On the eve of “the vote”, I thought we should possibly step back and recognize again what is not happening. Though we have repeatedly been witness to multiple reasons to fear the future, those dire outcomes simply have not arrived. Now, I know that this could drive a “they haven’t happened yet bozo” type of response and I get that – I do.
To carry one step further, I hope Brexit does happen. I think it would be fantastic. But I have a hunch it will not be voted as such tomorrow. Further, if it does happen, I suggest we be prepared to take advantage of any carnage in the aftermath as it is yet one more sideshow event to the larger picture unfolding for us all.
Often when I send along these notes I sort of cringe at the idea they can be perceived as “predictions” which are nothing more than a flip of the coin. We all know the many experts who “called the 2008-2009 crisis” – not enough know they had been calling it since 2001.
My point? Well, Yogi said it best:
“It’s tough to make predictions, especially about the future.”
It is not surprising to me that our airwaves are filled with many very smart people making predictions. What does surprise me is that we still believe the next prediction in earnest, even after so many have repeatedly been missed before it.
So, please do not think of our work as a prediction. All we try to focus on is the basics – and oddly enough, focusing on the basics puts you at the proper location in the future far more often than all the fancy nuances too many get lost in today. I know – it’s boring. I get that too. But it works.
Like it or not, the most fundamental aspect of a business and its future value is simpler than most want to recognize: a) How big is your market for the services you offer?, and b) is that audience getting larger or smaller?
I don’t mean to be repetitive but that is the basic starting point foundation of all potential future value.
I suspect it is the main driver in making the Barbell Economy portfolios we openly provide to members consistently more productive than the averages. Remember this: While I get the whole asset allocation process many investors are taught, it reminds me of the Morningstar “boxes”.
One can often diversify themselves into mediocrity.
If we can see that 70,000,000 people are likely to travel through different doorways at different stages of life, that’s extremely valuable. We don’t need every one of them to do the exact same thing but as a mass moving in the same direction, a solid theory can be had that value is likely to be found if you offer XYZ services/products/widgets, etc.
I like the way Ken puts it –
There are three kinds of people in the world, those who can count and those who can’t.
The Other Thing About Predictions…
It is seemingly lost on the audience as to just how badly we are collectively at defining what we should expect. How many times do we need to ride the roller-coaster of fear mongering to understand it’s just a flat out bad ride?
I read a piece yesterday titled “The 3 Black Swans that Could Destroy the Markets”. Now look, the title alone should make you aware that the writer does not entirely understand what a Black Swan is or why it is called same. Second, take a gander at what the three Black Swans are:
No One Winning Enough Electoral Votes to Become President
It is amazing how much nonsense is created for consumption these days. Before we get on to some more important charts, recall that Peter Lynch was well before his time when he stated:
“Far more money has been lost by investors preparing for corrections than has ever been lost in the corrections themselves.”
That my friends is the cost of fear. It’s expensive and things to fear will never end.
Speaking of Fear
There are a number of very bright people on the airwaves in recent months telling us repeatedly that the future cannot possibly be as good as the past. There has just been too much improvement, too much advance, too much supply and on and on and on.
We are told the massive hurdles we face will surely lead to much lower returns in the financial markets and a decreased standard of living. We are warned that wealth inequality will continue to widen the gap between the haves and have-nots, creating even more ammunition for coming disasters.
It’s easy to get sucked into this line of thinking. Often, when presenting the data, the PhDs have complex models and a narrative to back up their claims. In an uncertain future, sometimes it’s easy to default to a pessimistic view on where things are heading – because heck, it just sounds smarter.
But what if just the opposite is true?
Ponder This With Me
First, we have never had this big a generation of people getting ready to barrel into the US economy. The implications of this massive shift are being completely misunderstood by many – just as they were in the late 70’s/early 80’s.
That being said though, other very effective changes are underway as we speak. Our “Tectonic Shifts” report back in late 2013 on energy has come to pass. OPEC knows, the Saudi’s know it and the market knows it. We are unlikely to face the energy squeezes we have in the past. Take a look:
The cost of our energy consumption as a nation (as a percent of income) is now lower than we have ever seen.
Factor in what Gen Y engineers are likely to do with solar, battery and wind energy to power things like houses, cars, planes and factories — which has just barely begun — and the economic surprises could be, well positive.
Then reconsider the household balance sheet. We noted last week in your notes the new record highs in per capita net worth. The chart above takes this a little bit further and adds even more value to the $8.3 trillion sitting in consumer bank accounts earning zilch.
Household debt has undergone two major peaks, one during the late 1980s after the Oct/’87 market crash and early 90’s recession and another beginning in 2007.
After debt peaks and households become too stretched, they spend a period paying off and defaulting on debt, which significantly hampers those looking for constantly improving consumer spending habits.
Most of the reason the early 1990s and the late 2000s were so awful economically was that households were paying off past debts, rather than supporting current businesses with their spending. The latter period was further hampered by Gen X, a generation too small to keep the ball rolling as well as the baby boomers were able.
But so much debt has been washed away in the last seven years that household debt payments are now at their lowest level in 35 years! You don’t hear that anywhere in the press.
This puts households in a position of health the likes of which has not been seen for decades. They can now safely take on debt in a way that won’t stretch them too thin….when fear recedes.
Keep in mind, there is never a time when households pay off their debts and stay there; everything is a pendulum between the boom of building up debt and the pain of paying it back.
In all the mess we have meandered though since 2008, we are now at a point where the likely trajectory of debt is up, by a lot and for a while, which wasn’t true for a lot of the last 30 years.
The Great Unknown
We come full circle today – back to the future. It’s what we are all scared of…when that fear recedes, our markets are set to explode.
How will the market react to rising interest rates? Well, many may not recall this but rates surged from 1954 to 1969, from about 0 to 10%. Rather than hurting the market as so many are terrified of today, stock returns were blisteringly strong — about 12% a year after inflation.
Inflation rose considerably from 2002 to 2007, but stock returns were excellent.
The one thing we can count with some confidence is people.
Millions and millions of them will grow up soon – here in the US.
Tens of millions of new households will be in demand.
Massive new technology shifts are underway.
To think we can predict just how much surprising strength Gen Y will create in our economy as the smartest, most technologically savvy generation to ever grow up is foolishness.
However, to think it is all dark and cannot succeed is equally foolish.
Mindset shifts are needed dead ahead.
I repeat: we must recognize the current underneath and not the surface of the water.
The Barbell Economy is moving forward very steadily and productively (see above). It is the struggle to adapt which is holding too many others back.
We have FedEx’d our economic pipeline to work hard to de-risk the option of another ’08/’09.
We have done such a good job of hedging that we have missed the one thing we cannot fathom given the harsh cloak of fear:
An explosive wave of growth and demand driven by our demographics – for the next couple decades.
Fear drives your attention.
People Drive Markets.
Until we see you again, may your journey be grand and your legacy significant.