Saturday, December 30, 2017

What Bodes for 2018?

Will 2018 bring prosperity, disaster, or just ho-hum?

A recent article in Marketwatch seems to indicate that 2018 will be a banner year for the stock market.   That is, if you only read the first part of the article.  The first part of the article talks about investor sentiment, and uses surveys of investors to show that people are still bullish on the market, and that young people in particular, think that stocks are a good investment right now.

Oh, boy.

The second part of the article is more interesting, as it canvasses professionals in the field.  And their enthusiasm for stocks and the market is, well, a little more tempered:
Beyond those historical trends, investors are torn over the prospects for 2018 and beyond, though most analysts are expecting tepid returns. Equity strategists surveyed by MarketWatch expect the S&P to end next year at 2,819, which represents upside of about 5% from current levels. Meanwhile, in contrast to the bullishness expressed by the AAII poll, a survey from the Boston Consulting Group pointed to growing caution.
“Overall, 68% of respondents think the market is overvalued — by an ­average of 15 percentage points,” read BCG’s analysis of its survey. It noted that the percentage of bearish respondents was “more than twice the 29% of investors in last year’s survey who thought the market was overvalued.”
Only 16% said it was undervalued. Furthermore, investors on average are expecting total shareholder returns (TSR) of 5.5% over the coming three years, “the lowest percentage we have recorded since we began asking about TSR expectations in 2010, and close to half the long-term average TSR of 10% that companies have achieved over the past 90 years.”
More than half the investors in BCG’s survey — 53% — say the next economic recession will occur over the next two years; only 18% say it is more than three years out.
Of course, another article in Marketwatch argues that being "overbought" isn't as scary as it sounds.  So, who do you believe?

Well, as I have noted time and time again, trying to time the market is nearly impossible to do.  But then again, you live through a number of these cycles and you start to see patterns emerge.   During the meltdown of 2008-2009, we read tons of articles about how things were coming apart.   I read dozens of articles that said that GM was facing bankruptcy, but decided not to sell my GM stock.  I rode it "all the way down" to zero, which in retrospect, was kind of foolish - particularly after I read an article which described the company's massive debt problems.   Hey, GM will never go bankrupt, right?   Wrong.

I did see the signs of trouble in the Real Estate market and sold out in 2005-2007.   We did OK, although one property we sold kind of late and we missed the top of the market.   But considering how many people we knew personally that went bankrupt because of their "buy and flip" mentality, we consider ourselves very luck.

And for the record:  None of these friends were poor people who bought houses through the Community Reinvestment Act - they were all middle- to upper-class people who thought they could get richer through buying and selling real estate.  So let's put that "It was all Bill Clinton's fault due to the CRA" bullshit fake news urban legend to rest once and for all, OK?

The reality is, these sudden rises in the prices of gold, tech stocks, real estate - or whatever - followed by sudden declines, were bubbles.  And bubbles occur when people over-bid the prices of things based on exuberance and emotion, and eventually reality kicks in and people realize that these things were not worth what they thought they were.

Which is why I find it very interesting than young investors are excited about stocks, while the older investment professionals have a more rational view.   One group has lived through bubbles in the past, the other was still wetting its pants when the market collapsed in the spring of 2009.

The narrative that is being sold is that companies will start making all sorts of profits, now that the new tax law is in effect.   They will repatriate money from overseas and invest it in the US in new factories and job hiring.   The problem with this narrative is multifold.   First, what do you invest in?   You bring this money back to the USA and spend it on what?

Already, we are seeing an orgy or mergers and acquisitions, as companies, rife with cash, spending top dollar to acquire other companies.   They are basically wasting this windfall by spending too much to buy out a competitor.

Second, in a tight job market, who are you going to hire?  I ran into this with my own practice back in the late 1990's.  The job market was very tight and it was very hard to hire anyone - even a secretary.  I finally realized that it would be a lot easier to be one of these sought-after employees than to be a beleaguered employer, so I went off to work for an odious law firm that was doing "tech" IPOs and wanted an Patent Attorney on staff - and was willing to throw money at me.   It didn't last long - and the tech bubble (if you can call "tech") burst and the firm changed direction and got into real estate or something.

So hiring costs will go up.  They will have to hire people who are the dregs at the bottom of the barrel - folks who won't get up off their couch unless you overpay and underwork them.    Your margins will shrink - and if you read the above article, you can see that profit margins are already in decline.

But let's assume that all of this can be fixed, and you "invest" this windfall in a new factory or by merging or whatever.   Now you are on the road to profitability!   You will sell your products and services and people will line up to buy them?

What people?   The problem for the American consumer today is that wages are stagnant (even if employment is up) and their debt-load is at all-time highs.   How are they going to buy all this junk if they don't have any money to spend and are hopelessly in debt?

Plus, I think there will be a lot of consumer fatigue in the future.  Many are worried that the telcos and cable companies will try to charge premium prices for faster internet service, now that the "net neutrality" has been eliminated.   But I have to ask myself, "who would pay for this?" - certainly not me.   I think I would chose instead to consume less content rather than pay more.

And this is the flaw I see in most business plans these days.  Many are predicated on the consumer being a chump and willing to pay more and more and more without complaint.  "We'll give away the printer, and then screw them by forcing them to buy $50 printer cartridges that print only five pages before they dry out!"   A nice plan, but what ended up happening is that the demise of paper was accelerated that much faster.   When it came right down to it, folks realized that looking at something on a huge desktop display, laptop, phone, or pad, was just as good and a lot cheaper - in fact, free.   You screw your customers and people find alternatives.

Then there are the communities which never recovered from the recession in the first place - according to this article in The Atlantic, about one in six Americans.   These are folks in the "Rust Belt" who voted for Trump, hoping he would bring back their factory jobs.  We drove up along the Ohio/Pennsylvania border this summer, through Youngstown, and saw all the old steel mills, some still running, others abandoned.  Even the ones still open seemed underutilized.   It is an area of the country mired in poverty.  The best thing you can do is leave.   But don't move to San Francisco and then whine about how hard it is to live in the city - and move back.

The point is, there are a lot of people in this country who has basically given up - folks in rural areas who are on Social Security disability and stealing their neighbor's shit so they can buy opiods.  I am not sure that the rising tide caused by the tax cut will lift their boat much.

And then there is just history.   Bull markets are always followed by Bears.   How much of a bear, we don't know, but the more a bubble over-inflates, the further it has to fall.   So the sooner the retraction is, the better off we all are.  Sadly, this seems to be a pattern as of late - boom-and-bust cycles that are shorter and shorter.   Some have noted that this type of "economy" tends to favor the very wealthy, as they can time their trades better than others (having better access to information) while the small investor blindly invests, either ignoring his investments (which is not a bad thing, necessarily) in his 401(k), or latching onto "the next big thing!" (which is horrific) and losing it all.

So what do we do?   If you pull out of the market today, you might miss out on opportunities in 2018.  If you keep your money in, it may drop in value if the market crashes - or at least retreats.   Or maybe the market will just subside a bit, and there won't be any huge losses or gains.   We can't predict the future.

I left most of my money in the market the last time around (other than cashing out on real estate) and after about a year, we recovered 90% or more of what was lost in February of 2009.   So not panicking is probably the best strategy.   If you decide to "sell out" after the market drops, you are merely locking in your losses.

My personal strategy is to diversify, and this time around, I have a lot more in cash than the last time, and part of this is by design.   Since I am older and retired, I am spending my money, so I need to have some in cash, anyway.   I did get a small inheritance from my Mother (less than 10% of my net worth, as it turns out) and I have left that in a money-market account.   I simply didn't see anything worth investing in at this time.  Real Estate?  No.  Stocks?  No.  Gold?  Heck no.   Bitcoin?  Hell No.  I'm not jeopardizing a good thing for a long-shot at a better thing.

But since I am closer to the end of my life than the beginning, it is better to be more in cash and bonds and "safe" investments than in stocks and real estate.   Younger people can recover from setbacks - they have time on their side.   Older people have little time, and a setback at an older age can be permanent.

I think we can hope for a soft landing in 2018.  If the market continues to accelerate in 2018, it will be a harder landing in 2019 or 2020.

But that's just guessing.   No one will really know until, well, about a year from now.