Juggling Dynamite

We have to wonder how much more pain and suffering the masses will tolerate to keep subsidizing the reckless and unethical.  Is there anyone alive who still doesn’t understand the direct connection here?  When the coming bear market unveils the extent of the damage once more,  the next test of the status quo will be at hand.

The financial crisis really began 10 years ago this month.

The American people have not forgotten the unimaginable costs they still face to this day.pic.twitter.com/0y9AJuevU0

— Better Markets (@BetterMarkets) September 25, 2018

The financial world is a complex and dangerous place for those who don’t know what they are looking at.  Some valuable historical perspective is offered in this segment.

Clarity Financial Chief Financial Strategist Lance Roberts reviews the history of stock valuations, the CAPE, and how what happened in the early ’90’s is relevant to investors of the twenty-teens. Here is a direct video clip.

Paid to help sell complex risk products and/or collect fees on them, most finance workers and experts have little reason to acknowledge real-life return facts.  And buyers who rely on the industry’s glossy charts and jargon are dupes indeed.  The mathematical truths are these:

• While the US stock market has been the best performing in the world since inception, a buy and hold equity portfolio has only produced positive compound real returns over five short periods since 1900, being 1926-1929 (before crashing 84%), 1960-1968 (before crashing over 50%), 1990-2000 (before crashing over 50%), and 2016 to present (before ?). 
• For all other holding periods–the vast majority of the time–investors were waiting to try and make back their principle.  Most gave up repeatedly, cashing out near lows, and locking in permanent losses.
  
• Even if owners did not blink as their savings tanked in bear markets but continued holding, the total annual return, adjusted for inflation, over the last 18.5 has been 1.46% a year– with all the central bank intervention and financial ‘rescues’–and even unrealistically assuming that every single dividend was reinvested, no income withdrawn, and no fees ever paid.
• On a risk-adjusted basis-which takes into account the negative skew and volatility that stockholders endured to pick up that measly 1.46% annualized nickel in front of steamrollers,  guaranteed deposits and government treasuries have handsomely out-performed equity products.
  
• Moreover, they are priced to do so for the foreseeable future as well, since corporate securities (stocks and credit) are once more valued for steep losses from current levels.
• So, yes, as Lance points out in the clip above, one can resist facts, and stay in stocks at record valuations for fear of missing out, but the bets aren’t rational and the return prospects are grim.  So, what’s the point of this ‘investing’ thing again?
• Staying out of heinously-valued markets in favor of more secure deposits, while preparing buy lists so that we can capitalize on equities when others are selling in panic and return prospects favorable?  That’s an investment plan worth executing.
• It’s in our best interests to vary exposure to market cycles depending on risk and reward prospects and our own lifeline. The most critical part of the exercise is to avoid assets that are priced for return-free risk.  If we fail at that, we fail miserably.
  
• I have explained the disappointment that Warren Buffett has become several times in the past 20 years, for a recap see: Why Buffett won’t warn that stocks are in a bubble.

If Canadians had practiced prudent debt-avoidance guidelines the past decade (and been counseled by banks and other financial advis0rs to do so)  they would be better drown-proofed and resilient coming into the rising rate, economic downturn part of this cycle. Unfortunately, many did the opposite, and so are learning hard lessons once more. Next, the coming job loss wave will hit the undersaved and indebted like a tsunami.

Scott Terrio, manager of the consumer insolvency at Hoyes, Michalos & Associates, joins BNN Bloomberg to discuss debt traps in a rising rate environment. Here is a direct video link.