Christmas Evening thoughts

If you have been reading my little letters on holidays then you know I like to put a positive spin on things, even of a serious nature. Today is no different. 

First off, let me wish you all a very Merry Christmas and whatever Happy Holiday that you might otherwise celebrate. Frankly, I have come to respect the Festivus made up holiday for its airing of grievances. With that in mind, let me air some.

But first, if you aren’t reading this each week from Jeff Miller, you should be. I met Jeff through Cody Willard a few years ago. It took some time for him to grow on me, and I’m sure vice versa, but he’s got his act together and a nice format for summarizing important things to think about:

Weighing The Week Ahead: What Stocks Are The Winners And Losers From Tax Cuts?

The Markets are Topping

If you read my most recent article The 12 Sells Of Christmas then you saw the charts I put up showing the similarity between the current bull market and the one from just before the financial crisis. You also saw the CAPE ratio chart. 

Here’s some more scary charts. And, if you don’t find them scary, you don’t scare easy enough, so pay attention and have a little respect and fear of what these charts are implying.

Here is one of the best pages for keeping track of things economic and market related by charts. These might be the most stolen charts in the financial advisory industry: dshort – Advisor Perspectives

Q Ratio

Market Remains Overvalued – dshort – Advisor Perspectives

Q GeometricWhat you should think there are two things. First, “dang, that’s the third highest valuation for the stock market in history.” Second, “hmmm, I wonder if it could become the highest?” 


Notice we are approaching the 3rd standard deviation. What does that mean? It means, reversion to, or beyond, the mean is coming. Understand what I mean? Because I mean it.

I’ve mentioned Crestmont before. I loves me some Crestmont. There’s more in the linked article. Here’s one to ponder, it’s left incomplete:

Nominal Total ReturnThe chart shows that we were undervalued in 2009, but not that much compared to following other crashes. Does this imply more pain ahead? Could be, it could be. For more, read:

Validating the S&P Composite Stock Price Index – dshort – Advisor Perspectives


Market Cap to GDP: An Updated Look at the Buffett Valuation Indicator – dshort – Advisor Perspectives

BuffettOnce again, it’s not hard to see that the stock markets are overvalued. 

Warren Buffett cites the low interest rates as reason we are seeing higher valuations. Jeremy Grantham this summer talked about the possibility that we see valuations stay higher for a long time. I don’t argue with either point. 

However, the clear over valuation on stocks adds an element of risk for investors because of the unknown element of whether or not valuations can stay this high. That in and of itself makes investing harder.

It is more important than ever to build our own little mini-indexes vs using the big broad indexes. By having our own 20-30 stock portfolios with a small handful of ETFs, we can use both smart stock selection with asset allocation to protect ourselves and take advantage of investment opportunities. 

The Economy Ain’t What You Think (Maybe)

I don’t know what you think about the economy. That’s why there is a maybe in the section title. 

There is this idea that the U.S. economy is running on all cylinders by one camp and another camp thinks we need stimulus. Which is it? 

Let me make this very, very clear: 

Slow Growth Forever is not fixed! There is no “fixing” it. 

Understanding The ‘Slow Growth Forever’ Global Economy

Investing In The ‘Slow Growth Forever’ Global Economy

‘Slow Growth Forever’ Keeps Dropping Hints

Brexit Was A Reaction To ‘Slow Growth Forever’

You Must Accept Economic ‘Slow Growth Forever’

What If Janet Yellen Is Doing A Good Job But It’s Not Enough?

How I Prepared For A Flash Crash In An Overvalued Market

I will be writing a very updated version of the “slow growth forever” thesis in coming weeks. I need some year-end data, so I’d expect it out in mid to late January. 

So far, the indicators do not scream recession, but they imply this is about as good as it gets. So, can we hold it? I don’t know. The tax cuts might keep us levitated a while, but I don’t for very long. “The Crash of 2020” is starting to seem like a slogan to me.

RecessionA little about the tax cuts. Riddle me this. If the economy is doing well, why did we do tax cuts? Why are we trying to stimulate with employment kicking proverbial ass.

If we wanted more people to make more money, wouldn’t we improve our education and training systems, i.e. junior colleges. Wouldn’t we make those dang near free at least for the chronically underemployed? 

Here’s what I told my kids and my daughter’s boyfriend when they asked about the tax cuts (did you really think I’d write on a holiday without mentioning the kids?):

“The tax cuts are giving about $60 billion in cuts to the richest 1% of the population. Another $60 billion to everybody else, the other 99%. And the corporations are getting like $140-200 billion, hard to know just yet. And, something like 3/4 of the money that corps get will go to shareholders, which is only half the population since half the folks don’t invest, and the top 1% will get about half of that. So, who’s getting screwed?”

Will the tax cuts stimulate? A bit perhaps. But not much and not for long. We’ve been told by corporate executives that about 3/4 of the money will go to share buybacks and dividends. A bit will go to capex and employees, but not much. It’ll be a token amount for headlines in most cases. Sure, there will be some additional economic benefit, but it’ll be one off stuff. 

Once the corps get their loot and pump it into buybacks and special dividends, the rich will cash out at higher share prices and lower tax rates. That’ll take us into early 2019 probably. 

Now, don’t get me wrong. I think a corporate tax rate in the 20-25% range makes sense to be competitive and to cover their share of national spending, which runs at about 22%, and rising, of GDP. However, there is a whole raft of tax breaks that keep many companies with single digit effective tax rates. Those were promised to be done away with, but were not. I call bullshit.

The World is Catching Up

For decades, the United States had huge advantages over the rest of the world. We did not get bombed during World War II and that allowed our companies to help rebuild the world. Our money has also been supported by the Petrodollar deal with Saudi Arabia since the 1970s, allowing us to issue debt without deflating the currency (and living standards).

We also have the world’s best military, an extensive diplomatic corps and the rule of law, which support our endeavors at every level. It is hard not to like doing business with America, and sometimes it’s just plain hard to resist. We also have the best geography on the planet complete with darn near every resource we could need, which is wildly underappreciated by an oblivious populace in many cases. 

That said, China is a big deal, so it India and Europe if she is smart enough to stand together is a major global force. China is launching an oil futures market imminently. It won’t crush the value of the dollar, but it is another step in the direction of us not being able to indiscriminately issue debt due to requirements that others use dollars. In short, our days of debasing the currency to stimulate the economy is coming to an end as international demand for dollar debt is slowly waning. Other nations, particularly China, and eventually India want to trade in their own currencies so as to support their balance sheets and standard of living, i.e. fight inflation. 

I’ll have more on that Chinese oil futures market once it opens. It’s an important development. I talked about it a bit a long time ago on a website far, far away:

Could Trump, China conflicts take the U.S. into recession?

The Trump oil trade, and why oil might soon reach $100 again

yrbium asked on the chart in MOSI: 

1) are there any international stock ETF’s that you have a particularly high regard for, like QQQ, that might be either a complementary core holding, or at least something you generally always consider when you’re looking to add international stock exposure to the circumstantial portion of a portfolio?
2) will you be providing a recommended all ETF portfolio (i.e as you’ve described: approx 5-8 ETF’s with core QQQ at 25%, fixed income 25%, circumstantial 50%), with periodic tactical updates?

The answer is yes and yes because we are going to need to be much more globally aware going forward. While there are secular growth markets in America, those same markets might be growing faster abroad. We need to know which companies benefit and which ETFs give us access to good foriegn companies. I expect to be 25-50% internationally invested again within 3 years. 

The Next “Big One”

The next “big one” is coming. It’s always coming. It usually takes a very long time to get here. Having a massive recession in 2008-09 followed by another generational event less than 20 years later is unusual. I don’t know if we’ll get another “big one” that big for many years.

However, the tax cuts bother me. That’s ammunition we are shooting at no apparent target. Having already done QE, and barely raising interest rates since, and now tax cuts seems to have emptied a lot of our chambers for fighting the next recession. 

If we have little fire at the next recession there is only one real alternative left, to really print money. So called “helicopter money” as Milton Friedman described it. 

If I am right, and we are blowing off ammunition without stopping the next recession – remember, “slow growth forever” – then, we are going to see another doozy of a recession in a few years.

Folks need to realize that the current round of tax cuts are very, very similar to those made by George W. Bush in 2002-04. That money contributed to the run up to the Great Recession. Sure, there were a lot of other factors to the Great Recession, but the tax cuts then were dumb and so are the tax cuts now. Governments should be paying down debt when there is good economic times, not running up more debt. Anyway, here’s something from on a parody site I was part of way back P.B.O. (Pre-Barack Obama), if you want to know a laundry list of what caused the financial crisis.

Formulating a Game Plan for Great Future Christmas Gifts

I know I’ve painted a bit of a dire outlook and I meant to. The markets are overbought and overvalued, both stocks and bonds. The economy isn’t nearly on as firm a footing as people think while things are good. The governments and central banks have limited ammunition to fight off the next recession short of helicopter money.

What does that mean? It means a lot of people will have a very bad investment experience sometime in the short to intermediate term. We on the other hand know it’s coming. We can prepare and make money no matter what. 

To do that, we have to not be stubborn. We can’t glom onto ideas like “buy and hold forever” because of what something did in the past. Buying dividend stocks might beat the markets, but if the markets make zero – yes, ZERO – over the next 5 to 7 years, then how good does that making a few percent per year feel? That’s a lot of lost time and time is not on our side as investors because we get old and die. 

What we can do is stick to smart investing ideas. Buy growth and income at value prices. That simple premise is huge. It’s what Buffett actually does. He buys growth and income generating assets at value prices. That’s it. We can do that too and we have a HUGE advantage to Buffett. We don’t have to try to move around $200+ billion. We have five, six, seven and eight figure portfolios. 

We are nimble enough to crush the institutional guys, not just the markets. Peter Lynch talked about that too. It’s what Buffett alluded to when he said he could make 50% per year if he only had a billion to manage. 

We are going to crush markets. We are going to make absolute returns. How do I know. Because I’ve been simplifying investing for years and beating the markets almost every year. This past year, and I’ll put up a chart right after New Year’s I will have made about 40% for 2017 in client accounts, despite being around a quarter in cash most of the year. That’s massive risk-adjusted returns. 

I have a series of trades coming that will give us leverage to several potential things that could happen in 2018-19. Both upside and downside trades. Strong dollar and weak dollar. Expensive energy and cheap energy. And of course, we’ll just buy some really good companies that are undervalued because by virtue of being undervalued and good, they will have less correlation to the markets. And that will help us make money whichever way the wind blows in the next year or two. 

When it’s all said and done, hopefully those around you listened to you a bit and did well. Hopefully you told them to subscriber here before the rate goes up. Regardless, you’ll be in a position to buy good Christmas gifts and bring some cheer to a world that will probably get rocky for awhile as the world comes to grips with slow growth forever.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own a Registered Investment Advisor – – however, publish separately from that entity for self-directed investors. Any information, opinions, research or thoughts presented are not specific advice as I do not have full knowledge of your circumstances. All investors ought to take special care to consider risk, as all investments carry the potential for loss. Consulting an investment advisor might be in your best interest before proceeding on any trade or investment.

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