One simple word can change your thinking

Tuesday, 11 July 2023 — Gold Coast

[6 min read]

Dear Reader,

Since its dark days of March 2009, Wall Street — ably assisted by its central bank benefactor — has soared to levels beyond anything we could ever have imagined.

Nasdaq has clocked up a 16-fold gain and the S&P 500 a more ‘modest’ seven-fold increase. Contrary to what people might think, compound returns of this magnitude ARE NOT normal.

However, the longer something goes on, the more ingrained the belief becomes in its permanency.

This headline from the 4 July 2023 edition of The Wall Street Journal captures the current mood of eternal optimism…one-fifth of investors age 85 or older have gone all-in on the market…WOW…

I recall Buffett saying something like, ‘when others are greedy, you should be scared…’.

Are this cohort of bullish seniors aware of just how overvalued the US market is?

Instead of being greedy, shouldn’t they be scared?

As of 30 June 2023, 16 valuation metrics — four of which have data points dating back to 1925/26 — are ALL registering readings of…Moderately to Extremely Overvalued.

Nothing is cheap out there.

You know what the opposite of Extremely Overvalued is?

Yep…Extremely Undervalued.

And, you know how we get there?

Yep…by way of a massive reversal in fortunes.

The reason this rather distressing prospect is dismissed so easily is because for 14 years, the Fed has not let anything bad happen to Wall Street. Every stumble has been met with more stimulus measures.

But life tells us artificial pricing mechanisms are NOT sustainable.

Eventually, something breaks.

And, with every passing day, we’re getting closer to that breaking point.

As witnessed in the hollowing out of markets in 2008/09, these ‘over-the-cliff’ moments determine whether investor fortunes are fleeting or enduring.

There’s a subtle difference between ‘getting rich’ and ‘being rich’.

However, knowing the difference is crucial, not just to financial success, but to living a life that’s both rich and rewarding.

‘How to get rich’ and ‘How to be rich’

There might only be one different word between the two sentences, but the meanings are worlds apart.

For example, Sam Bankman-Fried (SBF) got rich but had no clue about how to be rich.

In a scene from the movie All the Money in the World (about the kidnapping of John Paul Getty’s grandson), Getty is talking to Fletcher Chase (Getty’s Mr Fix It) about a book he’d written titled…How to Be Rich.

Getty told Chase the publishers wanted to change the title to How to Get Rich.

Getty said (words to the effect), ‘any fool can get rich, but to be rich means learning how to handle freedom.’

Very true.

How to be rich requires discipline.

Determining which choices add real value to your life and ignoring those that lead you to a path of personal and financial destruction…like, do you go all-in on an Extremely Overvalued market?

That one word, ‘be’, has the power to frame your thinking on the responsibilities that come with managing your personal wealth.

Getting rich (creating sufficient retirement capital) can be the product of hard work, savings, and — in some cases — good old-fashioned luck…being in the right place at the right time, lotto win or inheritance.

Staying rich…well that poses a whole set of new challenges.

It’s these challenges we must do our best to prepare for…trying to anticipate the events that can undermine our endeavours to create genuinely rich lives.

Wealth is not just about money

If you have a family, money is only one part of a much larger picture.

In a family unit, the dimensions to wealth we need to pay attention to are:

Human wealth constitutes of our family members.

The continual development of their skills, abilities and emotions enables them to lead full, interesting and rewarding lives. The more content they are within themselves…the greater the chances they’ll make a positive contribution to the family. Why is that important? If you’ve ever known a family with a ‘problem’ child/children, you’ll know just how emotionally and financially draining that can be for the parents. Hmmm…why does SBF come to mind?

Cultural wealth is the identity of the family. What do we stand for? What are our values? What won’t we fall for? How do we see ourselves? How do others see our family? How do we communicate with each other? How do we make decisions together?
The PwC scandal is a classic case of how a toxic culture of dishonesty can ruin a business. The same can happen in a family. Creating and maintaining cultural wealth is vital to your family’s success.

Financial wealth is stewarding your capital in a responsible and prudent manner. Teaching the next generation — by your actions and communications — how to be responsible custodians of money. Responsible debt management. The value of living within your means. Understanding when it pays to be under or over-weight in a particular asset class.

Social wealth is the contribution the family makes to society…charitable causes, local community, church, and professional organisations. Giving back is an excellent way to express your gratitude for being fortunate enough to have accrued wealth. Assisting those who are less well-off can keep you grounded. Humility is a common character trait that exists in families that have succeeded in being wealthy.

Getting rich and being rich are two very different mindsets.

Decisions we make create our lives

Our lives are the sum of the decisions we make…the better those choices, it then stands to reason, the better the quality of your life.

If investors who’ve gotten rich courtesy of the Fed’s recklessness, want to be rich, they’ll need to make some decisions on how to limit their downside risk from the inevitable collapse on Wall Street.

Alternatively, they could decide valuation metrics can remain forever entrenched in ‘Extremely Overvalued’ territory.

Hmmm…has that ever happened before in history?

Nope.

Your choice.

Regards,

Vern Gowdie,
Editor, The Daily Reckoning Australia

Dear Reader,

Wealth, power, status…and love. Those are the things we all want. Love is in a class of its own — immeasurable and imponderable. But the others are all relative.

So, we felt sorry for the owner of a huge mega-yacht that came into the harbour yesterday. Sleek and long…with its own starched-white crew and chef…worth maybe US$50–$100 million. The rule of thumb is that annual operating expenses come to about 10% of the purchase price.

How proud the owner must have been! His friends and family aboard…all impressed by his floating palace…

But then, mooring in Taormina bay…

…the poor owner must have felt like he needed a second job; the yacht was dwarfed by other super-super yachts already in the harbour.

Welcome to the world of the rich…in Taormina, Sicily.

Rates rocket

We are in Sicily attending a wedding. Despite all the advances in technology — AI, cryptos, and luggage with wheels…

…and all the advances in public policy — the Patriot Act, the war in Ukraine, removing statues, and almost 13 years of negative real interest rates…

… and progress in society itself — using ‘they’ to describe a single person, taking pride in things that used to be unmentionable and unpardonable, and recognising that we are all hopeless racists…

…people still hitch themselves, one to another, like plow-horses.

And sometimes they want to do it in exotic locations…which is why we are here.

The wedding went smoothly and elegantly. And then we spent the weekend exploring the countryside…including the towns of Castiglione di Sicilia and Troina, where we heard they were giving away houses.

More about that…tomorrow.

Today, let us look at the most important thing to happen in the financial markets.

Benzinga reports, ‘10-Year Treasury Yields Rise Above Inflation for the First Time in Three Years’:

‘In a significant market development, the yield on the 10-year US Treasury note surpassed the rate of inflation for the first time in more than three years. With the current yield at 4.04% and inflation recorded at 4% year-on-year in May 2023, this milestone signals a crucial market shift.

‘…when bond yields surge above inflation, the dynamics change dramatically.’

And here’s the Reuters’ report, ‘US two-year Treasury yield surges to 16-year high after employment data’:

‘The two-year US Treasury note yield rose to its highest level since June 2007 on Thursday after news that private payrolls jumped in June, showing that the labour market remains surprisingly strong despite risks of recession from higher interest rates.’

‘Piping hot’

What sent interest rates shooting up was news, last week, which told us that the labour market is ‘piping hot.’ We don’t believe it really is; most of the new jobs are actually second jobs taken by people who are desperate to keep up with rising costs. But the news, along with chatter from the Fed, convinced traders that the Fed will stick with its rate hikes a while longer.

Stocks sold off as a result. But not nearly as much as they need to. By our reckoning, the Primary Trend in interest rates has turned up…which means asset prices must go down a lot more.

Interest rates have been increasing for the last three years — since July 2020. That is the Primary Trend. And after 40 years of lower and lower borrowing costs, in which mortgage rates fell from over 15% to under 3%, our economy is not prepared for such an important change. Too many people borrowed too much money that must now be repaid…refinanced…and/or supported at much higher rates.

But so far, so good. The Nasdaq had its best first half in 40 years. The S&P 500 rose by 16%. Jobs are still plentiful (though, not necessarily good jobs). And the economy is still growing at 2% per year.

So, comes the question: is our theory wrong? Can the US economy…and its asset prices…continue to grow and prosper, even as interest rates go up? Or not?

Hard landing

Our grandfather lived through the crash of ‘29 and the Great Depression. His bank failed and he lost all his savings. We may have told you this story before, but we’ll tell you again; he reported:

‘It was rough. After the Black Friday crash, the stock market bounced back a bit. People thought the worst was over. But then, the banks failed.

‘I had an office in one of the tall buildings downtown [Baltimore]. We didn’t have air conditioning back then, so we left the windows open. And one day a guy jumped out of one the offices above me.

‘I heard him say as he passed by my window: “All right so far.”’

(One of the things we most admired about our grandfather was that even though he had lost all his money, he never lost his good humour.)

David Rosenberg must see the bodies coming down, too. On TV news over the weekend, he said it was ‘totally ridiculous’ to think that there would be no hard landing. He went on to say that the next 12 months will tell the tale, as Adjustable-Rate Mortgage payments approximately double…and the federal government’s own bill from interest on the national debt goes over US$1 trillion per year.

We don’t know for sure what tale the coming months will tell, but we expect it will end with a thud.

Regards,

Bill Bonner,
For The Daily Reckoning Australia