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.
I’m a big fan of Warren Buffett (as many of you know) as I admire his intellect, drive, and humility. There’s a reason he’s in the top 5 richest in the world.
Warren Buffett has a chart that he’s described as his favorite. It’s the total valuation of the stock market versus the Gross National Product of the US.
What is it telling us now? A = Stocks are modestly expensive.
Should you sell everything to cash? A = No. It does, however, tell us to be very cautious going forward and watch the percentage we have allocated to the equity markets.
Do you know what the percentage of your portfolio is exposed? If not, please contact me and I’ll do what I can to help you out.
Oh, and in case you’re curious or a compliance officer, the Shanghai Composite Index is an index of all stocks (A and B Shares) that are traded at the Shanghai Stock Exchange. It is merely being used as a proxy for the stock makret and cannot be invested in directly.
The stock markets have been making some headlines recently. Last Friday, the DOW declined below 12,000.
Should you freak out? Is this the beginning of the end?
I also address whether I feel the gold rally will continue. Does it make sense to be a part of your portfolio?
TRANSCRIPT:
Hi Clients and Friends, Mike Brady here.
Just a quick video just to let you know what I’m thinking about this week. And this week I’m thinking about, sort of, the news headlines about the kind of, the steady erosion in the Dow and the stock markets, the equity markets, over the last week and a half to two weeks. The momentum has certainly slowed, but is this something you should freak out about, and completely sell all your stocks, and this is the beginning of the end? I don’t believe so. An official correction in the market is when you hit ten percent, and we have not hit that.
As of the recording of this video it’s down about six and a half percent from its high. And you have to ask yourself if this is, you know, completely impacting your portfolio, maybe you have too much in equities and stocks. So this is a good time to evaluate whether or not you are getting the full force of that, the extent of that decline. And if so, then you probably have too much in your in your, too much equities in your portfolio.
I do believe that diversification is a very key ingredient. The last couple of years we’ve had a pretty strong, upwardly mobile market with a couple of declines here and there; and most notably last summer in July. But pretty much it’s been up, up, up. And so something like this makes great news headlines.
I’ve been asked in the past if I think that gold is a good compliment to your portfolio- and the answer is yes. Gold has had a huge rally over the last few years. And one of the reasons why, there’s three reasons why I think it’s going to continue to be attractive and a nice hedge, a nice part (a relatively small part) but a part of your portfolio.
Number one is I think low real interest rates world-wide still make it attractive. I mean, real interest rate means what you are getting after inflation. So if your rate of return is five percent and inflation is four, then your real rate of return is the difference which is one percent.
The second reason why gold is going to be attractive is some fiscal concerns, highlighted in you know, continued fiscal deficits. And so, I think this is something that is a real concern and what makes gold a little bit more attractive.
The third thing is just emerging market economics. It becomes, as emerging markets world-wide, globally, people…, it becomes commodity driven, and people in those areas do want some gold and some inflationary…some protection against inflationary pressures.
I think of, whenever you’re looking at which asset class to go towards, whether or not it’s stocks or bonds or gold, or whatever it might be; it’s like a beauty contest. It’s not always what you think is the most beautiful but you have to think about what everyone else thinks is the most beautiful. And I do think that gold is something that everyone finds very attractive. And so we always have to evaluate do they still think it’s attractive? And we have to be smarter than them about that.
It’s the same way with the momentum of the equity markets, the bond markets, whatever it might be. And so, I think that this summer it is going to be choppy as it relates to the equity and the stock markets. We’ll continue to evaluate that. Do people, getting back to my analogy of the beauty contest, do people still think that it’s attractive? But I think, you know, some of the profitability of the underlying balance sheets of corporations etc., make it attractive to me, and I have to continue to watch to make sure that it’s attractive for other people, to other people, if they are seeing it the same way that I’m seeing it.
So anyway, that’s, those are my thoughts. That’s it for this week. My name is Mike Brady, my company is Generosity Wealth Management. I am a, kind of a holistic comprehensive approach with clients, with their financial well-being. Give me a call, 303.747.6455. I am a registered representative with Cambridge Investment Research. You have a wonderful week and I’ll talk to you next week. Bye bye now.
One of the big drags on the economy in the coming years will be our fiscal deficits and budget problems.
I’ll be writing this summer about the US ability (and struggles) to sell bonds and finance the debt, particularly as QE2 ends and the Chinese bubble bursts (at some point in the future).
This article talks in depth about an issue we may see more of in the future–US debt being downgraded. This is from a German, not US, rating agency, but it could be just the beginning.
