Part 1 was 1.5 weeks ago. This is part 2, updated as of Monday morning.
It’s a particularly long video, but filled with my current thoughts
* What does the S&P downgrade mean?
* What should you have and not have in your portfolio?
* Should you move everything to cash?
* Is this emotional selling or fundamental?
I’m going to have 2 or 3 videos this week since so much is going on. One of the aspects of my job, in my opinion, is to over communicate with you as the adviser/client relationship is a partnership.
TRANSCRIPT:
Hi there, Mike Brady with Generosity Wealth Management, and today the topic is “Should You Freak Out, Part 2.” Because I did part one about a week and a half ago and just because so much is happening in the markets I’m going to try to do a video maybe twice this week, maybe even three times, believe it or not. Just because so much is happening in such a short time, I want to make sure that I have good communication with you; both to my prospective clients, to my existing clients and to whoever else might be interested in this.
So, a week and a half ago, if you go back and look at that video, what I said is, I said that I thought that the debt ceiling was going to be raised, but I it’s going to be kicked down the, the can’s going to be kicked down the alley. And, absolutely that’s what happened. It’s pretty much a joke in my opinion. I said that it was going to be rough, “it’s going to be very volatile,” I think is what I said. We certainly have seen some volatility in the last nine days or so. And then I asked the question, I go, “is this the abyss?” “Is this 2008, all over again?” And I said, “no, I didn’t believe that it was, but we were going to have a rough patch before it got back out.” And I was more optimistic than I was pessimistic. And, when data changes you should feel free to change your opinion. Some of the data is worse, I mean I didn’t see as rough of a patch last week as I said a week and half ago. But, the reason you have a diversified portfolio, the reason why you make modifications throughout the year, is for something like last week.
If you are here at the beginning of the week wondering “Oh, my gosh! What should I do?” The answer is that it might be too late. You should have the portfolio already and a good relationship with your advisor who can explain what your portfolio is.
Hopefully you’re very low, if down to zero, on municipals. Hopefully your exposure to Europe is next to zero. Hopefully you have some gold exposure. And hopefully you’re well weighted with a lot of bonds in there, as well, which are of a short term nature. So, anyway, that’s what you do in preparation for it. But here we are.
So the question is, is this the beginning…, is this the end of the beginning or the beginning of the end? Or where does this really go. And one thing we have to watch out for, I think this is a very common thing to do, but we want to be the smart money. We want to be the professionals- and not fall into what so many others, maybe our neighbors are doing. And that is assuming that when the market goes down, that it will continue to go down, it very well could, but we can’t jump to that conclusion. When the market is down ten per cent that doesn’t mean it’s going to go down twenty per cent or forty. It is not linear. As an example, if you make one per cent one month, it doesn’t mean you’re going to make twelve per cent for the year. Or if you lose one per cent in a month, it doesn’t mean you’re going to lose twelve percent. It’s not linear.
And so, right now the question we might ask ourselves is, is it down now and is it going to rebound back up either slowly or quickly, or is it going to continue and getting out and cutting our losses is actually the wiser thing to do.
Right now it’s a very unknown situation. It’s always unknown- ‘kay I don’t want to sit here and say that we absolutely know- but we’re dealing with a couple of major macro events that have not happened before. One of which is the down grade of the, of the S & P, excuse me, from the Standard and Poor’s of the U.S. government. And the whole ripple effect that that might have; I mean, as it relates to municipals, as it relates to money markets, as it relates to a number of different things. It’s a little bit unknown. I will, I will just kind of talk about that right this second, I think.
Let’s talk about the Standard and Poor’s downgrade. It was poor timing. Friday, after market close- I mean just pretty rude as far as I’m concerned. Particularly after the last couple of weeks of the debt ceiling, very hyper-political discussion, one way or the other, on the two sides there. And so, first off, let me just tell you, I have a pretty low opinion of Standard and Poor’s. These are the same people who had highly rated Enron and Worldcom bonds, companies and bonds right before they went belly-up. These are the same people who downgraded Lehman Brothers the day that it collapsed. These are the same people who gave AAA ratings to all of the sub-prime mortgages that were packaged in structured products, with CDOs, all the different, all the different alphabet; the CDO’s, CLO’s, et cetera. This is the same company that did that. And so, if they bring down AAA, the U.S. government from AAA to AA+, I think it is, or AA-, sorry I can’t quite remember, I’ll look here at my notes here in a second, but it’s the next one down. Then does that mean that the, what does it really mean? It doesn’t mean that they’re not wrong, it just means that I have a pretty low opinion of the Standard and Poor’s.
Now, the U.S. government, I think they said, Standard and Poor’s pretty much said what we all believed anyway- that we have a huge debt problem. Now, frankly, let me just cut to the chase here- what does this really mean; the possibility of the U.S. government not paying its debt is zero. Because all of this debt is in U.S. currency, ‘kay, so that does not mean that there wouldn’t be a negative consequence if we just turned on the printing presses. But, I’m telling you, the probability of the U.S. defaulting on its debt is zero. Forget everything you’ve seen or read leading up to this the debt ceiling, which is a whole other discussion about how important this debt ceiling really is, but the probability is zero. Now if they turned on the printing presses now that would have other effects. Of course, there would be inflation, and other negative consequences but we would pay it off, even if it was in deflated dollars, okay?
Now Warren Buffet, who I think very highly of, I mean the guy, give or take, thirty or forty billion dollars, he and I are, pretty much pals. And the guy is super smart, and he basically said the U.S. government, I’m still, the AA is now the previous AAA. Now what effect did this have in other governments? Japan was downgraded in January of 2011, it was pretty much a nonevent. The market dictates what they are going to require on the bonds that they buy from the government. So, Japan, it’s been downgraded most recently, and it pays half of what the U.S. does in order to borrow, ‘kay? That’s just it. We need to take into consideration that the Standard and Poor’s has probably said something that we all believe. They said the right thing, they said it kind of poorly, in my opinion, at a wrong time, they could have waited until a little of the uncertainty goes away but they said it, they said it.
So now, this, the S & P downgrade does have an impact on municipals. Unfortunately municipals, I think a lot of them are going to be downgraded sometime this week or in the near future. That’s just kind of the way it goes. What impact that’s going have on the cost of borrow? It will probably increase the cost of borrow. They’re probably not going to survive quite as well as the treasuries. But once again, the market’s going to dictate what they require with your capital. The capital flows to what the best opportunity is. So, if a municipal bond or the U.S. government is still the best opportunity for them, that capital that’s in that free market, is going to say, “this is what premium I require for you to receive my capital.”
I think, I’m just going to look here at my notes, because there is a lot going on, let me just jump to the conclusion. Which is; no I’m not freaked out and I don’t think you should be freaked out too.
Now is the time where rational thought, calmness, an understanding that you’ve done what you can to put your portfolio in a position to weather this out, I am still, and I’ve not been convinced, although I could be convinced in the next couple of days, as data changes and opinion changes; but the fundamentals and the emotional are two different things. And I still like the fact that there’s two trillion dollars in balance sheet cash in the companies. And one and a half trillion in excess capital reserves in our banking system. I do like some of the efficiencies that companies have. And I still am feeling comfortable with some of the fundamentals in the market even if the technicals are not looking so good. And even if some of the emotionality has to be whetted out- now is not necessarily the time to freak out.
Now, that might change in a day or two. I’m actually recording this on a Monday morning, markets have closed sharply down. I think a lot of that is emotionality and a knee jerk reaction to an event that happened after the close on Friday.
So, I’m going to, like I said, keep you updated and hopefully do these videos as often as I can this next week.
Let me just kind of knock through a couple of things here…
Municipals I talked about, let me put that to the side. You know there was nothing that was said last week that was new news- in my opinion. Europe: still a mess. If you’ve been watching my videos and reading my newsletters for the last year and a half, absolute disaster. You should have very very minimal international exposure.
Let’s see, QE2, the end of quantitative easing two; we all knew it was going to happen. It happened at the end of June- that’s not a surprise.
‘Kay, I’m just going to reach through all my notes here, make sure I hit everything.
Buffet, God I love that guy, he’s smart, I wish I was as smart as him. Basically, he has a lot of cash and he is bullish on the U.S. and the U.S. market. It’s the most vibrant, robust and diversified economy. And you might say, “Oh, it doesn’t feel that way.” (Oops, I’m going to get a little bit closer and get focused again.) “Oh, it doesn’t feel that way.” But in comparison to all of the other options, that is the case.
Let’s see, okay, I think I’m going to end now, I’ve been droning on for a while. One thing that I do want to kind of end on, there’s two things I want to end on; The first thing is, there seems to be a need to explain every type of a decline. Whereas we feel it’s our birthright if the market goes up. When the market went up 100 points or 200, it’s like “Okay, it went up 200.” We don’t sit here and say, “Why? Why did it go up? I don’t understand!”
But on the other hand if it goes down 100 or 200; you got to explain it! There has to be an absolute answer for it. And I’m a chaos theory guy in general. And what that means, is sometimes things happen, a confluence of events that are very hard to explain. And I think that’s one of the things we’re in right now. A lot of newspapers and pundits are trying to explain exactly why this happened or that happened, etc. And it is typically a combination of all of them plus some emotionality thrown in to it.
Right now, getting back to the- now is the time where we feel comfortable in the mix that we have with our portfolio. Maybe we’ll make some modifications as things go through. And as data goes through, you can’t be beholden to, “I’ve got to, this is exactly what is going to happen, and what I feel what must happen.” Because the market doesn’t care what we think. So we’ve got to also be willing to change our opinion. I’m just not changing my opinion just yet.
The very last thing I want to talk about is- I’m going to throw up, after this video, some great web sites that I go and read throughout the day. I think they’re absolutely wonderful.
Forget CNN money, forget all these other kind of larger stream ones, they’re garbage. I like some of the blogs which analyze why something happens, or starts to explain it and goes underneath the surface; Pragmatic Capitalist, Zero Hedge, the Reform Broker, there’s a bunch of really good blogs out there that I really recommend.
Anyway, Mike Brady. Generosity Wealth Management, 303.747.6455. And you have a wonderful day and give me a call if there are any concerns that you might have, thanks, bye bye.
One of the effects of a US Government downgrade is a municipal downgrade to follow.
If you’ve been following my newsletters over the past few years, you know I’ve advised you to watch your municipal holdings closely if you have any at all.
The free (relatively) capital market ultimately determines the cost municipals will have to pay to borrow money.
Debt Ceiling, Greek and European debt issues, bad global recession…..
Should you freak out? Time to move the cash to the mattress? I don’t think so.
Here are my current thoughts……..
TRANSCRIPT:
Hi! Welcome to the Generosity Wealth Management weekly Video/ Newsletter.
And this is the last week of July and what is really hot topic in the news right now is the debt ceiling negotiations; you know, should you panic, should you freak out, should you change your portfolio? And I have to tell you that I am actually more optimistic than pessimistic; which is in favor right now. That is kind of the easy thing to do. I mean we joke in our industry that economists have predicted ten of the last two recessions, and I don’t want to be that guy.
We’ve spent the last ten weeks downgrading the S&P 500, earning expectations, and we’ve heard from about 2/3 of the S&P 500, for the second quarter and surprise- 75% of them have exceeded those pretty low expectations. Right now companies have a huge amount of cash that they’ve been hording. Cash is ridiculously cheap right now. You’ve got earnings, their efficiencies are good. I continue to be somewhat optimistic about the second half of the year. I said that three weeks ago and I have not changed my opinion that we’re looking at some big abyss, some crevasse that’s going to hit us. I just don’t see that.
We’ve got three things that I’m really kind of paying attention to; we’ve got the GDP that’s coming out this Friday; we’ve got more earnings estimates that are coming out; and then we’ve got this debt ceiling.
If I have to guess on the debt ceiling-we’re going to kick the can down the road for a bit. It’s going to be relatively short to mid-term increase in the debt. Just enough to keep the newspapers in business with headlines. You know we’re going to be hearing about this for the next six to twelve months, irritatingly. But it is what it is.
The market as a whole is pretty much back to where it was in April before this correction. And with all these other things it’s actually surprisingly held its own. And as I mentioned we’re going to be looking at the GDP, we’re going to be looking at the debt, we’re going to be looking at the earnings. The earnings are looking good. The debt, I think, when the world doesn’t end on August 2nd, is going to be less of an event than what you’ve been led to believe.
And then going back to the GDP estimate, which is not really sure what. It’s been having some bad numbers, frankly, in the last couple of months. But the others are looking good.
Plus, I mean, the opportunities, just abysmal opportunities in bonds, kind of leads me to, and all the cash that been kind of on the side lines, kind of leads me to believe that this is going to be a good thing for August, September- not necessarily a bad thing.
So I’m going back to feeling good about my assessment at the beginning of the quarter.
Anyway, my name is Mike Brady. I am an integrated, holistic, comprehensive wealth management firm, here in Boulder, Colorado, but I have clients throughout the United States. My phone number; 303.747.6455. You have a wonderful week, and I’ll talk to you later.
The 2nd Quarter 2011 is over and I have a slightly longer video this week because I include my preview for the 3rd quarter.
I talk about what I think of the current economic environment, bucking the trend on some of the pessimism I hear and read about so much anymore.
I send my newsletter and videos on a weekly basis, so if you watch only a few througout the year, at least watch my more comprehensive quarterly videos.
Click to watch
TRANSCRIPT:
Hi! Welcome to the Generosity Wealth Management Video.
This video is the second quarter review and the third quarter review. I’m going to try to spend most of my time on the preview because no matter what we do, we can’t relive the second quarter. Hopefully we can learn from it but we can’t redo it.
The second quarter for the stock market indexes- if we were, if the quarter had ended a couple of weeks earlier then we’d be saying “oh man, what a horrible quarter!” But well, it ends on June 30th. And the last week of June was a nice pop-up in the equity markets. All of April was pretty good, going into May, and then we just hit a big slide. For about six weeks all through May and June, except for this last week in June; relatively low volume though, on the exchanges. Bonds were just kind of chugging along through the quarter until the last week and the last week was a really bad week for the bonds. I think what was happening, is with Quantitative Easing ending, a big buyer of bonds, that bond holders were like, “wait a second! I don’t want to be the greater fool, holding these bonds. The demand for these bonds is going to be less and so I’d better get rid of them now.” And so, they got out of them and moved into equities.
Now let’s talk about the third quarter for just a second. I want to tell a little bit of a story about emotionality. There were mythical creatures called Sirens. And they lived, this is a Greek story, with Ulysses and the Sirens. And the Sirens lived on these islands and they had this beautiful music, sailors would become enthralled with the music, want to go toward the Sirens with their boats, where the rocks were, they’d hit the rocks and get a big hole and the boat would sink. OK, bad stuff. But Ulysses, he really understood this, but he really wanted to hear the beautiful melodies that he’d heard so much about. So what he did is he gave wax to the sailors on the boat that he was on, and said “put this in your ears and tie me to this pole” (that was on the boat,) “and no matter what I do, don’t untie me.” So they got close to the island, Ulysses was able to hear the beautiful melodies, he went stark raving mad, but because the sailors had the wax in their ears they didn’t hear it. They sailed away and they were just fine.
Now, Ulysses’ plan saved his life and the lives of all those around him because he had a plan and his foresight and his non-emotionality about it was, is really kind of something to be admired; and kind of the lesson in the story.
So why do I say that? Right now, it is very fashionable to be “bearish;” to be down, you know, on the economy and the recession and investments and the world is going to end. I mean I’m on a significant number of blogs and things that I read, and it’s very fashionable to say “You know what? Armageddon is right around the corner!” And I was just, two – three nights ago, at you know, a social gathering and it wasn’t “is it going to happen?” but “when is it going to happen?” They are actually trying to argue and pinpoint the actual month that the 2008 crisis is going to hit again.
You know, I listen to all that data. I look at yield curves, both in the U.S. and in others countries. I look at the various data that keeps coming out. I look at the balance sheets of companies to find out what their cash balances are and what their profit abilities are.
I listen to what’s happening over in Greece. Which, if you’re not paying attention to that whole Greece debt and austerity plan, and then, kind of, the bail-out, you’re missing good stuff! I mean that is just fascinating- it is better than any Jerry Springer show you could imagine.
So I have to talk all the stuff into consideration and I have not moved from my analysis six months ago, that this will be a positive year, 2011, for the equity markets and for the bond markets. And how positive it’s going to be? I don’t know. But you know what; I am still going to have a position in the equity markets. I am still going to be modestly positive in my outlook for this year.
When I look at the yield curves of the kind of, the other countries, you know; the Brazil, and Russia and India and China, some of the not quite developing countries; but not quite the been-on –the-world –stage –for a very long time like Japan, Europe and the United States; I, they have a curve that is going from normal to flat, to inverted. They are about flat right now. And that causes me concern. That will not bode well for them so I want to be more U.S. If we are relying on an awful lot of the growth going forward on these various countries, and so if they start to go towards a recession, then that’s impact us, and, here in the United States. But that being said, I think that we’re more willing and ready and able to handle that.
Particularly, since when you look at the cash positions of corporations it’s actually quite large. When you look at the profitability of corporations right now, they’ve gotten rid of, kind of, the “fluff;” kind of the efficiency. Now when I say “fluff” please don’t call and e-mail me with bad things saying “oh, wait a second, they got rid of a lot of people, that’s not fluff!” No. They did get lean and so that’s a good thing going forward even if there might have been short term, some pain, that they might have done in their own austerity measures. And so, I am continuing to be kind of mildly bullish, when most people that I have around me that I talk to are from mild-bear to full-blown “Armageddon is right around the corner!” I’m just not in that camp.
I still feel that bio-tech is going to be the next big thing in the next ten years. I continue to think that gold is something to be considered. And so, if I’m wrong, I believe that gold will dampen that wrongness. Because at the end of the day, nobody knows the future; I certainly don’t know the future. So what I’m going to do is I’m going to try to have a wise diversification, not a naive diversification; transparency, and of course communicate and keep the expenses as low as possible; because they can, of course, can drag down any kind of a portfolio if you have too high of expenses.
Anyway, I am not making any major changes for the third quarter. I’ve had an opportunity to go through all of the statements for clients. They were actually mailed out on Saturday. So hopefully clients have gotten them already either; Tuesday, Wednesday or Thursday of this week. But I’m not making any huge, major changes.
I will continue to have my video so that you know what I’m thinking about because if the data changes, you know what, my opinion might change. I have an opinion more than just once a quarter when I do my quarterly review and preview.
Anyway that is where I am right this second. I encourage you to give me a call if you would like or an e-mail with any thoughts or refutation of my conclusions. I am, my business is growing- I’m actually very proud of that, and so if you know of somebody you feel I should speak to who would like some guidance, you know, I’d love to talk with them, 303.747.6455. My name is Mike Brady. I am the President of Generosity Wealth Management. And I have a couple of disclaimers here at the end that you should definitely stay tuned for. But in the meantime I hope you have a wonderful week, I hope you have a wonderful quarter and I’ll do another video in a week. Talk to you later, bye bye now.
I’ve been talking about the problems with the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) for over a year now. Greece in particular has been very prominent in the news recently.
Has this been a slow train wreck? Yes. Has our investment markets continued to go up during that time frame? Yes. Will our markets continue to go up? That’s always the question, and a harder one to answer. One of the things I’m trying to do is guide you and my clients to that answer, knowing of course the future is unknown.
Anyway, this week I discuss what I believe is another bubble ready to burst–China. I’ll be following up over the summer with technical reasons why structurally and euphorically (if that’s even a word), China is someplace to be cautious.
TRANSCRIPT:
Hi Clients and Friends, Mike Brady here.
This week I’m thinking about some of the similarities between China, right now, and the U.S. right before our stock market crash in the late 20s, frankly. So does that mean that I think that China is going to have this huge implosion? No. Do I think that China is a bubble? The answer is absolutely yes. Tread lightly, as it relates to China.
One similarity is just a massive disparity between, in income, and in wealth, and in education; China now, the United States back in the late 1920s.
There’s the rapid industrialization; huge boom in the last 10 to 15 years in China, very similar to the rapid industrialization in the United States.
Opaque and misleading economic data and fiscal data- very big similarity. Massive buildup of leverage amongst the rising class. Credit and leverage is, has, had increase significant in China just like we had in the 1920’s.
And kind of the last thing, is bubbles, in both residential real estate and infrastructure. What they have done, they being China, in the last fifteen to twenty years is just unbelievable. But this has also led to an incredible infrastructure bubble and real estate bubble over in China. And when that thing bursts, we just saw it back in 2008; it can have some pretty dramatic effects on the economy and on the stock market. And that’s what I’m greatly concerned about right now.
I haven’t really thrown out a bunch of statistics and reasons for why I’ve come to these conclusions. But if you want to give me a call and I’d be happy to talk to you about them, 303.747.6455. My name is Mike Brady; my company is Generosity Wealth Management.
The reason why it’s called Generosity Wealth Management is I believe that if we put together some of your investments, and your tax and your retirement, and your estate planning; all these kinds of silos together that you can start to be generous with yourself, your family and the causes you believe in. I want to help you learn to be generous. So I am a registered representative with Cambridge Investment Research. And you have a wonderful, wonderful week and I’ll talk to you later. Bye bye.
