"Tiny bubbles (tiny bubbles)
In the wine (in the wine)
Make me happy (make me happy)
Make me feel fine (make me feel fine)"
Leon Pober, popularized by singer Don Ho, "Tiny Bubbles," 1966
Things could go wrong.
I am talking about the economy and your retirement, not Trump.
It is an enormous relief not to feel responsible for the financial and emotional well-being of my investment clients. I loved my work, but I felt a relentless sense of responsibility. Ten years ago, a week after I retired, I sat at this desk and read the financial news and realized that the weight on my shoulders was gone. I had my own money to consider, but no one else's. When one retires from Morgan Stanley, as I did, one is forbidden to give investment advice for five years, lest former clients think they are getting advice from a Morgan Stanley agent when they are not.
I am retired, a private citizen. I am free to say that the stock market isn't cheap and that it gives me the willies.
I feel like we have been in investment crazyland twice before. One crazyland was the internet boom years of the late 1990's, culminating in March of 2000. And again in 2006-2007 period in mortgage lending when TV ads advertised 110% cash-out financing on new home purchases.
My personal experience in the financial markets is that about every decade it all goes to hell all over again. People chase opportunity and they forget. It doesn't go to hell from a starting point of discouragement and caution. It goes to hell from a starting point where people all around you got rich, quickly and easily, buying something that seemed to have perfect logic. In the 1990s we knew that the new internet thing would change everything, so buy tech stocks. In the mid 2000s banks saw that mortgage loan packages converted high-yielding mortgages into AAA-rated supposedly risk-free bonds and that they could put generous margin in them. Quick money.
Enthusiasm and optimism worry me.
Reading John Hussman's analysis of the risks to stock investors will give you the willies. He says the stock market is at the highest, craziest valuation in history. Higher than 1929. Higher than March 2000. He anticipates the market return over the next decade to be negative. How negative? Six percent a year compounded negative. Whew!
This scattergram of historical valuations and returns puts the current status at the bottom end of expected returns. The stock market is not cheap.
But relax. John Hussman has been worrying for a long time and he has been wrong, even as markets have gone up, notwithstanding his warnings. He is a worrywart.
In the long run, I expect the U.S. economy, and therefore the stock market, to be OK. People adjust to circumstances. People are inventive and ambitious, and life will go on. There are lots of catalysts and tripwires for the economy but eventually things will resolve themselves. Just have patience; buy and hold and keep adding money.
The problem is that no one lives a life "in the long run." We don't get "average." We get the hand we are dealt at that moment of our life.
The "Magnificent Seven" stocks trade at some 33 times earnings -- high -- but maybe well worth it because their growth potential is so high. Investors think these stocks are special. That is what people think at points of enthusiasm. The rest of the 493 stocks are high but not crazy-high, with a PE ratio nearer 23. Average is about 16. Stock market prices embed a lot of optimism.
Ignore me. I suspect I am just an old fart full of the worries and cautions that arise from looking backward too much. It is easier for me to see past hazards than new opportunities, because I won't be around for much of the wonderful potential world of the next half century.
I don't know if things will go wrong. I am not predicting. But this I know: Sometimes things go wrong.
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6 comments:
We are quite possibly in the beginnings of an AI bubble. Enormous amounts of money are being invested in data centers. If AI does not producing enormous profits, all of that money will evaporate, and those data centers will sit dark and unused.
Look up “dark fiber“ and you will see something just like this happened with fiber optic buildout. The difference is, many years later other companies were able to come in and use that dark fiber. But these data centers are equipped with this year‘s chips, and even if some new use for data centers comes along in 10 years, no one will be interested in using 10-year-old chips.
A.I. will produce good returns, but not the returns we expect. A.I. has the potential to unleash the full potential of the authoritarian state described in Orwell's "1984", and, a robot reminiscent of the science fiction depicted in "The Terminator". Asimov's "I, Robot" possessed an algorithm to prevent a robot from harming humans, but would a robot be capable of doing without an internal regulator?
The features inside A.I. will also offer a method of manipulating the global stock markets. Like all great inventions, there is an upside and a downside. The scramble now is to control the upside and minimize the downside. The winning side will be determined by which side proves more beneficial or detrimental. I suspect help or hurt will be determined by which makes the most profit.
This post was reviewed with the help of A.I.
Stock PE ratios are too high right now, and much higher than 20 or 30 years ago. Plus, the stock market is rigged by the market makers, and little guys like us get eaten for lunch.
So you’ve switched to all cash? I doubt it.
About half cash. about 15 % bond-type investments. 15% ETFs with a downside buffer, so I break even if the market goes down, but only profit about 8% if the market goes up. Only about 20% in stocks, and that is because some legacy investments in Apple and Microsoft have done so very very well. I keep them to make as charitable gifts, What works for me isn't for everyone, but my goal is to avoid the remorse of a big loss. This means, though, that I am subject to inflation, which erodes my pushing power since my income is only about 5% and inflation erodes 2% of that. Plus the dollar has declined against the rest of the world by about 9% since Trump was inaugurated.
Peter, I learned about the stock market back in the late '70s, learning from a stock broker who was a fellow soldier with me in the Army Reserve. He taught me enough that I stuck with investing (and trading!) since then. My wife and I also took every advantage our employers offered to set up IRAs and 401Ks. A special incentive was the warning back then that Social Security would not likely be around when we retired.
The good news? We built a good nest egg over the years, and Social Security is still there, providing us with the income we are living on today.
We survived the many market downturns aver the years by not selling when other were. Thankfully, I had a strong stomach, and felt that the investments would eventually recover. And they have, in spades.
I did research day trading, so know the ins and outs, but instead go my returns by following technology companies, and I picked a few good ones. Though I missed the boat selling all my Apple shares years ago when they came out with an iPod instead of a cell phone. I made some money while holding it for a few years. Hindsight is 20/20.
85% of my money is in the hands of Fidelity, with the goal of striving for 7-10% returns. Not interested in Annuities.
I still have a pot of money for some trading fund. Primarily getting good returns with tech stocks and covered calls. No regrets.
Finally, I paid more than my fair share of taxes by converting most of our IRAs and 401Ks into ROTH IRAs. It hurt a bunch at the time, but fortunately did most of that during COVID times. There's been a great recovery since then, and I have no regrets.
I too donate a lot from one of my accounts that was set up as a charitable trust.
To those reading this, read a few books about the ins and outs of investing in the stock market. Also discuss your plans and needs with a trusted financial advisor or fiduciary. It's best to be smart about the market when getting advice from a financial advisor. Sometimes my questions to a few of them made them realize that I was not naive.
And finally, Peter, many of us are old farts. We've learned a lot over the years, though. And yes, Sometimes things can go wrong. Very wrong!
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