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February 11, 2020 | Price-Indiscriminate Buying Thwarts Financial Plans

Danielle Park

Portfolio Manager and President of Venable Park Investment Counsel ( Ms Park is a financial analyst, attorney, finance author and regular guest on North American media. She is also the author of the best-selling myth-busting book "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," and a popular daily financial blog:

This recent Real Vision segment is worthwhile and offers many important observations on the dynamics that have shaped the economy and asset prices over the past two decades.

Raoul Pal, in his role as CEO and co-founder of Global Macro Investor, joins Real Vision to explain the interconnected problem of the everything bubble and the coming retirement crisis to answer the question, “why do we invest?” …Pal breaks down the crucial demographic, economic, and political trends that have combined to create the problem and suggests potential solutions for Baby Boomers, Millennials, and Gen Xers to get out the door before the fire of the coming recession.  Here is a direct video link.

Starting at the 30-minute mark Pal discusses steps that individuals can take to help navigate through the next decade and beyond. The follows passage is a good summary:

“Everbody is taking too much risk…look at what risks you are facing.  You are in the bubble. You are creating the bubble.  You need to protect yourself and get out it.  Take responsibility for your retirement savings and think about what you need to do to adjust your future expectations…To adjust your future expectations means to understand that you can retire with less money…You’ve got too many equities and your pension plans are also overallocated…and also you’ve got too few bonds. You don’t own bonds which will protect you in the inevitable recession which I think is dead ahead.”

I write and speak about similar issues and solutions every day.  Some critical takeaways are these:

  • The median age of baby boomers (born 1944 to 1964, ages 56 to 76) is now over age 65.  This means the bulk of this cohort is now at or beyond the average retirement age.
  • Baby boomers own some 57% of the national wealth (net assets) versus about 16% for Generation X (born 1965 to 1980, ages 40 to 54), and just 2% for Millennials (born 1981 to 1996, ages 24 to 39 in 2020.)
  • Twenty-five years of debt-addition and asset-inflating policies have driven the market price of most assets to uneconomical levels and income yields to record lows.
  • This means that baby boomers are asset-heavy but income-short.  They will need to sell assets and raise cash to help cover their expenses.
  • The gap between the price boomers are hoping to sell for and the price which younger generations can afford to buy is too wide to be sustained.
  • Just as the buying pressure of boomers helped fuel the rise in widely-held assets like real estate, corporate bonds and equities, boomer selling pressure over the next decade+ will force prices lower.
  • Most boomers need to downsize their living expenses and young people need affordable housing. Multi-generational households offer a solution for both.
  • Most people and pensions today are undersaved/underfunded and have far too much of their portfolios in equities and corporate debt at unsustainably high prices, and too little in more principal-secure government bonds and deposits.
  • Corporate bonds are a much higher-risk asset class today than government bonds and guaranteed deposits, but most people–including so-called financial experts–conflate the two.
  • The majority of capital today is passively allocated in price-indiscriminate funds, ETFs and approaches.  This has enabled valuations to become extreme and thus highly vulnerable to mean reversion.
  • To avoid being a victim in this environment, one needs to make responsible choices in terms of their own life plan and financial decisions.  This includes reducing our exposure to the repricing cycle ahead by minimizing holdings of over-priced, over-bought, high-risk assets in favour of lower-risk cash, deposits and government bonds.

A couple of caveats or cautions I would add to Pal’s comments.  He talks about investment opportunities in developing countries like India and Africa.  Just as with high-growth sectors and companies, I agree that countries with higher population growth have the potential for higher growth rates over time.  But this is a long term theme and does not mean that high tech companies or developing world stocks are not today highly vulnerable to the same global recession and deflationary pressures facing other hyper-inflated assets.

In a globalized world, recessions and bear markets hit developing economies just as hard, if not harder, than developed.   There is no free lunch in an everything bubble.

Pal also talks about cryptocurrency as a longer-term opportunity. It may well be, and we explained legitimate catalysts for cryptocurrencies in November 2017 here. But near-term, cryptocurrencies are also a non-productive, speculative risk in a world of toxic debt-levels, asset leverage and too little cash to pay bills.

Most people cannot afford to lose principal–financially, emotionally and/or psychologically.  We must never mistake good products or longer-term stories for good investment prospects at every price.  Price and timing define our risk and return odds.

Patience and capital protection remain the wisest choice in the facts at hand.  Doing so now also preserves valuable optionality to purchase higher-yielding income assets ahead at a fraction of their present price and risk, when the masses are selling.

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February 11th, 2020

Posted In: Juggling Dynamite

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