A House of Cards

"Money is the Mc-mansion in Sarasota that starts falling apart after 10 years. Power is the old stone building that stands for centuries. I cannot respect someone who doesn’t see the difference.” - Frank Underwood in The House of Cards

One of the main reasons for limiting my blog posts is that they were starting to sound a bit like a broken record.  Since I started them almost 10 years ago it seems like I have spent the majority of my time warning against the excesses of money printing.  These excesses have to lead to a monumental market capitulation unless money printing continues unabated AND at an accelerated pace.  As both of these criteria continue my doomsday predictions have been wildly off the mark.  Not only has money printing continued, but after the Federal Reserve reduced its money printing efforts the combined might of the rest of the world’s central bankers jumped into the fray not just offsetting the Fed’s reduced participation but expanding the global monetary base.  With this tinder continually being fed into the roaring blaze that is the stock markets of the world, the result is unbated increases in equity prices. As I write this the markets are on a continued tear to infinity and are breaking records daily.  In fact, 2017 has turned out to be one of the smoothest periods of unabated stock market growth in all of history and this is after 8 years of a bull market!  At this late stage in the game you would expect some form of volatility but by all measures risk is off the table.  Forget about a correction (a drawdown of 10% or more), this stock market hasn’t even had a 3% drawdown in all of 2017, the second longest stretch in US stock market history.  Bear funds and ETFs are closing in record numbers and the new millennials are mega bulls as they have never experienced a correction! 

Old hands like myself are not at all optimistic.  I have seen this story all too often before (1987, 1997, 2000, 2008) so why should it be any different this time around?  Certainly, the length of the bull market has many professional investors amazed particularly in light of the weak economic recovery and there is a sense of despair among many sages of Wall Street who see the inevitable but cannot for the life of them fathom why the market continues upward.  Well things recently changed dramatically as the Federal Reserve announced that it would start to drain money out of the market at a rate of $10 Billion a month for the first quarter and then increase the withdrawal by an additional $10 Billion a month each quarter thereafter until they reach the maximum of $50 Billion a month.  Effectively they are starting with a pea shooter (limited impact as the market has shown) and rapidly growing to a rocket launcher which is sure to kill off the market.  I doubt that the market will wait for the rocket launcher and will wilt long before that cannon arrives so to me the time is near.  Whether the market dies this year or next no-one can honestly say but the reality is that this market has been propped up with the excesses of money printing and it will die with the lack of it.

My investment strategy throughout this period has been to ready myself for the inevitable by building up a steady and secure cash flow stream that will allow me the opportunity to jump in when things finally collapse.  As always, I am not looking to time the market (if I was I would still be long stocks and would sell them all at the exact highs) but to wait patiently for the buying opportunity to present itself at which stage I have my cash reserves ready to take advantage of the market malaise.  This to me is the prudent way to invest and I have been encouraging long term readers to do the same.  Those that have will survive and thrive, those that are overexposed will suffer and those that are leveraged will see their net worth disappear.  So, while it has been a long lonely ride to this place, I expect the not too distant future will provide amply.

Bubble, Bubble, Toil and Trouble!

"Double, double toil and trouble; 

Fire burn and caldron bubble. 

Fillet of a fenny snake, 

In the caldron boil and bake; 

Eye of newt and toe of frog, 

Wool of bat and tongue of dog, 

Adder's fork and blind-worm's sting, 

Lizard's leg and howlet's wing, 

For a charm of powerful trouble, 

Like a hell-broth boil and bubble." - William Shakespeare

I mentioned it in the last letter but it is worth mentioning again, by any metric that you can find we are in a bubble (apologies to Shakespeare as he says Double not Bubble but close enough for this blog).  Simple economic mathematics shows that the result of printing money and holding interest rates at below market values is the over-inflation of asset values.  It was just a matter of time before it happened but even the Federal Reserve has now mentioned that asset values “may” be a little high.  By the time they are saying this you can bet that we are in the final throws of the bull market.  That said they still have not learned their lessons and continue to believe that their money printing techniques (that have never worked) can magically manipulate market prices removing the chance of even the slightest drop in economic expansion.  Bernanke stated when he was the Federal Reserve Chairman that “we’ve never had a decline in house prices on a nationwide basis”, right before the property bubble burst.  Now we have Yellen saying that we’ll never have another financial crisis!  Wow the egotism and the ignorance is unbelievable and this is from the most powerful market manipulator in the world.

I have also mentioned repeatedly that economic growth can only resume at a healthy clip when you remove the shackles of debt.  While the Federal Reserve has stopped printing money the rest of the world’s central bankers took up the mantle and have bludgeoned forward mindlessly printing.  This has resulted in the massive run up in stock prices.  These stock prices require this fuel to keep them airborne so when you have Yellen and others start to talk of cutting back on their stimulus there is going to be a fall out, it is just a matter of time.  As with all fall outs the most egregious benefactors will be the hardest hit.  Think of say Tesla with a $60 billion market capitalization and losing $400 million a quarter, or Snap Chat (never made money), or Twitter (same) or a myriad of other stocks and you get the picture.

So, taking Yellen’s comments at face value (I assume that she was not joking although I secretly hope that she was) what will the Federal Reserve do when the market takes a nose dive?  Well for one they can drop rates from the lofty 1% mark that they raised (now that should be really helpful, NOT), or they can print more money and add to the $15 trillion of debt onto the global central bankers’ balance sheets (this has never worked and never will but I am sure that they will try once again), or congress could reduce taxes and increase spending right when they are talking about balancing the budget deficit.  This time around the tools at their disposal are significantly curtailed and while they will no doubt try all of the above the results will be even more feeble than those we have witnessed to date.  Not only has this been the weakest recovery in the history of the world but with the massive buildup of debt the next recovery will be even worse.

I am sure that this will not stop our egotistical maniacal leaders from proving once and for all that their strategies work.  This will mean tens of Trillions (billions will be SO 2010 darling) added to the Federal Reserve’s balance sheet plus negative interest rates (you will now have to pay the bank to place your savings there).  Once again this will kick the can down the road however the recovery will be even more anemic as massive increases in debt DO NOT STIMULATE AN ECONOMY.  Growth stimulates an economy and growth comes from innovation and entrepreneurialism not debt.  Debt becomes a yolk that must be dragged around slowing down the cogs of capitalism grinding the economy down to its knees.  This is why the economic expansion has been weak and why, given the policies of the central bankers around the world, we will suffer for decades to come.