FWIW # 57 Out of Control

I’m obsessed, and I know it. “Know what you own” is, in my professional opinion, a principle even a six-year-old can understand. Why, then, have speculators (you can’t call them investors) put $42 billion into a private-credit vehicle like the one described in a recent Wall Street Journal article? If you do nothing all day long, take a few minutes and read this article. Keep in mind, the speculators in this private-credit security must be either institutional or accredited retail individuals. Accredited means they are sophisticated, have at least $1 million in investments, and/or have had an annual income of $200,000 for the last two years. Knowing the criteria, read the article. I commend the Wall Street Journal for publishing it.

            On Wall Street, anyone with any knowledge and experience knows that more money has been lost reaching for yield than with any other strategy. Some of the securities in these opaque portfolios are issued by private equity firms. Scrambling for liquidity to pay off current investors, these firms are selling some of their investments to new groups of speculators at a higher price than the original investors did and using private credit in the process. It’s not really a shell game, but it makes a thinking person wonder when the music will stop and who won’t receive a check in the mail when it does.

            We are in challenging times. Probably the saddest aspect of these historical days and weeks is the way some, perhaps most, of the established media and political foes of the president are, in my opinion, giving hope and courage to enemies of this country. I’m not going to get into a definition controversy about the word imminent as it relates to the war in Iran. The president’s largest flaw is his unfiltered and out-of-control mouth. That flaw does not override the courage it takes to see a clear challenge that will eventually seriously impact the United States and to meet the challenge head-on rather than pushing the decision down the road for someone else, as presidents from Ronald Reagan to Joe Biden did for the last 50 years. What is disheartening to me is the way the media uses their dislike of Trump to portray the enemy as the victim. Last week I watched a major news organization on national television in primetime give an interview to the Iranian foreign minister, who naturally said they want peace and were injured by the lack of sincere negotiations by the US. Can you imagine a media organization in 1942 giving a primetime interview to Joachim von Ribbentrop, Adolf Hitler’s foreign minister, or to the Japanese foreign minister? It would have been treason then, and it should be treason now.

            Why is this factor important to investors? It’s just one of several indicators that many aspects of the country are spinning out of control, and that impacts market psychology.

            All over the media, both institutional and social, betting has now become predicting. There are offshore companies skirting rules and allowing US citizens to join the craze of betting on or predicting the outcome of any sport or activity. Even the business media uses the terminology that buying or selling an investment is “betting” on the outcome. In the last few weeks, advertising has claimed that a new AI algorithm can tell a person what the price of a stock will be tomorrow. Really? If that’s the case, why share this knowledge instead of buying the stock today and selling it tomorrow for riskless profit? Do that 30 days in a row and have huge piles of money. Several people are now bragging about their success in the past with predicting gains and avoiding losses by using a system they’ve designed. Really? Then why sell this knowledge to others when owning the system will allow the creator to have untold wealth by investing themselves? Think these people are just being nice? Think they’ve made so much money, they don’t want to make any more from their surefire money-making system?

            The stock market has enjoyed a major upward revaluation over the years since the 2008–9 financial crisis. There were three basic reasons for this rally: First and foremost was the unprecedented expansion of the money supply and balance sheet by the Federal Reserve. Second, the Fed deliberately suppressed interest rates, unleashing a rush to accumulate assets with essentially free money. Financial suppression (keeping interest rates too low) diverted the normal flow of capital from fixed-income investments into higher-risk stock, real estate, and other alternative private investments as speculators and investors sought higher returns. Finally, the inflationary spiral that resulted from the monetary and fiscal malpractice by the federal government boosted the pleasing, but distorted, rise in asset prices.

            Will the same ingredients sustain the markets going forward? It’s unlikely. It will not be unusual for the stock market to decline over the next year. Market psychology has shifted. There are several shocks that could make market psychology even more negative than it is now. As discussed in Rule 7 and 8 in our book 19 Rules for Getting Rich and Staying Rich Despite Wall Street, serious wealth comes from compounding returns over lang periods. If market psychology has turned and stock prices churn up and down in a narrow range, our strategy of above market cash flow will help enhance the compounding effect. This is the time not only to know what you own but to know what you want to add to your portfolio at an attractive price. The most important investment principle now is “Be patient.”

            Interest rates have risen in the last week. The Iranian war is the reason. Do not believe this military excursion is short-lived and under control. Wars are lost because one side is not committed to total war, which is necessary to win. Challenging times are ahead. Know what you own and keep extra investment income and liquidity.