Are You Getting Your Piece of the Pie?

© Can Stock Photo Inc. / Elenathewise

The Federal Reserve provides us with a quarterly report of household net worth. The latest number is $89 trillion, up 59% from the financial crisis year of 2008. I don’t care who you are, that’s a lot of wealth—and a nice increase.

The distribution of our wealth from person to person is the subject of some political debate, which we will leave to the politicians. It always has made sense to us to focus on the things within our control; let’s see what we can learn from the numbers.

Our $111 trillion of assets includes homes, pensions, stock, money in the bank, mutual funds, small business ownership, and bonds.

We owe $22 trillion, most in the form of mortgage debt but also including consumer debt like auto loans and credit cards.

Net worth is simply the value of our assets minus our liabilities, or what we own minus what we owe. $111 trillion minus $22 trillion is our $89 trillion in net worth.

Here are the pertinent points, as we see them:

1. Having wealth in different forms is a good thing, a form of diversification. We the people have money in the bank, different kinds of investments, homes and businesses.

2. Debt can make sense when it helps us own assets of enduring value that we can afford to pay for over time. $22 trillion is a lot of debt, but it helps us to own $111 trillion worth of homes and businesses and other assets.

3. Since debt or liabilities are subtracted from assets to determine our net worth, it makes sense to minimize debt over time. One who pays off a car loan and then keeps putting the payment amount in savings each month might get by with a smaller loan the next time a vehicle is purchased.

4. Because assets are the starting point for determining net worth, one should seek to invest effectively for growth and income over time. Money does not grow on trees, but it may grow over time.

Our $89 trillion net worth is a very large amount of wealth for us as a society. The decisions we make play a big role in determining whether or not we each get our piece of the pie. We have written about Four Habits for Financial Success which might help, and we encourage you to call or email if we can be of service.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Nattering Nabobs of Negativism

© Can Stock Photo Inc. / junjie

Once upon a time in America, a sitting vice president was investigated for extortion, tax fraud, bribery and conspiracy. In a plea bargain deal, he pled no contest to a tax charge and resigned. Although historians judge Spiro Agnew as perhaps the worst vice president in history, he did bequeath us the memorable phrase in our headline.

We begin our essay this way for two reasons. First, although some believe the current times are the worst ever or the most this or the least that, there probably are no new things under the sun. Second, the pervasive rotten mood of the country has reached fairly extreme levels.

As contrarians, we believe the times of greatest danger in the markets are when optimism reigns and it seems like clear sailing ahead. Think 1999.

Conversely, the times of greatest opportunity are when the mood is in the toilet. There was a lot to be negative about in 1974, when Nixon resigned and the Arab Oil Embargo meant there was no gas at the gas station and inflation was heating up. And 1982, when mortgage interest rates hit 15% and businesses paid 20% interest and the economy slipped into a double-dip recession. And 1990, with war in the Mideast and falling house prices and the fallout from a huge financial crisis in the S&L’s…same thing. And 2002, when we were dealing with recession and the aftermath of 9/11 and terrorism.

Following each of those episodes, major gains ensued in the stock market. Why is this pertinent today?

Contrarians have to be delighted with the pervasive pessimism of the public. (Or the nattering nabobs of negativism, if you prefer.) LPL Research strategist Ryan Detrick has documented a variety of sentiment measures that have reached multi-year or multi-decade extremes. Gallup reports the most prolonged negative poll readings for the question of whether the country is on the right track or wrong track. You can learn in any barber shop or café that we are going to hell in a handbasket, just listen.

Warren Buffett stated our view more concisely when he wrote, “Be greedy when others are fearful.” If you would like to know more about how this relates to your situation, call or write.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

Money in the Bank

© Can Stock Photo Inc. / turk12

We have learned over the years that money in the bank is useful and worthwhile for a variety of reasons. It helps us deal with emergencies and take advantage of opportunities. The confidence that comes from having that certain amount safe and sound is perhaps the best thing about it.

With the right amount of money in the bank, people may have more tolerance to the ups and downs of longer-term investments. With today’s low returns on safe, liquid investments, for some living with volatility is the only way to have a chance at decent returns over time. (We are using ‘money in the bank’ as a term to include a variety of conservative investments likely to maintain value.)

As with so many things, there is a gap between how people usually think of their money and how the financial industry talks about it. For example, when you think about the balance you need to have in order to sleep comfortably, you think in terms of a dollar amount. It might be $2,000 or $200,000 or some other number—a matter of circumstances and personal preference.

But the financial industry talks about it in terms of percentages. For example, a blend of 80% stocks and 20% conservative, or 60/40, or 40/60. We see things a little differently. Like Warren Buffett, we believe a temporary dip is not a loss, we are optimistic about the long term, and we know that tolerating volatility is crucial to successful investing. But you still need to sleep comfortably at night, and you still need those advantages that come from having money in the bank.

Our solution: we will be working with you in the weeks and months ahead to sort out how much if any of the funds entrusted to us should be devoted to capital preservation first. We won’t be talking about percentages like 80/20 or 60/40; we’ll be looking to help you ascertain that dollar amount in conservative investments that will leave you feeling comfortable.

This is slightly harder than it sounds, since the trade-off for more stability is less growth potential over time. But we are here to work you through these issues. Write or call if you would like to discuss your situation in detail, or have other questions about this.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss.

Stock investing involves risk including loss of principal.

There is no assurance that these techniques are suitable for all investors or will yield positive outcomes.

When the Tide Goes Out

© Can Stock Photo Inc. / RobGooch

A lot of money talk uses words that evoke water: liquidity, a wave of buying or selling, money sloshing around. We have described large sums of money going into a particular sector as a tsunami.

The extreme actions taken by central banks around the world, instead of goosing economic activity, have actually caused people to become more cautious, spend less, and save more money. The primary effect has been a huge increase in demand for supposedly safe bonds and other fixed income investments.

In our lifetimes, there have been several investment manias that featured large sums of money pouring into a single sector or type of asset. The real estate boom of the early 2000’s is fresh in our minds. The technology and growth stock boom of the late 1990’s grew into a classic bubble.

The biggest financial tsunami in history is the one we are in right now: the rush into bonds. Bloomberg recently reported on the International Monetary Fund’s concern over the global $152 trillion debt pile. The key for us is to understand how this happened: people and institutions demanded bonds in unprecedented quantities. Interest rates reached extremely low levels as the tsunami of money flooded the fixed income markets.

The market will supply whatever is demanded. Companies that didn’t need money borrowed, simply to lock up financing for years or decades ahead at the most favorable prices in history. Some consumers are taking on mortgage debt at the lowest interest rates ever just because they can. Governments around the world see little cost to borrow, so finance their deficits.

The global debt pile is like a coin with another side. That other side is the unparalleled tsunami of money into bonds and fixed income. Investors who believed they were being prudent have ramped up their holdings in the supposedly safe kinds of investments.

Some say you cannot spot a bubble when it is happening. We disagree. What cannot be known is when the bubble pops. To get back to our water words, we can’t know when the tide will go back out.

We believe that bonds will be punished severely in price when the tide goes out. There will be collateral damage to bond substitutes and other income investments. And other assets may rise in price, as money returns from the bond bubble and goes back into other, now-neglected sectors. Peril and opportunity go together.

This issue is the key to the investment markets for the next few years. We know that opportunities and threats are always present, and you know we’ll be working hard to sort out which is which. If you have questions about how this applies to your situation, please write or call.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

Cryptogenic Market Action: How it Can Help You

© Can Stock Photo Inc. / gajdamak

The field of medicine has a pair of terms that mean the same thing. The words describe an incredibly useful concept. The concept has important applications to the investment markets, and other economic and business usage. We were aware of the idea, but previously had no handy term to describe it.

The words are “cryptogenic” and “idiopathic.” They mean ‘of uncertain or unknown origin.’ For example, a cryptogenic stroke is one that has no known causative factors. Sometimes doctors know why something happened, other times they don’t. When they don’t, the diagnosis includes one or the other of these descriptions.

How would this apply to investing?

Every day at the market close, commentators speak or write as if they know exactly why the market did what it did. Despite the market averages being set by millions of people making billions of dollars in transactions for a nearly infinite variety of reasons, commentators boil it down to ONE REASON. “The market rose today over better-than-expected whatever,” or “The market fell today because of poor whatnot.”

We have said as many ways as we know how: the market goes up and down. It just does. To put it in more clinical terms, the market has cryptogenic rallies and idiopathic falls. The short-term action is of mostly unknown or uncertain origin.

According to, in 1602 the Dutch East India Company issued shares that could be traded on the first stock exchange in Amsterdam. We suspect that at the close of trading on the first day, somebody said something like, “The market rose today because the tulips looked set to bloom early.” And this nonsensical tradition continues to this day.

If we accept the idea of cryptogenic stock market action day to day, we can focus instead on long term trends and fundamentals that may prove more fruitful.

Slow Burn

© Can Stock Photo Inc. / cafaphotos

We are now in the 7th year of economic expansion and recovery since the last recession. Many commentators insist that after such a long stretch, the next recession must surely be right around the corner. Of course, they’ve been insisting this for the past 7 years–remember the term “double dip”? The recovery didn’t make it a full year before people started predicting its demise, and now here we are seven years later.

Part of the longstanding skepticism surrounding this market cycle is grounded in the weak performance of this expansion. It’s been a long, slow recovery since the recession started in 2008. In a lot of people’s minds, those two things don’t go together. They think, “The recovery is going slowly, so it must not have enough fuel to keep going for very long.” There is a certain intuitive appeal to this way of thinking. We tend to see something moving quickly as having more momentum, so it would take longer to come to a stop.

The economy doesn’t really work in terms of “momentum”, though. Instead, market cycles tend to be driven by sentiment. In a normal expansion phase, optimism feeds into faster and faster growth, eventually creating a bubble. When the bubble finally pops at the height of its exuberance, values plummet and the economy is likely to plunge into recession.

You can think of it in terms of an out of control fire. The bigger it gets, the stronger it gets—but the faster it burns through its fuel. A raging conflagration will consume its fuel and die down to embers faster than a more contained fire.

In this analogy the current economic cycle has been a slow, cautious burn. The fire is burning away quietly but hasn’t really erupted into a general blaze—pessimism is widespread and we haven’t really seen the kind of manic stampede that marked the last days of the previous few expansions.

We never know how much fuel there is left for our “fire.” The expansion must eventually run itself down, but this may be a matter of months or days or years—we can’t be sure. However, we view the slow pace of recovery as an indicator that there may be a good bit of fuel yet untouched.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Scorecard: 1,000 to 2

© Can Stock Photo Inc. / mflippo

The Savings & Loan Crisis of the late 1980’s resulted in over a thousand felony convictions of executives for wrongdoing, after a third of the institutions went broke. The FBI had a thousand agents on it, and the government was determined to find and punish thieves. The New York Times wrote extensively about this.

Thoughtful people all across the ideological spectrum are incensed that there have been only two felony convictions related to the 2007-2009 financial crisis. The recent crisis had a far greater impact on the economy, workers, families and retirees. Yet far less was done to investigate and prosecute the bad guys.

Naturally, many people of all political persuasions are concerned and upset. Corruption, incompetence, or both? No one knows. It clearly violates the social compact on which our society is based.

Now, get ready for another astonishing shock. In lieu of sending criminals to jail, various agencies of government have been soliciting multi-billion dollar settlements from the large banks. But whose money is this? Yours and mine—shareholders. It is as if the government is collecting ransom from thieves which they are paying from our pockets.

If you think we are being melodramatic, consider that the Justice Department recently asked Deutsche Bank for $14 billion to settle allegations of wrongdoing. This figure is more than two-thirds of the bank’s net worth, as measured by the value of its shares in the market. In our system, the presumption was that a company is owned by its shareholders. Now we find out that the government thinks it is entitled to more than half the net worth of this company—instead of doing its job and prosecuting wrongdoers.

In our opinion, the system worked better and more fairly when thieves went to prison and shareholders enjoyed the rights to their property without impairment by arbitrary government action. One of the worst aspects of this situation is how little attention it is getting; this article is intended to help rectify that. Please spread the word by sharing and linking and emailing your representatives.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Fruition, What a Wonderful Word!

© Can Stock Photo Inc. / gregepperson

We’re inspired by recent conversations with clients and friends whose plans, as they say, have come to fruition. Fruition—the realization or fulfillment of a plan or project—scarcely begins to describe the satisfaction and joy we’ve seen.

The recent retirees after downsizing to a maintenance-free home, going to art festivals instead of pulling weeds, having more dinners with their descendants, seeing more ball games… people going on that Alaska cruise or the tour of Italy… hobbies becoming true avocations. These are some of the plans we’ve seen come to fruition for people we are close to.

A wise person once said that a plan is a dream put into writing. We are in the business of trying to make the arithmetic work for people who would like to try to make their dreams come true. We’ve written before about the best way to retire and the point is, dreams are personal. What are you trying to do? Where do you want to wind up?

One of the privileges of long experience in our work is seeing the realization or fulfillment of plans made long ago. But life sometimes throws curve balls. So we’ve also seen adaptations and adjustments made by people who would have preferred to avoid the need for adjustments. Not everyone we love lives as long as we wished, health may be fleeting, and circumstances often present a mixed bag. The point is, sound plans usually put us in better shape to deal with the unanticipated.

Money is not the most important thing in the world. But it is also true that resources give us options we might otherwise not have. Wealth may free up our time, and time is what life is made of. Dreams and arithmetic working together may make the best things more likely. If you would like to discuss your dreams and plans in greater detail, please write or call.

Au Naturel

© Can Stock Photo Inc. / kadmy

We’ve written before about our positions in natural resource sector companies. They were key to both our pain in 2015 and our pleasure in 2016.

Noted investor Jeremy Grantham of Grantham, Mayo & van Otterloo (GMO) recently published additional insights on this topic in a white paper. Three of his nine key points are worthy of special mention:

1. “Resource equities have not only protected against inflation historically, but have actually significantly increased purchasing power in most inflationary periods.” Regular readers know we believe that prospects for increasing inflation are under-appreciated in today’s markets. Although we have no guarantees that we are correct in this view, and past performance is no guarantee of future results, we may be very well-positioned for a rise in inflation.

2. “We believe the prices of many commodities will rise in the decades to come due to growing demand and the finite supply of cheap resources.” Low prices have curtailed future supplies; we know how this works.

3. “Despite all of this, investors generally don’t have much exposure to resource equities.” As eclectic contrarians, we are used to marching to a different drummer. This is certainly the case in 2016 with regard to our exposures in this sector. The unstated premise is that when the crowd decides to gain exposure, a lot of money may shift into the sector. Again, no guarantees.

We are watching economic, business and market trends closely to see how this all comes out. We enjoyed the analysis by Jeremy Grantham, even as we guard against the fallacy of believing he is a genius because he agrees with us. As always, please call or email if you would like to discuss your position.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.