Hi Do, Here are Todd’s latest fun picks to take your financial skills to the next level... Happy New Year!
We've entered the fourth year of epochal change (which I first announced Q4, 2021), and several noteworthy developments are brewing...
The most significant development is the bond market, as measured by TLT, which is within spitting distance of the lowest prices in the past 25 years. (Gee! I wish milk and eggs would do the same thing!!)
Beyond losing more than half it's value, this decline stands out because the Fed reduced short-term interest rates by 100 basis points (1 percent) since September. Bonds initially bounced (as they should), but have since fallen back toward their lows (as they shouldn't).
I noted this phenomenon (bond market moving opposite the Fed) two months ago in this newsletter, but I stated that more time was required to see if it was just a data aberration.
Well, more time has passed now, and the problem is persisting. Not good.
This is a big deal that conventional media is barely touching. It tells you the bond market is calling the Fed's "bluff." The bond market is saying that the combination of government debts, deficit spending, and inflation are NOT under control. The emperor has no clothes.
Long-rates going opposite short-rates is how this funny-money-debt-liquidity game ends (the epoch changes). We now have a warning shot over the bow.
The gold market is conveying a similar message by advancing to all-time highs in 2024. Gold is a "fear" gauge, acting as a reverse-measure of confidence in our fiat money system.
Put bonds and gold together, and you get a clear picture.
But the stock market is in its own world, continuing to rise with the A.I. narrative, Trump narrative, and a tailwind of passive investment flows buying the indexes on auto-pilot every month regardless of price insanity.
This is admittedly a strong tailwind, as evidenced by the results produced. But nothing last forever...
The top 7 stocks (Mag 7) already represent an astounding 32% of the S&P 500 capitalization. This is greater concentration in fewer stocks than ever in history, which is not good.
Worse yet, market valuations are higher than at any point in recorded history (depending on the specific valuation metric you use), profit margins are at a historical peak, and U.S. stocks represent the highest concentration of world stock market capitalization in decades. This is a peak of a peak of a peak.
Adding to this problem, the S&P 500 has returned more than 20% per year for the past decade. In a world where profits grow at 7% per year, this is mathematically impossible to sustain.
Any one of these indications would merit caution as a harbinger of frothy excess, but when you put them all together with a bond market heading south, then a clear picture forms - this is no time to be sanguine.
Passively accepting stock market risk is not justified by the potential reward. This is not my opinion. It's a math truth.
Limits to stock market valuation excess result in mean reversion because of financial mathematics. Fundamental value is determined by the discounted present value of the earnings. Periods of high valuation reflect optimism about those earnings, and periods of low valuation reflect pessimism. When prices rise too fast (like 20% per year for the last decade) resulting in peak valuations, they must mean revert to return to underlying earnings growth. This is simply a math truth. It's why high starting valuations (like we have today) consistently result in lower returns in the future.
History proves this principle because there are business and financial truths that determines the boundaries, and we are currently at (or in excess) of all historical boundaries for many statistically valid indicators.
I cannot tell you when this mania will end. I don't have a Crystal Ball or connection to the Higher Power to know the future. Nobody does. The exact sequence of how this market will unravel is never known in advance.
But you can know four things with high confidence based on today's data: The current stock market is absolutely, positively a "mania" that will be viewed as an epic "bubble" in hindsight after it bursts. Downside risk is extremely high right now. Full cycle returns will be extremely low. The expected return on the stock market, net of inflation, will be roughly zero over the next 10-15 years. Passively accepting market risk as a buy and hold investor makes zero long-term financial sense, but what happens in the short-term is anyone's guess. My epochal change call in Q4 2021 stated that a buy and hold 60/40 portfolio would endure tremendous volatility for little-to-no return net of inflation over the subsequent 15 years. We're now 3 years into that call with the bond market down 50% from it's highs and stocks pushing every valuation extreme awaiting its second round of mean reversion since Q4 2021. In other words, we're right on track with expectations - lot's of volatility with no returns net of inflation.
I don't get to know the exact path we will travel or the timeline, but the destination itself is baked into the cake. Remember, it's a financial math truth.
You can either align with this math truth by diversifying your portfolio into this tactical asset allocation strategy designed specifically for this market environment, or you can accept the unmanaged market risk inherent in passive buy-and-hold investing.
The investment game changed at Q4 2021. I called it a change of investment epoch, or epochal change. Active risk management (not just the passive diversification of buy and hold) became the required investment strategy to navigate the next decade of high volatility and low returns. Have you adjusted your strategy yet?
There's only one investment solution that I've recommended to navigate epochal change, and it has performed enviably throughout. Those who have taken action to diversify their investment strategy into this tactical asset allocation solution have been more than happy with the real-time results.
Again, I'm an optimist. There's a beautiful future ahead, and the risks are manageable with the right investment strategy. But every act of creation is first an act of destruction. We must traverse a rocky financial road to get from here to there.
Your job is to manage risk using smart investment strategy. You must preserve and grow capital for better days to come.
I hope this month's investment education resources (below) help you navigate what lies ahead... Russel Napier was the first high-profile strategist to align with my epochal change call during its first year, so it's fitting that he's featured in this 3rd anniversary update. In this interview he explains how the global monetary system existing since 1994 (the prior epoch) is being radically restructured (the new epoch), which will result in a future where governments mandate how investors should deploy their capital. He expects the next shock to be deflationary before returning to long-term inflationary, financial repression. The resulting structural breakdown in the global monetary system will cause gold to rise over the long-term. Conversely, the S&P 500, which is overvalued and over-owned by foreigners, will see forced selling when capital repatriation is required. Sound familiar?!? On Bubble Watch- Howard Marks "Memo" - Oaktree Capital Management Howard Marks was the second high-profile strategist to align with my epochal change call (but not until the second year), so it's fitting to feature his latest market analysis in this 3rd anniversary update. While his entire article is filled with insights relevant to today, his three timeless investment maxims are worth noting because they're obviously true and contrary to the current passive investment mania: (1) It's not what you buy, it's what you pay that counts. (2) Good investing doesn't come from buying good things, but from buying things well. (3) There's no asset so good that it can't become overpriced and thus dangerous, and there are few assets so bad that they can't get cheap enough to be a bargain. Haha! Timeless wisdom that couldn't be more contrary to today's passive investment craze, and yet it's obviously true. And of course, my recommended investment solution to manage the bubble risk Howard warns about is here.
Onward and upward!
Todd Tresidder
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