You and I didn’t feel it but there was a 6.4 magnitude earthquake at the IMF annual meetings in Bali, where “global finance chiefs spent the week assessing the tremors now ripping through the world economy,” Bloomberg reported October 15, 2018.
PIMCO’s global economic adviser, Joachim Fels left the resort saying, the quake “was symbolic for the widespread feeling among participants that the ground under the global economy, financial markets, and the multilateral trading system has started to shift.”
Christine Lagarde, IMF Managing Director observed that U.S. stock valuations have gotten “extremely high” which attendees considered an implication a correction was overdue.
Indonesian President Joko Widodo declared, “Winter is coming.”
Former Federal Reserve Chairman Alan Greenspan became famous for his speech at the American Enterprise Institute on “Irrational exuberance.” Here are three things that makes Greenspan’s market implication extremely interesting. First, notice the date of that speech is December 5, 1996 submits realclearmarkets.com. Second, you and I can recall that the DOW and the S&P 500 doubled in the last five years from 1995-2000. Third, the NASDAQ quadrupled during the same time frame, according to Yahoo Finance.
I call Greenspan the canary in a long coal mine because it took about four years for the thought that came to him “in the bathtub one morning” to show up as I recall in the headlines starting about February, 2000. By 2002, the DOW and S&P 500 were off about 50%, while the NASDAQ tech stocks were off about 80%, according to Yahoo Finance.
Back in the good ‘ole USA, Steven Mnuchin, U.S. Treasury Secretary, didn’t find the sell-off “particularly surprising” as he advocated this country’s economic fundamentals remain strong. Meanwhile, President Donald Trump threw the “loco” Federal Reserve under the bus because of the interest rate increases.
Now a decade after the Lehman Brothers collapse (which had been in business about 168 years; source history.com) policymakers looked at the risks of another financial crisis. “Financial imbalances continue to build up, and the new financial system has yet to be tested,” said Tobias Adman, head of the IMF’s monetary and capital markets department reported Bloomberg.
Three sectors have driven over 85% of returns, year-to-date September 30, 2018, according to Keith Stempel, regional consultant AssetMark, in a meeting for financial advisors, October 18, 2018. Stempel went on to say that five stocks have led the overall markets. The five stocks share the highest valuation AND the most leverage.
I turned to my friend, economist Lacy Hunt, Ph.D., who in my opinion would have made an excellent Fed Chairman is executive vice president, Hoisington Management Co., a firm that manages over $4 billion to help us separate the news from the noise. Here’s what I learned in my October 17, 2018 conversation.
Hunt went on to say, “The demographics are deteriorating in the U.S. and it is worse elsewhere. Global population is 1.25% growth per year and is moving steadily lower over the next 100 years. Technology will offset some of the loss of population, but recognize it’s not the immigrants who are taking jobs, it’s technology. In the meantime, thanks to the FED, debt is undermining growth. What’s more, the FED has become the world’s de facto central bank. Various forms of quantitative easing consequences of the FED allowed the rest of the world to become overly indebted. Restrictive monetary policies are hitting the world first, but we are in line. Ultimately we can’t control the world with 23-24% of the world’s Gross Domestic Policy. We’re just not that important anymore.”
If you and your family are prepared for an earthquake or a hurricane, odds are you will live to tell your story. By analogy, please reflect on the photo at the top here where the elevated house called by the owners Sand Palace appears to be the only house unscathed after Category 4 Hurricane Michael blew through Mexico Beach. Fla.
You might call it a miracle. I will say, that’s the easy answer. When we dig deeper, we discover that with 40-foot pilings buried into the ground at a cost that roughly doubles the cost per square foot, compared with ordinary building practices, the house was built for 250 mph winds, according to the owner’s architect in the New York Times, October 14, 2018.
According to me, now is the time to prepare for the good, the bad, and the unforeseen. Here’s my 5 step process to prepare for Winter. No matter which quarter Winter suddenly appears.
- Pay down or pay off all credit card debt.
- Apply what you learned from ‘Hurricane Credit Crisis in 2008.” Must you repeat the past? Take the time to see what happened to your life savings in the past (200-02 & 2008-09).
- Use technology to ascertain how much loss you are willing to accept.
- For all liquid accounts look for companies that put to use on your behalf customized portfolios that may perform within your risk of loss parameters.
- If you are working now, determine what your specific financial goal is that you need to reach to make work optional. If you are retired, identify what your portfolio needs to be to maintain your lifestyle. In both cases, look for software that can help figure out what is your acceptable probability for success.
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