By Tom Hankes
Consultant, Borger Capital Group LLC.
Clint Eastwood fans will recall this iconic line from Dirty Harry, a 1971 movie about an unconventional cop in San Francisco. I think there are parallels between confrontation with the thug in this movie and today’s stock and bond investors, who collectively answered Dirty Harry’s question with a most emphatic “Yes”. I have personally warned many people that it’s time to get out; their collective shrugs telegraph nothing but smooth sailing and blue skies ahead.
The average investor has maybe 35-40 years to accumulate what he needs for retirement, assuming he/she raises a family after getting established in a job and beginning to save for retirement. As one gets closer to that date, a clear thinking person should start to wonder “Should I get out of this nerve-wracking investment stuff and get conservative? Or when should I get out? There is always a mental tug of war going on trying to answer that question. In artificially rising markets, you could be in FOMO mode (fear of missing out), thinking, “ if I just hang on a little bit longer, I can add more to my retirement account ( or recover some of my losses).
You’ve got the bull market media and newsletters out there always pressing you to stay invested. They say: “in the long run, investors who stay invested always come out ahead”. But, in my perspective, if you’re in the 55-70 age range, the “long run” starts to turn into the “really short run”. If you really raise Cain with your advisor because you are increasingly concerned about losses, they may talk you into more conservative stocks to keep you as a client, or a higher mix of bonds relative to stocks. That also is a lousy idea. There are times when markets are so insane that you simply have to get safe and stay that way, because the risks are so high. Now is one of those times in my view. It’s been a long time waiting for sanity to return.
There are dozens of indications that the markets are headed to the stock coronary care unit. Here are a few of those indicators:
US households’ allocation to stocks reached 42.2% in the first quarter of 2024, an all-time high. In 2000, the NASDAQ DOTCOM peak it was 38.4%. Stocks have risen another 9% since March 31, so this percentage must be even more exaggerated when brought up to date to Sept.
Warren Buffet, who many in the know think is the world’s greatest investor, has dumped large portions of his bank stocks and Apple computer shares, his largest position. He’s been a seller for seven straight quarters. He’s sitting on his largest cash pile in his lifetime. Per an August 3 rd article he’s sitting on his biggest cash hoard ever of $277 billion up from $189 billion at the end of the first quarter of 2024 which means he likely sold $88 billion of his stock holdings (ties into my comments above about holding cash). When the Sage of Omaha loses faith in the markets, it’s time to pay attention.
Market Capitalization as a percent of book value is over 6.0. In normal times with normal valuations that ratio is between .5 and 1.3.
Stock market capitalization has grown more than three times the growth rate of GNP (gross national product) since 1995. This is one of the key measures Buffett uses to gauge the over exuberance of the markets. This ratio is absurd.
Hedge funds are selling shares with both hands; who do you think they are selling to? Look in your bathroom mirror for the answer (small retail investors who can’t pass up any “buy the dip” opportunities).
The yield on junk bonds is only 3% above the yield on 10 year treasury bonds. The “Junk bonds” tells you all you need to know, these are issued by companies expected to go broke.
Individual call option buyers have gone nuts betting on continued happy times for bull market investors. And they are buying short-dated options which are notoriously big money losers.
Investors sensing a major turning point soon, have several possible
options: 1) Doing nothing and continue to slurp alcoholic beverages from the market punch bowl, 2) Getting very conservative and going to all cash, 3) Going to a mixed bag, some cash, some commodities (usually precious metals), and maybe some stocks. But, keep in mind, in a bear market 90% of stocks decline; you better have finely honed stock picking skills to be buying stocks in a bear market (aptly called “catching a falling knife”). When markets get ugly, holding a large portion in cash, or better yet, your entire portfolio makes sense. When stocks and bonds start losing value, that is deflation kicking into gear. Holding cash is a fabulous way to increase your purchasing power in a deflationary environment.
If you are in cash and the market sinks 50%, you now can buy twice as many stocks after the drop. There is one HUGE CAVEAT about going to an all cash position: “If the Great Taking” scenario and CBDCs (central bank digital currencies) materializes as we expect, you could lose 100% of your money and certainly you will lose control of your money. The Fed will be naming all kinds of positive reasons why you should just love CBDCs, but yours truly is telling you that’s a ticket to slavery.
How about bonds? The Fed recently lowered its rate 50 basis points (½%) so the market got all giddy for a few days. It’s all politics folks. The Fed is going to have to roll over 16 trillion in debt In the next 3 years, and they will have to pay a yield a lot higher than the yields they’ve been paying. In addition, the largest holders of our bonds, China and Japan are reducing their positions. Therefore, the government has to sell even more bonds than the 16 trillion above to compensate for their dwindling US bond portfolios. Which means what exactly? You guessed it: the government will need to pay much higher rates to compensate for reduced faith in the US dollar.
Even as things stand today, interest expense in the Federal budget is expected to come in at about 1.6 trillion. If you have bonds, get rid of them (all of them) you will only lose money going forward (yes, even if you hold them to maturity and even if they are investment grade bonds). All interest rates will be climbing dramatically instead of sinking as they’ve done for 38 years. Bond values will shrink and so will their purchasing power. Even worse, there is massive counter party risk to owning them. And recall that corporations loaded up on cheap short term debt after the GFC; now refinancing much of that debt is in the cards. It may be quite difficult.
Only assets you own free and clear are safe from theft. You know the drill: own debt free precious metals or debt free income producing businesses which have zero counter party risk, unlike stocks, bonds, and every paper guarantee you own. If you value your freedom, you’ll want to own as much of them as you can afford.
If you want to discuss your personal situation in more depth, I’m here to help. Schedule a free 30-minute strategy call here, and together, we can find the best course of action for your specific circumstances.
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