December 22, 2019 | Too Much

John’s a lucky guy. At 32 he’s got a $1 million house (no mortgage) plus $800,000 in cash and liquid investments. Yup, inherited. He and his fiancée are getting married in 2020 and with a combined income of $90,000, hope to save a third of it annually. No debt.

“Your blog is a national treasure,” he says. “Thank you for your insightful and colourful commentary.” And that MSU earns him our pre-Yule attention. Here’s the ask:

“I’m concerned about the everything bubble and it’s really hard for me to know what to do. I’m a value investing aficionado and voracious reader, and I have people coming up to me and asking for advice. I don’t know what to tell them because I’m unsure myself about what to do. There aren’t many bargains out there. I am in a very fortunate position and am grateful for everything that’s been given to me. But I don’t want to mess it all up. What do I do?”

Is this a dangerous time to be invested? Should a 30s dude with the better part of two mill just sit on cash for a few years until the future reveals itself? After years of big gains have we reached some kind of financial zenith? Is the reckoning or a big reset inevitable?

Well, wow, 2019 has been outsized. Global stocks added about $10 trillion in worth. Commodity prices jumped. Even bonds piled on the profits. American stocks have gained 30% when you include dividends. Toronto’s up about 20%. Emerging markets made bank. And look at the FANG stocks – Apple up 77%, FB ahead 57%, Google gained 30% and Netflix added 24%.

A boring, more predictable, lower-vol balanced & diversified portfolio added 13%. Lately every asset class seems to be on the rise, and right around the globe – even in China, Russia, Greece, Ukraine or Brexit-addled Britain.

Why? Rampant speculation? The last great gasp of greedy capitalism? Or is this all justified. A precursor of what’s to come?

Well, John. Look at some of the drivers behind the gains. Like Trump. He’s the most pro-business, pro-growth, pro-profit president in memory. His legacy might be high inflation, an increased wealth divide, climate change denial and a society more prejudiced, divided and dumbed-down than ever, but, man, he’s crack cocaine to investors. Lower corporate taxes, less regulation and beating up the Fed have all helped fuel markets and drive unemployment to record low levels. Consumer confidence brims, so in an economy where 70% of the GDP derives from household expenditures this is the result. Half of Americans love Trump. Half hate him. He’s a personal boor and impeached. But he sure makes people spend.

Speaking of the Fed, 2019 saw central banks turn on a dime from being hawks to doves. Rising benchmark rates, surging bond yields and that scary inverted yield curve thing ended when the Fed dropped the cost of money three times and decided to jam more stimulus into an economy that didn’t need it. Jobs were plentiful and markets at record highs, but the gas was poured on anyway.

Meanwhile corporate profits have continued to drive the price of financial assets. After a few years of record earnings, expectations were low – and they were shattered. When companies make money, stocks go up. Duh.

More stimulus came through fiscal measures (governments) at the same time monetary stimulus (central banks) was happening. China stepped up and took aggressive actions to mitigate the damage caused by Trump’s trade war, for example. Growth in that country next year is expected to top 6%. And speaking of that, the US president has done the inevitable, scaling back on his nationalist, protectionist, America-first rhetoric as he seeks more trade agreements prior to the November election. Witness the new NAFTA.

Meanwhile the uncertainty surrounding Brexit is lifting, following the thumping Tory election victory this month. More turmoil will ensue, but the rules are becoming clearer. Just what investors wanted. Together with the Washington-Beijing thaw, the two major clouds over the global economy are lifting, or at least brightening. And, as mentioned Mr. Market thinks Trump will be re-elected.

So, John, these are some of the reasons everything’s going up.

But all is not ponies and hugs. You may not be pickled in debt, but legions of people are. Governments can’t balance their books any better, either. Ottawa’s sliding deeper into the red and Trump will have a $1 trillion deficit soon. Global debt is at record levels, just like Canadian households. Rates that have been too low for too long have certainly helped inflate asset values and turn reasonable people (and countries) into loan-snorting addicts.

So the inevitable conclusions are (a) stay invested but (b) be careful.

It sounds like you’re now a ‘value investor’ who seeks out beat-up stocks to speculate on. Two words of advice: stop it.

You’re a teacher with an inherited wad of dough, not a financial analyst who – in a pricey market – shouldn’t be making those kinds of bets. Markets may be setting up for years more of eye-popping results, but along with that will come high volatility, emotional angst and the chance of making some spectacular mistakes. Besides, with a NW of $1.8 million at age 32, why would you be flipping equities, sucking up risk and looking for supersized returns? Just build a boring ETF-based portfolio with lots of balance and look forward to having $14 million by the time you retire.

She’ll love you even more for not being a cowboy. Trust me.

Garth Turner December 22nd, 2019

Posted In: The Greater Fool

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