A few days ago, when spewing about slagging markets, I also slagged a Houston-based financial dude and columnist for the august American publication, Forbes. In suggestig that Chicken Little, doomster, we’re-all-gonna-die, gonzo apocalyptic journalism is not worth following (and, so far, wrong) I held up a column by Jesse Colombo written in 2014. It warned of a “devastating crash” in the stock market – which has since risen about 40%.
Jesse wrote:
“Following the bull market pattern of the past five years, the U.S. stock market continues to climb to new highs while shaking off all reasons for pessimism as well as the warnings of skeptics. Stock market bulls are becoming increasingly brazen as they drive the market to nosebleed heights, which is convincing a greater number of people into believing in the economic recovery. Unfortunately, the public is being fooled because the U.S. stock market and economy is experiencing another classic central bank-driven bubble that will end in a calamity, erasing of trillions dollars of wealth.”
Turns out Jesse is a permabull who’s made bubbles into a growth industry. For a decade he’s been hammering away at warning people about an economic and financial market smoky hole which has yet to materialize. It seemed reasonable to recall his failed words when arguing on this pathetic blog with all the deplorable doomers who show up with their guns, flashlights, Cottonelle, MAGA hats and cans of tuna. Besides, he’s in Texas. Some big Forbes guy. What would he care about GreaterFool?
But, apparently, he reads this blog. Oops.
“This is Jesse Colombo, the “high-falutin’ financial analyst” you recently wrote about and criticized on your blog,” he says. “I tried to post my rebuttal in your comments section of that blog post, but it wouldn’t let me. Please publish my rebuttal in the name of fairness…”
Of course. In fact, Jesse – who has that American jock rockstar Alpha Dog look about him – and I seem to share some common ground when it comes to waving a yellow flag in the face of fools who keep buying stuff just because everybody else is buying stuff.
Here is what he wants you to know about the scary, debt-fueled, gossamer world in which we live.
“You completely ignored the specific conditions that I said would pop the bubble,” he argues. “Rising interest rates. As I wrote in that article you quoted…
Scenario #1: After several more years of the bubble-driven economic recovery, the Fed has a “Mission Accomplished” moment and eventually increases the Fed Funds rate (after it ends its QE3 program this year), which pops the post-2009 bubbles that were created by simulative monetary conditions in the first place. Rising interest rates are what ended the 2003-7 bubble, which led to the Global Financial Crisis.
“Come on, Garth – an article headline is not a prediction. I listed specific conditions that would cause the bubble to pop in the content of the article. It’s not fair for you to ignore that and distill my entire argument from a headline.
“I explained that this bubble would continue to inflate and grow even riskier as long as interest rates remained at extremely low levels, which is exactly what has happened. I said that the bubbles would finally burst when interest rates rise to a high enough level, which is only starting to happen recently. People are mistaken if they think I was “calling the top” back then.
“I was carrying out my mission – to give early alerts for dangerous bubbles.”
Here’s the interesting part, considering this is a blog that has long warned little beavers not to throw most of their net worth into a single inflated housing asset, since it would inevitably correct. Just as warning about the US real estate bubble years before it blew would have been useful, Jesse says he’s doing the same now about the unsustainable path the Trump-goosed US economic recovery is on.
Calling out a bubble is best before it's a bubble. Duh.
This is not true growth, he says, but the illusion of it – bubbles in housing, tech, stocks, bonds “and U.S. exports to countries that are experiencing bubbles of their own (Canada, China, and emerging markets).”
“It is stressful and challenging enough to be living in a world that has so many dangerous bubbles, but even worse that our fellow man makes it unnecessarily difficult to actually warn about them and prevent the damage they cause. Despite these hurdles that I see in front of me, I intend to do my best to keep warning about bubbles in hope that humanity will finally advance beyond this era of artificial economic booms and subsequent crises.”
Hmm. So I empathize with J. After all, it’s easier for a man who makes his money from investing others’ assets to fudge risks and kibitz clients. The world is full of people who lie. If he truly sees systemic risks, he’s right to call them out. He may be correct, maybe not. So far, pfft. But that’s not distant from what the canine-addicted host of this blog is all about. I’ve spent the last few years telling people they may regret throwing everything they have at one asset and taking on epic debt to do so.
Stocks & bonds bubble or real estate bubble. How are you supposed to deal with this stuff? Should you listen to the warnings and heed, or go with the crowd and chase gains?
The answer will only be clear in the rearview. Meanwhile the best way forward is a common sense one. Buy a house if you need it and can afford it without being buried in debt or blowing all your wealth. Invest in a portfolio that holds safe things as well as growth assets – balanced, diversified and liquid. Have a Plan B. Ignore the extremes. Listen to your gut. Be aggressively conservative.
Be fair.
“Love the blog,” writes Nick, genuflecting deeply. “Been a daily reader for years.”
“It’s been a little while since you’ve delved into asset allocation for new money to invest, and I was wondering if you could touch upon it, given the recent drop in global markets.
“My wife has recently changed employers and has had to take all her workplace investments with her, forced to cash out. She’s got about $75-$100k ready to invest. We are probably going to put it into the recommended balanced portfolio, but were wondering if you think any tweaks to the standard 60/40 are a good idea when buying in today’s somewhat depressed equity markets and increasing interest rate environment. Of course, feel free to use our situation on your blog as I’m sure many others are wondering if the recent events have presented new buying opportunities.”
So, Nick, tell us stuff.
“Married, mid 30s (me 32, she 34), DB pensions at work (hers better than mine), combined salaries of a bit over $200k before bonuses, house worth a little over a million with a mortgage of about half that, investment condo worth about $450k with mortgage of $200k (nets about $8-$9k a year after all taxes/expenses, not amazing the place may also double as our retirement home one day), combined investments of about $300k. No children and no plans to have any (wife wants a dog asap).”
The best time to invest is when you have the money. So why wait? In the sweep of time for two 30-somethings it matters not when you buy securities. But it’s even sweeter when you can do it during a market correction, which is now. Equities have lost about 10% from the highs of late summer, and will like keep on rocking-and-rolling until the midterm slugfest is over next Tuesday night. Following that, it would be reasonable to expect a relief rally. After all, nothing fundamental has changed about the economy, except higher interest rates – and we all knew those were coming.
As for your overall financial picture, $1.4 million in real estate and $300k in liquid assets is not exactly being balanced. Plus you have three-quarters of a million in debt to carry, destined to renew at higher rates in the future. And the condo is cash-flow positive? Nope. Not when you factor in $250,000 of equity which is earning nothing and may even erode steadily as condo values reset. Plus the income gained is taxable at your marginal rate.
Yes, she should invest now in exactly the portfolio this pathetic blog has outlined. Yes, you are doing well. Yes, you could do better. Sell the condo, pay down the house mortgage and get a dog.
Now, here’s Bob, a retired old fart millionaire of the kind Millennials hate. “First off, thanks for your blog. I read it all the time and enjoy your perspective,” he says, earning points. “You’ve taught me a lot over the years. I suspect that you put a lot of time into it.”
You have no idea, Bob. I come here every day to fight deplorables.
“So, a quick question for you. I’m just a dumb old farmer, so I hire gunslingers to handle my finances. These guys have fancy models, fancy suits, and fancy offices. I’m pretty conservative with my retirement plan, about 60% bonds and the rest in equities, mostly US and foreign, maybe 15% Canadian. Bottom line: there’s a few mill to play with, they’ve averaged about 8%. Course, everyone is a genius in a bull market.
“But now things have changed a bit. The Trumpinator has trade wars on his agenda, the US Fed and Bank of Canuck are raising rates, and as a result debt, deficits, and paying bills is more challenging for everyone – even Uncle Sam. In September, my guys told me that they thought the party was going to last for another 18 months or so. Based on what happened to stocks in 2008, I’m not too uncomfortable with a 1/3 drop in the value of my stocks in the next bear market. What’s going to happen to my bond portfolio though? It’s supposed to be high quality stuff and have laddered maturities. Do you think the bond prices will compensate for the change in yield over time? Or should I get out bonds completely for the next few years?
“The little devil sitting on my left shoulder is telling me to fire my experts, sell all the stocks and bonds – then just buy a triple short S&P500 ETF and hang on for the ride. The little angel on my right shoulder is sayin that October is always a looney month, hang in there, and go suck martoonies on a warm beach somewhere cuz life is just too short to worry about mundane, unimportant things like money.”
Listen to the angel, Bob. Using big leverage to short the US index has the potential to put you back in the piggery shoveling slop. Interest rates will rise until they hit ‘neutral’ in the view of the central bank – about 1% more. This was evident a long time ago, so your suits hopefully got you into a mess of short-duration bonds which are not much impacted by rising rates. Longer bonds, of course, have been creamed. Prices move in the opposite direction to rates. Yields up, bond value down. Having two-thirds of your money parked there is excessive. So, yeah, you should get the smart guys to review them and justify the holdings. Laddering maturities is not such a hot idea. Did they explain that?
As for October, it traditionally brings increased volatility, nervousness and calls to the inner Chicken Little most people harbour. It’s all been accentuated by the Trump Referendum on November 6, and the same rising rates which have trashed your bonds. The bottom line seems simple. You are old. And rich. And clearly worthy of moister disgust. So just spend it all.
Finally, a few people have been asking about preferred shares which are supposed to rise in value when rates fall, providing some protection against what just happened to Bob’s bonds. So why have pref ETFs like CPD been falling?
Here is the word from my PM buddy, Ryan (of the yellow Porsche):
Definitely an overreaction. I think it’s a combination of a few factors. First, and most importantly is the current recent risk-off environment. With stocks down over 10% in the last few weeks, prefs being the next most risky are down as well. We’ve seen a small widening of credit spreads in the bond markets which captures this current risk-off environment (but nothing significant which supports our still positive view and our expectation for a bottom soon). Second, is we’ve seen increased issuance from the banks over the last few weeks so this is repricing the market. Third, there could be some tax loss selling. I’ve found that when prefs are down in the year you see lots of selling late in the year (generally in late Nov/Dec) to take advantage of tax loss selling. While these are good reasons prefs are down, I do believe it’s just irrational selling and will bottom soon. My favourite pref blog feels the same:
“Due to the retail nature of preferred share investors, the sector is prone to episodes like this, in which the market behaves irrationally for a while until people take a deep breath and look at the comparable after-tax yields. I just wish there was some way of predicting the outbreak and duration of such events!”
This chart of CPD shows how aggressive the selling has been and how deeply oversold the pref market is. We should stabilize soon, barring a recession, which we believe is remote over the next 9-12 months.
About the picture...
Alexa writes: “I’m reaching your today because not only do we enjoy reading updates on the housing market each day, we love seeing a new dog picture. I realize this may not be a standard e-mail you receive but it would mean so much if you could use one of the dog photos attached in an upcoming post. Daisy was my partner’s dog who unexpectedly passed away earlier this year at his 30th birthday while we were celebrating with friends & family. It was devastating, but we think of her constantly. I just know it would mean so much to him if he opened your blog one day and saw her picture. I’ve attached a few for you to choose from should you allow Daisy to be featured on your blog one day. Keep up the amazing work – it’s a breath of fresh air.”
Here’s to you, Daisy.
