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Where’s the Adult Merit Badge for Super Savers?

Super Savers are a special breed.

They are not concerned about keeping up impressions; they exist outside the mainstream of seductive consumerism.

Call it a mindset, call it walking a different path; perhaps it’s an offbeat childhood money script. Whatever it is, those who fall into this category or save 20% or more of their income on a consistent basis are members of an elite group who strive for early financial independence.

Speaking of independence: At RIA we believe households should maintain 3-6 months of living expenses in a savings account for emergencies like car and house repairs.  They should also maintain an additional 6 months of living expenses as a “Financial Vulnerability Cushion,”  whereby cash is set aside for the big, life-changing stuff like extended job loss especially as we believe the economy is in a late-stage expansionary cycle. Job security isn’t what it used to be; best to think ahead.

In 2018, TD Ameritrade in conjunction with Harris Poll, completed a survey among 1,503 U.S. adults 45 and older to understand the habits that set Super Savers apart from the pack. The results are not surprising. However, they do validate habits all of us should adopt regardless of age.

Like a physical exercise regimen, shifting into Super Saver mode takes small, consistent efforts that build on each other.

So, what lessons can be learned from this elite breed?

First, on average, Super Savers sock away 29% of their income compared to non-super savers. 

Super Savers place saving and investing over housing and household expenses.

Keep in mind, the Personal Saving Rate as of December 2019 according to the Federal Reserve Bank of St. Louis was a paltry 7.6%.  How does this group manage to accomplish such an arduous task? They abhor the thought of being house poor. They focus attention on the reduction of spending on the big stuff, or the fixed costs that make a huge impact to cash flow. Candidly, they’re not concerned about cutting out lattes as a viable strategy to save money. Super Savers spend 14% on housing, 16% on essential household expenses compared to non-supers who spend 23% and 21%, respectively. Any way you cut it, that’s impressive!

Perhaps it’s because Super Savers think backwards, always with a financially beneficial endgame in mind. There is great importance placed on financial security, peace of mind and freedom to do what they want at a younger age. They consider the cumulative impact of monthly payments on their bottom line, which is not common nature for the masses.  They internalize the opportunity cost of every large or recurring expenditure.

Super Savers weigh the outcome of every significant purchase, especially discretionary items, which invariably increases their hesitancy to spend. This manner of thought provides breathing room to deliberate less expensive alternatives and thoroughly investigate the pros and cons of their decisions.

Tip for the Super Saver in training: Sever the mental connection between monthly payments and affordability. How? First, calculate the interest cost of a purchase. For example, let’s say you’re looking to purchase an automobile. First, never go further than 36 months if you must make payments. Why? Because longer loan terms like 48 to 72 months is a payment mentality that will undoubtedly increase interest costs.

For example, let’s say an auto purchase is financed for $23,000. At 3.49% for 36 months, the payment is roughly $674 with total loan interest of $1,258. For 72 months, naturally there’s a lower monthly obligation – $354. However, total loan interest amounts to $2,525.

A Super Saver’s consideration would be on the interest incurred over the life of a loan, not the affordability of monthly payments. An important difference between this manner of thinking and most, is to meet a lifestyle, it’s common for households to go for the lowest monthly payment with little regard to overall interest paid. Super savers will either consider a less expensive option or adjust household budgets to meet higher payments just to pay less interest in the long run.

Second, Super Savers live enriching lives; they don’t deprive themselves.

Members of the super crowd don’t live small lives -a big misnomer. I think people are quick to spread this narrative to ease personal guilt or envy. Certainly, a fiscal discomfort mindset is part of who they are when they believe personal financial boundaries are breached. However, the TD Ameritrade survey shows that both super and non-super savers spend the same 7% of their income on vacations!

Third, starting early is key for Super Savers.

Per the study, more than half of Super Savers started investing by age 30 (54%).  I’m not a fan of personal finance dogma. Many of the stale tenets preached by the brokerage industry are part of a self-serving agenda to direct retail investor cash into cookie-cutter asset allocation portfolios; all to appease shareholders.

However, one rule I’m happily a complete sucker for is Pay Yourself First. It’s not just a good one. It’s the core, the very foundation, of every strong financial discipline. Why? Paying yourself first, whereby dollars are directed to savings or investments before anything else, reflects a commitment to delayed gratification. An honorable trait that allows the mental breathing room to avoid impulse buys, raise the bar on savings rates and minimize the addition of debt.

Per Ilene Strauss Cohen, Ph.D. for Psychology Today, people who learn how to manage their need to be satisfied in the moment thrive more in their careers, relationships, health and finances when compared to those who immediately give in to gratification. Again, the root of Pay Yourself First is delayed gratification; the concept goes back further than some of the concepts the financial industry has distorted just to part you from your money.

Fourth, Super Savers embrace the simple stuff.

When it comes to financial decisions, basics work. For example, Super Savers avoid high-interest debt (65% vs. 56% for non-super savers),  stick to a budget (60% vs. 49%), invest in the market (58% vs. 34%) and max out retirement savings (55% vs. 30%).

Listen, these steps aren’t rocket science; they’re basic financial literacy.

For example, I’ve been ‘pencil & paper’ budgeting since I began my Daily News Brooklyn paper route at age 11. Budgeting over time fosters an awareness of household cash flow.  Try micro-budgeting for a few months. It will help you intimately engage with  personal spending trends.

Micro-budgets are designed to increase awareness through simplicity.

Yes, they’re a bit time-consuming, occasionally monotonous; however the goal is worth it – to uncover weaknesses and strengths in your strategy and build a sensitivity to household cash-flow activities. My favorite old-school book for budgeting comes from the Dome companies. For a modest investment of $6.50, a Dome Budget Book is one of the best deals on the market.

Last, Super Savers believe in diversified streams of income and accounts!

44% of Super Savers prefer to bolster already impressive savings rates by funding diversified sources of income, compared to only 36% of their non-super brethren. In addition, Super Savers are especially inclined to lean into Roth IRAs compared to non-super savers. It is rewarding to discover how the best of savers seek various income streams to build their top-line.  They are also tremendous believers in Roth IRAs. The reason I’m glad is this information further validates why our advisors and financial planning team members have passionately communicated the importance of the diversification of accounts for several years.

Super Savers build the following income streams outside of employment income – Dividends, investment real estate, annuities (yes, annuities – 21% vs. 14% for non-super savers), and business ownership (14% compared to 8%).

Their retirement accounts are diversified; over 53% of Super Savers embrace Roth options (53% compared to 29%). A great number of Super Savers fund Health Savings Accounts and strive to defer distributions until retirement when healthcare costs are expected to increase.

Why diversification of accounts?

Imagine never being able to switch lanes as you head closer to the destination called retirement. Consider how suffocating it would be to never be able to navigate away from a single-lane road where all distributions are taxed as ordinary income. There lies the dysfunctional concept that Super Savers are onto – They do not believe every investment dollar should be directed to pre-tax retirement accounts.

Congratulations -With the full support of the financial services industry you’ve created a personal tax time bomb!

As you assess the terrain for future distributions, tax diversification should be a priority.  Envision a retirement paycheck that’s a blend of ordinary, tax-free and capital gain income (generally taxed at lower rates than ordinary income). The goal is to gain the ability to customize your withdrawal strategy to minimize tax drag on distributions throughout retirement. Super Savers have figured this out. Regardless of your savings habits, you should too.

Many studies show that super savers are independent thinkers. Working to create and maintain a lifestyle that rivals their neighbors is anathema to them.

Now, as a majority of Americans are utilizing debt to maintain living standards, Super Savers set themselves apart as a badge of courage. No doubt this group is unique and are way ahead at crafting a secure, enjoyable retirement. and financial flexibility. Whatever steps taken to join their ranks will serve and empower you with choices that those with overwhelming debt cannot consider.

And speaking of badges: Did you know Amazon sells Merit badges for adulting? It’s true. I believe they need to add a “I’M A SUPER SAVER” badge to the collection.

If you’d like to read the complete T.D. Ameritrade survey, click here.

FPC: Do You Have A “Financial Vulnerability” Cushion?

REGISTER NOW for our most popular workshop:


  • The Westin Austin at the Domain- 11301 Domain Drive, Austin, TX 78758
  • February 8th from 9-11am.

Everyone has heard of having emergency funds, but how many have heard of a financial vulnerability cushion (FVC)? Common, old rule of thumb financial rules typically dictate savings rates, but in times like we currently face should we be doing something different?

I know, I know times are great. Markets are hitting all-time highs daily, unemployment is better than anything we have seen in 50 years, tax brackets are low, and the list goes on and on. These are just a few of the more common themes and I’m not here to argue any of them.

I am here to hopefully provide an ounce of clarity.

What happens after some of the best times? What happens when life can’t get you down? What happens after some of the worst times? Markets eb and flow and not just financial markets, but job markets as well.

They don’t say when it rains it pours for nothing.

We want you to be prepared.

I’m not talking about building a bunker, but I am talking about going above and beyond the typical 3-6 months of expenses held in a fully funded emergency fund.  In times like these it’s difficult to think about putting funds anywhere but in the market. After all, the market has been red hot. I visit with people daily who question their need for additional savings or any money in savings accounts while the market’s notching all-time highs weekly. FOMO or “Fear of missing out” is very real.

Have you ever wondered why Wall Street tells everyone that buy and hold is the only strategy, yet they don’t utilize it themselves?

Have you ever wondered how so many people end up in difficult financial positions? Many times, it’s because they choose the present over the future in terms of spending or believe the future will improve and things will only get better. I’ll get that raise or bonus this year, but unfortunately as many know sometimes things are as good as they get.  Don’t get me wrong I’m an eternal optimist, but when it comes to things I literally have no control over I know a little better.

We’d like for you to start thinking a little differently when it comes to where to put your funds and how much you should have saved that are easily accessible and low risk.

Emergency Funds

These funds should be in a savings account and accessible, but not so accessible you can go to the ATM and make a withdrawal. Emergency funds are for real emergencies, your A/C goes out, the car breaks down, your kid breaks their leg, the list goes on. (I’ve actually encountered all within the last 12 months) so don’t say it can’t happen!

We like online banks that are still FDIC insured or a brick and mortar that pays a higher interest rate. Don’t leave these funds in a bank that pays you very little or next to nothing. The banks are using your funds to make money, so should you. Every little bit helps.

A resource to find a credible bank could be or Just type in High Yield Savings. Recently there have been many more banks popping up in the search que so do your research on each institution or give us a call if you have any questions.

Financial Vulnerability Cushion or (FVC)-

These are funds that you can think of a little differently, what if I lose my job/have a disability/illness AND the A/C goes out and the car breaks down.  Instead of putting funds in your savings account go ahead and structure these a bit different.

It’s ok to ladder CD’s to lock in higher or current rates. If using CD’s, you would ladder these in the event rates rise so a portion is always coming due. Example 3 months, 6 months, 9 months, 12 months. This may be difficult to stomach because these rates will be similar to what you will earn in a high yield savings account but will also provide a better rate should rates decrease. Short term bond funds or ETF’s could also be suitable for these funds. Safety and liquidity are key here.  We currently favor short term, high credit quality bonds or Treasury bond ETF’s. Remember, you’re not putting these funds here forever and these should be monitored like any other investment. While these are safer investment’s they are not cash and carry some risk and loss of principal.

While the main purpose of the Financial Vulnerability Cushion is to fortify your financial house, these funds can also be utilized for opportunities as well.

How many times have you thought to yourself if only I had the funds to invest or if you only did something differently? Well, congratulations you can now be one of the few investors with additional cash to buy low. This especially makes sense since Wall Street wants you to ride it out and you can’t time the markets, but they sure can. Wall Street will also tell you that cash is a terrible investment. Ever wonder why? How does Wall Street get paid on cash? Long term cash can be a terrible investment, but as our Director of Financial Planning Richard Rosso says you can fall on one of two swords in regards to having cash:

  1. The inflation sword or
  2. The loss of principal sword.

Our thoughts are this isn’t a forever holding. While I do think this strategy could be used indefinitely for all of the reasons above. This is a strategic investment to be used in late stage cycles. This is your chance to pounce when the market is on sale or that business opportunity falls in your lap. After all true financial freedom is earned not given in markets and often times it is taken away just as quickly.

Bet On Yourself.

Bet on yourself to make the right decision, to be prudent, to be wise. When everyone and I mean everyone is doing one thing does it make sense to be a bit of a contrarian, protect assets and give yourself an opportunity in the future?

This is a great time to review your financial plan and take a look at your assets. Where are you making your contributions? What impact will that make when you make withdrawals? What will give you the most opportunity for success. Most success isn’t given overnight and neither are investment returns.

No one knows what tomorrow brings, but we do know as Roman philosopher Seneca once said “Luck is what happens when preparation meets opportunity.”

Call your advisor, and ask them about your Financial Vulnerability Cushion.

Do you have one?

FPC: All The Numbers You Need To Know For 2020

REGISTER NOW for our most popular workshop:


  • The Westin Austin at the Domain- 11301 Domain Drive, Austin, TX 78758
  • February 8th from 9-11am.

Hopefully you’ve had some time to reflect and grade yourself on your financial progress for 2019 and you’re ready to take 2020 by the horns. The new year brings new numbers to be aware of to ensure you’re taking advantage of all you can. There are many contribution limits, income limits and a vast array of numbers used in financial planning, but here are a few more common ones to make sure you’re staying on track.

Retirement Plans:

For employees:

401(k), 403(b), most 457 plans and the federal governments Thrift Savings Plan employee contributions have increased from $19,000 to $19,500. The maximum amount employees + employers can contribute has also gone up to $57,000.

For those of you over 50 the catch up provision has increased from $6,000 to $6,500.

Please, please don’t overlook the Roth option if you have it within your plan.

For Small Business Owners:

SIMPLE IRA plan contribution limits have been increased from $13,000 to $13,500. There is also a catch up provision of $3,000 for individuals over 50.

SEP IRA contribution limits have also increased from $56,000 to $57,000 or 25% of income whichever is lower.


While the maximum contribution limits for IRA’s of $6,000 and a catch up provision of $1,000 for those over 50 remained unchanged. The income limits for deductibility in the case of the Traditional IRA and the ability to contribute to a Roth IRA did change a bit.

Traditional IRA

You can always make a contribution to a Traditional IRA with no income limitations, but your contribution may not be deductible for income tax purposes. For those of you who would like to make a tax deductible contribution which I assume is most of you, the numbers have changed slightly. There is such a thing as a “phase out limit”. This applies if you make over a certain amount of income you can still contribute and deduct, but the amount will be reduced that you can deduct.

Then there are those who can’t make tax deductible contributions at all.

If you and your spouse are not covered by an employer sponsored plan then regardless of income you can make a deductible contribution.

If you are covered by an employer sponsored plan here is what you need to know about those phase out limits. If you’re single or Head of Household the income limit starts at $65,000 and ends at $75,000. Meaning that if you make between $65,000 and $75,000 your deductible contribution will be reduced, but if you make over $75,000 you can’t deduct your contribution for income tax purposes. If you file Married Filing Jointly that number is $104,000 to $124,000.

Now if only one of you is covered by an employer sponsored plan the income limit for tax deductible contributions goes up to $196,000-206,000.

Roth IRA

Roth IRA’s are a little trickier than their older brethren the Traditional IRA. You can either contribute or you can’t. In the case of the Roth the benefit isn’t a tax deduction, but paying taxes now, funding the Roth with after tax funds and enjoying tax free growth and distributions should you meet a couple of small stipulations.  Roth contributions can be withdrawn at any time without a 10% penalty, but the earnings could be subject to taxes and the 10% early withdrawal penalty if you don’t meet the following:

  • Withdrawals must be taken after 59 ½
  • Withdrawals must be taken after a five year holding period

There are also a few qualifying events that may preclude you from having to pay taxes and/or 10% penalty, but we’ll save those for another post.

Here are the numbers you need to know to determine if you can or can’t contribute to a Roth IRA.

If you’re single or Head of Household and make under $124,000 you can make a full Roth contribution of $6,000 if you’re over 50 you can also make the additional $1,000 catch up contribution. If you make over $124,000, but less than $139,000 then you will be able to make a partial contribution. Over $139,000 you’re out of luck on a Roth IRA.

Married Filing Jointly income numbers for eligibility to contribute to a Roth increase a bit as well increasing from $193,000-$203,000 to $196,000- $206,000.

Saving for Health Care

There are two main types of accounts designed to help pay for medical expenses. If you can utilize them both that’s great, most don’t have that choice, but if you have to choose I really like the Health Savings Account.

Health Savings Accounts (HSA)

If you have access to a Health Savings Account max it out and if you can pay medical expenses out of pocket don’t use these funds.

This is the only account in the world which will give you a triple tax benefit-funds go in pre-tax, grow tax free and come out tax free if used for qualified medical expenses. Fidelity did a study last year that estimated the average 65 year old couple will spend $280,000 in health care expenses. You must be in a high deductible health insurance plan to utilize a HSA, but we are seeing more and more employers offering these types of plans.

This year if you are single you can contribute $3,550 and families can contribute $7,100 to an HSA. There is also an additional catch up provision of $1,000 for those 55 and older.

Flexible Spending Accounts (FSA)

FSA’s which are typically use it or lose it now have an annual contribution limit of $2,750 up from $2,700 in 2019.

Social Security and Medicare

We spend a lot of time discussing Social Security and Medicare and for good reason. According to our workshop attendance in 2019 there is a thirst for knowledge in these areas. I understand, they both can be confusing and this is an area that contains “stealth taxes.”

Social Security

Social Security had a couple of increases in 2020, for instance the estimated maximum monthly benefit if turning full retirement age (66) in 2020 is now $3,011.

OASDI which is an acronym for Old-Age, Survivors, Disability Insurance (Social Security Trust) taxes income up to $137,700 this is an increase from $132,900 in 2019. The current tax is 6.20% on earnings up to the applicable taxable maximum amount of $137,000. The Medicare portion is 1.45% on all earnings.

The retirement earnings test exempt amounts have also increased. In layman’s terms, if you take social security prior to full retirement age you will have $1 in benefits withheld for every $2 over $18,240/yr.

The year an individual reaches full retirement age that number increases to $48,600/yr, but only applies to earning for months prior to attaining full retirement age. In this instance $1 in benefits will be withheld for every $3 in earning above the limit.


Medicare Part B premiums have also increased from $135.50 to $144.60. The first threshold for premium increases or surcharges has also increased for single filers to $87,000 to $109,000 and $174,000 up to $218,000 for joint filers. If you’re above those first numbers your monthly premium goes up to $202. 40 and it only goes up incrementally from there.

These are some of the more common numbers we watch for to either try to keep more money in your pocket or make sure you’re maximizing all funding sources. Now is a great time to check to ensure you’ve updated any systematic contributions to reflect the new numbers. After all, I know you’re paying yourselves first.

Financial Planning Corner: A Change To RMD’s For Post-49’ers

Happy New Year from RIA Advisors Planning Corner! As we wind down the holiday season our focus begins to shift back toward wealth and health.

This financial industry and retirees have been trying to figure out what the passage of the SECURE ACT means to them. We’ve spent some time on this over the last couple of weeks, but we keep getting one really important question from readers over the holidays.

When do I have to take my Required Minimum Distribution aka RMD from my tax deferred retirement account?

We’ll break this down for you by date of birth.

You were born before 1949…

Business as usual if you are already taking RMD’s. The SECURE ACT does not impact you. Continue to take your RMD’s as scheduled.

If you were born between January 1st and June 30, 1949…

Again, business as usual. Since you turned 70 ½ in 2019 hopefully you have already taken your RMD. However, if you didn’t make your distribution in 2019 you’re in luck. You can still take your 2019 distribution as long as you do so prior to April 1, 2020. Remember you will still be on the hook for your 2020 RMD as well as last year’s 2019.

You were born between July 1st and December 31st, 1949…

Winner, winner chicken dinner! The SECURE ACT does affect you. Your first RMD is now 72 instead of 70 ½.

You were born after 1949…

Ding, ding, ding you won the SECURE ACT. Your first RMD doesn’t happen until you’re 72.

RMD’s aren’t to be taken lightly. If you neglect to make your distributions Uncle Sam will penalize you to the tune of 50% of the amount not withdrawn.

I’m sure in the coming weeks we’ll continue to discuss the implications of the SECURE ACT as we receive more questions.  The bill certainly accelerates the need for funds outside of Traditional IRA’s and retirement accounts since the Stretch IRA is all but dead. For more information on the SECURE ACT go to and type in SECURE ACT in the search bar for previously written articles.

Financial Planning Corner: What You Need To Know About The SECURE Act

All you need to know about the SECURE ACT, a Required Minimum Distribution reminder and last minute financially savvy gift ideas

The week before Christmas has been just a little busier than usual. Even with all of the additional political hubbub, it looks like politicians did have time to get one thing done: The SECURE ACT.

The SECURE ACT has finally been sent to President Trump’s desk to be signed. This bill does accomplish several good things for small businesses and the average worker, but it does eliminate one key element for IRA beneficiaries which is the ability to stretch IRA funds generationally. Currently, non-spouse beneficiaries have the ability to stretch distributions from an inherited IRA over their life span. Unfortunately, with the passing of SECURE ACT this is no longer the case. Now, non-spousal inherited IRA funds must be distributed within a 10-year time frame. Who’s the winner here? It’s clearly Uncle Sam as they find more ways to get their hands on your hard-earned dollars. This is just another reason to explore Roth conversions and to take a hard look at where you park your funds. I fear having the flexibility of where to take distributions from will become all the more valuable in the coming years.

Read more on the Secure Act from our Director of Financial Planning, Richard Rosso CFP®.

RMD Reminder

If you’re 70.5 or older you have five market days before the New Year, be sure to take out your Required Minimum Distribution before year end. If you don’t, I’m sure Uncle Sam won’t mind collecting that 50% excise tax on the amount not distributed.


End of Year Gift Ideas…

Ever wonder what to give the kid that has it all? It seems like these days kids have more and more access to technology that we could have only dreamed of. Heck, my 3-year-old can work an iPad as well or better than I can and he doesn’t even own one. If this is you this holiday season, don’t fret. Here are a couple ideas that may not produce any big smiles from the little ones, but will help give your loved ones a leg up in life.

Roth IRA

Do you have a child or grandchild that has worked this year? No, we aren’t talking about those with babysitting or lawn jobs that never get taxed. The IRS defines earned income as “all the taxable income and wages you get from working… for someone who pays you or in a business you own.” Key word taxable.

You can contribute to a Roth or Traditional IRA depending on income limits, but considering they’re children let’s assume they fall under the income limits. With these assumptions, I would go with the Roth. Having the ability to put funds aside at a young age in an account that will grow tax free without income taxes taken out in retirement is a no brainer.

The max you can put aside for 2019 for your worker is up to their earned income or $6,000… whichever is less.

529 Plans

529 plans are an excellent way to put funds aside for college without the child getting control of the assets at the age of 18. A 529 plans biggest benefit is its tax-free growth if the funds are used for higher education.

Annual contributions to a 529 plan for 2019 can be up to $15,000 per year or a lump sum contribution of $75,000 for a 5 year period. Be careful not to trigger gift tax consequences. 529 plans are issued for each state, if you live in a state with state income tax check to see if your state plan offers tax benefits for your contributions. If you live in a state without state income tax pick the plan that’s most appropriate for you.

These gifts may seem boring and fall on deaf ears for the time being, but I can assure you as your kids or grandkids age they will be more valuable and meaningful than any toy or trinket they could receive.

One Last Suggestion

One last gift suggestion is one of your time. Time with family, time volunteering, time helping others. We often think that gifts have to be of monetary value and overlook one of the most fleeting and sought-after things, time. If you’re on your death bed would your thoughts be of one more zero in your bank account or of time? In this world, or even our role as advisors, I believe it’s ever more important to help keep things in perspective. I hope you enjoy TIME with loved ones, recharge and prepare to conquer 2020.

However, if you don’t have the time I’m sure there are many charitable organizations who need and would love a monetary donation. Plus, you may reap the benefit of a nice write-off if you can itemize your taxes. Sorry, I couldn’t help myself with one more money saving tip.

With any monetary gift consult with your financial advisor and CPA to ensure you’re staying within the lines and utilizing the right vehicle for the purposes intended for they all have their pro’s and con’s. The information above is intended to provide basic insight into a couple of often overlooked strategies.

We hope you have a Merry Christmas and a happy, prosperous, healthy New Year.

In 2020, we look forward to keeping you up to speed on financial planning topics, new rules and regulations and most of all things that help enrich or better your life.

Why The Measure Of “Savings” Is Entirely Wrong

In our recent series on capitalism (Read Here), we were discussing how the implementation of socialism, by its very nature, requires an ability to run unlimited deficits. In that discussion was the following quote:

Deficits are self-financing, deficits push rates down, deficits raise private savings.” – Stephanie Kelton

On the surface, there does seem to be a correlation between surging deficits and increases in private savings, as long as you ignore the long-term trend, or the reality of 80% of Americans in the U.S. today that live paycheck-to-paycheck.

The reality is the measure of “personal savings,” as calculated by the Bureau of Economic Analysis, is grossly inaccurate. However, to know why such is the case, we need to understand how the savings rate is calculated. The website recently provided that calculation of us. 

As you can see, after the estimated taxes and estimated expenses are paid, there is $6,017 dollars left over for “savings,” or, as the Government figures suggest, an 8%+ savings rate. 

The are multiple problems with the calculation.

  1. It assumes that everyone in the U.S. lives on the budget outlined above
  2. It also assumes the cost of housing, healthcare, food, utilities, etc. is standardized across the country. 
  3. That everyone spends the same percentage and buys the same items as everyone else. 

The cost of living between California and Texas is quite substantial. While the median family income of $78,635 may raise a family of four in Houston, it is probably going to be quite tough in San Francisco.

While those flaws are apparent, the biggest issue is the saving rate is heavily skewed by the top 20% of income earners. This is the same problem that also plagues disposable personal income and debt ratios, as previously discussed  in “America’s Debt Burden Will Fuel The Next Crisis.” To wit:

“The calculation of disposable personal income (which is income less taxes) is largely a guess, and very inaccurate, due to the variability of income taxes paid by households. More importantly, the measure is heavily skewed by the top 20% of income earners, and even more so by the top 5%. As shown in the chart below, those in the top 20% have seen substantially larger median wage growth versus the bottom 80%. (Note: all data used below is from the Census Bureau and the IRS.)”

The interactive graphic below from MagnifyMoney shows the disparity of income versus savings even more clearly.

When you look at the data in this fashion, you can certainly begin to understand the calls for “socialism” by political candidates. The reality is the majority of Americans are struggling just to make ends meet, which has been shown in a multitude of studies. 

“The [2019] survey found that 58 percent of respondents had less than $1,000 saved.” –

Or, as noted by the WSJ:

“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.”

When looking at the data, it is hard to suggest that Americans are saving 8% or more of their income.

The differential between incomes and the actual “cost of living” is quite substantial. As Researchers at Purdue University found in their study of data culled from across the globe, in the U.S., $132,000 was found to be the optimal income for “feeling” happy for raising a family of four. (I can attest to this personally as a father of a family of six)

A Gallup survey found it required $58,000 to support a family of four in the U.S. (Forget about being happy, we are talking about “just getting by.”) 

So, while the Government numbers suggest the average American is saving 8% of their income annually, the majority of “savings” is coming from the differential in incomes between the top 20% and the bottom 80%.

In other words, if you are in the “Top 20%” of income earners, congratulations, you are probably saving a chunk of money.

If not, it is likely a very different story.

The “gap” between the “standard of living” and real disposable incomes is shown 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 $2654 annual deficit that cannot be filled.

That gap explains why consumer debt is at historic highs and growing each year. If individuals were saving 8% of their money every year, debt balances would at least be flat, if not declining, as they are paid off. 

We can see the inconsistency between the “saving rate” and the requirement to sustain the “cost of living” by comparing the two. Beginning in 2009, it required the entire income of wage earners plus debt just to maintain the standard of living. The gap between the reported savings rate, and reality, is quite telling.

While Stephanie Kelton suggests that running massive deficits increases saving rates, and pose not economic threat as long as their is no inflation, the data clearly suggests this isn’t the case.

Savings rates didn’t fall in the ’80s and ’90s because consumers decided to just spend more. If that was the case, then economic growth rates would have been rising on a year-over-year basis. The reality, is that beginning in the 1980’s, as the economy shifted from a manufacturing to service-based economy, productivity surged which put downward pressure on wage and economic growth rates. Consumers were forced to lever up their household balance sheet to support their standard of living. In turn, higher levels of debt-service ate into their savings rate.

The problem today is not that people are not “saving more money,” they are just spending less as weak wage growth, an inability to access additional leverage, and a need to maintain debt service restricts spending.

That is unless you are in the top 20% of income earners. 

Peak Buybacks? Has Corporate Indulgence Hit Its Limits

Since the passage of “tax cuts,” in late 2017, the surge in corporate share buybacks has become a point of much debate. As I previously wrote, stock buybacks are once again on pace to set a new record in 2019. To wit:

“A recent report from Axios noted that for 2019, IT companies are again on pace to spend the most on stock buybacks this year, as the total looks set to pass 2018’s $1.085 trillion record total.”

The reason companies spend billions on buybacks is to increase bottom-line earnings per share which provides the “illusion” of increasing profitability to support higher share prices. Since revenue growth has remained extremely weak since the financial crisis, companies have become dependent on inflating earnings on a “per share” basis by reducing the denominator. 

“As the chart below shows, while earnings per share have risen by over 360% since the beginning of 2009; revenue growth has barely eclipsed 50%.”

As shown by BofA, in 2019, cumulative buybacks are up +20% on an annualized basis, with the 4-week average reaching some of the highest levels on record. This is occurring at a time when earnings continue to come under pressure due to tariffs, slower consumption, and weaker economic growth.

While share repurchases are not necessarily a bad thing, it is just the “least best” use of companies liquid cash. Instead of using cash to expand production, increase sales, acquire competitors, make capital expenditures, or buy into new products or services which could provide a long-term benefit; the cash is used for a one-time boost to earnings on a per-share basis.

Yes, share purchases can be good for current shareholders if the stock price rises, but the real beneficiaries of share purchases are insiders where changes in compensation structures have become heavily dependent on stock-based compensation. Insiders regularly liquidate shares which were “given” to them as part of their overall compensation structure to convert them into actual wealth. As the Financial Times recently penned:

Corporate executives give several reasons for stock buybacks but none of them has close to the explanatory power of this simple truth: Stock-based instruments make up the majority of their pay and in the short-term buybacks drive up stock prices.

That statement was further supported by a study from the Securities & Exchange Commission which found the same issues:

  • SEC research found that many corporate executives sell significant amounts of their own shares after their companies announce stock buybacks, Yahoo Finance reports.

Not surprisingly, as corporate share buybacks are hitting record highs; so is corporate insider selling.

What is clear, is that the misuse, and abuse, of share buybacks to manipulate earnings and reward insiders has become problematic. As John Authers recently pointed out:

“For much of the last decade, companies buying their own shares have accounted for all net purchases. The total amount of stock bought back by companies since the 2008 crisis even exceeds the Federal Reserve’s spending on buying bonds over the same period as part of quantitative easing. Both pushed up asset prices.”

In other words, between the Federal Reserve injecting a massive amount of liquidity into the financial markets, and corporations buying back their own shares, there have been effectively no other real buyers in the market. 

Less Bang For The Buck

While investors have chased asset prices higher over the last couple of years on hopes of a “trade deal,” more accommodation from Central Banks, or hope the “bull market will never end,” the impact of share buybacks on asset prices is fading.

The chart below is the S&P 500 Buyback Index versus the Total Return index. Following the financial crisis, when companies changed from “splitting shares” to “reducing shares,” there has been a marked outperformance by those companies.

However, while corporate buybacks have accounted for the majority of net purchases of equities in the market, the benefit of pushing asset prices higher is waning. Outside of the brief moment in 2018 when tax cuts were implemented, which allowed companies to repatriate overseas cash, the buyback index has underperformed.

Without that $4 trillion in stock buybacks, not to mention the $4 trillion in liquidity from the Federal Reserve, the stock market would not have been able to rise as much as it has. Given high valuations, weakening earnings, and sluggish economic growth, without continued injections of liquidity going forward, the risk of a substantial repricing of assets has risen.

A more opaque problem is that share repurchases have increasingly been done with the use of leverage. The ongoing suppression of interest rates by the Federal Reserve led to an explosion of debt issued by corporations. Much of the debt was not used for mergers, acquisitions or capital expenditures but for the funding of share repurchases and dividend issuance.

The explosion of corporate debt in recent years will become problematic during the next bear market. As the deterioration in asset prices increases, many companies will be unable to refinance their debt, or worse, forced to liquidate. With the current debt-to-GDP ratio at historic highs, it is unlikely this will end mildly.

This is something Dallas Fed President Robert Kaplan warned about:

U.S. nonfinancial corporate debt consists mostly of bonds and loans. This category of debt, as a percentage of gross domestic product, is now higher than in the prior peak reached at the end of 2008.

A number of studies have concluded this level of credit could ‘potentially amplify the severity of a recession,’

The lowest level of investment-grade debt, BBB bonds, has grown from $800 million to $2.7 trillion by year-end 2018. High-yield debt has grown from $700 million to $1.1 trillion over the same period. This trend has been accompanied by more relaxed bond and loan covenants, he added.

It’s only a problem if a recession occurs.

According to CNN, 53 percent of chief financial officers expect the United States to enter a recession prior to the 2020 presidential election. That information was sourced from the Duke University/CFO Global Business Outlook survey released on Wednesday. And two-thirds predict a downturn by the end of next year. While a slight downturn may not amount to a recession, it certainly means CFOs are taking the initiative to prepare for the worst.”

This is a very important point.

CEO’s make decisions on how they use their cash. If concerns of a recession persist, it is likely to push companies to become more conservative on the use of their cash, rather than continuing to repurchase shares. If that source of market liquidity fades, the market will have a much tougher time maintaining current levels, or going higher.


While share repurchases by themselves may indeed be somewhat harmless, it is when they are coupled with accounting gimmicks and massive levels of debt to fund them in which they become problematic.

The biggest issue was noted by Michael Lebowitz:

“While the financial media cheers buybacks and the SEC, the enabler of such abuse idly watches, we continue to harp on the topic. It is vital, not only for investors but the public-at-large, to understand the tremendous harm already caused by buybacks and the potential for further harm down the road.”

Money that could have been spent spurring future growth for the benefit of investors was instead wasted only benefiting senior executives paid on the basis of fallacious earnings-per-share.

As stock prices fall, companies that performed un-economic buybacks are now finding themselves with financial losses on their hands, more debt on their balance sheets, and fewer opportunities to grow in the future. Equally disturbing, the many CEO’s who sanctioned buybacks, are much wealthier and unaccountable for their actions.

For investors betting on higher stock prices, the question is whether we have now seen “peak buybacks?”

The Disconnect Between The Markets & Economy Has Grown

A couple of years ago, I wrote an article discussing the disconnect between the markets and the economy. At that time, the Fed was early into their rate hiking campaign. Talks of tax cuts from a newly elected President filled headlines, corporate earnings were growing, and there was a slew of fiscal stimulus from the Government to deal with the effects of 3-major hurricanes and 2-devastating wildfires. Now, the Fed is cutting rates, so it is time to revisit that analysis.

Previously, the consensus for the rise in capital markets was the tax cuts, and low levels of interest rates made stocks the only investment worth having. 

Today, rates have risen, economic growth both domestically and globally has weakened, and corporate profitability has come under pressure. However, since the Fed is cutting rates, hinting at expanding their balance sheet, and a “trade deal” is at hand, stocks are the only investment worth having.

In other words, regardless of the economic or fundamental backdrop, “stocks are the only investment worth having.” 

I am not so sure that is the case.

Let’s begin by putting the markets into perspective.

Yes, the markets are flirting with “all-time highs.” While this certainly sounds impressive, for many investors, they have just started making money on their investments from the turn of the century. As we noted in “The Moment You Know You Know, You Know,” what is often forgotten is the massive amount of “time” lost in growing capital to meet retirement goals.

This is crucially important to understand as was something I addressed in “Stocks – The Great Wealth Equalizer:”

“By the time that most individuals achieve a point in life where incomes and savings rates are great enough to invest excess cash flows, they generally do not have 30 years left to reach their goal. This is why losing 5-7 years of time getting back to “even” is not a viable investment strategy.

The chart below is the inflation-return of $1000 invested in 1995 with $100 added monthly. The blue line represents the impact of the investment using simple dollar-cost averaging. The red line represents a “lump sum” approach. The lump-sum approach utilizes a simple weekly moving average crossover as a signal to either dollar cost average into a portfolio OR moves to cash. The impact of NOT DESTROYING investment capital by buying into a declining market is significant.”

“Importantly, I am not advocating “market timing” by any means. What I am suggesting is that if you are going to invest into the financial markets, arguably the single most complicated game on the planet, then you need to have some measure to protect your investment capital from significant losses.

While the detrimental effect of a bear market can be eventually recovered, the time lost during that process can not. This is a point consistently missed by the ever bullish media parade chastising individuals for not having their money invested in the financial markets.”

However, let’s set aside that point for the moment, and discuss the validity of the argument of the rise of asset prices is simply a reflection of economic strength.

Assuming that individuals are “investing” in companies, versus speculating on price movement, then the investment process is a “bet” on future profitability of the company. Since, companies derive their revenue from consumption of their goods, products, and services; it is only logical that stock price appreciation, over the long-term, has roughly equated to economic growth. However, during shorter time-frames, asset prices are affected by investor psychology which leads to “boom and bust” cycles. This is the situation currently, which can be seen by the large disconnect between current economic growth and asset prices.

Since January 1st of 2009, through the end of the second quarter of 2019, the stock market has risen by an astounding 164.90% (inflation-adjusted). However, if we measure from the March 9, 2009 lows, the percentage gain explodes to more than 200%. With such a significant gain in the financial markets, we should see a commensurate indication of economic growth.

The reality is that after 3-massive Federal Reserve driven “Quantitative Easing” programs, a maturity extension program, bailouts of TARP, TGLP, TGLF, etc., HAMP, HARP, direct bailouts of Bear Stearns, AIG, GM, bank supports, etc., all of which total more than $33 Trillion, the economy grew by just $3.87 Trillion, or a whopping 24.11% since the beginning of 2009. The ROI equates to $8.53 of interventions for every $1 of economic growth.

Not a very good bargain.

We can look at this another way.

The stock market has returned almost 103.6% since the 2007 peak, which is more than 4-times the growth in GDP and nearly 3-times the increase in corporate revenue. (I have used SALES growth in the chart below as it is what happens at the top line of income statements and is not AS subject to manipulation.)

The all-time highs in the stock market have been driven by the $4 trillion increase in the Fed’s balance sheet, hundreds of billions in stock buybacks, and valuation (PE) expansion. With Price-To-Sales ratios and median stock valuations near the highest in history, one should question the ability to continue borrowing from the future?

Speaking of rather extreme deviations, another concern for the detachment of the markets from more basic economic realities, the deviation of reported earnings from corporate profits after-tax, is at historical extremes.

These sharp deviations tend to occur in late market cycles when “excess” from speculation has reached extremes. Recessions tend to follow as a “reversion to the mean occurs.

While, earnings have surged since the end of the last recession, which has been touted as a definitive reason for higher stock prices, it is not all as it would seem.

Earnings per share are indeed an important driver of markets over time. However, the increase in profitability has not come strong increases in revenue at the top of the income statement. The chart below shows the deviation between the widely touted OPERATING EARNINGS (earnings before all the “bad” stuff) versus REPORTED EARNINGS which is what all historical valuations are based. I have also included revenue growth, as well.

This is not a new anomaly, but one which has been a consistent “meme” since the end of the financial crisis. As the chart below shows, while earnings per share have risen by over 360% since the beginning of 2009; revenue growth has barely eclipsed 50%.

While suppressed wage growth, layoffs, cost-cutting, productivity increases, accounting gimmickry, and stock buybacks have been the primary factors in surging profitability, these actions have little effect on revenue growth. The problem for investors is all of the gimmicks to win the “beat the estimate game” are finite in nature. Eventually, real rates of revenue growth will matter. However, since suppressed wages and interest rates have cannibalized consumer incomes – there is nowhere left to generate further sales gains from in excess of population growth.

Left Behind

While Wall Street has significantly benefited from the Fed’s interventions, Main Street has not. Over the past few years, as asset prices surged higher, there has been very little translation into actual economic prosperity for a large majority of Americans. This is reflective of weak wage, economic, and inflationary growth which has led to a surge in consumer debt to record levels.

Of course, weak economic growth has led to employment growth that is primarily a function of population growth. As I addressed just recently:

“Employment should increase to accommodate for the increased demand from more participants in the economy. Either that or companies resort to automation, off-shoring, etc. to increase rates of production without increases in labor costs. The chart below shows the total increase in employment versus the growth of the working-age population.”

While reported unemployment is hitting historically low levels, there is a swelling mass of uncounted individuals that have either given up looking for work or are working multiple part-time jobs. This can be seen below which shows those “not in labor force,” as a percent of the working-age population, skyrocketing.

If employment was indeed as strong as reported by government agencies, then social benefits would not be comprising a record high of 22% of real disposable incomes. 

Without government largesse, many individuals would literally be living on the street. The chart above shows all the government “welfare” programs and current levels to date. While unemployment insurance has hit record lows following the financial crisis, social security, Medicaid, Veterans’ benefits and other social benefits have continued to rise and have surged sharply over the last few months.

With 1/5 of incomes dependent on government transfers, it is not surprising that the economy continues to struggle as recycled tax dollars used for consumption purposes have virtually no impact on the overall economy.


While financial markets have surged to “all-time highs,” the majority of Americans who have little, or no, vested interest in the financial markets have a markedly different view. While the Fed keeps promising with each passing year the economy will come roaring back to life, the reality has been that all the stimulus and financial support hasn’t been able to put the broken financial transmission system back together again.

Amazingly, more than two-years following the initial writing of this article, the gap between the markets and the economy has grown even wider. Eventually, the current disconnect between the economy and the markets will merge.

I bet such a convergence will likely not be a pleasant one.

VLOG: Savvy Social Security Strategies For Maximizing Benefits

Are you closing in on retirement and have questions about social security?

When you begin to collect benefits, how you collect them, and what potentially can impact those payments can be very confusing. Danny Ratliff and Richard Rosso, both highly qualified CFP’s, delve into the many most commonly asked questions about social security and how to maximize the benefits in retirement.

Still have questions? 

No problem.

We at RIA Advisors, a registered investment advisory firm, specialize in preserving and growing investor wealth in times like these. If you are concerned about your financial future, click here to ask a question and find out more.

What Can We Learn From A Shutdown?

As we are now in to day 26 of the government shutdown, the 800,000 federal employees and contractors being used as political pawns go without their first paycheck. This whole ordeal, while unfortunate, is a great reminder of what can happen to any of us: missing a paycheck:

Luckily many financial institutions have stepped up to the plate and done the right thing for the furloughed employees to modify loan agreements, waive late penalties and overdraft charges, but some may not be so forgiving.

What happens if you find yourself in this scenario? If you miss a paycheck, would life go on as you know it? The numbers say that for most, it’s doubtful. The Federal Reserve Board issued a report on the Economic Well-Being of U.S. Households last May and although most households are better off than they were a year ago, missing a paycheck could still make many cry or cringe. According to the study, only 4 out of 10 could meet a $400 emergency expense, or would do so by borrowing or selling something.

This takes us back to Personal Finance 101:

  • Spend less than you make.
  • Build an emergency fund.

We typically recommend that a dual income household have at least 3-6 months of expenses set aside in an emergency fund and a single income household 9-12 months. It always helps to know you have these funds to fall back on until things turn around. Life happens: people get laid off, companies or governments miss paychecks, and people get sick.

If these numbers seem lofty, don’t worry; they were lofty to everyone at one point.  Everyone must start somewhere. If you don’t have any savings now, start by trying to save $1,000. It’s amazing how many things that will fall into the “I need cash quick” range are under $1,000. Think about this: To save $1,000 in a year, you need to save $83 a month, or roughly $2.75 a day.  I notice that once people get on the right path to savings, they typically accumulate cash much quicker than they would have previously thought.

Do yourself and your family a favor and start an emergency fund or solidify it if you already have one. Don’t be afraid of holding cash, but also don’t leave it in an institution that won’t pay you any interest.  You can find banks that will pay you for holding your cash. Check out or as they are both good aggregators that will show you rates and rankings institutions that actually want your money.

Another alternative and something we have done for clients is find a money market that actually pays. We are currently finding rates north of 2%, but you have to look.  Short term bond funds, individual bonds or Treasury’s, while not as liquid, can also provide a boost to your savings with little risk.

If you have any questions, please don’t hesitate to email me.

Let’s Be Like Japan

There has been a lot of angst lately over the rise in interest rates and the question of whether the government will be able to continue to fund itself given the massive surge in the fiscal deficit since the beginning of the year.

While “spending like drunken sailors” is not a long-term solution to creating economic stability, unbridled fiscal stimulus does support growth in the short-term. Spending on natural disaster recovery last year (3-major hurricanes and two wildfires) led to a pop in Q2 and Q3 economic growth rates. The two recent hurricanes that slammed into South Carolina and Florida were big enough to sustain a bump in activity into early 2019. However, all that activity is simply “pulling forward” future growth.

But the most recent cause of concern behind the rise in interest rates is that there will be a “funding shortage” of U.S. debt at a time where governmental obligations are surging higher. I agree with Kevin Muir on this point who recently noted:

“Well, let me you in on a little secret. The US will have NO trouble funding itself. That’s not what’s going on.

If the bond market was truly worried about US government’s deficits, they would be monkey-hammering the long-end of the bond market. Yet the US 2-year note yields 2.88% while the 30-year bond is only 55 basis points higher at 3.43%. That’s not a yield curve worried about US fiscal situation.

And let’s face it, if Japan can maintain control of their bond market with their bat-shit-crazy debt-to-GDP level of 236%, the US will be just fine for quite some time.”

That’s not a good thing by the way.

Let’s Be Like Japan

“Bad debt is the root of the crisis. Fiscal stimulus may help economies for a couple of years but once the ‘painkilling’ effect wears off, U.S. and European economies will plunge back into crisis. The crisis won’t be over until the nonperforming assets are off the balance sheets of US and European banks.” – Keiichiro Kobayashi, 2010

While Kobayashi will ultimately be right, what he never envisioned was the extent to which Central Banks globally would be willing to go. As my partner Michael Lebowitz pointed out previously:

“Global central banks’ post-financial crisis monetary policies have collectively been more aggressive than anything witnessed in modern financial history. Over the last ten years, the six largest central banks have printed unprecedented amounts of money to purchase approximately $14 trillion of financial assets as shown below. Before the financial crisis of 2008, the only central bank printing money of any consequence was the Peoples Bank of China (PBoC).”

The belief was that by driving asset prices higher, economic growth would follow. Unfortunately, this has yet to be the case as debt both globally and specifically in the U.S. has exploded.

“QE has forced interest rates downward and lowered interest expenses for all debtors. Simultaneously, it boosted the amount of outstanding debt. The net effect is that the global debt burden has grown on a nominal basis and as a percentage of economic growth since 2008. The debt burden has become even more burdensome.”

Not surprisingly, the massive surge in debt has led to an explosion in the financial markets as cheap debt and leverage fueled a speculative frenzy in virtually every asset class.

The continuing mounting of debt from both the public and private sector, combined with rising health care costs, particularly for aging “baby boomers,” are among the factors behind soaring US debt. While “tax reform,” in a “vacuum”  should boost rates of consumption and, ultimately, economic growth, the economic drag of poor demographics and soaring costs, will offset many of the benefits.

The complexity of the current environment implies years of sub-par economic growth ahead as noted by the Fed last week as their long-term projections, along with the CBO, remain mired at 2%.

The US is not the only country facing such a gloomy outlook for public finances, but the current economic overlay displays compelling similarities with Japan in the 1990s.

Also, while it is believed that “tax reform” will fix the problem of lackluster wage growth, create more jobs, and boost economic prosperity, one should at least question the logic given that more expansive spending, as represented in the chart above by the surge in debt, is having no substantial lasting impact on economic growth. As I have written previously, debt is a retardant to organic economic growth as it diverts dollars from productive investment to debt service.

One only needs to look at Japan for an understanding that QE, low-interest rate policies, and expansion of debt have done little economically. Take a look at the chart below which shows the expansion of the BOJ assets versus the growth of GDP and levels of interest rates.

Notice that since 1998, Japan has not achieved a 2% rate of economic growth. Even with interest rates still near zero, economic growth remains mired below one-percent, providing little evidence to support the idea that inflating asset prices by buying assets leads to stronger economic outcomes.

But yet, the current Administration believes our outcome will be different.

With the current economic recovery already pushing the long end of the economic cycle, the risk is rising that the next economic downturn is closer than not. The danger is that the Federal Reserve is now potentially trapped with an inability to use monetary policy tools to offset the next economic decline when it occurs.

This is the same problem that Japan has wrestled with for the last 25 years. While Japan has entered into an unprecedented stimulus program (on a relative basis twice as large as the U.S. on an economy 1/3 the size) there is no guarantee that such a program will result in the desired effect of pulling the Japanese economy out of its 30-year deflationary cycle. The problems that face Japan are similar to what we are currently witnessing in the U.S.:

  • A decline in savings rates to extremely low levels which depletes productive investments
  • An aging demographic that is top heavy and drawing on social benefits at an advancing rate.
  • A heavily indebted economy with debt/GDP ratios above 100%.
  • A decline in exports due to a weak global economic environment.
  • Slowing domestic economic growth rates.
  • An underemployed younger demographic.
  • An inelastic supply-demand curve
  • Weak industrial production
  • Dependence on productivity increases to offset reduced employment

The lynchpin to Japan, and the U.S., remains demographics and interest rates. As the aging population grows becoming a net drag on “savings,” the dependency on the “social welfare net” will continue to expand. The “pension problem” is only the tip of the iceberg.

If interest rates rise sharply it is effectively “game over” as borrowing costs surge, deficits balloon, housing falls, revenues weaken and consumer demand wanes. It is the worst thing that can happen to an economy that is currently remaining on life support.

Japan, like the U.S., is caught in an on-going “liquidity trap”  where maintaining ultra-low interest rates are the key to sustaining an economic pulse. The unintended consequence of such actions, as we are witnessing in the U.S. currently, is the ongoing battle with deflationary pressures. The lower interest rates go – the less economic return that can be generated. An ultra-low interest rate environment, contrary to mainstream thought, has a negative impact on making productive investments and risk begins to outweigh the potential return.

More importantly, while there are many calling for an end of the “Great Bond Bull Market,” this is unlikely the case for two reasons.

  1. As shown in the chart below, interest rates are relative globally. Rates can’t rise in one country while a majority of global economies are pushing low to negative rates. As has been the case over the last 30-years, so goes Japan, so goes the U.S.
  2. Increases in rates also kill economic growth which drags rates lower. Like Japan, every time rates begin to rise, the economy rolls into a recession. The U.S. will face the same challenges. 

Unfortunately, for the current Administration, the reality is that cutting taxes, tariffs, and sharp increases in debt, is unlikely to change the outcome in the U.S. The reason is simply that monetary interventions, and government spending, don’t create organic, sustainable, economic growth. Simply pulling forward future consumption through monetary policy continues to leave an ever-growing void in the future that must be filled. Eventually, the void will be too great to fill.

But hey, let’s just keep doing the same thing over and over again, which hasn’t worked for anyone as of yet, but we can always hope for a different result. 

What’s the worst that could happen?  

The Ingredients Of An “Event”

This past week marked the 10th-Anniversary of the collapse of Lehman Brothers. Of course, there were many articles recounting the collapse and laying blame for the “great financial crisis” at their feet. But, as is always the case, an “event” is always the blame for major reversions rather than the actions which created the environment necessary for the crash to occur. In the case of the “financial crisis,” Lehman was the “event” which accelerated a market correction that was already well underway.

I have noted the topping process and the point where we exited the markets. Importantly, while the market was giving ample signals that something was going wrong, the mainstream analysis continued to promote the narrative of a “Goldilocks Economy.” It wasn’t until December of 2008, when the economic data was negatively revised, the recession was revealed.

Of course, the focus was the “Lehman Moment,” and the excuse was simply: “no one could have seen it coming.”

But many did. In December of 2007 we wrote:

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

A year later, we knew the truth.

Throughout history, there have been numerous “financial events” which have devastated investors. The major ones are marked indelibly in our financial history: “The Crash Of 1929,” “The Crash Of 1974,” “Black Monday (1987),” “The Dot.Com Crash,” and the “The Financial Crisis.” 

Each of these previous events was believed to be the last. Each time the “culprit” was addressed and the markets were assured the problem would not occur again. For example, following the crash in 1929, the Securities and Exchange Commission, and the 1940 Securities Act, were established to prevent the next crash by separating banks and brokerage firms and protecting against another Charles Ponzi. (In 1999, legislation was passed to allow banks and brokerages to reunite. 8-years later we had a financial crisis and Bernie Madoff. Coincidence?)

In hindsight, the government has always acted to prevent what was believed to the “cause” of the previous crash. Most recently, Sarbanes-Oxley and Dodd-Frank legislations were passed following the market crashes of 2000 and 2008.

But legislation isn’t the cure for what causes markets to crash. Legislation only addresses the visible byproduct of the underlying ingredients. For example, Sarbanes-Oxley addressed the faulty accounting and reporting by companies like Enron, WorldCom, and Global Crossing. Dodd-Frank legislation primarily addressed the “bad behavior” by banks (which has now been mostly repealed).

While faulty accounting and “bad behavior” certainly contributed to the end result, those issues were not the cause of the crash.

Recently, John Mauldin addressed this issue:

“In this simplified setting of the sandpile, the power law also points to something else: the surprising conclusion that even the greatest of events have no special or exceptional causes. After all, every avalanche large or small starts out the same way, when a single grain falls and makes the pile just slightly too steep at one point. What makes one avalanche much larger than another has nothing to do with its original cause, and nothing to do with some special situation in the pile just before it starts. Rather, it has to do with the perpetually unstable organization of the critical state, which makes it always possible for the next grain to trigger an avalanche of any size.

While the idea is correct, this assumes that at some point the markets collapse under their own weight when something gives.

I think it is actually a little different. In my view, ingredients like nitrogen, glycerol, sand, and shell are mostly innocuous things and pose little real danger by themselves. However, when they are combined together, and a process is applied to bind them, you make dynamite. But even dynamite, while dangerous, does not immediately explode as long as it is handled properly. It is only when dynamite comes into contact with the appropriate catalyst that it becomes a problem. 

“Mean reverting events,” bear markets, and financial crisis, are all the result of a combined set of ingredients to which a catalyst was applied. Looking back through history we find similar ingredients each and every time.

The Ingredients


Throughout the entire monetary ecosystem, there is a consensus that “debt doesn’t matter” as long as interest rates remain low. Of course, the ultra-low interest rate policy administered by the Federal Reserve is responsible for the “yield chase” and has fostered a massive surge in debt in the U.S. since the “financial crisis.”  

Importantly, debt and leverage, by itself is not a danger. Actually, leverage is supportive of higher asset prices as long as rates remain low and the demand for, rates of return on, other assets remains high.


Likewise, high valuations are also “inert” as long as everything asset prices are rising. In fact, rising valuations supports the “bullish” thesis as higher valuations represent a rising optimism about future growth. In other words, investors are willing to “pay up” today for expected further growth.

While valuations are a horrible “timing indicator” for managing a portfolio in the short-term, valuations are the “great predictor” of future investment returns over the long-term.


Of course, one of the critical drivers of the financial markets in the “short-term” is investor psychology. As asset prices rise, investors become increasingly confident and are willing to commit increasing levels of capital to risk assets. The chart below shows the level of assets dedicated to cash, bear market funds, and bull market funds. Currently, the level of “bullish optimism” as represented by investor allocations is at the highest level on record.

Again, as long as nothing adversely changes, “bullish sentiment begets bullish sentiment” which is supportive of higher asset prices.


Of course, the key ingredient is ownership. High valuations, bullish sentiment, and leverage are completely meaningless if there is no ownership of the underlying equities. The two charts below show both household and corporate levels of equity ownership relative to previous points in history.

Once again, we find rising levels of ownership are a good thing as long as prices are rising. As prices rise, individuals continue to increase ownership in appreciating assets which, in turn, increases the price of the assets being purchased.


Another key ingredient to rising asset prices is momentum. As prices rice, demand for rising assets also rises which creates a further demand on a limited supply of assets increasing prices of those assets at a faster pace. Rising momentum is supportive of higher asset prices in the short-term.

The chart below shows the real price of the S&P 500 index versus its long-term bollinger-bands, valuations, relative-strength, and its deviation above the 3-year moving average. The red vertical lines show where the peaks in these measures were historically located.

The Formulation

Like dynamite, the individual ingredients are relatively harmless. However, when the ingredients are combined they become potentially dangerous.

Leverage + Valuations + Psychology + Ownership + Momentum = “Mean Reverting Event”

Importantly, in the short-term, this particular formula does indeed remain supportive for higher asset prices. Of course, the more prices rise, the more optimistic the investing becomes as it becomes common to believe “this time is different.”

While the combination of ingredients is indeed dangerous, they remain “inert” until exposed to the right catalyst.

These same ingredients were present during every crash throughout history.

All they needed was the right catalyst.

The catalyst, or rather the “match that lit the fuse,” was the same each time.

The Catalyst

In the U.S., the Federal Reserve has been the catalyst behind every preceding financial event since they became “active,” monetarily policy-wise. As shown in the chart below, when the Fed has embarked upon a rate hiking campaign, bad “stuff” has historically followed.

With the Fed expected to hike rates 2-more times in 2018, and even further in 2019, it is likely the Fed has already “lit the fuse” on the next financially-related event.

Yes, the correction will begin as it has in the past, slowly, quietly, and many investors will presume it is simply another “buy the dip” opportunity.

Then suddenly, without reason, the increase in interest rates will trigger a credit-related event. The sell-off will gain traction, sentiment will reverse, and as prices decline the selling will accelerate.

Then a secondary explosion occurs as margin-calls are triggered. Once this occurs, a forced liquidation cycle begins. As assets are sold, prices decline as buyers simply disappear. As prices drop further, more margin calls are triggered requiring further liquidation. The liquidation cycle continues until margin is exhausted.

But the risk to investors is NOT just a market decline of 40-50%.

While such a decline, in and of itself, would devastate the already underfunded 80% of the population that is currently woefully under-prepared for retirement, it would also unleash a host of related collapses throughout the economy as a rush to liquidate holdings accelerates.

The real crisis comes when there is a “run on pensions.” With a large number of pensioners already eligible for their pension, the next decline in the markets will likely spur the “fear” that benefits will be lost entirely. The combined run on the system, which is grossly underfunded, at a time when asset prices are dropping will cause a debacle of mass proportions. It will require a massive government bailout to resolve it.

But it doesn’t end there. Consumers are once again heavily leveraged with sub-prime auto loans, mortgages, and student debt. When the recession hits, the reduction in employment will further damage what remains of personal savings and consumption ability. The downturn will increase the strain on an already burdened government welfare system as an insufficient number of individuals paying into the scheme is being absorbed by a swelling pool of aging baby-boomers now forced to draw on it. Yes, more Government funding will be required to solve that problem as well. 

As debts and deficits swell in coming years, the negative impact to economic growth will continue. At some point, there will be a realization of the real crisis. It isn’t a crash in the financial markets that is the real problem, but the ongoing structural shift in the economy that is depressing the living standards of the average American family. There has indeed been a redistribution of wealth in America since the turn of the century. Unfortunately, it has been in the wrong direction as the U.S. has created its own class of royalty and serfdom.

All the ingredients for the next market crash are currently present. All that is current missing is the “catalyst” which ignites it all.

There are many who currently believe “bear markets” and “crashes” are a relic of the past. Central banks globally now have the financial markets under their control and they will never allow another crash to occur. Maybe that is indeed the case. However, it is worth remembering that such beliefs were always present when, to quote Irving Fisher, “stocks are at a permanently high plateau.” 

Weekend Reading: Fall Back

Doug Kass made an interesting observation about the market yesterday:

“The month of September started with optimism.

That optimism has faded in the last two trading days.

The most notable winners (year to date), FANG, have been particularly weak as investors begin to understand (thanks to the Congressional testimony and hearings) that the component companies’ costs will balloon in order to deliver a product that is palatable to the U.S. government and other authorities – something I have been suggesting for a while. As noted yesterday, many other former market leaders are also falling back in price.

While there has been some rotation (there always is), there have been no notable winning sectors (save the speculative marijuana space).

Meanwhile, over there, the European banks are making new lows as the European bourses dramatically underperform and diverge from the S&P Index. And China’s stock market is moving swiftly into bear market territory.

I continue to believe that we are in an ‘Acne Market’ in which Mr. Market’s complexion is changing for the worse.

Economically, global high-frequency data is growing ambiguous.

In terms of sentiment, investors seem unduly complacent in their optimism and I know no strategists who are even contemplating the possibility of a large market drawdown.

The bottom line is that the economic, policy (trade, etc.), political (midterm elections are only two months away), currency and geopolitical outcomes are numerous and growing: Many of those outcomes are market adverse.

Over the last few years, it has paid to buy the dip.

It might be different this time as a maturing economy and stock market are showing their rough edges – just when global monetary authorities are pivoting and many non-US fiat currencies are imploding.”

I addressed last week, that emerging markets are likely sending a signal which is being largely dismissed by mainstream analysis. At the end of September, unless things markedly improve over the next 3-weeks, emerging markets will trigger the 4th major “sell” signal in the last 20-years.

“In 2000, 2007 and 2012, emerging markets warned of an impending recessionary drag in the U.S. (While 2012 wasn’t recognized as a recession, there were many economic similarities to one.)”

Currently, there is a high degree of complacency among investors, and Wall Street, the current bull market advance will continue uninterrupted into 2019. Targets are already being set for the S&P 500 to hit 3200, 3300, and higher.

While anything is certainly a possibility, it doesn’t mean that such will occur in a straight line either. The lack of leadership from the technology sector is certainly concerning given its extremely heavy weighting to the overall index. But likewise, the lack of performance from international markets also suggest “something isn’t quite right.” 

This also shows up in the Baltic Dry Index which is just a representation of the demand to ship dry goods. While the index bounced from the lows in 2016, as global central banks infused massive amounts of liquidity into the system, early indications suggest that the cycle of global growth has started to wane.

The biggest concern domestically remains the strength of earnings growth going forward as well. Currently, estimates remain extremely high and the drag from a stronger dollar, tariffs, and rising rates will likely bring estimates lower. As I noted last week:

“But looking forward, year over year comparisons are going to become markedly more troublesome even as expectations for the S&P 500 index continues to rise.”

While I am certainly hopeful the analysts are correct, as bull markets are much easier to navigate, the risk of disappointment is rising. As Doug notes, the contraction of monetary policy is beginning to take effect on the markets and the economy.

Risks are always under-appreciated when bullish enthusiasm prevails. But knowing when to “fall back” and regroup has always been a better strategy than fighting to the last man.

Just something to think about as you catch up on your weekend reading list.

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“I never hesitate to tell a man that I am bullish or bearish. But I do not tell people to buy or sell any particular stock. In a bear market all stocks go down and in a bull market they go up.” – Jesse Livermore

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Weekend Reading: Are Emerging Markets Sending A Signal

I have been, and remain, bearish on emerging markets for three reasons:

  1. As discussed yesterday, the U.S. is closer to the next economic downturn than not. When the U.S. enters a recession, emerging markets are hurt considerably more given their dependence on the U.S. 
  2. International risks in countries like Turkey, Greece, Spain, France, Italy, etc. 
  3. A strong dollar from flows into U.S. Treasury bonds for a “safe haven.” 

I recommended in January of this year to remove all international and emerging market exposure from portfolios and have been updating that position since each week in the newsletter:

“Emerging and International Markets were removed in January from portfolios on the basis that “trade wars” and “rising rates” were not good for these groups. With the addition of the “Turkey Crisis,” ongoing tariffs, and trade wars, there is simply no reason to add “drag” to a portfolio currently. These two markets are likely to get much worse before they get better. Put stops on all positions.”

This has been the right call, despite the plethora of articles suggesting the opposite.

For example, in January, Rob Arnott stated:

“Look at value in emerging markets. In the U.S., value is trading about 25% cheap relative to the market. In emerging markets, it’s close to 40% cheap. 

That’s pretty cool. If you can buy half the world’s GDP for nine times earnings or buy the U.S. for 32 times earnings, I know where I’m going to put my money.”

Now, I am not arguing Rob’s point. But, my position is simply that the economic dependency of emerging markets on the U.S. is extremely high. Therefore, when the U.S. gets a “cold,” emerging markets get the “flu.” 

Over the last 25-years, this has remained a constant.

In 2000, 2007 and 2012, emerging markets warned of an impending recessionary drag in the U.S. (While 2012 wasn’t recognized as a recession, there were many economic similarities to one.)

Currently, emerging markets have once again diverged from the S&P 500 suggesting economic growth may not be as robust as many believe. While a 2-quarter divergence certainly isn’t suggesting a “financial crisis” is upon us, it does suggest that something isn’t quite right with the global economic backdrop.

Lisa Abramowicz recently noted the problem with EM default risk in some of the emerging markets.

While the markets are currently dismissing Turkey, Brazil, China and Russia as non-events, the problem is the issue of funding needs for these countries.

“The second, more salient point is that a key reason for the solid growth across emerging markets in recent years, has been the constant inflow of foreign capital, resulting in a significant external funding requirement for continued growth, especially for Turkey as discussed previously.

But what happens if this outside capital inflow stops, or worse, reverses? This is where things get dicey. To answer that question, Morgan Stanley has created its own calculation of Emerging Market external funding needs, and defined it as an ‘external coverage ratio.’ It is calculated be dividing a country’s reserves by its 12-month external funding needs, which in turn are the sum of the i) current account, ii) short-term external debt and iii) the next 12 months amortizations from long-term external debt.”

Given the ongoing pressures of “tariffs,” trade wars and rising geopolitical tensions, the risk of something going “wrong” has become increasingly elevated.

Yet, market participants are ignoring the risk simply because prices are rising. As Doug Kass noted yesterday:

There is nothing like stock price advances to change sentiment. 

Just like fear dominates politics these days, the opposite is occurring in the markets as greed has emerged as a byproduct of sharply rising prices (which have desensitized investors to risks, doubt, and fear).

Besides growing economic ambiguities, the most notable lack of criticism is the unusual nature of the last decade, in which interest rates sustained themselves around the world at generational low levels. To presume that foundation to be sound in the future (particularly when a pivot of global monetary restraint has already started), is to congratulate Lance Armstrong for his Tour de France wins without noting his use of illegal drugs.

T.I.N.A. (‘there is no alternative’) is no longer a present condition as 1-month, 3-month, 6-month and 1-year Treasury yields are now at their highest levels in 10 years:

There is now an alternative.”

“The magnitude of the market’s rise in the month of August is almost certainly borrowing from future returns. In the extreme, a more durable and significant top may be forming.”

Higher borrowing costs on the short-end reduces consumption and the demand for imported goods. Emerging markets are likely already signaling there is an issue from the Federal Reserve’s actions, and the consequence historically has not been good. But, as I quoted yesterday:

Unfortunately, Powell left the unsettling feeling that monetary policy can be summarized as ‘We plan to keep hiking until something breaks.’”Tim Duy

Just something to think about as you catch up on your weekend reading list.

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“Stay humble…or the market will do it for you.” – Anonymous

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Weekend Reading: Impeachment Risk

Yesterday, the President stated:

“If I ever got impeached, I think the market would crash. I think everybody would be very poor. Because without this thinking, you would see, you would see numbers that you wouldn’t believe in reverse.”  

It is an interesting statement because there has been little to seemingly deter the bullish momentum of the market. Trade wars, tariffs, geopolitical stresses, a stronger dollar, and tighter monetary policy have all been quickly dismissed in exchange for hopes that corporate earnings and profitability will continue to accelerate into the future.

Even as I write this note this morning, the market is opening higher in the attempt to push the S&P 500 to “all-time” highs despite the fact the recent rally over the past week was attributed to “trade resolutions” with China which completely fell apart overnight.

“When reports emerged last week of a low-level Chinese delegation coming to meet with members of the Treasury department ahead of what the WSJ described would be a November trade summit in the US, stocks spiked and yields ran up (they have since tumbled with the 2s10s yield curve collapsing to just 20 basis points) on hopes that the long-running trade feud between the US and China may finally be coming to an end.

The skeptics were right because, after the conclusion on Thursday of the second day of the closely watched trade talks between the U.S. and China, there was ‘no major progress’ according to Bloomberg, with the stage once again set for further escalation of the trade war between the US and China.”

As you know, I was one of those skeptics.

Despite the headline rhetoric, the drive of the market is simply the momentum chase or more commonly known as the “Fear Of Missing Out (FOMO).” The momentum push is historically the last stage of a bull market cycle and is very difficult to stop. It is at this point in the cycle where “everything is as good as it can get,” literally. Confidence is at a peak, earnings and profitability are expanding and economic data is optimistic. Such provides the support to discount overvaluation and investment related risk.

But as I penned last week:

“’Record levels’” of anything are ‘records for a reason.’

When a ‘record level’ is reached it is NOT THE BEGINNING, but rather an indication of the PEAK of a cycle. Records, while they are often broken, are often only breached by a small amount, rather than a great stretch. While the media has focused on record low unemployment, record stock market levels, and record confidence as signs of an ongoing economic recovery, history suggests caution. For investors, everything is always at its best at the end of a cycle rather than the beginning.”

But the cracks are already starting to appear as underlying economic data is beginning to show weakness. While the economy grinds higher over the last few quarters, it was more of the residual effects from the series of natural disasters in 2017 than “Trumponomics” at work. The “pull forward” of demand is already beginning to fade as the frenzy of activity culminated in Q2 of 2018.

For the stock market, an impeachment process, which is a very low probability event, is likely the least of concerns over the next 9-12 months. What will matter to investors, in my opinion, are three things:

  • The Fed
  • China 
  • The 2nd Derivative

The Fed is important as they continue to hike rates which is already impacting, as we discussed yesterday, some of the more economically sensitive areas of the market.

China matters because they are a major trading partner with the U.S. and the potentially negative impact on corporate earnings from trade, tariffs, and a stronger dollar should not be quickly dismissed. While those things may not be immediately noticeable, even though they have been mentioned in recent corporate earnings reports, the longer they persist, the more they will matter. 

Lastly, the annual rate of change in earnings and economic data will begin to weaken as the year-over-year comparisons become much more difficult. Importantly, the explosive earnings growth in earnings this year, due to a lowered tax rate, has been key to supporting higher stock prices. That growth rate is set to slow markedly beginning in Q3 as the “tax rate effect” is absorbed and discounted. 

As far as the political backdrop goes, the biggest risk is the upcoming mid-term elections. If the House and/or Senate falls to the Democrats, the inability to push forward, or even the potential reversal of, any of the “Trumponomic” agenda will likely be much more unsettling for the markets in the short-term.

Nonetheless, the trend and momentum remains bullish, and bullish sentiment is an extremely hard thing to turn.

But it will eventually turn. The only question is what causes it?

There are certainly plenty of reasons for investors to be concerned, however, none of those “reasons” have seemed to matter so far. Most likely, the one that does is likely the one we aren’t even talking about yet.

Just something to think about as you catch up on your weekend reading list.

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“The trick of successful investors is to sell when they want to, not when they have to.” – Seth Klarman

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Weekend Reading: Why We Don’t Talk Anymore

I have been doing a daily radio talk show for 18-years. I started out, totally by accident, doing a financial talk show on a business radio station in early 2000 as the “” crash was underway. It was the genesis of what would eventually become Real Investment Then, in 2007, I got picked up by a larger radio station in Houston, Texas to do my own radio program and was eventually asked to expand the show to cover conservative politics.

As a “fiscal conservative,” discussing the intersection of political and fiscal policies as it relates to the economy, financial markets, and our families was an easy transition. As the “financial crisis” ensued our commentary regarding capital preservation and risk management brought on a larger audience. During the next 8-years under the Obama Administration, I openly disagreed with policies like the Affordable Care Act, IRS suppression of conservative groups, and unbridled spending and debt expansion in Government.

I didn’t disagree with these policies because they were from an opposing party, but because they weren’t good for the country, the economy, or our families.

Importantly, my show allowed for open and honest discussions by those on both sides of the argument. While we certainly had our share of “heated” debates, they were always civil, respectful and honest. We discussed facts, exposed fallacies, and shared beliefs in an educational format.

However, over the last two years, having those open and honest discussions are no longer viable. The “heated” exchanges are now simply vitriolic. There is no ability to “simply disagree” with those on the “right” or the “left” as debates are have devolved into yelling matches.

The hypocrisy of both sides has become acidic. During the Obama Administration, the “right” consistently droned on about the flaws in the U-3 unemployment rate. Now, they use it as proof that Trump’s policies are working. The “left” is just as bad in switching arguments to support their narrative as well.

Who would have ever believed that #FakeNews would actually be “a thing.”

Just as in any marriage, when two people are no longer “talking,” the end is near.

The same is true in this country.

A recent PEW study shows the political divide that engulfed our country.

Don’t dismiss this divide lightly. As Ben Hunt recently noted:

“Has all this happened before? Sure. Time to dust off your copy of Gibbon’s Decline and Fall. Time to reread Will and Ariel Durant. Just be forewarned, the widening gyre can go on for a loooong time, particularly in the case of a major empire like Rome or America. It took the Romans about four centuries to officially exhaust themselves, at least in the West, with a few headfakes of resurgence along the way. Four centuries of mostly ridiculousness. Four centuries of profitable revenge and costly gratitude. Four centuries of a competitive equilibrium in a competitive game.

Has this happened before in American history? Hard to say for sure (how dare the Pew Research Center not be active in the 1850s!), but I think yes, first in the decade-plus lead-up to the Civil War over the bimodally distributed issue of slavery, and again in the decade-plus lead-up to World War II over the bimodally distributed issue of the Great Depression. I really don’t think it was an accident that both of these widening gyres in American politics ended in a big war.”

Even the Bible notes the importance of unity:

“And if a house be divided against itself, that house cannot stand.” – Mark 3:25

We are currently on a path that can not end well.

We are no longer talking.

Yesterday, was the end of my “political” talk show.

I am returning to my roots beginning September 4th to help prepare you for the coming crash. 

It is not a bearish view.

It’s not a “doom and gloom” forecast.

It is just the simple the reality we are on a collision course in this country which won’t be stopped. I hope you will tune in and listen.

Just something to think about as you catch up on your weekend reading list.

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“The contrary investor is every human when he resigns momentarily from the herd and thinks for himself” – Archibald MacLeish

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Weekend Reading: Mathematical Adjustments Don’t Change Reality

Yesterday, I discussed the mathematical adjustment to the GDP calculation that added $1 trillion to economic growth. To wit:

“Where did a bulk of the change come from? A change in the calculation of “real” GDP from using 2009 dollars to 2012 dollars which boosted growth strictly from a lower rate of inflation.  As noted by the BEA:

“For 2012-2017, the average rate of change in the prices paid by U.S. residents, as measured by the gross domestic purchasers’ price index, was 1.2 percent, 0.1 percentage point lower than in the previously published estimates.”

Of course, when you ask the average household about “real inflation,” in terms of healthcare costs, insurance, food, energy, etc., they are likely to give you quite an earful that the cost of living is substantially higher than 1.2%. Nonetheless, the chart below shows “real” GDP both pre- and post-2018 revisions.”

Importantly, the entire revision is almost entirely due to a change in the inflation rate. On a nominal basis, there was virtually no real change at all. In other words, stronger economic growth came from a mathematical adjustment rather than increases in actual economic activity.

The change to a lower inflation rate also boosted disposable incomes and personal consumption expenditures which also boosted the savings rate. However, what doesn’t change is economic reality. The chart below shows what we call “real DPI” or rather it is disposable incomes (which is gross income minus taxes) less spending. What we have left over after paying our bills, healthcare costs, food, tuition, etc. is what is really disposable for spending on other “stuff” or “saving.”

Despite the adjusted bump in savings, consumer activity continues to remain weak. Given that roughly 70% of the economic calculation comes from personal consumption, watching consumer activity is a good leading indicator of where the economy is headed next. PCE figures also suggest the recent bump in economic growth is likely transitory. Looking back historically, GDP tends to follow PCE and not vice-versa.

More importantly, weaker economic growth rates will also be met with much tougher year-over-year comparisons on corporate earnings which likely further hamper equity returns in the near term.

As we summed up yesterday:

“As an investor, it is important to remember that in the end corporate earnings and profits are a function of the economy and not the other way around. Historically, GDP growth and revenues have grown at roughly equivalent rates.

Forget the optimism surrounding “’Trumpenomics’ and focus on longer-term economic trends which have been declining for the past 30+ years. The economic trend is a function of a growing burden of debt, increasing demographic headwinds and, very importantly, declining productivity growth. I see little to make me believe these are changing in a meaningful way.”

Changing the math doesn’t change reality.

Just something to think about as you catch up on your weekend reading list.

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“Everything eventually reverts to the mean.”Frank Holmes

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Weekend Reading: Price Is What You Pay

Yesterday, I discussed the failure of tax cuts to “trickle down” as they have primarily been used for corporate share repurchases. As I was digging into the data, Doug Kass emailed me a quick note:

“Berkshire Hathaway, likely under the weight of an enormous cash horde and more scarce alternative investment opportunities, has announced that it is loosening the terms of its buyback policy. It is also a signpost that the company has matured and will only duplicate GDP-like growth.”

While the announcement set the shares of Berkshire (BRK/A) (BRK/B) surging higher yesterday, there is a much more important message that investors should be heeding.

We recently delved into the performance of Berkshire as it has become the 10th-largest company in the world in terms of revenues. To wit:

“The graph below highlights this concern. It shows that 90-day rolling correlation of price changes in BRK/A and the S&P 500 are statistically similar. In the market crash of 2008/09 BRK/A’s price was cut in half, similar to the S&P 500. Based on correlations we suspect a similar relationship will hold true for the next big market drawdown.”

Both the sheer size of Berkshire, and the chart above, confirm Doug’s comment that Berkshire is likely to only generate rates of growth equivalent to GDP going forward.

So what’s the message that Mr. Buffett is sending? Simple:

“Price is what you pay, value is what you get.”

Investing is about maximizing the return on invested dollars by buying something that is undervalued and selling it when it is overvalued. This is the point missed by those who promote “buy and hold” investing which is the same as “buy at any price.” 

Corporations are, in many ways, held hostage by Wall Street and short term investors. An earnings miss can be disastrous to a companies stock price which can have severe consequences to stock option compensated executives and employees, shareholders and even bondholders. So, with pressure on companies to deploy excess cash, what are the options considering the “beat the estimate” game that must be played.

  • Hire Workers? Employees are a high cost and have a direct impact on profitability. Companies hire as needed to meet excess demand. Demand has remained stable and increased at the rate of population growth which is also the rate of employment increases: (Read this)
  • Invest To Produce More Products? Investments in future growth are accompanied by a negative short-term impact to profitability. Further, with rates rising the cost of borrowing for CapEx adds to the negative impact on current earnings.
  • Mergers & Acquisitions? Using cash to acquire revenue can be accretive to bottom line profitability. However, with stock price valuations elevated the costs to acquire revenue in many cases is becoming less attractive and often not immediately accretive.
  • Share Repurchases? While share repurchases do not increase top-line revenue growth or bottom line profitability, it does make it APPEAR the company is more profitable when they report earnings on a per share basis. The illusion of an immediate increase in profitability supports asset prices in the short-term despite potentially decreasing fundamental value.

From an investment standpoint, share repurchases by companies are a message that companies simply have no better options available with which to grow earnings and protect shareholder value.

So, back to Mr. Buffett who has been sitting on over $100 Billion in cash and T-bills over the last few quarters. With a dearth of value in the market, there have been few opportunities for a legendary value investor to deploy capital in a manner that will generate an attractive future rate of return. However, sitting on cash, in a low interest rate environment, is also not conducive as the purchasing parity power of cash is eroded by inflation.

So, what does the “World’s Greatest Value Investor” do when there is no better use for cash – buy back shares of your own company, of course.

The message from Buffett is quite clear – there is little value left in the market today otherwise he would be allocating his cash hoard very differently.

While many suggest that individuals should just “buy and hold” investments regardless of what the market does, Mr. Buffett’s actions reinforce the view that buying assets at current valuations is likely to have a disappointing outcome. 

Does this mean you should never invest? Of course, not.

But as Mr. Buffett himself has stated:

“Be fearful when others are greedy. Be greedy when others are fearful.” 

Just something to think about as you catch up on your weekend reading list.

Economy & Fed


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“Predicting rain doesn’t count. Building arks does.”Warren Buffett

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Weekend Reading: Renter Nation

“The psychological factors are harder to assess. People aren’t flipping condos for sport the way they were during the bubble when mortgages were available to anyone regardless of whether they had income or assets. Yet it seems there’s a widespread desire to own assets – stocks, bonds, and real estate – regardless of price. It’s not an obviously happy mania, where people are motivated by promises of great wealth. It’s more like a need to be an asset owner in an economy that continues to hurt workers without college degrees and becomes more automated. Nevertheless, the price insensitivity of many buyers is enough to cause concern.” – John Coumarianos

It is an interesting comment and John is correct. Low rates, weak economic growth, cheap and available credit, and a need for income has inflated the third bubble of this century.

But when it comes to housing, as I was digging through the employment data yesterday, I stumbled across the “rental income” component which is included in national compensation. When I broke the data out into its own chart, I was a bit surprised.

Let’s step back for a moment to build a bit of a framework first. While there has been much speculation about a resurgent “housing boom” in the economy, the data suggests something very different which is that housing has simply become an asset class for wealthy investors to turn into rentals.

As the “Buy-to-Rent” game drives prices of homes higher, it reduces inventory and increases rental rates. This in turn prices out “first-time home buyers” who would become longer-term homeowners, hence levels of homeownership rates first seen in the 1970’s. (Also, note surging debt levels are supporting higher homeownership.)

The chart below shows the number of homes that are renter-occupied versus the seasonally adjusted homeownership rate. As noted above, with owner-occupied housing at the lowest levels since the 1970’s, “renters” have become the norm. 

The surge in “renters” since the financial crisis, due to a variety of financial reasons, has pushed rental income to record levels of nearly $800 billion a year. Given the sharp surge in incomes, it is not surprising that multifamily home construction and “buy to rent” continues apace in the economy for now. For investors, it has become an alternative asset class with increasing asset values and income yielding well above the current 10-year Treasury rate.

With roughly a quarter of the home buying cohort either unemployed or underemployed and living at home with their parents, the ability to create households has become more problematic. The remaining members of the home buying, household formation, contingent are employed but at lower ends of the pay scale and are choosing to rent due to budgetary considerations. This explains why the 12-month moving average of household formation, used to smooth very volatile data, is near its lowest levels going back to 1955.

The risk to the “renter nation” bubble is a “rush for the exits” by the herd of speculative buyers turning into mass sellers. With a large contingent of homes being held for investment purposes, if there is a reversion in home prices a cycle of liquidation could quickly occur. Combine that with the onset of a recession, and/or a bear market, and the problem could well be magnified. Of course, it isn’t just the liquidation of homes that is an issue but the inability to find a large enough pool of qualified buyers to absorb the inventory.

Just something to think about as you catch up on your weekend reading list.

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“Risk comes from not knowing what you are doing.” – Warren Buffett

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Weekend Reading: The Japanification Of America Continues

Last week, I discussed the ongoing debt issue in the U.S. with respect to the recent CBO report and the trajectory of debt growth over the next 30-years.

The fiscal issues facing the U.S. are nothing new and have been a frequent discussion on this site. More importantly, I have discussed these issues directly with members of Congress, and especially with Congressman Kevin Brady, Chairman of the House Ways and Means Committee, who agree with my concerns yet have been unable, and unwilling, to tackle the “tough” issues. While conservatives in Congress talk a great game of fiscal responsibility, the reality is there is little “will” to actually be “fiscally responsible.”

While the country today is more politically divided than at just about any other point in history, “spending money” is the one thing that all members of Congress willingly agree to.

As I discussed previously, this is the same path Japan took previously.

“Debt is a retardant to organic economic growth as it diverts dollars from productive investment to debt service. 

The problems that face Japan are similar to what we are currently witnessing in the U.S.:

  • A decline in savings rates to extremely low levels which depletes productive investments
  • An aging demographic that is top heavy and increasingly drawing on social benefits.
  • A heavily indebted economy with debt/GDP ratios above 100%.
  • A decline in exports due to a weak global economic environment.
  • Slowing domestic economic growth rates.
  • An underemployed younger demographic.
  • An inelastic supply-demand curve
  • Weak industrial production
  • Dependence on productivity increases to offset reduced employment

The lynchpin to Japan, and the U.S., remains demographics and interest rates. As the aging population grows becoming a net drag on “savings,” the dependency on the “social welfare net” will continue to expand. The “pension problem” is only the tip of the iceberg.”

“Japan, like the U.S., is caught in an on-going “liquidity trap”  where maintaining ultra-low interest rates are the key to sustaining an economic pulse. The unintended consequence of such actions, as we are witnessing in the U.S. currently, is the ongoing battle with deflationary pressures. The lower interest rates go – the less economic return that can be generated. An ultra-low interest rate environment, contrary to mainstream thought, has a negative impact on making productive investments and risk begins to outweigh the potential return.”

I was reminded of this previous discussion this past week when Tyler Durden discussed a new bill in Japan limiting overtime work to 99-hours a month to cure “Death by Overwork.”

“Recently released government data revealed that Japan’s jobless rate touched 2.2% in May, the lowest level in 26 years. And as Japan’s working-age population dwindles, job openings have outpaced the number of workers available to fill them: As a reference, two months ago, there were 160 job offers available for every 100 workers seeking a job.”

What got my attention was the similarity to an issue that has stumped economists over the last couple of years – surging job openings that go unfilled. We can restate quote above to apply to the U.S.:

“Recently released government data revealed the U.S. jobless rate touched 3.8% in June, the lowest level in 48 years. And as Japan’s working-age population dwindles, job openings have outpaced the number of workers available to fill them: As a reference, two months ago, the ratio of offers to unemployed hit the highest level of this century.”

Employment growth has essentially done little more than to absorb population growth over the last several years but has begun to deteriorate over the last few years. With net hires (hires less layoffs and quits) declining the ratio of job openings to hires is likely to rise further.

While the surge in “job openings” has remained a conundrum for economists, the answer may not be so difficult as employers continue to report the problems with filling jobs as:

  1. unfit to do the job (too fat/unhealthy/old),
  2. lack of requisite skills (education/training), and; 
  3. unwilling to accept the job for the rate of pay.

This was noted in the recent FOMC minutes:

Contacts in several Districts reported difficulties finding qualified workers, and, in some cases, firms were coping with labor shortages by increasing salaries and benefits in order to attract or retain workers. Other business contacts facing labor shortages were responding by increasing training for less-qualified workers or by investing in automation.”

A recent job posting revealed what we already suspected about the “new economy.”

While these are anecdotal examples, it potentially explains why labor force participation remains stuck at multi-decade lows as government benefits provide more income than working. Currently, social welfare makes up a record high of 22% of disposable incomes. The reality is that if the jobless rate was actually near 4%, job openings would be filled, wages would be surging for the bottom 80% of workers along with interest rates and economic growth. Instead, we see more evidence of economic stagflation than anything else.

Despite many exuberant hopes of an “economic resurgence,” the vast majority of the data continues to point to a very late stage economic cycle. While I am not suggesting the U.S. actually IS Japan, I am suggesting we can look to Japan as “road map” as to the consequences of high debt levels, aging demographics, deflationary pressures and opting for “short-term fixes” rather than fiscal responsibility.

Unfortunately, the Administration has chosen to follow the path of Japan which is unlikely to have a different outcome. There is no evidence that monetary interventions and government spending create organic, and sustainable, economic growth. Simply pulling forward future consumption through monetary policy continues to leave an ever-growing void in the future that must be filled. Eventually, the void will be too great to fill.

There is certainly time to change our destination, but it will require a massive shift in perspective and desire to do so. With a rising number of Millennials starting to embrace socialism over capitalism, the future of the U.S. may be more like Japan than we readily wish to admit. 

Just something to think about as you catch up on your weekend reading list.

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“If you have large cap, mid cap, and small cap, and the market declines, you are going to have less cap” – Martin Truax

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Weekend Reading: #MAMI – Make America More Indebted

I have spilled a lot of digital ink over the last few years on the trajectory of debt, spending and the impact of fiscal irresponsibility. Most of it has fallen on “deaf ears” particularly in the rush to pass “tax reform” without underlying fiscal restraints. To wit:

“The recently approved budget was an anathema to any fiscally conservative policy. As the Committee for a Responsible Federal Budget stated:

‘Republicans in Congress laid out two visions in two budgets for our fiscal future, and today, they choose the path of gimmicks, debt, and absolutely zero fiscal restraint over the one of responsibility and balance.

Passing fiscally irresponsible budgets just for the sake of passing “tax cuts,” is, well, irresponsible. Once again, elected leaders have not listened to, or learned, what their constituents are asking for which is simply adherence to the Constitution and fiscal restraint.’

I then followed this up this past Monday with “3 Myths Of Tax Cuts” stating:

‘Tax cuts do not pay for themselves; they can create growth, but in the amount of tenths of percentage points, not whole percentage points. And they certainly cannot fill in trillions in lost revenue. Relying on growth projections that no independent forecaster says will happen isn’t the way to do tax reform.

As the chart below shows there is ZERO evidence that tax cuts lead to stronger sustained rates of economic growth. The chart compares the highest tax rate levels to 5-year average GDP growth. Since Reagan passed tax reform, average economic growth rates have only gone in one direction.'”

The reason for the history lesson is the CBO (Congressional Budget Office) has just released a new report confirming exactly what we have been saying for the last two years.

“In CBO’s projections, the federal budget deficit, relative to the size of the economy, grows substantially over the next several years, stabilizes for a few years, and then grows again over the rest of the 30-year period, leading to federal debt held by the public that would approach 100 percent of gross domestic product (GDP) by the end of the next decade and 152 percent by 2048. Moreover, if lawmakers changed current laws to maintain certain policies now in place—preventing a significant increase in individual income taxes in 2026, for example—the result would be even larger increases in debt.

The federal government’s net interest costs are projected to climb sharply as interest rates rise from their currently low levels and as debt accumulates. Such spending would about equal spending for Social Security, currently the largest federal program, by the end of the projection period.”

My friends at the Committee for a Responsible Federal Budget summed up the issues well.

  • Debt Is Rising Unsustainably
  • Spending Is Growing Faster Than Revenue
  • Recent Legislation Will Substantially Worsen the Long-Term Outlook if Extended. 
  • High And Rising Debt Will Have Adverse and Potentially Dangerous Consequences (Will lead to another financial crisis.)
  • Major Trust Funds Are Headed Toward Insolvency. 
  • Fixing the Debt Will Get Harder the Longer Policymakers Wait. 

While the CRFB suggests that lawmakers need to work together to address this bleak fiscal picture now so problems do not compound any further, there is little hope that such will actually be the case given the deep partisanship currently running the country.

As I have stated before, choices will have to be made either by choice or force. The CRFB agrees with my assessment.

“CBO continues to remind us what we’ve known for a while and seem to be ignoring: the federal budget is on an unsustainable course, particularly over the long term. If policymakers make the tough decisions nowrather than wait until there’s a crisis point for action – the solutions will be fairer and less painful.”

I am not hopeful. With government dependency at record levels as a percentage of disposable incomes (22.05%), the outlook for the economy will continue to become less bright as Government transfer payments only offset a small fraction of the increase in pre-tax inequality.

These payments fail to bridge the gap for the bottom 50% because they go mostly to the middle class and the elderly. With wage growth virtually stagnant over the last 20-years, the average American is still living well beyond their means which explains the continued rise in debt levels. The reality is that economic growth will remain mired at lower levels as savings continue to be diverted from productive investment into debt service.

The “structural shift” is quite apparent as burdensome debt levels prohibit the productive investment necessary to fuel higher rates of production, employment, wage growth, and consumption. Many will look back at this point in the future and wonder why governments failed to use such artificially low-interest rates and excessive liquidity to support the deleveraging process, fund productive investments, refinance government debts, and restructure unfunded social welfare systems.

Instead, those in charge continue to “Make America More Indebted.”

As individuals, we must realize we can only depend on ourselves for our financial security and work to ensure our own fiscal solvency.

As my father used to preach:

“Hope for the best, prepare for the worst, and remember the best rescue is a self-rescue.” 

Be hopeful. Just don’t be dependent.

Just something to think about as you catch up on your weekend reading list.

Economy & Fed


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“ Wall Street is a street with a river at one end and a graveyard at the other.” – Fred Schwed, Jr.

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