Juggling Dynamite

While stock markets end January at new cycle highs and record hyper valuations, John Hussman’s February missive is worth a little mull for thinking minds.  Here’s a snippet:

“Understand this. The more glorious this bubble becomes in hindsight, the more dismal future investment returns become in foresight. The higher the price investors pay for a set of future cash flows, the lower the return they will enjoy over time.

…if market valuations, which are presently about triple their historical norms on the most reliable measures, simply move to double their historical norms a decade from today, the implied 10-year annual total return for the S&P 500 would be roughly (1.036)*(2/3)^(1/10)-1+.02 = 1.48% annually.

Simply touching the historical norm – not even reaching historically undervalued levels – would imply a 10-year annual total return for the S&P 500 of roughly (1.036)*(1/3)^(1/10)-1+.02 = -5.18% annually.

Whatever they’re doing, it’s not “investment.”

Jim Cramer’s comments on CNBC this morning are a mainstream acknowledgement of a secular shift which we have noted for some time now.  The investment ‘belief’ phase in fossil fuel companies has turned.

“I’m done with fossil fuels. They’re done,” @MadMoneyOnCNBC‘s @JimCramer says after oil giants Exxon Mobil and Chevron reported Q4 earnings this morning. “We’re in the death knell phase.” https://t.co/rdcmoeRGMB pic.twitter.com/yl8iP7hpMi

— CNBC (@CNBC) January 31, 2020

As noted by IEEFA analysts last year, the sector valuation has fallen significantly from 29% in 1980 to just 5% of the S&P 500 market cap today, so it is not that difficult for US-focused money managers and fiduciaries to reallocate 5% of their investment portfolio compared with when it was 29%.

Unfortunately, this is not the case for Canadian-based funds and managers, since the oil and gas sector remains more than 16% of the TSX composite weight today, and international divestment flows represent concentrated selling pressure for the overall Canadian stock market.

The last thirty years of increasingly more reckless financial policies, behaviours and capital allocations have come at a bad time for baby boomers.

Low savings rates, boom-bust asset cycles, expensive housing, fewer guaranteed pensions, low yields and rising insurance costs, along with cash-strapped kids–all have made finances tighter than hoped, for most.

Now aged 55 to 75 years old, all are nearing the age when most were expected to retire and within the final 1 to 3 decades of their expected lifespans.  Financial loss-tolerance is low and time is of the essence.

For the economy overall, this suggests lower spending from the consumption sector that has driven about 60% of Canadian GDP over the last decade.  Capital investment from business and government will need to pick up slack with a focus on improving the efficiency and productivity of resources so the population can spend less and benefit more.

Rick Lowes RBC’s VP of Retirement Strategy discusses with Financial Post’s Larysa Harapyn. Here is a direct video link..