Before I get started, I must say the whole gloom and doom mantra is new to me. It is not my natural state. Rants about what the government owes, raised taxes and the budget deficit are not among my favorite things.
But you must wonder about the Trump tax cuts, the Joe Biden tax plan, proposed tax rates, and the impact on government debt and public health. It’s been a long time since we worried about core inflation, the World War II debt, and tracking the cost of living. Sadly, it’s time to dust off that old basket of goods and services, break out the inflation calculator, plug in projected CPI, and try to out-guestimate the bureau of labor statistics.
Those of you who have read me for a while know me to be usually bullish, optimistic, and very positive on the United States and the power of the US economy to drive prosperity for us all.
I know I’ve been more of a bummer lately, and I am sorry for that. So before I get into my now-regular review of the storm-filled skies, let me remind you this won’t last forever. It never does. We will get through this. It will be OK for you, and me, for our families, and for our country. I know that in my bones. But until it passes, we need to be very careful to play our cards right.
Still, in times like these, it pays to spend an enormous amount of time pondering this, and thinking about how to best chart our way through to prosperity ahead.
2020 continues to be a year for the record books, and not in a good way.
As I write this as we run up to the election, these facts dominate my thinking:
1. Stocks continue to trade at frothy levels, well above those justified by economic conditions and company profits. This induces much risk, and a lot of opportunity.
2. COVID continues to pound the world. Already responsible for the worst economy since the Great Depression, this huge threat shows no signs of letting up. Safe vaccines – which typically take on the order of 10 years to develop – still seem a long way off. Infection rates continue at pandemic levels, and it looks like the dreaded second waves are beginning to build in Europe, the US, China, and elsewhere.
3. Accelerated by COVID, the US National Debt problem continues to worsen, with profound implications for the years ahead.
4. Big tax hikes for investors seem certain. As deficits mount, Social Security and Medicare go belly-up, and government spending on social programs and infrastructure seem unavoidable, the piper will have to be paid. Remember Uncle Sam? If you have accumulated some wealth, I WANT YOU! (Not me – him!)
5. Civil strife – arguably the worst in US history – grips the nation, pushing many areas to the brink of anarchy and personal risk for many citizens.
6. Finally, the Presidential election is careening into what would be comedic political theater were not the stakes so high. This is no laughing matter. Hopefully there will be a clean and uncontested decision, and an orderly transfer of power, but this does not seem likely to me. Both sides have so much invested in disputing the outcome – whatever it may be – that I fear the sparks shall fly for a long, long time after Election Day. Piled on top of threats 1-5, I think this makes for a most dangerous time.
From an investment standpoint, these conditions mean extremely treacherous waters. The market seems to have made peace with either a Biden or a Trump victory, but not with endless uncertainty or a damaging power-grab…which both parties have made some grumbles about contemplating.
Regardless, market valuations remain in bubble territory. This is truly amazing and frightening. If it pops – and a messy, knife-fight election aftermath might just be the trigger – we could be in for Mr. Toad’s Wild Ride before we find a bottom and stocks fairly price business realities once again.
For these reasons, my firm continues to counsel dry powder, and we are keeping our clients’ portfolios with material cash positions. Our objective is to hedge the outlooks, to both benefit if the bubble keeps expanding, but to be in a position to scoop up stocks cheap if the bottom falls out.
In markets like this, steely-eyed tactical trading can yield juicy profits. Still, such a tactical approach is not a long-term investment strategy. It’s an approach to target short-term profits based on momentum and technical strength. We’re not looking to marry these stocks, and a high percentage won’t work out, and are quickly dumped when that becomes clear. But so long as enough do well, and in a big enough way, the overall gains can be impressive.
Longer term, my firm’s investing strategy will be informed by several key factors:
1. Tax efficiency. We think taxes are going way up, and know well that it’s not what you make, but what you keep, that counts. We devote considerable effort to tax best practices to help maximize the real wealth of those we advise.
2. Inflation protection. We see inflation going much higher in the early ‘20s, and fear a lot of traditional investments like bonds and many stocks are at high risk of it. Of course, cash is the worst place to be in an inflationary environment. Wise strategies will be very sensitive to targeting investments with strong potential to actually grow while the US dollar shrinks in value.
3. New Economy. The world was changing fast before COVID, and that change is now on steroids. Sectors like office real estate and brick & mortar retail are getting hammered and will never come back all the way. Education is permanently changed. Tech is king, but way overvalued. Green energy is getting very big and very profitable.
The investment road ahead has never been as challenging, or as hard to read. Got wrong, and the risks could blow up your wealth and derail your retirement. Got right, and we will be OK, even prosper. As has long been said, there’s always a bull market somewhere, and I believe this will continue to be true going forward. Be relentless in its pursuit.
Rest assured, we are working very hard to read the tea leaves, and get you the information to get safely through this mess.
Again, this won’t last forever. We will get past this. Times always change. The important thing is to recognize what’s really going on, in order to best adjust and profit from it.
Our view is very different from what you may hear on the news or elsewhere, but we believe it is the most realistic of what is actually going on. Think of it as a beacon, if you will, to guide your way to smarter decisions.
This gathering storm – market bubble, big-inflation and hiked taxes – is so dangerous, and so urgent, that I teach a dedicated course on it through my Family Wealth Education Institute. These classes are free, online, and open to all. I invite you to register, details are here.
To read my tips on the dos and don’ts of financial advisor selection, click here.
All the best, and chins up! This will pass!