.'”

Of course, a full-year later, after the annual data revisions had been released by the Bureau of Economic Analysis was the recession officially revealed. Unfortunately, by then it was far too late to matter.

However, it is here the mainstream media should have learned their lesson.

The chart below shows the S&P 500 index with recessions and when the National Bureau of Economic Research dated the start of the recession.


There are three lessons that should be learned from this:

  1. The economic “number” reported today will not be the same when it is revised in the future.
  2. The trend and deviation of the data are far more important than the number itself.
  3. “Record” highs and lows are records for a reason as they denote historical turning points in the data.

For example, the level of jobless claims is one data series currently being touted as a clear example of why there is “no recession” in sight. As shown below, there is little argument that the data currently appears extremely “bullish” for the economy.


However, if we step back to a longer picture we find that such levels of jobless claims have historically noted the peak of economic growth and warned of a pending recession.


This makes complete sense as “jobless claims” fall to low levels when companies “hoard existing labor” to meet current levels of demand. In other words, companies reach a point of efficiency where they are no longer terminating individuals to align production to aggregate demand. Therefore, jobless claims naturally fall. 

But there is more to this story.

Less Than Meets The Eye

The last two-quarters of economic growth have been less than exciting, to say the least. However, these rather dismal quarters of growth come at a time when oil prices and gasoline prices have plummeted AND amidst one of the warmest winters in 65-plus years.

Why is that important? Because falling oil and gas prices and warm weather are effective “tax credits” to consumers as they spend less on gasoline, heating oil and electricity. Combined, these “savings” account for more than $200 billion in additional spending power for the consumer. So, personal consumption expenditures should be rising, right?


What’s going on here? The chart below shows the relationship between real, inflation-adjusted, PCE, GDP, Wages and Employment. The correlation is no accident.


Economic cycles are only sustainable for as long as excesses are being built. The natural law of reversions, while they can be suspended by artificial interventions, can not be repealed. 

More importantly, while there is currently “no sign of recession,” what is going on with the main driver of economic growth – the consumer?

The chart below shows the real problem. Since the financial crisis, the average American has not seen much of a recovery. Wages have remained stagnant, real employment has been subdued and the actual cost of living (when accounting for insurance, college, and taxes) has risen rather sharply. The net effect has been a struggle to maintain the current standard of living which can be seen by the surge in credit as a percentage of the economy. 


To put this into perspective, we can look back throughout history and see that substantial increases in consumer debt to GDP have occurred coincident with recessionary drags in the economy. No sign of recession? Are you sure about that?


Importantly, the extremely warm winter weather is currently wrecking havoc with the seasonal adjustments being applied to the economic data. This makes every report from employment, retail sales, and manufacturing appear more robust than they would be otherwise. However, as the seasonal trends turn more normal we are likely going to see fairly negative adjustments in future revisions. This is a problem that the mainstream analysis continues to overlook currently, but will be used as an excuse when it reverses.

Here is my point. While Trump’s call of a “massive recession” may seem far-fetched based on today’s economic data points, no one was calling for a recession in early 2000 or 2007 either. By the time the data is adjusted, and the eventual recession is revealed, it won’t matter as the damage will have already been done.

As Howard Marks once quipped:

“Being right, but early in the call, is the same as being wrong.” 

While being optimistic about the economy and the markets currently is far more entertaining than doom and gloom, it is the honest assessment of the data and the underlying trends that is useful in protecting one’s wealth longer term.

Is there a recession currently? No.

Will there be a recession in the not so distant future? Absolutely.

Trump’s call for a “massive recession” may very well turn out not to be true. However, whether it is a mild, or “massive,” recession will make little difference as the net destruction to personal wealth will be just as disastrous. That is the nature of recessions on the financial markets.

Of course, I am sure to be chastised for penning such thoughts just as I was in 2000 and again in 2007. That is the cost of heresy against the financial establishment, but well worth paying to keep my clients from being burned at the stake, not if, but when the next recession begins.

Lance Roberts


Lance Roberts is a Chief Portfolio Strategist/Economist for Clarity Financial. He is also the host of “The Lance Roberts Show” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, and Linked-In

The Chart Every 25-Year-Old Should Ignore

There are two primary reasons Millennials aren’t saving like they should. The first is the lack of money to save, the second is the lack of trust in Wall Street. A recent post from JP Morgan, via Andy Kiersz, got me to thinking on this issue.

“JPMorgan shows outcomes for four hypothetical investors who invest $10,000 a year at a 6.5% annual rate of return over different periods of their lives:

  • Chloe invests for her entire working life, from 25 to 65.
  • Lyla starts 10 years later, investing from 35 to 65.
  • Quincy puts money away for only 10 years at the start of his career, from ages 25 to 35.
  • Noah saves from 25 to 65 like Chloe, but instead of being moderately aggressive with his investments he simply holds cash at a 2.25% annual return.”


There are two main problems with this entire bit of analysis.

Saving Is Problem

First, while saving $10,000 a year sounds great, the real problem is that median incomes in the U.S. for 80% of wage earners is $42,564 (via the Census Bureau, 2014 most recent data).


The problem, of course, is JP Morgan assumes that these young individuals are able to save an astounding 25% of their annual incomes. This is not a realistic assumption given that many of the Millennial age group are struggling with student loan and credit card debts, car notes, apartment rent, etc.

But it really isn’t just the Millennial age group that are struggling to save money but the entirety of the population in the bottom 80% of income earners. According to a Bankrate.com survey, 63% of American’s do not have enough savings to pay for a $500 car repair or a $1000 emergency room bill. However, as noted, it even covers a large number of higher income individuals as well.

“While savings predictably increase with income and education, even 46% of the highest-income households ($75,000+ per year) and 52% of college graduates lack enough savings to cover a $500 car repair or $1,000 emergency room visit.”

How are Chloe, Lyla, Noah and Quincy to save $10,000 a year when Chole works as a nursing assistant, Lyla waits tables, Noah is a bartender and Quincy works retail? (These are the jobs that have made up a bulk of the employment increases since 2009. They are also in the lower wage paying scales which makes the problem of savings for difficult.)  This is also why Millennials are setting new records for living with their parents.

“Young people started moving out mid-century as they became more economically independent, and by 1960 only 24% of young adults total—men and women—were living with mom and dad. But that number has been rising ever since, and in 2014, the number of young women living with their parents eclipsed 1940s—albeit by less than a percentage point. And last year 43% of young men were living at home, which is the highest rate since 1940.”


“But Lance, wages have been rising recently. That helps, right?”

While we have, at long last, seen an uptick in wages recently, the growth rate of wages remains well behind levels seen prior to the financial crisis. Wage growth remains woefully behind levels of rising healthcare, food and other related living costs that eat up a substantial portion of incomes reducing the ability to save.


Stocks Do Not Deliver Compound Rates Of Return

The second major problem with JPM’s analysis is the assumption that stocks deliver compounded returns over the long-term. This is one of the biggest fallacies perpetrated by Wall Street on individuals in the effort to entice them to sink their money in “fee-based” investment strategies and forget about them.

Compound returns ONLY occur in investments that have a return of principal function and an interest rate such as CD’s or Bonds (not bond funds.)  This is not the case with stocks as I have explained previously:

“First, while over the long-term (1900-Present) the average rate of return may have been 10% (total return), the markets did not deliver 10% every single year.  As I discussed just recently, a loss in any given year destroys the ‘compounding effect:’

Let’s assume an investor wants to compound their investments by 10% a year over a 5-year period.”


“The ‘power of compounding’ ONLY WORKS when you do not lose money. As shown, after three straight years of 10% returns, a drawdown of just 10% cuts the average annual compound growth rate by 50%.

Furthermore, it then requires a 30% return to regain the average rate of return required. In reality, chasing returns is much less important to your long-term investment success than most believe.”

Secondly, while JPM’s assessment shows a nice smooth acceleration of wealth for the four individuals, there is a huge difference that occurs when accounting for the variability of returns during a long-term investment period.  To wit:

“Here is another way to view the difference between what was ‘promised,’ versus what ‘actually’ happened. The chart below takes the average rate of return, and price volatility, of the markets from the 1960’s to present and extrapolates those returns into the future.”


“When imputing volatility into returns, the differential between what investors were promised (and this is a huge flaw in financial planning) and what actually happened to their money is substantial over the long-term.”

Lastly, and probably the most critical point, is valuation level of the market when these individuals began the saving and investing program.

The problem for Chloe and her friends is that valuation levels are currently at some of the highest levels recorded in market history. The chart below shows REAL rolling returns for stock-based investments over 20-year time frames at various valuation levels throughout history.


Of course, none of this even includes the negative impacts to individuals and their savings due to the emotional and psychological impact of market volatility over time. As I discussed previously in “Dalbar: Why Investors Suck:” 

“In 2014, the average equity mutual fund investor underperformed the S&P 500 by a wide margin of 8.19%. The broader market return was more than double the average equity mutual fund investor’s return. (13.69% vs. 5.50%).”


Why is this? Well, according to Dalbar, there are three primary reasons:

  • 25% Lack of capital to invest (Chloe can’t save $10,000 a year)
  • 25% Capital needed for something else. (Noah is paying off student loan debt.)
  • 50% Were directly related to psychological and emotional factors.

Of course, after years of watching their parents slaughtered by two massive bear markets, which Wall Street never warned of and were directly responsible for, is it any wonder that “trust” is a major issue? 


See the problem here for Wall Street?

What Millennial’s, and everyone else, is starting to figure out is that Wall Street is not there to help you, but only to help themselves. “Long-term” and “buy-and-hold” investment strategies are good for Wall Street’s bottom lines as the annuitized revenue stream accrues each year. Unfortunately, for individuals, the results between what is promised and what actually occurs continues to be two entirely different things and generally not for the better. 

Don’t misunderstand me. Should individuals invest in the financial markets? Absolutely. However, it should be done with a solid investment discipline that takes into account the importance of managing volatility and psychological investment risks. There are many great advisors that do exactly that, unfortunately, they generally aren’t found on the front pages of investment publications or in the financial media.

Of course, the problem to solve first is getting Millennial’s out of their parents basements and back into the work force. Having a job makes it easier to start investing to begin with.

Lance Roberts


Lance Roberts is a Chief Portfolio Strategist/Economist for Clarity Financial. He is also the host of “The Lance Roberts Show” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, and Linked-In