In the late stage of the business cycle, you’ll start hearing a lot of jargon that doesn’t quite add up to the rosy headlines. For instance, on June 25, 2019, Federal Reserve chairman Jerome Powell said, “Proximity to the ELB [effective lower bound] poses new problems to central banks and calls for new ideas. The questions we are confronting about monetary policymaking and communication, particularly those relating to the ELB, are difficult ones that have grown in urgency over the past two decades.” Powell closed his speech with what might have been considered a fairly benign statement in normal times, saying, “We are also mindful that monetary policy should not overreact to any individual data point or short-term swing in sentiment.” Wall Street responded by selling off 200 points on the Dow Jones Industrial Average.
What in the world was Powell saying? Who understands this language, and why weren’t they happy with his speech? It certainly is different from what you hear from the White House, which is basically, the U.S. is on a tear, doing great and you’re insane if you don’t buy stocks and real estate.
If you think there’s something going on behind the scenes, you’re absolutely right. If you are formulating your financial plan based upon the headlines, then you’re on a buy high, sell low rollercoaster. There are time-proven solutions that work much better. Let’s start with a few Wall Street secrets that your broker isn’t sharing with you.
13 Wall Street Secrets and Sayings
1. Never confuse a bull market with wisdom.
2. Never reach for yield.
3. The higher the dividend, the higher the risk.
4. Bulls make money. Bears make money. Pigs get slaughtered.
5. A rising tide lifts all ships.
6. Late stage of the business cycle.
7. Financial imbalances.
9. Investment grade.
10. Effective lower bound interest-rate.
11. Accommodative policy.
12. Modern Portfolio Theory.
13. What's Safe? (It's not what your broker is selling you.)
And here’s what they mean.
1. Never confuse a bull market with wisdom. There are times when even a monkey throwing darts at a wall full of stocks could make a killing, i.e. a bull market. The share prices go up because stocks are in a bull market, and everything is rallying. There are also times when even experienced investors go belly-up, i.e. a bear market. A sound nest egg strategy is designed to protect your assets from downturns, capitalize on rallies and is never over-leveraged on a bad idea. Buy and Hold is not a strategy that works in today’s world. (If you think it is, keep reading.)
2. Never reach for yield. When you are getting paid nothing in your savings, it’s very tempting to get sold into high-risk bonds, money market funds and CDs that are not FDIC-insured. The salesman will convince you that you are going to earn a solid XYZ yield and that income will set you up! What s/he doesn’t say is just how risky the company you are investing really is. Highly leveraged companies still have access to bank capital at 5% (sometimes even lower). So, if they are borrowing from you at higher than that, it tells you everything you need to know. They are borrowing from you because they can’t borrow from a bank. Oftentimes, these risky, junk bonds or junk dividend-paying stocks pay the highest commission to the salesman that is advising you. As Roy Rogers was fond of saying, “I’m more concerned with the return of my money than the return on my money.”
3. The higher the dividend the higher the risk. GE isn’t the only highly-leveraged company that is borrowing from bond investors to pay dividends to stock investors, i.e. borrowing from Peter to pay Paul. Investors were livid when they discovered that GE was buying back its own stock and paying high dividends to keep its share price inflated and make earnings look stronger than they really were (so that it could continue to borrow). When a company cuts its dividend, as GE did, the share price drops like a knife. GE’s share price dropped to half on the news, and is currently trading at less than 1/3 of its price just two years ago. If you wait for the headlines that a company is in trouble, it’s too late to protect yourself. (Warren Buffett managed to sell all of his GE stocks a couple of months before the dividend cut.)
A 5% dividend isn’t enough to pay for losing half of your principal. If you don’t know how to evaluate the debt load of the company, without having blind faith in your broker-salesman’s assurances, then you should underweight dividend-paying stocks in 2019. More than half of the investment grade companies are at the lowest rung – just one downgrade away from junk bond status.
4. Bulls make money. Bears make money. Pigs get slaughtered. Although this aphorism is obvious, the employment of its wisdom does elude a lot of people. When the safe money is earning zero, and you’re reaching for 5% or higher return on your stocks or bonds, you’re falling into the porcine category. If you’re all in on stocks right now because the markets are at an all-time high and Wall Street is in party mode, you’re more likely to end up in the pig sty than the castle. A well-designed, time-proven plan doesn’t just earn money in good times. It also protects your assets from the downturns.
5. A rising tide lifts all ships. This secret is right in alignment with “Don’t confuse a bull market with wisdom.” Bull markets lift all stocks. However, as Warren Buffett says, when the tide goes out, you’ll see who has been swimming naked. Bear markets can sink the share price of even robust companies with hot new products. Apple lost half of its share price value in the Great Recession, even though the smart phone was a market disrupter that would later take the company on to a trillion-dollar valuation.
6. Late stage of the business cycle. The economy is cyclical. There are good times and there are tough times. Economists call this the business cycle. So, if you’re translating what the late stage of the business cycle means, you might say that the economy is on recession watch. Things are closer to a correction than they are to continued growth and share price gains. In fact, the second quarter of 2019 is ushering in an earnings recession, where many S&P500 companies are expecting lower earnings for the first time in years. Part of this is due to the one-year bump everyone received from the tax cut in 2018. However, another piece is that the economy is slowing. In 2018, GDP growth was 2.9%. In 2019, it’s predicted to fall to 2.1%.
7. Financial Imbalances. Normal folk would call this “bubbles.” Warren Buffett has admitted to having $100 billion on the sidelines, due to the overpricing of stocks and bonds. Alan Greenspan has said that stocks and bonds are in a bubble. Robert Shiller (Nobel Prize winning economist) warns that the last two times when stocks were this overpriced was before the Dot Com Recession and the Great Depression. Real estate is unaffordable in 74% of U.S. communities. Bubbles.
Low interest rates create bubbles. This is something we’ve seen for the past two decades. In the Dot Com Recession the bubble was in Internet stocks. In the Great Recession, the bubble was real estate. Today, it’s stocks, bonds and real estate, which puts the economy on much more perilous footing than it was on in 2000 or 2008. (See chart below.) One of the biggest problems is that there just isn’t enough room to cut interest rates to really goose economic growth. However, the banks have a new Bank Bail-In program, using your money… Something that I’ll address in an upcoming blog.
8. Overleveraged. The total private nonfinancial credit is currently over $30.9 trillion. $15.6 trillion of that is consumer debt, of which $1.6 trillion is student loans. $15.2 trillion is concentrated in the business sector. This is much higher than it was before the Great Recession. As the Federal Reserve Board indicated in their most recent Financial Stability Report, “Although debt-financing costs are low, the elevated level of debt could leave the business sector vulnerable to a downturn in economic activity or a tightening in financial conditions.”
At the same time, the Feds are aware that if they cut rates, then corporations may be tempted to continue to borrow, putting their firms at even greater risk. Business debt is “historically high” and risky debt has increased. Firms with low credit scores and/or very high debt are still borrowing. The leverage has increased above the levels of 2007 (before the Great Recession).
9. Investment grade. Any corporate bond rated AAA, AA, A or BBB is considered investment grade, with anything lower entering into “speculative” or junk bond status. The problem is that you might own a bond or a bond fund that you believe is investment grade, which is more speculative than you might realize. ½ of all investment grade bonds are BBB (one hairs breadth above junk status). Additionally, many investment grade bond funds can actually invest 20% (or more) in junk bonds. So, it’s time to review the bonds and bond funds in your nest egg.
10. Effective lower bound interest-rate. The problem with the ELB being at zero is that there isn’t any room for a rate cut to help an economy that has entered a recession. If you take a look at the Bubble Chart above, you’ll see that the Feds had plenty of room to cut rates in the Dot Com Recession. In fact, bonds were earning up to 25% in 2001, as a result of rate cuts! There was ample room in the Great Recession, though the Feds also had to rely upon quantitative easing to get the economy rolling again. This time around, the Feds are still highly leveraged and rates are only at 2.25-2.5%. This could make for policy impotence, and is one of the reasons why the Feds are not going to be hasty about a rate cut. This also means that bonds won’t help your nest egg in the next recession – unless a miracle happens and the Feds are able to increase rates before the next downturn. That means you have to learn what’s safe in a world where both stocks and bonds are in a bubble and vulnerable to the next recession.
11. Accommodative Policy. This is the longest expansion in history. However, the Feds have had to keep rates near zero in order to achieve it. An “accommodative policy” that makes money free to borrow (for corporations, not for consumers) creates bubbles. As the economy heats up and moves on its own, the Feds typically raise interest rates to stop the speculation. That didn’t happen in this expansion. However, under Jerome Powell, the language and messaging has indicated that the Federal Reserve is very concerned about keeping the free punch bowl (cheap, easy money) available to Wall Street.
Wall Street is expecting a rate cut at the Fed meeting July 30-31, 2019. Since the July 26, 2019 GDP report is likely to be quite weak (potentially as low as 1.3%), and the earnings recession will have been recorded by many S&P500 companies, there’s a chance that the Feds might cut rates. However, that isn’t a given, as I indicated in my analysis of the board governor’s speeches over the last few weeks. If the Feds do cut rates, the Street will know it is because the economy is weak – meaning that will not necessarily translate into a stock rally.
12. Modern Portfolio Theory. MPT is a simple idea. Keep enough safe and diversify the rest. Any good broker-salesman will tell their client that they use MPT, even if the plan they design is nothing of the kind. In fact, I’ve been doing a lot of second opinions of managed portfolios lately, and I have yet to find one person who was properly diversified, with enough safe.
MPT with annual rebalancing earned gains in the last two recessions and outperformed the bull market in between. Buy & Hope lost 78% in the NASDAQ during the Dot Com Recession and 55% in the Dow Jones Industrial Average in the Great Recession.
You can’t afford to lose more than half of your assets every 8-10 years. So, you must be the boss of your money and learn the basics of investing (they are easy), in order to be sure that you are protected from the next downturn.
If you'd like to learn time-proven strategies that earned gains in the last two recessions and have outperformed the bull markets in between, join me at my Wild West Investor Educational Retreat this Oct. 19-21, 2019. Click on the flyer link below for additional information, including the 15+ things you'll learn and VIP testimonials. Call 310-430-2397 to learn more. Register by July 31, 2019 to receive the best price.
I'm also offering an unbiased 2nd opinion on your current retirement plan. Call 310.430.2397 or email info@NataliePace.com for pricing and information.
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Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.
ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.
Information has been obtained from sources believed to be reliable however NataliePace.com does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this publication and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.
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Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.