Top Three Videos – September 10, 2023

Quick Summary Bullets:

Timing the Market and Investor Behavior

• Despite macro reasons for pessimism, the market can delay a major correction for a long time, allowing investors to participate in the rally.
• Bear markets tend to be short-lived, lasting around 12 to 18 months, while corrections within a bullish trend are fast and the market quickly recovers back to all-time highs.
• “There’s a huge difference between being conservative and being out of the market right. You can be conservative and be fully invested in stocks in the market that is completely doable.”
• “If I’m in stocks I’ve got all this risk. So I’m going to be conservative somebody all in cash and then the market takes off and you’re like well now. I’m all in cash. I’ve got to get back in the market of course. Now you’re buying the market probably at a peak.” – This highlights the common mistake of trying to time the market, which often leads to buying high and selling low.
• “I’m generally biased towards encouraging people to take risks.” – Dean Penn’s advice on taking risks in career decisions.
• Focusing on avoiding the 10 worst days in the market can actually lead to better long-term returns than trying to catch the 10 best days.
• The mainstream media promotes the idea of buy and hold, but active management to avoid downturns in the market is key to long-term success, as getting back to even is not making money.
• Good risk management can lead to better returns and help achieve financial goals sooner.

Monetary System and Capitalism

• The government’s bailout of companies like Boeing and General Electric goes against the principles of bankruptcy laws and ignores the process of allowing weak players to fail, ultimately hindering the growth of stronger and healthier companies and economies.
• We have become a society focused on immediate gratification and regurgitating data all day long, spending our time with our faces in computers, which is a stark contrast to the visionary mindset of the past where we looked towards the future and explored space.
• The current economic situation may be signaling the need for a cleansing and restructuring of the status quo in order to pave the way for a new growth cycle.
• Our monetary system, which allows for unlimited creation of money through debt, has a potential end game where unserviceable debt could lead to a collapse of the entire system.
• “As Americans, we have become complacent and avoid short-term pain, which prevents us from fixing problems and allowing capitalism to grow and flourish as it’s supposed to.”
• The Federal Reserve may be engaging in stealth quantitative easing (QE) despite reducing their balance sheet, which could have implications for interest rates.

Economic Factors and Interest Rates

• Economic growth and inflation are key drivers of interest rates, as lenders need to compensate for opportunity costs and adjust lending rates accordingly.
• Technical analysis is important in the short term as it reflects market psychology, but fundamentals also play a role in generating long-term returns.
• Lance Roberts suggests that despite the current lack of concern about a recession, the clock is ticking for the next one, with interest rates and Fed rate hikes being potential triggers.

Market Valuations and Sustainability

• “The markets have grown a lot more than the underlying components… Essentially what they’ve done is they’ve pulled returns that we would have experienced in future years and they’ve pulled them earlier in along the timeline.”
• Revenue growth has not been able to keep up with the rate of earnings growth, raising concerns about the sustainability of current valuations in the stock market.

Transcript Summary:

• 00:00 Markets are currently range-bound and struggling to find direction, but historical data suggests a potentially strong end of the year, with valuations and fundamentals indicating low returns over the next five to ten years and the importance of technical analysis in the short term, while accounting gimmicks and stock buybacks inflate revenue and earnings growth, potentially leading to future consequences.
  • Markets are currently range-bound and struggling to find direction, but historically September tends to be a weak month with sideways trading, setting up for a potentially strong October, November, and December as portfolio managers allocate funds and the holiday shopping season begins.
  • The speaker discusses the possibility of the stock market consolidating for a month before potentially moving back towards July highs by the end of the year, citing historical data and seasonality as factors to consider.
  • Stock market fundamentals are currently dismal, indicating low returns over the next five to ten years, and with valuations already overpriced, the best expected rate of return is around six percent, potentially resulting in periods of gains and losses that ultimately leave investors at the same level as when they started.
  • Valuations and fundamentals matter in the short term, but over a one to two year period, technical analysis is all that matters in the market, as stock prices appreciate based on the future value of cash flows and earnings.
  • Revenue and earnings growth in the stock market have been inflated through accounting gimmicks and stock buybacks, but at some point, these manipulations will no longer be sustainable and the lack of real revenue growth will undermine valuations.
  • Companies often manipulate their earnings to meet Wall Street estimates, creating an incestuous relationship between corporations and Wall Street, where short-term fundamentals and growth don’t matter as much as market momentum and psychology, resulting in inflated stock valuations and potential future consequences.
• 18:04 Understanding the collusion between Corporate America and Wall Street is crucial, as analysts’ ratings are influenced by financial incentives, but being bearish in the current market conditions is risky, so it’s important to be aware of potential downturns while still being fully invested in stocks by diversifying across sectors and stocks.
  • There was collusion between Corporate America and Wall Street, similar to the Lance Armstrong era in the Tour de France, where everyone involved turned a blind eye to doping in order to maintain ratings and sponsorships.
  • The importance of Wall Street lies in corporate profits, investment banking, and relationships with pension funds and managers, with analysts often being wrong but their ratings influenced by financial incentives, ultimately driven by institutions and not retail investors.
  • Understanding the game of the stock market is crucial, as there are macro reasons to be pessimistic but that doesn’t mean a major correction will happen immediately, allowing for participation in the current rally.
  • Bear markets tend to be short-lived, lasting about 12 to 18 months, while corrections within a bullish trend are fast and swift, with the market quickly recovering back to all-time highs, indicating that the bullish trend has never been broken since 2009.
  • Being bearish in the current market conditions is risky, but it is still important to be aware of the potential for a downturn and to be conservative in investing, while still being fully invested in stocks by diversifying across sectors and stocks.
  • Investors often make the mistake of trying to time the market by going all in cash when they perceive risk, but end up buying at the peak and selling at the bottom, resulting in underperformance compared to the market.
• 30:40 Higher interest rates and a potential recession in the next 6-24 months could pose problems for the market, making it important to understand the drivers of financial conditions and invest accordingly, while bankruptcy laws being ignored and the Federal Reserve’s focus on protecting major companies may have long-term economic consequences.
  • Yields on US Treasury bonds have remained relatively stable as economic growth and inflation rates continue to dictate interest rates, with the current 10-year treasury rate aligning with expectations.
  • Interest rates, economic growth, and inflation have a historically high correlation, and while technical analysis is important in the short term, fundamentals and psychology also play a role in generating returns in the market.
  • Higher cost of debt in the next 6-24 months will be problematic due to a debt wall, tighter financial conditions, and the potential for a recession, and it is important to understand the drivers of financial conditions such as interest rates and the Fed’s actions in order to make informed investment decisions.
  • The speaker discusses the potential for a recession and the importance of monitoring interest rates and debt spreads, noting that while currently tight, there is a likelihood they will eventually blow out, making it a good idea to start investing in instruments that will benefit from this.
  • Bankruptcy laws and processes for dealing with economic downturns are being ignored in order to bail out companies, which prevents the market from getting rid of weak players and hinders the growth of stronger companies and economies.
  • The speaker discusses the impact of the Federal Reserve’s focus on protecting major companies like Apple, Microsoft, and Google, likening it to the Communist model and warning of long-term economic damage and wealth inequality.
• 48:16 The economy is transitioning to a service-based society with increasing debt and income inequality, and the stock market recovery requires time and effort, similar to losing weight, but the monetary system’s unlimited creation of debt will eventually lead to collapse.
  • The economy is transitioning to a service-based society with slower growth and increasing debt, leading to income inequality and a realization that the future may not be as prosperous as the past.
  • The process of recovering from a stock market downturn is similar to losing weight, as it requires time, effort, and a realization that there is no quick fix, but rather a painful and cleansing period that leads to a new growth cycle.
  • The monetary system allows for unlimited creation of money through debt, but eventually, there will be too much unserviceable debt and the system will collapse, although nobody wants to admit or deal with it.
  • The speaker plans to cut government, return most departments to the states, and address issues like Social Security and Medicare, emphasizing the need for sacrifices and sustainability.
  • The avoidance of short-term pain and the failure to fix underlying problems has led to worsening conditions in various sectors, such as healthcare, finance, and Wall Street, preventing capitalism from functioning properly and hindering economic prosperity.
  • The speaker discusses the lack of resilience and fortitude in the current generation, emphasizing the need for long-term solutions and the potential challenges that younger generations will face as older generations pass away.
• 56:30 The Federal Reserve may be engaging in stealth quantitative easing (QE) by buying long duration bonds to offset the decline in shorter duration bonds maturing, keeping interest rates artificially low to prevent a recession, despite inflation and economic growth suggesting higher rates, and the speaker is bearish on the market.
  • The Federal Reserve may be engaging in stealth quantitative easing (QE) despite reducing their balance sheet, which contradicts the belief that interest rates will skyrocket due to the Fed selling treasuries.
  • The Federal Reserve is reducing its balance sheet by allowing shorter duration treasuries to mature and buying long-dated treasuries, resulting in a reduction of their balance sheet.
  • The Federal Reserve is buying long duration bonds to offset the decline in shorter duration bonds maturing, resulting in a need to buy additional bonds to maintain the desired runoff rate.
  • Interest rates are being kept artificially low by the Fed through the purchase of treasuries to prevent a recession, despite inflation and economic growth suggesting higher rates.
  • The Federal Reserve is trying to prevent the economy from breaking by engaging in quantitative tightening and rate hikes, which is reflected in the data on interest rates and the balance sheet, giving confidence that they can intervene if needed, while also discussing the divergence between GDP and GDI and its implications for the market.
  • The speaker is naturally bearish and finds it difficult to be bullish on the market.
• 01:06:41 The economic data has improved, but there is a possibility of future disappointment and a high probability of recession due to increasing levels of debt diverting income and production away from productive sources.
  • The economic data has been better than expected, leading to a shift in estimates from a potential recession to a positive outlook, but there is a possibility of future disappointment, and the relationship between GDP and GDI should be considered.
  • Increasing levels of debt have been diverting income and production away from productive sources, resulting in slower rates of economic growth, and this trend is expected to continue as debt continues to increase.
  • Production is the key to economic growth, and relying on debt and temporary measures like job creation through infrastructure projects is not sustainable for long-term prosperity.
  • Gross domestic income has consistently underperformed gross domestic product, and the widening gap between the two suggests a high probability of recession in the future.
  • The speaker discusses the likelihood of a market break and the connection between GDP and GDI, explaining why interest rates are going lower and mentioning a trade involving the purchase of a 20-year duration bond.
  • A newly issued bond, about two months old, is available at a slight discount to par with a yield to maturity of 4.58%.
• 01:22:05 Taking smart risks and managing them is crucial for long-term wealth in the stock market, with conservative value investing and active management being key to avoiding downturns and preserving capital.
  • The speaker shares a personal story about receiving advice from a dean at Stanford Business School who encouraged taking risks when making career decisions.
  • Taking smart risks can lead to gains, but it is important to manage and limit the number of risks to avoid potential negative outcomes, similar to the approach of using military force.
  • Avoiding the 10 worst days in the market can lead to better long-term returns, as the best days often occur during bear markets.
  • Conservative value investing outperforms growth investing in the long term because money rotates into value during market corrections, and active management is key to avoiding downturns and preserving capital.
  • Focus on managing risk and long-term returns in your portfolio, as outperforming during market declines is crucial for long-term wealth, and working with a financial advisor who prioritizes risk management is important.
  • The success of Buy and Hold investing depends on the starting point and market conditions, as it may work well during periods of depressed valuations and market recoveries, but not during periods of market downturns, highlighting the importance of understanding one’s starting point and acknowledging the role of luck in long-term investing.
• 01:32:11 The speaker discusses a bond swap trade and encourages viewers to register for an upcoming online conference, while also recommending seeking guidance from a professional financial advisor and offering free resources on their website.
  • The speaker discusses a bond swap trade made this week, swapping TLT for EDV in their live traded portfolio due to a lack of an active data feed for a specific bond on their website.
  • The speaker encourages viewers to register for the upcoming Wealthy On Fall online conference, mentioning a discount for early bird registration and additional discounts for previous conference attendees.
  • It is recommended that viewers seek the guidance of a professional financial advisor who is knowledgeable about macro issues, and Wealthyon endorses a free consultation with one of their recommended advisors.
  • They offer to help people get prudently positioned in advance of fundamentals finally mattering, and if you enjoy Lance and I discussing intellectual topics on this channel, show your support by liking, subscribing, and clicking the bell icon.
  • There is a 15-minute video clip in this weekend’s newsletter that explains the reasoning behind the bond trade and discusses the economic and portfolio aspects of it, which can be downloaded for free from the website.