Summer of Discontent May Just be Starting

I hate to be overtly negative, however, given the vast wave of anger, frustration and extremism that is accelerating around the globe, I am extremely cautious going into summer as an investor. In the wake of another terror attack, this time in Turkey, talking investment strategy seems small, however, that’s what this website is for. Before I continue, my heartfelt condolences to everybody affected by the senseless violence that seems to be on the rise. 

In recent post “Brexit was a Reaction to “Slow Growth Forever” I said that “The dramatic impacts of the emotional nature of surges in populism cannot be underestimated.” While a populist ethic is healthy and desired for the survival of civilization, when emotions exceed pragmatism, we get a range of consequences, mostly bad. I am afraid we are closing in on something far more bad than what we have seen so far.


It is clear that lone-wolf, affiliated and inspired terrorists are not under control. Anybody who has professed to have an answer to terrorism has been wrong or been lying. Killing has begotten more killing. Negotiations have failed at almost every turn. 

Violence around the world, though not by official armies in most cases, is out of control. Kidnappings in South America are rampant – I am terrified about what could happen at the Olympics. Mexico, New Guinea, Pakistan, Iraq, Afghanistan, South Africa, Yemen (on the doorstep of Saudi Arabia), Kenya, Somalia, Chechnya, Haiti and many other places are suffering not only high crime, but extreme violence. These are not so isolated places that the world can ignore what is going on.

There is also extreme crime and violence in American cities by normal citizens. There are multiple American cities on the list of “most dangerous places in the world,” including St. Louis, Baltimore, Detroit, Birmingham, New Orleans and Flint, Michigan among others. I seriously wonder if the Flint, Michigan leaded water problem isn’t far more pervasive around the United States since it seems we have a lot more crazy? I know in Milwaukee, Wisconsin where I live, we have seen severely rising violent crime rates the past few years including a rash of carjackings in places you would never have expected it 20 years ago. 

What is going on is not just manifested in crime. It is manifested in politics as well. While I try to avoid political discussion here, it is clear to me that extreme ideology is being manipulated by those who seek power. And, it’s not just one party. There are few, if any, innocents. 

Why are we, humans, so susceptible to violence and political manipulation? How have been able to take what is undoubtedly the greatest potential time in history to live quality lives and turned it into an ocean of angst? I think the answers lie somewhere in the way that power and money work in the world now. In addition, the demographics of the planet are throwing a huge curve ball to economic systems that formerly worked.

I’m not here to offer a solution to the world’s problems. I know that we need significant cleansing of the political systems. I’m not sure if there are better people to put in place. I know that extremism of every kind needs to be reigned in, from religion to financial to ideological.  Are we willing to control our own emotions and ingrained ways of self-validation without infringing on the rights of others? I don’t know. I do know it is up to the millennials. I will talk about that in my annual “freedom” letter in a few days.

What About the Small Matter of Investing

While Brexit led to some market turbulence, we saw a rally today that offset yesterday’s losses. The temptation, reinforced by the financial media and investment industry is to buy the dips. I am here to tell you in no uncertain terms that is now wrong. You want to sell much of what you have left in stocks, with very few exceptions, on up days in the markets. To those who are excited about buying this little correction, forget it. The U.S. equity markets have not oversold yet. 

The SPDR S&P 500 ETF (SPY) continues to trade below its 100 week average (I have posted charts recently in other posts). Valuations are high using various time measures and estimates for earnings growth are clearly still too optimistic. Analysts currently are projecting 4.2% earnings growth. I believe earnings growth in the coming quarter will be well below that.

We also of course are seeing the baby boomers in the early phases of distribution, this will increase in coming years. I believe this is a sea-change most do not recognize or understand yet. That generation has the most money in the markets. As it comes out, there is little to offset the selling. The millennials won’t have enough money to invest for many years to pushes prices up. It is a very real possibility we see a 2000-2002 style market about to develop, except that it affects almost everything rather than being centralized to technology.

The only factors supporting equity and bond markets are the central banks, corporate buybacks and foriegn capital. We know that all three of those are turning over. Central banks can’t seem to impact improvement in the velocity of money or productivity. Corporate buybacks have been announced to be headed lower and in light of expanded corporate debt I expect they will follow through on the reduction in buybacks imminently. Foreign capital in needed in foreign places and it will find its way there.

Subscribers here ought to be around half in cash depending on risk tolerance. It is a good idea to sell down equity funds (including ETFs) so that you are holding around 75% cash. We have some limit orders set to buy at lower levels, but those are quite a ways down. Do not get impatient.

This isn’t a drill. Nothing fundamental supports the continuation of the bull market. If we get an irrational rally – completely possible – that will be a signal to get very short the equity AND bond markets (because the bond vigilantes won’t sleep forever). For now, I am waiting for equilibrium. I hope we find it so I can buy some good companies and sectors. If we overshoot up or down, I will be looking to do something far more opportunistic and aggressive. 


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