US Economy

  • 21 Apr
    Are We Already In A New Bear Market?

    Are We Already In A New Bear Market?

    • The biggest investor of them all just said that he will start cashing out. Hopefully, this won’t lead to a bear market, but it will certainly put the brakes on further growth.
    • Economic signals are mixed, the outlook is uncertain and as much as the low unemployment rate is positive, historically, that isn’t a good sign for the future.
    • As always, we’ll discuss what to do in this environment.

    Introduction

    It seems that the S&P 500 peaked on March 1, 2017. More →

  • 19 Apr
    The Next Bear Market Is Coming. Here’s Where It Will Start.

    The Next Bear Market Is Coming. Here’s Where It Will Start.

    • $2 billion a day flows into Vanguard to be mindlessly invested in the market through index funds.
    • When the only reason people invest is because staying on the sidelines means getting sore while others get rich, it usually spells trouble ahead.
    • When the investors plowing $2 billion per day understand what are they buying at extreme valuations, the next bear market will arrive and it will be terrible as the buying reverses to selling.

    Introduction

    A recent The New York Times article described how Vanguard, the $4.2 trillion mutual fund, is the fastest growing fund due to the attractiveness of passive investment vehicles and the average 0.12% fee the fund charges. The low fee is something I applaud as I strongly believe fees in the financial world should be minimal or performance related where nothing is paid if the manager doesn’t deliver. More →

  • 13 Apr
    Why You Should Consider Defined Benefit Pension Plans Before Investing

    Why You Should Consider Defined Benefit Pension Plans Before Investing

    • By adjusting a few percentage points on expected returns and discount rates, unfunded amounts become huge.
    • It’s essential to check the possible future pension obligations of your investments as they can easily cost you your returns. I’ll show a possible impact on General Electric.
    • If you have a defined benefit plan of any kind, don’t take it for granted. The only certain retirement income is the one you provide by yourself.

    Introduction

    A good way to see what’s going on in the pension fund industry is to analyze the 50 largest defined pension plans of the S&P 500 through Goldman Sachs’s 2016 Pension Review. More →

  • 12 Apr
    How To Prepare For Anything The Economy Throws At You

    How To Prepare For Anything The Economy Throws At You

    • All stocks will rise with a rising tide, therefore it’s wise to buy those stocks that won’t fall off a cliff in a recession.
    • The usual suspects—like consumer staples, utilities, and healthcare—are good ideas, but not at any price.
    • Bonds are close to becoming a win win situation.

    Introduction

    Yesterday we analyzed the FED’s latest meeting minutes, and saw how when the FED applies historical probability calculations to their own estimations, the result is that anything can happen.

    The FED itself stated that, in the next few years, economic growth could be anywhere between -0.5% and 4%, unemployment between 2% and 7%, and inflation between 1% and 3% with a 70% confidence interval. A 70% confidence interval means that there is a 30% chance economic indicators end up outside the above mentioned ranges. More →

  • 28 Mar
    Triggering The Next Recession – The Automotive Industry

    Triggering The Next Recession – The Automotive Industry

    • The automotive industry makes up 2.5% of GDP, but its discretionary nature is what makes it important.
    • Car loan delinquencies are rising, sales are starting to get stretched from a credit perspective, and higher interest rates won’t help.
    • There is no risk of a financial crisis arising from the automotive industry, but it’s very likely that the industry will lead the economy into a healthy recession.

    Introduction

    In a recent article, I elaborated on the difference between having a static or a dynamic view of the markets and how not thinking ahead can be very dangerous. I used the total amount of car loans outstanding to point out how things have changed in the past, i.e. car sales increased due to low interest rates, and how things will change in the future, i.e. interest rates will increase and lower car sales. More →

  • 20 Mar
    Is This The Beginning Of The End For The Era Of Financial Engineering?

    Is This The Beginning Of The End For The Era Of Financial Engineering?

    • Most developed world economies can’t continue to grow without financial engineering.
    • However, inflation forced tightening will eventually have a significant impact on credit.
    • This will only lead to more accommodation and toward an eventual crash, so be prepared.

    Introduction

    Each significant historical bear market has an initial trigger. Weak home and car sales killed the 2003 – 2007 bull market, while the realization that stock valuations had gone too far initiated the bear market in March 2000.

    But what will trigger the next bear market? Well, there’s a great possibility that it will be monetary tightening. Perhaps it won’t be the latest quarter percentage point rate increase, but it will probably be one of the next rate hikes. More →

  • 08 Mar
    Inflation Has Arrived – Here’s What That Could Mean For Markets

    Inflation Has Arrived – Here’s What That Could Mean For Markets

    • After 7 years of enjoying interest rates close to zero, the party is over.
    • There are several scenarios that can develop, but the long-term outcome is clear.
    • In the short term, higher interest rates should increase demand for the dollar and U.S. assets, so we could see a higher S&P 500 in combination with higher interest rates.

    Introduction

    For the past year I have been writing about how things are bound to change when inflation finally arrives. Well, inflation has arrived and it’s quickly going higher which means that we’ll have to start talking in nominal and real returns, the FED will be forced to take action no matter the economic environment, and it will have significant repercussions on the economy and markets.

    Usually when I’ve written about inflation, it was about something that will happen somewhere in the future. Now that inflation is finally here, I’ll discuss what will happen in the short term. More →

  • 24 Feb
    Goldman Sachs Is Probably Right But Is It Worth The Risk?

    Goldman Sachs Is Probably Right But Is It Worth The Risk?

    • Goldman Sachs recommends being overweight U.S. equities because of expected loose fiscal policies and because, as they have stated, valuations don’t matter.
    • Goldman expects a 3% yearly return on a moderate risk portfolio.
    • I’ll touch on what the average Goldman client is risking for their 3% yearly return.

    Introduction

    Goldman Sachs (NYSE: GS) recently released its 2017 market outlook. It shouldn’t be a surprise that the outlook is positive. It’s in their interest for stocks and the economy to continue to thrive as GS makes its money from IPO commissions, asset management fees, etc.

    Despite the conflict of interest, their positive outlook will most probably be correct at the end of 2017, but there is something more important than being right or wrong on a yearly forecast.

    Today we’ll discuss Goldman’s view and analyze the possible impacts on our portfolios. More →

  • 16 Feb
    How Much Will You Lose In The Next Bear Market?

    How Much Will You Lose In The Next Bear Market?

    • The current stock market will, on average, deliver returns of 4% per year for the next 15 years. However, the risks don’t justify the returns.
    • All investors owning an S&P 500 or similar portfolio should know that they run the risk of a 50% temporary decline.
    • Various sectors and countries offer much higher returns for the same inherent volatility.

    Introduction

    What’s equally important to how much you expect to make from your investments if things go well is the question of how much volatility you can take if things go wrong. Today’s article is more of a reminder that there are two sides to each investment, the return side and the risk side.

    I’ll elaborate on techniques that will help you assess your future returns and risks. We’ll start with the fun part, the returns, and finish with the necessary part, the risks. More →

  • 20 Jan
    The Long & Short Term Outlook For Bonds Is Scary At Best

    The Long & Short Term Outlook For Bonds Is Scary At Best

    • As we are still far away from the FED’s target interest rate, bonds have plenty more room to fall.
    • Inflation could force the FED to hike rates and push bonds down very quickly.
    • This is probably the end of the 35-year bond bull market that has beaten the S&P 500 by five times.

    Introduction

    I haven’t written about bonds since back in July when I said that bonds were extremely risky (article available here).

    Unfortunately for bond holders, my call was prescient to the point of perfection because yields went up and consequently bonds prices went down. More →

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