Tag Archives: investment advice

The Middle-Class Squeeze Isn’t Made Up

My Comments: Are you a middle-class American? I used to be and may still be, but those like me are a dying breed. The economic devastation now engulfing a huge portion of Texas is going to reverbrate across the nation. Apart from the humanitarian crisis, it will add to the unseen crisis affecting middle class America.

Economic inequality led to the downfall of the Democratic Party last November. It’s manifest by the lower economic expectations of those who live in rural America, by those whose education is no longer enough to get ahead, and still pervasive social discrimination against those not white enough. To Trumps credit, he saw the problem and built a movement, even if he is likely to waste the opportunity.

Like many ‘economic’ essays, this may be hard for you to get through. But to the extent you want to preserve the underlying goodness of this nation, and protect yourself along the way, you would benefit from a better understanding of the problem.

By Barry Ritholtz / Feb 15, 2017

Benjamin Disraeli is reputed to have said “There are three type of lies: lies, damn lies and statistics.”

Today let’s address the third component of Disraeli’s formulation in the context of a recent National Review article with the headline, “The Myth of the Stagnating Middle Class.” The article observes that “more Americans have easier lives today than in years past.”

To regular readers, this is a variant of the assertion that “common folk live better today than royalty did in earlier times,” a claim we debunked two years ago. The current argument is more nuanced in that it: a) relies on a few statistical twists; b) contains statements that are true but don’t support the main claim; and c) is an argument against Donald Trump’s populism from the political right. It all has the general appearance of plausibility until you start digging.

This is where we come in.

Let’s begin with the claim that more Americans have easier lives today than in years past. This is true and almost always has been. Progress is humanity’s default setting ever since our ancestors climbed down from the trees and began walking upright on the African savanna.

Thus, it should come as no surprise that the standard of living for all Americans has been rising for many years, mainly because of technological advances. However, the main issue under discussion is actually about how the economic benefits of the U.S. economy get apportioned across the populace.

In other words, how the wealth is distributed. The National Review engages in a statistical sleight of hand that distracts from this.

For further insight I spoke with Salil Mehta, who teaches at Columbia and Georgetown, and is perhaps best known for his role as the top numbers-cruncher in the federal government’s $700 billion TARP bank bailout plan in the financial crisis.

Mehta made short work of the article:
The article is a peculiar mixture of motivating facts and fantasy logic, which is what makes cherry-picking statistics unsafe for policy conversation. The main issue with the piece is that that it continuously mixes and matches data to fit a fated narrative.

Mehta further observed that the National Review argument included in some cases various classes of Americans (such as minorities and immigrants), while excluding them at other times in statistics. This kind of data cherry-picking is always a red flag.

Consider for a moment how the Pew Research Center did its big research report, “The American Middle Class Is Losing Ground”: The report, which actually figures in the National Review article, analyzed the Current Population Survey from 1971 to 2015. It used data drawn from the Bureau of Labor Statistics, which has well-established standards for managing data and making empirical comparisons.

Maybe it’s best to make the point with two of the more telling charts in the report. Here’s the first one, showing that income growth for the middle class has trailed that of the upper class:

The second chart (below) shows that the wealth gap between the upper and middle classes also widened significantly (even after the losses from the financial crisis):

Best practice in these circumstances is to go to the original data source, cite it and analyze it in a way that is consistent, regardless of whether the outcome supports your conclusion.

As I’ve said before, there are many reasons to dislike this economic recovery: it has been lumpy and unevenly distributed by geography, by industry and by level of educational attainment. Much of that has harmed people who were once considered middle class. Add to this the decades-long impact of automation, globalization and the decline in labor’s bargaining power, and it adds up to economic stagnation for the middle class.

But wage and wealth stagnation alone don’t account for the full measure of middle-class angst. Inflation and its components also play a part. Prices for things we want have been deflating, while the cost of things we need have been going up. Mobile phones, computers and flat-panel TV are better and dollar-for-dollar cheaper than ever. The same is true for cars, which in a few years will likely be self-driving.

But those are mostly wants. When it comes to needs, it’s a different story. Housing, even after the 2008-09 crack-up, is expensive. Rentals have gone straight up as home ownership has fallen. The costs of education have skyrocketed and show no signs of slowing. Medical and health-insurance costs are among the fastest-rising of all consumer expenses.

The National Review article concludes by saying, “Government can’t fix that problem, because that problem doesn’t really exist.”

Wishing that a problem doesn’t exist doesn’t make it vanish. But it does offer some insight into why the Republican Party was blindsided by the rise of Donald Trump and his populist appeal. It isn’t that the party elite was myopic, but that it actively fabricated a bubble into which no contrary information was allowed entry. The troubling thing is that the GOP is still at it.

Middle-class anxiety has been building for more than a decade and it mixed in the last election with a general sense of frustration with America’s leadership class. No wonder the middle class feels squeezed — because it is.

Advertisements

U.S. Stock Valuations haven’t been this Extreme since 1929 and 2000

My Comments: I wasn’t here in 1929 but I was here in 2000. If there is such a thing as handwriting on the wall, you should be able to see it. We’d had a great run up and the year 2000 was just around the corner. Everyone was worried that our computers would crash because years were constructed around the last two digits and all of a sudden, both would be ZERO.

As it happened, nothing happened, except the run up suddenly stopped and everyone had to take a deep breath. And quit buying new stuff with all the money we didn’t have anymore since we’d spent it already. And the market crashed.

Aug 22, 2017 by John Coumarianos

“The stock market is now 35% passive and 65% terrified,” says financial adviser and blogger Josh Brown, a.k.a. “The Reformed Broker.” In other words, more investors nowadays are indexing their money and active managers fear for their futures.

Which begs the question, did Brown get it backwards? Should the 35% of stock investments that’s indexed actually be the terrified money? Yes, James Montier and Matt Kadnar of Boston-based asset manager Grantham, Mayo, van Oterloo (GMO) assert in a new paper called “The S&P 500: Just Say No.” The S&P 500 SPX, +0.17% is so expensive, they say, any money tracking the benchmark U.S. stock market index at this point is more speculation than investment.

Here’s how the authors put it: “A decision to allocate to a passive S&P 500 index is to say that you are ignoring what we believe is the most important determinant of long-term returns: valuation. At this point, you are no longer entitled to refer to yourself as an investor. You may call yourself a speculator, but not an investor.

“Going passive eliminates the ability of an active investor to underweight the most egregiously overpriced securities in the index (we obviously prefer a valuation-based approach for stock selection as well). When faced with the third most expensive US equity market of all time, maintaining a normal weight in a passive index seems to us to be a decision that will likely be very costly. Yet despite this, it remains a popular path, with around 30% of all assets in the U.S. equity market in the hands of passive indexers.”

Montier and Kadnar divide stock prices into four components. Since 1970, dividends, earnings growth, profit margins, and P/E multiple changes have contributed 3.4%, 2.3%, 0.50%, and 0.10%, respectively, to the S&P 500’s 6.3% annualized return after inflation.

By contrast, those same inputs have contributed 2.8%, 3.1%, 3.2%, and 3.8% to the index’s stunning 13.6% annualized real returns over the past seven years. In other words, the current rally is being carried by unusually high and persistent profit margins and multiple expansion, or the amount investors are willing to pay for earnings.

For recent returns to persist, profit margins and P/E multiples must continue to expand. That’s unlikely since both of these components are near all-time highs. GMO uses these four components to try to peer into the future by analyzing the historical cycle of profits, and the firm’s forecasts often resemble the signals of Robert Shiller’s “cyclically adjusted PE ratio” or CAPE, which compares current stock prices to the past decade’s worth of real earnings.

Basically, GMO thinks that U.S. stocks over the coming seven years will lose 6% due to P/E multiple contraction, and another 2.8% from margin contraction. While dividend yield and profit gains will contribute 5% to stock returns,, that still amounts to a real total return of -3.9% for the period.

Even assuming the current P/E ratio and profit margins are normal doesn’t allow for the computation of continued robust returns since P/E and margin expansion account for such a large part of recent gains. Basically, this is the third-most expensive U.S. market ever. The only times stock prices have been higher and prospective returns lower were in 1929 and 2000. A different cyclical adjustment that fund manager John Hussman uses shows the current market as the second-most expensive one.

Next, Montier and Kadnar examine stocks from a more bottom-up perspective, using the median stock’s Shiller PE and Price/Sales ratio. It turns out that the median stock’s Price/Sales ratio has never been more expensive since 1970. The median Shiller PE of stocks in the index is not quite as extreme, but still among the highest readings since 1970.

Finally, Montier and Kadnar run a Benjamin Graham-style stock screen based on four criteria: Earnings yield twice the AAA bond yield; dividend yield two-thirds of the AAA bond yield; total debt less than two-thirds of tangible book value, and Shiller PE of less than 16x. They find no U.S. stocks currently meeting those criteria. The authors quote Graham: “When such opportunities have virtually disappeared, past experience indicates that investors should have taken themselves out of the stock market and plunged up to their necks in U.S. Treasury bills.”

Even allowing for the fact that large U.S businesses are exhibiting monopolistic tendencies, and profit margin cycles appear different lately than in the past, Montier and Kadnar argue that stocks still aren’t cheap.
The upshot is that investors should have as little exposure to U.S. stocks as possible. Foreign stocks don’t offer compelling returns either, but they are priced to deliver at least somewhat higher returns than U.S. stocks. That’s especially true for emerging markets stocks.

While investors who seek relative value must venture abroad, those investing on more absolute terms should hold some cash. “When there is nothing to do, do nothing,” advise the authors. Both relative and absolute value investors should remember economist John Maynard Keynes’s remark that they will necessarily seem “eccentric, unconventional, and rash in the eyes of average opinion.”

U.S. stock valuations haven’t been this extreme since 1929 and 2000

My Comments: I wasn’t here in 1929 but I was here in 2000. If there is such a thing as handwriting on the wall, you should be able to see it. We’d had a great run up and the year 2000 was just around the corner. Everyone was worried that our computers would crash because years were constructed around the last two digits and all of a sudden, both would be ZERO.

As it happened, nothing happened, except the run up suddenly stopped and everyone had to take a deep breath. And quit buying new stuff with all the money we didn’t have anymore since we’d spent it already. And the market crashed.

Aug 22, 2017 by John Coumarianos

“The stock market is now 35% passive and 65% terrified,” says financial adviser and blogger Josh Brown, a.k.a. “The Reformed Broker.” In other words, more investors nowadays are indexing their money and active managers fear for their futures.

Which begs the question, did Brown get it backwards? Should the 35% of stock investments that’s indexed actually be the terrified money? Yes, James Montier and Matt Kadnar of Boston-based asset manager Grantham, Mayo, van Oterloo (GMO) assert in a new paper called “The S&P 500: Just Say No.” The S&P 500 SPX, +0.17% is so expensive, they say, any money tracking the benchmark U.S. stock market index at this point is more speculation than investment.

Here’s how the authors put it: “A decision to allocate to a passive S&P 500 index is to say that you are ignoring what we believe is the most important determinant of long-term returns: valuation. At this point, you are no longer entitled to refer to yourself as an investor. You may call yourself a speculator, but not an investor.

“Going passive eliminates the ability of an active investor to underweight the most egregiously overpriced securities in the index (we obviously prefer a valuation-based approach for stock selection as well). When faced with the third most expensive US equity market of all time, maintaining a normal weight in a passive index seems to us to be a decision that will likely be very costly. Yet despite this, it remains a popular path, with around 30% of all assets in the U.S. equity market in the hands of passive indexers.”

Montier and Kadnar divide stock prices into four components. Since 1970, dividends, earnings growth, profit margins, and P/E multiple changes have contributed 3.4%, 2.3%, 0.50%, and 0.10%, respectively, to the S&P 500’s 6.3% annualized return after inflation.

By contrast, those same inputs have contributed 2.8%, 3.1%, 3.2%, and 3.8% to the index’s stunning 13.6% annualized real returns over the past seven years. In other words, the current rally is being carried by unusually high and persistent profit margins and multiple expansion, or the amount investors are willing to pay for earnings.

For recent returns to persist, profit margins and P/E multiples must continue to expand. That’s unlikely since both of these components are near all-time highs. GMO uses these four components to try to peer into the future by analyzing the historical cycle of profits, and the firm’s forecasts often resemble the signals of Robert Shiller’s “cyclically adjusted PE ratio” or CAPE, which compares current stock prices to the past decade’s worth of real earnings.

Basically, GMO thinks that U.S. stocks over the coming seven years will lose 6% due to P/E multiple contraction, and another 2.8% from margin contraction. While dividend yield and profit gains will contribute 5% to stock returns,, that still amounts to a real total return of -3.9% for the period.

Even assuming the current P/E ratio and profit margins are normal doesn’t allow for the computation of continued robust returns since P/E and margin expansion account for such a large part of recent gains. Basically, this is the third-most expensive U.S. market ever. The only times stock prices have been higher and prospective returns lower were in 1929 and 2000. A different cyclical adjustment that fund manager John Hussman uses shows the current market as the second-most expensive one.

Next, Montier and Kadnar examine stocks from a more bottom-up perspective, using the median stock’s Shiller PE and Price/Sales ratio. It turns out that the median stock’s Price/Sales ratio has never been more expensive since 1970. The median Shiller PE of stocks in the index is not quite as extreme, but still among the highest readings since 1970.

Finally, Montier and Kadnar run a Benjamin Graham-style stock screen based on four criteria: Earnings yield twice the AAA bond yield; dividend yield two-thirds of the AAA bond yield; total debt less than two-thirds of tangible book value, and Shiller PE of less than 16x. They find no U.S. stocks currently meeting those criteria. The authors quote Graham: “When such opportunities have virtually disappeared, past experience indicates that investors should have taken themselves out of the stock market and plunged up to their necks in U.S. Treasury bills.”

Even allowing for the fact that large U.S businesses are exhibiting monopolistic tendencies, and profit margin cycles appear different lately than in the past, Montier and Kadnar argue that stocks still aren’t cheap.
The upshot is that investors should have as little exposure to U.S. stocks as possible. Foreign stocks don’t offer compelling returns either, but they are priced to deliver at least somewhat higher returns than U.S. stocks. That’s especially true for emerging markets stocks.

While investors who seek relative value must venture abroad, those investing on more absolute terms should hold some cash. “When there is nothing to do, do nothing,” advise the authors. Both relative and absolute value investors should remember economist John Maynard Keynes’s remark that they will necessarily seem “eccentric, unconventional, and rash in the eyes of average opinion.”

Protect Yourself Against Cognitive Decline

My Comments: Readers of my posts know I usually talk about money or some aspect of it. My challenge over the years has been to assess the financial literacy of whomever I’m talking with. And that challenge increases with age; both mine and that of my friends and clients.

This article might start a useful conversation between you and your children and/or other family members. I’ve had clients reach the end of their lives leaving loved ones totally ignorant about their financial lives. It can dramatically increase the pain and frustration of those they leave behind.

by Danielle Howard \ Aug 12, 2017

You could lose the ability to manage your finances and not know it

Many people work hard to make sure there are ample assets to provide for the go-go, slow-go and no-go season of life. Have you ever considered how the mental capacity to manage those resources will change as you age?

A study done in January of 2017 by the Center for Retirement Research at Boston College delves into how cognitive aging could affect financial capacity.

Your financial capacity is the ability to manage your financial affairs in your own best interest. It scopes a broad range of activities ranging from rudimentary money skills (understanding the value of bills and coins) to complex activities such as identifying assets and income, exercising judgment around risk and return of investments or comprehending tax implications of purchases or sales.

Many activities in our financial lives are based on “crystallized” intelligence. This is the knowledge and skills we have gained over time, also known as financial literacy. These are the practical, day to day financial applications or procedures in our lives. It is heightened with the level of involvement in family monetary matters. With normal cognitive aging, knowledge remains largely intact throughout our 70s or 80s.

Our “fluid” intelligence incorporates memory, attention and information processing. As our wealth grows, so does the need to track where it is, and how to best use it for what is important to us. This “fluid” aspect of our intellect can start to decline as early as age 30.

The research found that individuals who age normally are more likely to develop deficits in the area of judgment over their ability to carry out the basic tasks. However, there are cautions in both areas of capacity.

Many people in their fall season are competent of managing the “crystallized” aspects of their financial lives. If a person has not taken an active role in the family finances, they are vulnerable to losing capacity in this area. A “financial novice” may be a person that has had to take over the responsibilities of managing the family finances in the event of a death or incapacitation of another family member. Women who lose a spouse and have not been involved in the family finances are highly vulnerable to losing capacity in this area.

Cognitive impairment, ranging from mild (CMI), to dementia primarily affects financial judgment — the “fluid” intelligence”. This can pose challenges in that a person can feel confident and remain “knowledgeable” about day to day activities, but their impaired judgment makes them more likely to become victims of fraud. As people loose both the “crystallized” and “fluid” elements of their intellect, they are additionally exposed to financial abuse by caregivers.

Since a critical characteristic of cognitive decline or impairment is the unawareness of the deteriorating state, how can we protect ourselves and our loved ones?

1. Become financially literate. I have heard too many stories that started with “my spouse is the money person, I just let them take care of it”. Educate and empower yourself around everything financial. Start somewhere and keep learning.

2. Educate yourself on the aging process. Talk to your elder family members as to what they are experiencing. Embrace and make the most out of it. Do the best you can with your choices to maximize your health in all areas of your life during this season.

3. Build trusted relationships. That includes your relationships with friends, family and advisers (health, spiritual, financial). Make sure everyone has your best interest in mind and communicate with each other. Transparency, integrity and honesty will serve you well.

Danielle Howard is a Certified Financial Planner practitioner. She’s the author of “Your Financial Revolution: Time to Recognize, Revitalize, and Release Your Financial Power.”

ACTION OR NO ACTION?

My Comments: Friends of mine are scared. I’m less so. I want President Trump to be a successful President; our future as a respected state on the global stage is important to me.

But I am less confident today than I was last January. Not because of the Russia issue, but because of his apparent lack of intellectual curiosity. His role as President dictates he move beyond his role as a reality TV host. I’m no longer sure he can or even wants to.

The media and others can be alarmist. After all, that’s how you get an audience and generate revenue. And there are apparently lots of reasons for us to be alarmed. But so much of what we read and hear is simply noise.

I also believe that we are overdue for an in-depth review of the fundamental issues and assumptions about government that go back 75 years and more. This is a healthy process that will either reaffirm the assumptions that got us where we are or cause us to make some necessary changes. I don’t fear change like many of my contemporaries.

Clearly there was and is an imbalance economically among demographic elements of our society. It’s increasingly apparent to me that income inequality is the driving force behind much of the tension in this country. Whether that gets remedied under a Trump administration remains to be seen.

What kind of society do we want going forward, and do we have the courage and conviction to make it happen? I hope we do, and I intend to do what little I can to voice my opinions.

By Zachary Karabell / Feb 12, 2017

Just weeks into Donald Trump’s presidency, you would think that everything had changed. The uproar over the president’s tweets grows louder by the day, as does concern over the erratic, haphazard and aggressive stance of the White House toward critics and those with different policy views. On Sunday, White House aide Stephen Miller bragged, “We have a president who has done more in three weeks than most presidents have done in an entire administration.”

But Miller was dead wrong about this. There is a wide gap, a chasm even, between what the administration has said and what it has done. There have been 45 executive orders or presidential memoranda signed, which may seem like a lot but lags President Barack Obama’s pace. More crucially, with the notable exception of the travel ban, almost none of these orders have mandated much action or clear change of current regulations. So far, Trump has behaved exactly like he has throughout his previous career: He has generated intense attention and sold himself as a man of action while doing little other than promote an image of himself as someone who gets things done.

It is the illusion of a presidency, not the real thing.

The key problem here is understanding Trump’s executive orders and presidential memoranda. Trump very quickly seized on the signing of these as media opportunities, and each new order and memo has been staged and announced as dramatic steps to alter the course of the country. Not accustomed to presidents whose words mean little when it comes to actual policy, opponents have seized on these as proof that Trump represents a malign force, while supporters have pointed to these as proof that Trump is actually fulfilling his campaign promises.

Neither is correct. The official documents have all the patina of “big deals” but which when parsed and examined turn out to be far, far less than they appear. Take the order authorizing the construction of a border wall between the United States and Mexico. The relevant section of the January 25 order read: “It is the policy of the executive branch to … secure the southern border of the United States through the immediate construction of a physical wall on the southern border, monitored and supported by adequate personnel so as to prevent illegal immigration, drug and human trafficking, and acts of terrorism.” That sounds indeed like an order to fulfill a controversial campaign promise. The problem? Congress initially passed a Secure Fence Act in 2006 that mandated the construction of nearly 700 miles of fortified border. By 2011, under the Obama administration, most of that was completed, with a mix of pedestrian fencing and vehicle fortifications. Since then, there has only been minimal funding for further fortifications.

The result is that Trump issued an executive order mandating something that has in many respects already been done—with no congressional funding yet to redo the current fortified border with a larger, more expensive structure. The president does not have the budgetary discretion to build such a wall, and it remains to be seen whether Congress will authorize what promises to be a controversial and redundant project. This executive order, therefore, changes nothing, and only mandates something that has already been mandated, already been constructed and that the president lacks the spending authority to upgrade.

Then take things like the Keystone pipeline permits, the promise to deregulate and the most recently signed orders about crime. The January 24 order on infrastructure begins with a sentiment almost anyone could agree with: “Infrastructure investment strengthens our economic platform, makes America more competitive, creates millions of jobs, increases wages for American workers, and reduces the costs of goods and services for American families and consumers. Too often, infrastructure projects in the United States have been routinely and excessively delayed by agency processes and procedures.” It then declares that the policy of the Executive Branch is to expedite the permitting of such projects. That was followed by two memoranda on the Keystone and Dakota Access Pipelines that had been denied permits during Obama’s tenure, which urges the companies to re-submit their permit applications for review.

That might seem like an order to have the pipelines built. But Keystone remains almost entirely an idea, and oil shipments and infrastructure from Canada have long since been routed elsewhere given the years and years of delay in ever authorizing it. The Dakota Access Pipeline is largely complete, with a major dispute over its passage through tribal lands, and here too, it is unlikely that a presidential memorandum has any legal bearing on how that issue is resolved given that it lies within the purview of the Army Corps of Engineers and cannot simply be countermanded by the White House.

Or take the orders of deregulation. Those were widely hailed as a rollback of Dodd-Frank, especially given that the morning that the order was issued, February 3, Trump met with bank CEOs and expressed his dislike for many of the legislation’s provisions. The actual order, however, delivers much less than it promises, merely directing the secretary of the Treasury to review existing regulations and report back on which ones might be refined to achieve better outcomes.

Or the crime orders signed on February 9, which were widely hailed as cracking down on “transnational criminal organizations” and “preventing violence against … law enforcement officers.” Nothing in the text of these orders is either objectionable or in any respect a departure from current law and policy. One order states plainly that it shall be the policy of the administration to “enforce all Federal laws in order to enhance the protection and safety of Federal, State, tribal, and local law enforcement officers, and thereby all Americans.” The other says that the administration will seek to use existing laws to crack down on trafficking. You would have known none of that from the headlines both supporting and denouncing the efforts. Breitbart claimed “Trump Signs Three Executive Orders to Restore Safety in America” while many took these orders as a sign that police will have new, expanded powers and protections. In truth, the orders changed the status quo not one whit.

On it goes: The recent crackdown on undocumented immigrants that followed Trump’s January 25 order on enforcement priorities may depart from Barack Obama’s post-2102 policies to de-emphasize deportation of undocumented immigrants who do not have criminal records, but it appears fully consistent with deportation actions during both Obama’s first term and during significant portions of George W. Bush’s administration. The orders on health care, on defeating ISIS, on rebuilding the armed forces—all were essentially statements of intent with no legal force and requiring no action except a mandate to relevant departments and agencies to study issues and report back.

The travel ban, of course, is different. It was an actual policy order that dramatically changed immigration and visa policies for seven Muslim-majority countries. It was swiftly rejected by the courts, however, which meant that the signature policy of the Trump administration is now not a policy at all—at least, unless and until the White House finds a different approach.

Yes, what the president says matters. Trump’s casual relationship with the truth and his carefree use of tweets set the public agenda and help determine how foreign countries relate to our government. Intent also matters, and clearly, the Trump administration is determined to do a variety of things—from border security to health care to trade to immigration—that many, many Americans find objectionable, wrong and against the best interests of the country.

And yet, words are not the same as actions. Trump can issue as many documents called executive orders and presidential memoranda as he wants. As the fate of the travel ban shows, however, that doesn’t mean that even the more meaningful ones are actionable, and the preponderance of the orders to date would in any other administration have been news releases stating broad policy goals that may or may not ever become actual policy.

But too many of us take these words as action. That confirms both the worst fears of what the Trump administration is and the greatest hopes of what Trump wants it to be: a White House that shoots first and asks question later, a White House of action and change that shakes the status quo to the core and charts a new path for America and Americans. To date, this White House has broken every convention and rule of tone and attitude, toward Washington and toward the truth. But in reality, it has done far less than most people think.

In the time ahead, as Congress turns to actual legislation and the White House presumably does normal things like propose a budget and specify its legislative ideas, there will be real actions for us to probe and debate. Distinguishing between words and action is essential: When senators say silly things about legislation, we know to separate those public statements from votes takes and laws passed. When leaders of other countries speak aggressively, we do not immediately act as if war is imminent; if that were the case, we’d have invaded Iran and North Korea years ago. Words should be taken as possible indicators of future action, but not as absolutes and not always.

Trump poses a challenge to decades of tradition and precedent. He is masterful as conflating words and actions in a way that enrages and alarms his opponents and exhilarates and excites his supporters. It’s more important than ever to distinguish what is from what isn’t. Understanding the difference between what this president says and what he does is one of the only things that will keep our public debate from plunging ever deeper into the hall of mirrors.

Wall Street is sending huge warning signs for stocks

My Comments: Sooner or later, the penny will drop.

Joe Ciolli \ Jul 30, 2017

To a growing chorus of strategists and investors across Wall Street, the stock market looks like it’s headed for a rude awakening.

Their mounting pessimism comes at a time when US equities are looking healthy, at least on the surface. Major indexes are hovering near record highs they reached this past week, while corporate earnings are growing at a blistering pace.

Yet some market experts think this apparent strength is just masking deeper problems brewing under the surface.

Count Marko Kolanovic, JPMorgan’s global head of quantitative and derivatives strategy, as one of those stressing caution. In a client note on Thursday, he said that record-low volatility should “give pause to equity managers.” Kolanovic even went as far as to compare the strategies that are suppressing price swings to the conditions leading up to the 1987 stock market crash.

“The fact that we had many volatility cycles since 1983, and are now at all-time lows in volatility, indicates that we may be very close to the turning point,” he said.

A sudden move down in US stocks on Thursday — including a notably outsized loss in tech — was widely attributed to Kolanovic’s note, highlighting just how seriously many investors have started taking such warnings.

His consternation extends into the hedge fund world, where investment managers are also crying foul about low volatility to anyone that will listen.

Baupost Group, a $30 billion fund, recently highlighted the lack of price swings as a harbinger of pain to come, calling it a possible “accelerant for the next financial crisis.” Meanwhile, Highfields Capital Management, which oversees $13 billion, said this past week that low volatility is giving people the false impression that the market is risk-free.

Going beyond the much-maligned low-volatility environment, Bank of America Merrill Lynch has its own reasons for expecting an upcoming rough patch in stocks — one it sees coming sometime this autumn.

Michael Hartnett, the chief investment strategist of BAML Global Research, points to how the S&P 500 has continued climbing to new highs, even as the size of the Federal Reserve’s balance sheet has stayed relatively unchanged. He says this divergence is a “classic euphoria signal.” Such overexuberance has historically been a sign that investment sentiment is overextended.

Legendary investor Byron Wien, who currently serves as vice chairman of Blackstone’s private wealth solutions group, agrees with BAML. He sees the stock market outpacing the Fed’s balance sheet as problematic and called the development “disturbing” in a July 26 client note.

BAML also points to record low private client cash levels as a sign that the stock market may be close to maxing out. With investors looking fully invested, there’s limited dry powder for them to put to work in the market, should they feel inclined to add to positions.

And, perhaps most importantly to BAML’s call for a market top this autumn, a proprietary indicator maintained by the firm sits on the brink of reaching a sell signal. It’s put together a list of things that need to happen for the market to peak in August:
• The dollar index falls to 90, coinciding with “unambiguous” US labor/consumer weakness (non-farm payrolls lower than 100,000) and a flatter yield curve
• The end of high-yield leadership, which “should be an early warning system”
• Fatigue in equity growth leadership, in areas like the Nasdaq Internet Index, emerging markets Internet, and semiconductors

But, amid the growing pessimism, there are still strategists on Wall Street who see the S&P 500 hanging in there, at least through the end of 2017. A survey of 20 chief equity strategists conducted by Bloomberg shows an average year-end forecast of 2,439, basically unchanged from Friday’s close.

So while it’s anyone’s guess what will transpire in the coming months, it’s good to at least be aware of the cracks forming in the market’s foundation. And don’t say you weren’t warned.

How do I safely invest my retirement savings for growth?

My Comments: Financial illiteracy is a huge problem. But many people have no idea it applies to them.

The other day I was trying to explain something to a widow in her 70’s and it was like talking to my six year old grandson.

People should be exposed to the markets. But they need to shift some of the risk associated with the stock and bond markets to an insurance company. Over the next 10 – 20 years they’ll have a better overall rate of return without the headaches. There is a way to remain invested and not be exposed to all the risk. But you have to be careful about the fees. Send me your email (see Contact Info above) and I’ll explain further.

by Walter Updegrave/May 30, 2017

I have a retired friend who knows he needs growth to ensure his nest egg will last throughout retirement, but at the same time is nervous about the investing in the stock market. Any advice for how he should invest?–D.F.

First, let me say that I don’t blame you (I mean your friend) for being skittish. Even though stock prices have more than tripled after bottoming out in the wake of the financial crisis a little more than eight years ago and now stand at or near record highs, there’s that nagging concern in the back of many investors’ minds that the market could suddenly reverse course and we could be looking at another major selloff and a prolonged slump.

And, of course, at some point that will happen, as it has many times before. We just don’t know when or what will trigger the downturn. So the question is how do we invest our nest egg so we can take advantage of stocks’ potential for long-term growth without leaving ourselves too vulnerable to devastating setbacks that could jeopardize our retirement security?

The answer comes down to balance. But not just balance in an investing sense, or creating an investing strategy that reflects an acceptable tradeoff between risk and reward. I’m talking about balance in an emotional sense too, achieving a level of equanimity that helps us keep our composure when the markets are in turmoil, so we don’t do something we’ll later regret, like selling stocks in a panic at depressed prices.

The first step toward achieving investing balance is to build a portfolio of stocks and bonds that can generate acceptable returns while also providing reasonable downside protection. For help in creating such a stocks-bonds mix, you can go to Vanguard’s free risk tolerance-asset allocation tool.

The tool will also give you a sense of how such a blend of stocks and bonds has performed in the past, and you can also see how many years the various portfolios have suffered a loss and how each has performed on average over many decades.

You shouldn’t think of this as any sort of guarantee of how a given combination of stocks and bonds will fare in the future. If anything, many pros believe average returns going ahead for both stocks and bonds will be considerably lower than in the past. But at least you’ll have a good idea of how different mixes have behaved under a variety of market conditions.

In your zeal to protect yourself against setbacks, however, you don’t want to end up with a mix that’s so wimpy that you run a high risk of running through your nest egg too soon. So to get a sense of whether your recommended mix of stocks and bonds will be able to support the type of spending you envision during a retirement that could very well last 30 or more years, I suggest you also go to this retirement income calculator.

(The tool assumes you’ll live to age 95, which I think is a reasonable assumption for planning purposes. But if you’d like to see how long you might be around based on your age and health status, you can check out the Actuaries Longevity Illustrator.)

The calculator will estimate the chances that you’ll be able to maintain your planned level of withdrawals from your nest egg. If that probability is lower than you’d like — as a general rule, I’d say you’d like to see an estimated success rate of 80% or more, give or take — then you can re-run the numbers with different asset mixes and different withdrawal rates.

In general, though, as long as you keep your initial withdrawal rate within a range of 3% to 4% or so, you should be able to have decent assurance that your nest egg will support you at least 30 years. You can go with a higher withdrawal rate, but you’ll find that the chances of your money lasting throughout a long retirement start to drop off pretty quickly as you push your withdrawal rate above that range.

Once you’ve settled on an asset mix and withdrawal rate, you can turn your attention to emotional balance. I don’t know of a tool that can help with this aspect of investing and planning. Rather, the idea is to find ways to stay cool when the markets are (or seem to be) crumbling around you, and to avoid giving in to the impulse to take action when every fiber of your being is screaming at you to do something, anything!

One way you might maintain your composure when most investors are all shook up is to remind yourself that not all market downturns turn into full-fledged routs. You could even take a few minutes to review instances in recent years (Brexit, the Greek debt crisis, fears of a slowdown in China’s growth rate) when many investors were convinced a market drop would lead to a major selloff but stocks recovered. If nothing else, this exercise could reinforce the notion that it’s foolish to try to outguess the markets.
And even if things get truly ugly, you might take a few minutes to recall the process you went through to arrive at your portfolio and remind yourself that you factored the likelihood of a significant setback into your decision-making when you settled on your asset mix. Indeed, the whole point of the exercise was to create a portfolio that you could stick with regardless of what’s going on in the markets and that, aside from occasional rebalancing, you wouldn’t have to re-jigger.

And while I wouldn’t go so far as to suggest you don’t keep track of economic and financial news, you certainly don’t want to follow it obsessively, especially if watching every tick of the market’s downward trajectory gets you so rattled that you’ll eventually cave in to the urge to abandon your long-term strategy.

That’s not to say you can never make a move. There may be times when you should. If, for example, it becomes apparent that you overestimated your appetite for risk when setting your stocks-bonds mix, then you need to re-assess and do some fine-tuning. But if you do make a move, you should do it calmly, rationally and as part of a well-thought-out plan, not in response to the latest dip in the market or on the basis of some pundit’s prediction of coming Armageddon.