Some thoughts on the economy and market this morning...read this with the knowledge I bought my first security in 1979...so after 42 years of investing I am often wrong but I am never in doubt.
If anyone had doubts the recent government price index reports have confirmed inflation is running hot. An annualized 6.2% harkens back to the 1970's when there was double digit inflation. Much of that caused by the oil embargo and readjusting of the dollar to being delinked from gold and thus what is called the petrodollar. That petrodollar over time has been overtaken by the mass credit market, but that is a story for another time. This time around it is more about the Fed buying trillions of dollar assets and of course massive and growing spending by Congress and Biden. Frankly if Manchin does not put an end the current BBB bill inflation is likely to see double digits again. My bet is on something passing and inflation ramping up higher. (Understand Biden and Pelosi see themselves as the current reincarnation of FDR and believe they have a date with destiny regarding increasing federal government size and control over Americans. One more time if you have not read Generations and Fourth Turning by Strauss and Howe at least read the Wikipeida cliffnotes version as every politician in DC has read it and see themselves as part of the theory which is playing out right now. My use of 1940's here is in part because of generational thinking.) I use the 1970's as a focal point since many reading this post will remember those inflationary times, but the truth is this round of inflation is more suited to comparisons to the 1940's. The 1940's as now the federal government spent with abandon and the federal reserve kept interest rates low. Note I said INTEREST rates low, not INFLATION rates low, and that is the key to this time and how you spend and invest. Thinking like Ron Paul or some other doomsday forecasters all of who predicted one of the last dozen market crashes is not in order here, nor is investing like them. That will either keep you poor or make you poor via inflation.
Do the old rules of how to value the market like, PE ratios, earnings, and book value matter in this new market? Does out of control spending and federal reserve printing dollars matter to this market? The short answer is no. The real long answer is yes. Point here is trailing PE ratios are utterly ridiculous at over 30, forward PE is in the low 20's which is also high but ridiculous. If, and that is a BIG IF, the economy keeps growing even slowly and government largess keeps being pumped into the system that money will be spent and it will end up in the profit margins of businesses selling the goods and service and lots of that profit will push down PE ratios and push up stock prices. As always government largess enriches the already rich and does little long term for the middle class or poor other than make them slaves on the government plantation. There is also the fact many of these rich own millions in government bonds in essence owning in part or in business with the federal government that keeps sending them more wealth. It is a vicious cycle, but the elites in government, the press, and business enjoy and prosper handsomely the relationship.
Do the old rules of how to value the market like, PE ratios, earnings, and book value matter in this new market? Does out of control spending and federal reserve printing dollars matter to this market? The short answer is no. The real long answer is yes. Point here is trailing PE ratios are utterly ridiculous at over 30, forward PE is in the low 20's which is also high but ridiculous. If, and that is a BIG IF, the economy keeps growing even slowly and government largess keeps being pumped into the system that money will be spent and it will end up in the profit margins of businesses selling the goods and service and lots of that profit will push down PE ratios and push up stock prices. As always government largess enriches the already rich and does little long term for the middle class or poor other than make them slaves on the government plantation. There is also the fact many of these rich own millions in government bonds in essence owning in part or in business with the federal government that keeps sending them more wealth. It is a vicious cycle, but the elites in government, the press, and business enjoy and prosper handsomely the relationship.
Let me be clear we will NOT have a market crash as some are convinced will happen. The federal reserve has become the be all to both the Congressional out of control spending and the need to keep interest rates low since all the federal debt piling up can not be serviced at even one percent interest anymore, much less a real market rate interest rate of say 3% plus on treasuries. Also note even with all government spending we still are only spending 40% plus of annual production of America, none of the vast pool of savings and assets Americans own. Is it eroding the value of your savings and assets absolutely, but wealth gain is still happening only at a must slower pace of around 2% instead of say 5% annually.
If you own treasuries, including those TIPS, it must suck to be you. Besides the fact they are doing at best only keeping up with inflation and e no real return, your bond capital loses value each day. While the federal reserve keeps interest rates down they are allowing all be it with a wink and a nod inflation to do whatever it pleases. Government borrowing at less than 1% interest cost and inflation 6% and above is good for government inflating it's way out of it's current debt and making your bond and saving account dollars worth less and less. Note holding gold and crypto here is useless too since trust me if crypto gets serious use as an exchange the US will do what China has already done and clamp down on it hard. Gold is as I have opined since forever a non cash flow producing asset so holding it has no value for those who need money to live on. Gold since this round of inflation has commenced has LOST 2% of value. If you going to be able to compete with those slackers who are getting free money each month from the federal government you got to outbid them for the limited goods and services available from the provider. You do that like the rich folks with wealth accumulation.
One more time this market or economy crashing again it is not going to happen. Think of the money printing this way. Just producing more money to buy more goods does not produce more goods. It will make those goods that are produced more expensive by increasing the money chasing the goods produced. So for those producing those goods that means higher profits. Thus money printed means in essence money being handed out to the non producers or poorer workers who spend it into producer hands making them wealthier. Owning part of those producers business via stocks means you get to share in the profits. For those who say it will erode the economy that is true to a lesser extent than the money can only buy what is produced and taxed from the producers. So what is happening is the federal government is taking more of the current production of Americans and can only take 100%, but in this case all government is taking about 45% of all production, which might be the highest percentage ever. We do not get poorer overall, just lots of inefficient spending. The one item getting trashed in the dollar as the reserve currency. Do note here most of the red states are actually legislating tax cuts and holding government spending in line with inflation, which means more and more of government spending is going on in Washington.
Now one can pretty up this current economy and market all they want to regarding inflation, interest rates, valuations, and the like, but the deal here is until the current political and monetary actors in charge decide to do differently the only way to prosper is to play by THEIR rules and not the time honored rules. Right now the game is Modern Monetary Theory and if you do not know what that is go Google it and I will wait here. Lots of free money just washing around out there being spent many times by those with no idea of the value of work to money since they do not work and see no reason in doing such. You as an investor can take advantage of such of course. Anyone who got scared and dropped out of stocks in March 2020 has seen opportunity lost big and those who stayed in have been well rewarded literally more than doubling their assets in less than one year. Frankly yours truly stayed in for the most part, but wish I had put both feet in instead of just one having been scared by the dumbed down diversity hired press. I will not repeat that mistake again. Consider oil futures in April 2020 where any comer was being paid to take free oil off the market for future use by the scarecrows in our press preaching the all electric everything economy was here. But even with one foot in the market the two years have been marvelously rewarding for this long tenured investor. Going forward here I will do what I told someone else years ago regarding trading the market. You might not like the actors, the players, or the regime in control but if you want to be a part of the play you got to go by their rules. Thus I will be shortly after the new year begins be putting another 5% of assets into stocks, as I just did so about a month ago. Sorta a dollar cost averaging and watching the actors here and seeing how the economy and government spending play out over the next month and a half and on into 2022. I will no longer be waiting on a correction which will likely not come, unless we get a downturn with the first interest rate hike and that is late in 2022. Meanwhile ride this horse for more capital wealth gains.
Stocks have been and will continue to be the one place one can keep up and beat inflation going in about 250 years here in America. Even in this political mess betting against America for that same time has been a suckers bet. Businesses for profit can and do raise prices, and a profit of 10% on $100 is more profit at 10% on $110 inflated price and stock prices rise accordingly, all the while paying me a dividend from which to pay my bills. Cash flow assets make as much sense right now as they ever did. I would rather be riding with Jeff Bezos, Tim Cook, and others like them than with anyone or anything else right now. Stocks in the last 12 years have returned 19% annually, 9% annually since 2000. Nothing comes close to that return in investing. The meme stock players and millennial stock ESG players are only renting their dreams with those who see them as the latest group of suckers to be harvested for profits while those who avoid such fads are playing the better odds by putting their money with the ones in real control. Over time nothing has been able to weather out of control government spending and inflation than owning a part of a business which is owning stocks. As for stocks with so many workers retirement funds now linked to stock market appreciation imagine what will happen to politicians if the stock market sold off big time, think 2008 and we got Obama and a 60 seat Democratic Senate. These politicians understand that well.
How long will this inflation high/low interest rate scheme last? If history is a guide I give it another decade plus as it will take that long for the government to inflate their way out of the debt mess and that is assuming some no nonsense kick ass Gen X leaders take over and rights the ship soon. Meanwhile remember scared money never keeps pace with inflation and never wins the wealth accumulation game either.
So what is this investor buying? Much of the same that got us here. VOO...Vanguard S&P 500 fund... and BRK.B Berkshire Hathaway. I would suggest the same for you if you want to not only stay rich and/or get rich in this new economic/market environment. One final word you will notice we own NO individual stock, excepting for Berkshire Hathaway and that is more an index fund itself than a stock for those needing less income and more non taxable future growth. The rest of my holdings are in cash, legacy munis which you can not buy, some aggressive growth stock funds closed to new investors, and some high yield junk bonds all dry powder. Owning individual stocks, ANY ONE Stock, is taking a high gamble here only for selected fools as the current government masters can decide any day to come after your stock with a hammer and take it down. It is their rules and you must play their game. Good luck and good investing friends.
