Fear Mongering!

Okay, stop the presses. Sorry, that’s pretty old school with regard to news releases; maybe we should have started with stop the tweets or ask Siri to predict the market closing levels in 2018 with the botz run by artificial intelligence!?

As we review the current landscape, we are hearing more chatter or noise that needs some addressing.  First, let’s admit that none of us are clairvoyant and can pick the top of this market with any more certainty than anyone else.  However true this is, many people will attempt to extol their genius once it finally happens – a market correction that is…

So where are we today?

One data point we can look at is margin debt.  Margin debt is simply an aggregate of how much investors borrow to invest in stocks. This can be interpreted several ways, a simple analogy is: how big the credit card balance is.  The chart below tells the story as articulated in billions of dollars.  We have overlaid the last two big recessions, for some context.  One will note that at each recession point margin debt declined – in some cases, dramatically.

  

Source: VIP Wealth Solutions and Bloomberg

Another data point is the Housing Affordability Index.  Generally speaking, housing prices have been a great benefactor of cheap money.  This index is published monthly by the National Association of Realtors.  A value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home.  An index above 100 signifies that a family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20 percent down payment and a qualifying ratio of 25 percent. For example, a composite HAI of 120.0 means a family earning the median family income has 120% of the income necessary to qualify for a conventional loan covering 80 percent of a median-priced existing single-family home.

Where are we today? Things are getting more expensive. The chart below shows the index creeping down from above 200 to the recent data release of 148.90.

   

Source: VIP Wealth Solutions and Bloomberg

Diversification Skis or Bikes or Skis and Bikes?

Most bikes shops offer great inventories of some awesome bikes. They get their new bikes in during the late fall and early winter and sell them all summer and flog the last of the inventory in late fall. Yet, they hardly sell any in the winter. Conversely, ski shops do something of the opposite, with most of their sales coming in the winter. What some (many) stores have done is rotate from winter to summer gear to maintain their revenue and manage inventory. What this does is smooth out the revenue line of the store like so:

Source: VIP Wealth Solutions and Bloomberg

This approach to inventory and sales management is not magic - it's just simply understanding the seasonality that allows a business owner to want a smoother cash flow so they don’t have to reduce staff.    Building a lower risk portfolio is in the same framework.   We don’t want to get too deep into the asset allocation theory of the current marketplace, but investors know why we don’t own a boatload of energy companies all the time, or for that matter a boatload of ski companies! :)

There is one thing the store owner is almost never going to do! They are not going to close the doors and turn off all the energy, fire the staff and wait for the next great bike or ski season to arrive and reopen. The store owner knows that there will be times of fewer customers and some years they may need cheaper, more affordable bikes because of a depressed economy.  The store owner also knows that sometimes they will sell custom-made boards for the snow season that are more or less for those looking to just spend money on the greatest lines they can find. Remember, the store owner will stay in business and keep diversifying their approach to meet their local market conditions.

Gold or Bitcoins?

Historically, there was a theory that basically suggested that holding gold was a hedge against paper money.  If paper money was devalued then gold would maintain the store of wealth.  Has this theory changed with the entry of alternative currencies like Bitcoins?  Are bitcoin entries into the wallets of investors similar to Air BNB entering the domain once dominated by the hotel industry.  What about Uber or Lyft rideshare entry into the Taxi industry?  Are bitcoins a disruptive technology that replaces the wealth effect associated with gold?

In the expansion of cryptocurrencies like bitcoins, one must understand first the underlying infrastructure or technology that is required to mine an ICO.  The simplest and most entertaining analogy we have heard is that the energy utilized to mine one bitcoin transaction is equivalent to the energy required to do 200 loads of laundry. That’s a lot of dirty jeans... 

For the record, we won’t likely know the displacement truth of bitcoins versus gold for about 10 years.

Bubbles are starting – and they may or may not stop inflating!

One thing that we see for sure and for certain is that trees do not grow to the sky forever. What this means is that somewhere in the future the markets will take a rest and allow for some rethinking and retooling. When? That is now the trillion dollar question.

 

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