Juggling Dynamite

The financial press loves to flog viewers with bullish quotations at all times, but especially from Warren Buffett, and especially near cycle tops when valuations are the least attractive for investment.  See a detailed discussion in the recent article Warren Buffett is a hypocrite.

I last touched on this topic in a May 2018 article ‘Buffett indicator’ screaming ‘fire’ to risk-blind stockholders, to wit:

In recent years, I have written a few times about Why Buffett won’t warn that stocks are in a bubble. With more than $700 billion in assets under management, and positions too huge to move out of easily, Buffett’s fund has become synonymous with buy and hold, long-always stock holdings, that move up and down largely in lock step with the S&P 500.

Trouble is that since 1998 we have been moving through a secular bear market born of the highest valuations and worst investment return prospects in decades of market history.  And valuations are the most definitive factor in determining future returns.  Case in point, Berkshire Hathaway shares lost half of their market value in both of the last two bear markets along with the broad markets, and spent five+ years thereafter, just waiting to grow capital back to even.

The latest Berkshire’s shareholders’ annual meeting extravaganza held on May 5 attracted the usual media scrum with lots of hopeful hype about stock returns looking forward. The inconvenient truth however, is that on every metric, including Buffett’s self-named favorite valuation tool–being the total market capitalization of US stocks divided by US GDP (shown below since 1950)–stocks are screaming capital loss prospects, higher than in 2008 and nearly as high as the tech bubble top in 2000

Right on cue, after rising on QE flows into January 2018, Berkshire shares topped and are down nearly 5% over the past 19 months and counting.

The question for holders is how many years will it take to grow back principle after the full bear market has run its course, and how many will be able to hold on without liquidiating in losses in order to sleep at night or pay their bills.

At 86, and a billionaire, Buffett has more money than he can use.  Most others are not as old and certainly not as wealthy.  We cannot afford to do what Buffet says with our retirement savings.

Funny thing about low and negative yields on savings…they make people save more and spend less, which slows the economy, which makes central banks try to lower rates more, which makes people need to save more and spend less…which slows the economy more.

At the same time, savers, pensions, insurance companies and other critical institutions get sucked further and further down the capital risk hole into more and more illiquid bets trying to reach for higher yields which then blows big chunks off the capital in downturns, which then forces higher contributions, more savings and/or restructuring to pay out less…which causes people to cut back spending, which slows the economy further and spreads instability.  See Pension world reels from ‘financial vandalism’ of falling yields:

The plunge in yields risks spawning a vicious circle for the industry. The squeeze on returns tends to widen funding gaps, forcing managers or employers to inject more cash into the plans. That’s money which could have otherwise been used to fuel business or consumption so economic growth may take a hit — boosting calls for even more monetary easing.

The only way out is less debt and lower asset prices which will then come with investment-worthy higher yields.  In the meantime, working longer, spending less, saving more and avoiding over-priced assets are the best course to survive and thrive through this unprecedented time-for-the history-books.

Food banks started in the late 1960’s as a stop-gap charity to help poor people make ends meet and get through periods of unemployment.  As wage gains stagnated over the last 30 years, debt levels rose and food bank use by working people has steadily climbed in many countries including North America–especially since the 2008 recession.  Now the debt-inflated cost of shelter means a growing number of working people are unable to feed their families while paying their mortgage.

Hoping to curb rising defaults, major banks in Australia recently approached Foodbank South Australia wanting to refer customers in need of food to the charity, in the hope it will prevent more of them from falling behind on their mortgage payments. This is an unsustainable system.  Lower shelter prices, less household debt and higher income levels are all part of the solutions needed. See Banks are now referring people to Foodbank to help them pay their mortgage:

It comes as a new report has shown mental distress is increasing in older Australians, with nearly half of all homeowners aged 55 to 64 still paying off a mortgage — up from just 14 per cent 30 years ago.

Foodbank South Australia is now working on a new agreement which would enable clients to access its food services directly, with a voucher funded by the major bank.