As we head into the new year, three primary themes will need to be monitored and addressed from a wealth building (and mainly a wealth preservation) perspective. Over the coming weeks, months, and quarters, we’ll be spending more time on each of them and ensuring you are aware of the facts behind each of these themes and how they will impact wealth across America.
Extremely Over-Valued Asset Prices
Stocks, bonds, commercial real estate, structured products, private equity. You name the asset, and the prices and values of those assets are at extreme levels based upon historical metrics. Equity prices (the stock market) is at levels that can only be compared to a few times in the past 130 years;
- Leading up to the peak in 1929 and the subsequent crash that led to the Great Depression.
- Leading up to the peak in 1999 and the subsequent .com and technology bubble.
- Leading up to the peak in 2007 and the subsequent global economic meltdown.
It should be noted that on some metrics, we have already surpassed the peak levels in those past extreme environments. I often remind clients that one of the key components to a financial bubble is the underlying belief by the masses that there isn’t a financial bubble and that prices can (and are) justified by any and all means necessary for people to jump on the speculative bandwagons.
Financial markets can stray from averages for extended periods of time. But prices eventually reflect the underlying profits of the businesses. Hence, the price you pay is the ultimate predictor of success over the long run. If you over-pay for anything; a house, a car, a business, a stock, your future rate of return will be impacted. Investors are paying record prices with the belief that prices paid don’t matter. They will learn a hard lesson (again) but that is why cycles have and always will be a part of market history.
The important takeaway from extreme valuations is that in the few times in market history that levels have been like the current levels, major and catastrophic investor losses have followed for those that failed to take the warnings seriously.
Runaway Health Care Costs
As we all work hard to generate income, save consistently, and invest prudently, it often takes long work hours, sacrifice, shifting priorities and increased stress levels. It is now becoming apparently clear that one of the biggest risks to a well-laid-out wealth plan is sickness and health problems related to chronic diseases and other avoidable health issues.
I am seeing more and more cases of people working extremely hard to build their wealth only to have to use that wealth on healthcare costs and expenses that were the result of chasing the wealth in the first place.
Healthcare costs are soaring. The costs of treatments, the underlying insurance, and the lost opportunity costs of being unhealthy are major impediments to preserving wealth. If you aren’t healthy, none of the wealth matters. If you can’t build wealth without maintaining (or improving) your health, you are traveling down a dead-end road.
If you aren’t prioritizing your health along this journey, that often ends with a mountain of regret both financially and physically.
Unsustainable Debt Levels
Underneath rising asset prices like stocks and real estate are mountains of debt that have grown tremendously over just the past few years. Sovereign debts are at levels that are difficult to comprehend for the normal person (trillions upon trillions). But beyond the debts of governments lie bigger debt problems and those are the debt levels taken on by corporations and individuals.
Corporate debt levels are at all-time highs as companies raced to borrow money at low interest rates. Those same companies didn’t invest the money into the future of their enterprises but rather spent the proceeds issuing dividends, paying executive compensation, and buying back shares. Now thousands of companies are straddled with debts that must be managed into the future (plus interest).
Household debts are over-whelming many consumers;
- Auto loan debts are not only at all time high’s over $1 trillion dollars, but sub-prime loan delinquency rates are rising at rates that are like those seen prior to recessions.
- Student loan debts and defaults have strangled many young adults before their careers have even started. With student loan debts now around $1.4 trillion dollars and default rates becoming a problem, it’s no secret why record levels of young adults are still living in their parent’s basement or still dependent on Mom and Dad.
- Credit card debt levels are now back at record levels and are over $1 trillion dollars with default rates increasing.
As we look at the numbers underneath the economic health of the world, what becomes apparent is that the only thing that is growing at an impressive rate are the debts of the world.
If you don’t have a legit plan to reduce and eliminate your debts in a timely manner, there is no better time to start than right now in early 2018.
And for those, excited and optimistic about equity prices and the stock market, you should know this, margin debt (stocks bought on borrowed money) is at the highest level in market history. Margin debt in stock market accounts has increased by $146 Billion since February 2016 and now stands at over $580 Billion. Stock prices are being boosted and elevated by other investors speculating with borrowed money.
It’s a lot of fun to make money on money that isn’t even yours to begin with. It’s not a lot of fun when prices start to decline. In those instances, you are not only losing money on borrowed money, but you must pay back the loans with interest. When people borrow to buy stocks when prices are increasing, they are the same folks who are forced to sell when prices start to decline because they lack the funds to cover the losses and the interest. These are not long-term investors piling into the markets. They are short-term speculators.
The world is currently living during extreme times. Extreme politics, extreme valuations, extreme debt levels. Cycles are part of life. Protect yourself. Don’t get suckered into taking foolish risks. Keep your emotions in check (which is very hard to do when money is being flashed all around you). Be a student of history. Stick to proven principles of success. Realize that sometimes things feel safe when “everybody else is doing something.” That doesn’t make it ok, that only makes it riskier. There is often delusion within the crowds. Every bubble in the past only occurred because of the madness and delusions of the masses. If you want average results, do what everybody else is doing. But look around, the average person is really struggling to keep their head above water (unless you are following them on social media of course). You will not want average results during the second half of this cycle.
The Great News About Extreme Markets
The beauty of extremes is that it makes it that much easier to see the inevitable and avoid the impending damage. Your wealth over the long-term will benefit in two important ways; First, you will avoid the extreme losses when extreme valuations reset. Second, you will have the capital to buy good investments at good prices once the deleveraging process begins and those with mountains of debt will have to pay for their sins yet again.
Prudent investing is about buying quality investments at good prices (People forget this basic premise during bubbles.) You have a long life ahead of you and will go through many cycles during your lifetime. Keep things in perspective and you will see your wealth grow and will also be protected appropriately during risky times.
“A fool and his money are always separated.”
If you have questions or want to talk markets, feel free to email or call me. Stay tuned for more in-depth looks at the three themes for 2018. Stay on your toes, be aware of the major risks that are present and execute on the principles of wealth. We are in times where preserving wealth will become far more important than other desires.