2016-08-20
It seems there are a large number of Humongous Investors like George Soros, Bill Gross, Stanley Druckenmiller, Paul Singer and Carl Icahn, who are trying to talk the market down. Many of them offer compelling reasons for selling. Maybe they are right. My question is, why do they have to tell people? Have they already sold and are now in cash awaiting the drop in prices that they are broadcasting is about to happen?
This June 21 article does indicate the real concern is negative interest rates. The world has never before encountered such a situation. The offset there is to over-weight Goldminers, as I have and Soros says he’s doing.
My argument to those who believe that Price-Earnings multiples are too high is that interest rates have never been so low. If rates bounce, the bond market drops, so there is real risk in bonds today, which is pushing new money into equities. As earnings increases are not being accommodative, that means Prices have to lift on account of what we call Multiples Expansion. I see it happening today with much more to come. But what is the alternative to equities?
Other than precious metal bullion, which is really not an easily tradeable investment, I don’t see much. It can’t be real estate, which is already well over-priced. For example, in a less expensive neighbourhood but close to where I grew up, today’s newspaper shows a small 1278 sq.ft. totally unremarkable house that had been listed for $839,000, an outrageous price, actually sold in eight days for $1.152 million. What is the value of anything these days when money earns virtually nothing?
Should central bankers around the world decide that raising rates is in the best interest of their respective national economies, that action will crash equity prices as well as bond prices. That would severely damage government budgets, which are already stressed. I don’t see a single one that is in good financial shape. Moreover, the money center banks that hold humongous margin account positions would fail and the global financial crisis of 2008 would be a small one in comparison to the next crash. There would soon be a global depression.
So the key Central Bankers and Finance Ministers have a problem. They have to lie to the people that their economies are in great shape, the government coffers are full, and that rates are going up, but slowly, when we know they’re not.
My answer, as before, is to buy Goldminers and Value stocks among the non-Goldminers. Chasing high PE stocks higher is a mug’s game, i.e., one you are likely to lose. But there are many industries whose average PE is still fairly low and the treasuries of these companies in very good shape. In tough economic times, it’s the bad companies that fail, and the good ones, the ones I call Quality, carry on.
These are interesting times for sure, but one where I continue to believe that equity prices (and risk levels) are going higher. I don’t think it possible for the hand-holding bankers and government leaders to change course now and bring the world’s financial system to ruin.
On a personal note, our daughter Stefanie is soon on her way with husband Jonathan to live and work in his hometown of Victoria BC, a city continuously named as Canada’s most liveable. Every parent would have mixed feelings. On the other hand, Pat and I intend to do something about it. We decided to maybe downsize our summer home in Toronto, living aboard Time&Space, and buy a smaller or different style one for here, where Will, Fiona, Caitlin and Owen reside, and one for Victoria as well, where the cruising waters are incredible. We also plan to spend time at our home in Havana, which is so upbeat these days.
When you work as intensely as I do, I need an offset, and that happens with the boating lifestyle. For those who might be interested, here is the listing link: http://tinyurl.com/zsmvvct. In May and June this year, we spent a small fortune in upgrades for the boat, and we doubled the insurance policy, thinking we were going to keep our Time&Space forever. Believing that money is widely available these days, I wanted the price set above $400,000, but decided to take the broker’s advice. After all, he’s the one selling it. If it doesn’t get sold this year, we’ll probably keep it next year and for many years. After all, those who have visited us can attest to the fact that we are in a park setting in the harbour overlooking the financial district of Toronto.
Also, on a personal note, in today’s Toronto Star, a travel writer featured our best friend in Cuba, Zenaida Romeu of Camerata Romeu. https://www.thestar.com/life/travel/2016/08/20/art-and-music-take-centre-stage-in-havana.html I have written about Zenaida a few times in the blog. If you are going to visit Havana, you cannot go wrong with an afternoon or evening of Camerata Romeu. You’ll come home raving about the experience. Send me a note and I’ll get a schedule of her upcoming concerts.
Interesting days coming up in the market. I will try to write about them every day in the comments section.
