Happy St. Patrick's Day
Thursday, March 17, 2022
Happy St. Patrick's Day financial farmers! There are few cultures so naturally blessed with song, word, and dance than the Irish. The best investments are those that we can enjoy. If you're in the mood for some traditional Irish song along with your Guinness beer today check out The Harris Bros: https://youtu.be/6jfx7D10etE
Saturday, March 12, 2022
Mr. President, please stop lying. On Thursday the U.S. Bureau of Labor Statistics released the Consumer Price Index. "Over the last 12 months, the all items index increased 7.9 percent...the 12-month increase has been steadily rising and is now the largest since the period ending January 1982." That's 40 years fellow farmers, 40 years! Is a recession next?
In the face of rampant inflation, demand priorities shift to essential items a la a "Maslow's Hierarchy of Needs." So although unemployment is at historically low levels, the jobs aren't necessarily higher-paying. So once the purchasing barrier develops it will be hard to prevent negative GDP growth; ie consumers will focus on staples like food and housing, cut travel consumption to the bare minimum, and look for alternative means of entertainment. Pot and streaming services come to mind as the ultimate crutch for a large swath of the population; remember, politicians have a vested interest in keeping the "Bread & Circuses" running.
There is a great line in Seinfeld where Jerry asks George to teach him to lie like him. George shrugs and tells Jerry "That's like saying to Pavarotti, 'Teach me to sing like you.'" But he continues with this sound piece of advice Joe Biden has internalized: "Jerry, just remember. It's not a lie, if YOU believe it." That's where we are right now...data doesn't matter, truth is subjective, and the future is rosy. Just not for the middle class.
Thursday, March 10, 2022
Bear Market Playbook
Surviving a Bear Market ain't easy. Obviously the first thing you lose is proper grammar, mainly do to shock of the financial mauling you're getting in the market. First, keep calm. It is highly unlikely you can outrun a bear. The goal here is survival. We're where we're at for a conflux of reasons, none of them good. Now the question is, "How do I position my portfolio to survive, no THRIVE in a Bear Market?"
The first step is to understand what a Bear Market is. It is a historical "rule of thumb" for the past several hundred years which denotes the fall in valuation of roughly 20% off the highs of an index. I'm using the NASDAQ index as my benchmark. The high was 16,212 in Nov 21 and the low (so far) was 12,588 which we plumbed last week. This indicates we are some 22% off the record high and in a Bear Market.
More than just a percentage, a Bear Market also has some very, very "special" traits; ie it feels like you are getting mauled because, well you're getting mauled. Massive volatility spikes cause precipitous price declines (below what we think is even possible), which are often followed by sharp spikes the following day. Only to be succeeded by plunges the following day. And around and around the wheel turns until there is a day or period of capitulation in which the bear has taken everything he wants from you and departs for his cave.
The journey to the cave typically takes about 289 days on average. That's a long time. In that journey back to the cave there are multiple head-fakes, sniffing, foraging trips, digging, biting, and other general uncivilized acts of behavior. Timing the bottom is almost impossible. What is possible is security selection, discretion, and allocation. Investors need to decide if they plan on staying in the game or not, and if so what is a tolerable near-term loss. Booking a loss is painful, but not booking a loss is often worse.
So to playbook this out, figure out what type of loss is tolerable in the near-term. They say your first loss is your best loss, so with that in mind sketch out several "pain bands" and stick to them. After the bear rolls through, along with tons of carnage, there also remain good companies which have been beaten up. You have even previously owned them! Take a look around and start rebuilding slowly, and for God's sake please, please avoid the wash sale rule; don't sell a security and then buy it back within a 30-day window. As an American still kinda free, you have a right to minimize your taxes....part of this means don't get whacked for wash sales.
One of my previous posts dealt with the value of education. Reread that. A solid education often results in a solid job with a corresponding good income. A good income allows you to buy stocks, real estate, companies, etc. etc. during bad times. And a LOT of money can be made in the bad times. Indeed, it is often said "the profit is made in the purchase." That is the true value to an investor that a Bear Market provides; the ability to pick up good brands, companies, and cash flow on the cheap. In fact, a strategy of ONLY buying in Bear Markets is commonly used by investors I term "Mountain Men."
Mountain Men are like the sasquatch, they are only rumored to exist. Typically you don't hear from them for long periods of time until there is a crisis of some sort. Then they spring into action. The Mountain Men come down from the mountain, or in from the jungle or away from the beach with bags of money. These bags of money are then used to purchase quality stocks on the absurdly cheap prices of a fraction of their true book value or growth prospects or leadership value.
The point here is that you need a list, a bag full of money, and the structure in place to buy. We can all have a list. If we have a decent job and live (somewhat) frugally then we can use excess cash to purchase more assets. The structure of course is your brokerage account or retirement account or 401K or personal balance sheet.
Eventually a Bear Market turns into a Bull Market. And those Bear prices rise to Bull levels. And investors who had excess liquid capital available stand to make a killing if their list was good and there cash was deployed correctly.
Siege of Kiev
After squandering multiple opportunities to destroy the sitting duck convoy of Russian tanks invading the Ukraine, the United States and its European Allies now face a dire decision. Will they let the Russians encircle major Ukrainian cities like Kiev or provide direct intervention?
In the coming days Russians will have surrounded multiple Ukrainian cities, despite the best attempts of the brave and vastly outnumbered Ukrainian resistance. History tells us Russia is entering a siege mentality; they will attempt to squeeze the Ukrainians out of their homeland by incessant shelling, cutting off water, electricity, and inflows of food. The Russians are going to have a hell of a time, however, eliminating every Ukrainian and taking all of the major cities. There are fundamental differences in moral, motivation, and support that the Ukrainians enjoy.
Consider, the Ukrainian Resistance is fighting for their homeland. Russians are invading under the direction of a unelected tyrant determined to destroy cities in a medieval fashion. The weeks ahead will reflect the dire consequences of utilizing war crimes to get a population to surrender. The desire to survive is far greater than that to conquer, especially when the entire world is united against Russia. An endless supply of weapons is now flowing into Ukraine.
Sieges only work if those surrounding a city, or castle, or country, can maintain endless shelling, have vast supplies of food, and have some degree of rotation or relief in their forces. And at all times the siege force must be aware of the dangers to their flanks of cutting off their supply, communication, and leadership lines.
So although the current situation looks dire for the Ukrainian people, the Russia hordes need to be extremely concerned as their armies will soon begin wasting away from constant guerrilla warfare. The Ukrainians have demonstrated a steely resolve the defend their homeland. Hopefully they will receive a Berlin Airlift-type of supply run from the Western world to help them defeat these invaders. America needs to stand strong with true patriots lest we find ourselves in a far, far worse scenario in the coming weeks. Leadership matters.
Monday, March 7, 2022
Bear Market Hell
Today marks the beginning of the Bear Market Hell. Although this country has endured much over the past 2 years, today we are embarking on something totally new...and painful. What was once the land of milk and honey has become one of soaring inflation, government disfunction, and most sadly the killing of thousands of innocent Ukrainian lives as we are on the cusp of WWIII. In the shadows lurks the bear.
A bear market is historically defined as a 20% or more fall from the market's highs, and in this instance we are refereeing the all-important NASDAQ market which has become the barometer for world innovation and advancement. It has badly stubbled, and we are now in a full-on Bear Market.
Bear Markets are brutal for investors who own long position in stocks because the equity in many ways becomes a value trap, ie the asset withers away on a daily basis, even though it might be supported by reasonable price-to-earnings ratios, a solid dividend, and a leading market position none of that really matters in a Bear Market. The only thing that matters in a Bear Market is survival. Fear is everywhere.
Assume we'll be in the bear's dark cave for some time, as there is no end in sight for the current fiscal policy, energy regulations, or leadership failures. We're stuck. Investors with long-term views, think decades, can find increasingly good deals out there. In fact, those old curmudgeons Warren Buffett and Charlie Munger LOVE the opportunities a Bear Market presents; much suffering, plenty of misery, and a huge serving of stocks-on-the-cheap. They feast fear.
What to do, what to do? With little hope on the economic policy front, little chance of domestic energy being reignited, and a war looking more like a siege, investors need to be wary of committing assets. Cash has become king again, and investors can survey the field of battle for carrion like vultures for purchases.
It is hard to believe we're not headed for a recession now. The benchmarks have spoken their truth, and investors are finally listening. "Nature, time, and patience are the great healers," but hopefully voters are the fourth great healer this November.
Financial farmers need to be patient here. Long-term capital can be deployed with care on great brands broken low. Stagflation has also risen its ugly head, so beware of companies that can't (or won't) pass along price increases. We may have 8 months of pain ahead with markets whipsawing back-and-forth until new leadership takes power. Until then, a siege mentality is appropriate (and warranted.)
Sunday, March 6, 2022
We can learn a lot from the Ukrainians. Under siege from a Russian horde, Ukraine is fighting back in a 1776esque David vs. Goliath war. Zelenskyy is gaining the moniker of "Churchill," while Putin sits alone at the end of a 40-ft table. How did we get to the cusp of World War III?
Weakness arouses evil. Like a crack addict on a street corner looking to score their next hit, Western countries became completely addicted to cheap, abundant Russian oil and gas. They relinquished their sovereignly by becoming dependent on Russian fossil fuels. America helped abandoning our energy independence, ie killing the Keystone Pipeline, restricting domestic production, and also suckling on the tit of Russian oil to the tune of ~8% of our daily energy needs. Evil was aroused by this weakness.
Oddly, Biden still has an opportunity still to fix this mess. But it will take leadership, and unlike Zelenskyy's Churchill performance, Biden is looking more and more like Neville Chamberlain...a shrinking violet. If indeed Biden DOES want to do something effective and not continue with the script of "Wag the Dog," then a simple sentence can begin the healing.
Biden has the power TODAY to kill inflation, crush the Russians, and rally the global markets with a single sentence: "I'm reversing my domestic energy policy effective immediately." That will act as a catalyst to jumpstart a legit Western response. Yes, the existing financial sanctions are slowly acting as an anaconda, squeezing the Russian people out of Western goods, services, and even fresh borsht. But we need to do more.
Ukraine matters. If you don't think so, take a look at gas prices at the pump or take a look at your 401k balance recently. For the Ukrainian people, however, they are looking through a different lens. They see rubble, smell smoke, and taste despair. The West needs to provide arms for the Ukrainians to defend their country. The USA needs to drill baby, drill. And financial farmers need to think like the Rothschilds who built a financial empire with a simple strategy: "Buy when there is blood in the streets."
Saturday, March 5, 2022
The Case for Gold
Physical gold that can be carried with you or stashed has been the backbone of wealth for thousands of years; hordes of gold coins are still being found in England that date from Roman times! The recent invasion of Ukraine further illustrates the case for gold.
Gold is an ideal store of wealth because it is compact, rare, liquid, valuable, useful, portable, universal, elemental, incapable of being created by man, hard(er) to seize, doesn't rust, and you can stash it almost anywhere.
In contrast to "crypto," in which nearly everything is known about the buyer and seller, where it can be seized almost at any time by any government agency for any reason, and if there is a thunderstorm you potentially lose all access to your wealth, gold offer significant advantages.
There is no better example of the value of gold than the current situation in Ukraine. Millions are fleeing the Russian onslaught and have to leave behind their belongings, real estate, and bank accounts (save what they were able to withdraw at the last minute.) Refugees are literally leaving with the clothes on their backs and whatever they can put in their pockets.
When the grid is down and your crypto is frozen, your AMEX is worthless, and nobody is taking your cash, gold is the proverbial golden ticket out. Physical gold should be a component of every financial farmer's portfolio.
Tuesday, March 1, 2022
"It's The Oil, Stupid."
James Carville's classic quip to Bill Clinton to help him win the 1992 Presidential Election was "It's the economy, stupid." Somebody needs to whisper to Joe Biden that Republicans are going to clean house in November because, once again, it is all about the economy. And this time, the economy is oil.
Oil prices have a significant effect on the consumer price index, ie inflation, because oil touches everything; from shipping, to manufacturing, to construction, to food, to travel, etc. etc. The list is virtually endless. Yes, even your Netflix! Streaming takes energy.
$100 crude oil prices are going to significantly increase the inflationary pressures not only in the United States, but globally as well because oil is demonstrated in U.S. Dollars. This will cause a slowdown in the U.S. economy, with the most likely result a recession as demands ebbs, then collapses as both prices INCREASE and the Federal Reserve withdraws liquidity from the economy. It is the perfect storm.
The Democrats could still be heroes if they had a modicum of will to unleash domestic oil production. They won't, but it they did multiple things would happen immediately. First, the 8% of daily US energy needs currently being sourced from Russia would disappear (hence we don't fund Russia on the back end for then wasting our resources refunding Ukraine on the front end.)
Next, for approximately every 10% price drop in oil there would be a resulting 2.7% decrease in the CPI. Finally, wait for it, OK the quick math tells me $50 oil solves the rampant inflation problem. Oh yeah, you also make the USA energy-independent again, without have to rely on "favors" from enemies abroad.