Time is flying. The S&P is down yet again at roughly 2,200 (yes we realize the exact number is 2,237.40). Putting this in perspective, ten years ago it was at approximately 1,100. No we’re not going to use exact figures since that’s not the right way to invest over long periods of time. You want to use long-term growth rates, long term returns and think critically about what the market is “pricing in”. In short, the market is a lot more attractive in just 4 days. Why? well if you went from 2,529 to 2,237.40 in just 4 trading days? It means you’re down 11% in just four days. Think about that. It means you lost 1.5 years of normal gains in just 4 days. So with that we’l explain what is going on and what we’re doing now.
Thinking Like a Rational Investor: At current levels (yes in just 4 days), now the market is what we would consider fairly valued. The market goes up about 7% per year over the long-term and over the last decade we’re up around 7-8%. Depending on what day you use, if you include dividends etc. The problem? Markets usually undershoot to the downside meaning that when people start to panic (like now we’re starting to see it), the CAGR will usually break down into the 5% range (sometimes less and in extreme cases go to 0% which is a clear buy sign).
Start looking for distressed assets in about a week or two. It really is that simple, we were asked in the last Q&A why we have 3-5 years of income sitting in cash and the answer is clear, commercial real estate. Those apartment complexes will likely be decimated. The renters are out of work, the property is levered up to the gills and fire sales will begin. If someone reading this has been in the real estate market for a long time they know that distressed assets are already popping up. That’s how fast the market fell apart. We cannot possibly comprehend how anyone was recommending real estate and stocks back in 2019 but that’s a topic for another day.
Readers Who Listened: For the readers who listened to our advice the last 3 years, first of all congrats on your massive gains in gambling and other such ventures we have highlighted. Second of all, you’re now in a position of power but you need to act intelligently. If you want to buy stocks remember that we’re at EQUAL risk. This means the only people buying now should be people with 20-30 year time frames or longer. If you press us on it, we think it still goes lower but at least we’re no longer begging you to avoid buying it (this should make sense to people who have followed our blog for a long time). Instead of pleading for avoidance if you have a long time frame it’s not insane to buy small amounts and do the dollar cost averaging strategy.
Now what do we officially recommend? Instead what you want to do is create asset protection. This means we already know that there will be price inflation again. You cannot buy corporate bonds, mortgage backed securities and even ETFs <— the world has gone mad with that last one… and expect prices to remain the same. The liquidity crunch and massive printing is going to eventually weaken the dollar. For those that don’t like these finance words (we don’t either) below is an explanation in plain english as to why stuff like gold, bitcoin, stocks and bonds are all going down.
First: Sudden demand shock with zero revenues. Second: suddenly everyone needs cash to pay for everything – bills, employee costs etc. Third: to pay for all of this they have to sell everything this means stocks, bonds, gold, crypto, art work, cars, their pets etc. Fourth: after selling everything the dollar should strengthen because everyone wants US dollars to pay for stuff so you see this in DXY increasing rapidly in value. Fifth: the government quite literally floods the system by printing US dollars over and over and over again. Sixth (where we are now): the US dollar begins to stabilize and all of that printed money is now floating around. Seventh: now you should see the value of “store of value assets” like gold, crypto, and perhaps even some stocks begin to rise and then.. Eight: after we get through that stage assets begin to slowly go up in value. That last one is why people are now joking that their Lattes will cost $20 and iPhones will cost $20,000 by the end of this decade.
So if we’re correct (as usual we may be wrong), we think we’re somewhere around point six and seven. So this means you should do what? You should begin slowly spending your cash on store of value assets (gold, crypto etc.) and save a large chunk to pray for a distressed asset sale in about a month. If you followed the blog you probably have 4 years in cash, 4 years in crypto currencies. Everyone is different but years are easier to express the balancing. Over the next few days you want to have 2.5 years in cash, 5.0 years in crypto/gold, 0.5 years in equities. If this is confusing we’ll use $100 bill. That $100 bill was in 50/50 crypto cash. Now those specific dollars (the $100 that’s likely up 15% or so) needs to be split as follows $31.25 cash, $62.5 crypto/add some gold, $6.25 extremely small addition to just the S&P 500. Notice, we’re not going to bother telling people how much crypto vs. gold to have because the risk tolerance level is incredibly high.
In summary, we are now at “fair value” in our opinion. We do think the market goes down a bit so you can imagine that we’re taking the $6.25 example and just chucking it into gold… But the downside is now limited and…. Now you know why all asset prices were falling like a rock. Panic selling to pay bills. Remember. Due to money printing this should reverse which is why we would begin *slowly* reducing total cash balance if you have large reserves.
For Brand New Readers: For those that are entirely new. There is practically no chance our advice will be taken but we’ll try anyway. Go ahead and check our 8 years of predictions from trump winning the election (we put real $$ on it not just talking about it), S&P advice to dollar cost through 2018 and taking it out in 2019 etc… After that, since we know no one will listen to all of the stuff we highlighted our basic recommendation is take 5-10% of net worth and inflation hedge. Period. No exceptions. This means the following three products: Gold, Crypto and TIPS (Treasury Inflation Protected Securities). You want to have some exposure to all of this stuff because it allows you to avoid hyperinflation potential. When prices begin to move they could move quick so at minimum avoid having all that cash destroyed. If your cash position was 20% (our initial guess) taking it down to 10% and buying inflation hedges can help you avoid a catastrophe.
Long-term Issues: Here is the fun part. Life is not about predicting the first derivative (say people go back to work), the game is predicting the third derivative. Most people can think about first and second level problems but the money is made in the third level. This is because it is not priced into the market.
First derivative is people will be shaky. You’re not going to suddenly hit the clubs, fly around and stay in crowded areas. This is pretty obvious. So the people who have the means to do this are the wealthy. The wealthy will likely fly less, lock down employees more and avoid being the first one to go back and move around.
The second derivative? This will naturally flow into the real estate market. Those massive commercial properties will have defaults. There is just no way to avoid it. Some areas are going to have big outbreaks and there is almost no way you can suddenly go back to “normal” world wide. Similar to what happened in Italy and China. Maybe we’re wrong but that’s the way it seems
Therefore we reach the third derivative. If we know that there will be financial distress for at least a period of time. IE. Parts of the economy will clamp up, its means asset sales will occur. During this entire fiasco we have to remember that Oil has also dropped to an incredible $20 a barrel (yes it moved around but it was even below this level for a second). So what does it mean? It means that Nevada and Texas are good places to look for a distressed real estate asset. Remember, this is the “good scenario”. We know that this whole pandemic will have real impacts. It is absolutely insane to believe that tomorrow the government can announce “open for business” and everyone operates the exact same way. People with 401Ks cut in half are not going to hit the casinos and clubs. People who saw 40 year olds die are going to reduce business travel if they can. So on and so forth. So you should take the time and look into Texas and Nevada for potential properties in a distressed sale if you have a long-term investment plan.
More Technical Overview: Now you have our recommendations revised. What a wild month. For those that are not interested in financial markets and how to predict these cycles feel free to close the browser. For those that are interested in the thought process go ahead and read below. As a final note, please don’t say we’re “whip sawing opinions”, when you lose 1.5 years of gains in four trading days that is a DRASTIC change in valuation. So in times of turbulence you have to keep your emotions in check and be ready to take out the machete (commercial property soon in our opinion).
First if you’ve frozen the economy (which we essentially have), the businesses now need to try and make up for that pain. If you had a month of pain, that’s more like a quarter of pain since you cannot reduce your fixed costs. A Company making $1M in revenue with $800K in costs will have a month of $0 in revenue and say $400K in fixed costs. At minimum he just lost 2 months of income (and has to find a way to close the gap). This usually means he’s going to run leaner (not hire as quickly) and he will also be a bit more fiscally responsible likely holding more cash.
If that is the case, it means that Companies will likely be less focused on stock buybacks (take the micro example we gave apply it to huge companies). Instead they will take the money and they will start to reduce debt on the balance sheet. Many of these companies had to draw down on lines of credit. This means they had agreements for the ability to borrow $1B, $2B or more. These companies already announced that they are drawing down these credit lines. This means their books now have more debt on them. Therefore, the next quarter (perhaps 2-3 quarters), they will want to pay off excess debt from a rational perspective.
Now that those two steps are understood, apply it to the stock market. Stocks explained for dummies is as follows: some guy is on one computer pressing a green button that says buy. On another computer some guy is pressing a red button that says sell. If we know that companies will at least avoid purchasing shares (the guy with a green button), for at least 3 months or so… It means that the number of people pressing the red button is higher. Some people forget that this is what a market is (just a bunch of people clicking buy and sell). Remember. Up to 50% of buy orders (people clicking the green button) is really just the CEO of the Company slamming that button. If that goes away for 3 months, buyside pressure is certainly depressed for now. This is exactly why we’re not yet ready to buy a bunch of stocks and if you want to take 5-10% of monthly cash flow, it’s “okay” but not that exciting in our opinion.
Now enter the Fed. We’ve gone full blown jungle juice retarded when in comes to fiscal policy. Unlimited QE is something that’s beyond incomprehensible. <— please take the time to watch the full video
Dollars are flooding the market everywhere at all times. Flooding. So eventually this is going to catch up. See the game here? We know the dollars are going to go into assets at some point and as long as the economy is shut we know dollars will continue to be in massively high demand. In simple terms, the Fed is taking a machine and printing trillions of George Washington paper that you use to pay for food and throwing it out there for free (practically for free). This means those dollars are eventually going to buy stocks, bonds, gold, real estate etc.
Now when this begins to happen (prices go up), you’ll see the standard goods and services being to rise. The coffee will no longer be $2.50 from starbucks and move up to $3.00. In an insanely complicated situation, now starbucks has to find a way to pay its employees slightly more so they don’t starve while maintaining profitability. Hence, our belief… the unemployment rate will go up no matter what (you can’t just pause the economy).
For those that didn’t enjoy the above (wasn’t a fun read we know)… What is happening is quite simple. The Fed is printing trillions of dollars and trying to give it to people who are losing trillions of dollars. They are losing trillions because the economy is at a standstill and fixed costs like rent, utilities and salaries must be paid.
Focus on the Micro: Now for some more basic non-investing stuff. What you can do now to help everything in your neighborhood is as follows: 1) you want to spend wit your local restaurants still… They will be in severe pain, 2) spend locally for anything else you can afford – small grocery shops, chiropractors, all services – they didn’t get the fast revolver loans at 0%, 3) do not surround yourself with older people, you may get infected and we have no idea how anyone can live with themselves if they cause their own mother/father to die, 4) have a very serious conversation with anyone over the age of 55 about remaining as quarantined as possible, walking outside when no one is around in a month isn’t going to be a big deal, but going to a MLB game would be incredibly irresponsible and 5) if you are successful please try to keep your employees even though it is a easy reason to lean out. You will have a work force that is much more motivated and they will remember this gesture for the rest of their lives.
Final Predictions: Our simple prediction is we need 7 days of data. We still think it’s worse than people think based on the information we’re getting from hospitals etc. That said, we’re not foolish. Many people live paycheck to paycheck and if we have 40%+ unemployment or something like that, we’re better off just living with the virus (mathematically). Our original idea of shutting everything down back in February is no longer possible (virus spread too quickly), so we should look at the death rate and come up with the best solution after that.
Best of luck to everyone and be sure to wear face masks when you go outside (at minimum wrap yourself with cloth).
Newer Readers: For those that are unfamiliar with our blog we have three high quality products in order: 1) Efficiency, 2) Triangle Investing and 3) Spending for Maximum Return. In order, you learn how to make a good amount of money (a million liquid within 10 years or so), how to correctly invest it and finally how we’d avoid blowing it all with intelligent spending.
Side note, this has been the first time where we could actually write so much. It has been fun! Thank you to all the readers who have been here for a long time!