Good Morning,


There was a recent interview with Jeremy Grantham in Barron’s.  Jeremy has been around for a long, long time – and his firm (GMO) manages billions and billions of client dollars.


His writings often see much coverage.  They are very intriguing, enlightening, extremely clear, sharp as a tack and usually, as for future market projections, quite ominous. Indeed as the year began, this warning:  “a horrendous bear market was in the offing” with their work.


White Flag?


Jeremy comments below:


“It suggests to me that I have in general been over-intellectualizing the working of the market for a few decades. I have had too strong a belief that investors would at least be influenced by past data in a sensible way. The market, however, appears not to care at all about the past or to learn much from it. This model for sure seems to say that for 92 years, at least, the market has with remarkable consistency been a coincident indicator of superficially appealing variables that in a strict economic sense have been inappropriate, and that have caused spectacular and unnecessary market volatility. The model is apparently a reflection of human nature and, of all factors influencing the market, human nature, as economically inefficient and unsophisticated it may be, seems the least likely to change.”

– Jeremy Grantham (GMO)


The lesson?  Not that someone is wrong – not at all.  More, it serves as a lesson from one very experienced guy.  There is no palm reading.  There is no crystal ball.  There is no unique choice to be made to eliminate risk.


Risk is everywhere – always present – in all ways.


Time is your controller of risk.  Just time.  Everything else is marketing.


Simple right?  Not really.


Another Take….


I have often stated that any market chart, whether it be an index, sector or stock is much like an EEG.  It is an emotional summation of all feelings.  It is not the rational understanding of all known economic data – as the efficient market theory portrays in school.  Not at all.


Why else would the same stock sell for 14 times earnings at certain periods and then, for example, 70 times at others?


Same stock – same business.


The only difference?  Emotional perception of value.




“a way of regarding, understanding, or interpreting something; a mental impression”


Risk is a moving target.  Always has been, always will be.  It’s like a chameleon if you will, changing colors like the wind changes direction.  The edges vanish as the mind bends to the adjusted “perception” and your emotions trample your brain.


The human element of investing has been this way since the beginning of time.  Warren Buffett recently stated that “if we absolutely knew interest rates would stay at 2.00% forever, then stocks would be priced at much higher levels.  The Dow would be 100,000.”


Premium for Risk?


I remind you here of a chart recently included in your notes.  It is called the “risk premium” and denotes the level of earnings as a rate of return on the price of the S&P 500 just as one would earn interest on a 10-year treasury.


The “difference” is called the risk premium – the “extra” amount you are being paid to take on the risk of stocks.  For the file, I repeat:  you take on risk no matter what you invest in. Your perception of the risk is the only thing that changes.

Here are a few things you may want to consider….


First, forgive me for the hand-drawn additions to Scott’s chart data.  I did so to bring your attention to the process of perception.


Note the orange box (the charts are the same).


Basically from roughly 1980 to about 2002, you got paid less to own stocks than bonds. An entire secular bull market covering almost two decades unfolded – which included two bear market periods – maybe three depending on your definition – all while the risk premium was below zero!


My point?  The perception of stocks being overpriced to bonds simply holds no water in historical terms.


Back to Jeremy’s point:


Humans are the drivers of markets.  Their movement, their actions, their habits, their needs, their stages of life – they all drive the markets and the economy.  Yes, that is very tough to grasp sometimes – because it takes us all back to a scary place.


We want to “know” exactly what causes something.


We want to “know” why things happen.


Entire media industries have been built because we demand a reason.


The reason?  It only becomes clear afterward – right?


Not before.


Why do we need a reason?


Because floating on the winds of time is terrible, right?  Demanding patience of ourselves in the wealth-building arena – and then forsaking the emotional pitfalls and knee-jerk reactions for the required discipline over time is a very, very uncomfortable setting.


In the end, we must get comfortable with this:


Time is your risk defining vehicle – not guessing highs and lows.


People are your roadmap – the sign-posts along the way to your planning goals.


Mathematical formulas based on historical norms will always have to adapt to the new normal – itself defined by the EEG reference above.  It will only take us so far in our understanding of the markets.


I read it defined best this way, “The human element in the investment game is unchanged throughout history….it remains fundamentally elusive to those who would seek to quantify it or predict its next bout of caprice.”


We can speak of mean reversions all day long or, how high is too high a price.  It has been battled forever.  Sure, we will see a reversion but this is the key:  never in history has that scary reversion unfolded when nearly the entire world was a) certain it is coming soon and b) already waiting for it.


So heck, here we are – on the doorstep of the beast.  The often ugliest period markets see each year.  The doldrums which bring summer to  close.  All the swoons of summers past will be replayed over the next few weeks.  Volume will fall, politicians will become quiet, markets risk becoming even more boring.


The ugly ducklings of earnings season are now set to be perceived as “new values” since almost every one of them beat earnings at a collectively blistering pace (see notes last week).


And to cap all this good news off, I read a really great piece by Morgan Housel over the weekend.


He says it much better than I so I paste it in here for your benefit:


“NEW YORK – The S&P 500 closed at a new high on Wednesday in what analysts hailed as the accumulated result of several hundred million people waking up every morning hoping to solve problems and improve their lives.


The index finished up 4 points. Goldman Sachs strategist Bill Blake said the move was the result of unidentified marginal buyers being a little bit more motivated than unidentified marginal sellers. “We’ve now had 241 years of people in daily competitive pursuits to do things a little better, and those benefits add up over time. Mix that with some good luck and where we happen to be in the business cycle, and here we are,” he said. “My job is to sound smart, but you can explain this stuff to a five year old,” he laughed.


Corporations earned $5.89 billion in after-tax profits. Financial advisors and middlemen took in $710 million in fees. The difference, Blake said, would accrue to investors over time.


Analysts warned of several metric tons of dopamine and cortisol careening through the global economy, which they said created a near certainty of poor financial decisions. At some point, Blake said, these bad decisions create social proof and feed on each other, leading to recessions. “When is the next recession?” he asked. “I don’t know. Whenever the second mortgage you took out to buy a boat to appease your insecurity convinces your brother in-law to do the same, and his boat gives the boat salesman enough misguided confidence to become a day trader, and then all three of you crack under a collective bout of geopolitical bad luck or something. But we’ll move on.”


About 9,000 new businesses formed on Wednesday. Another 8,200 dissolved. Analysts expect the trend to continue, calling it an “unmistakable example of basic capitalism.”


Fifty-five million American children went to school Wednesday morning, leveraging the compounded knowledge of all previous generations. Analysts expect this to lead to a new generation of doctors, engineers, and problem solvers more advanced than any other in history. “This just keeps happening over and over again,” one analyst said. “Progress for one group becomes a new baseline for the next, and it grows from there.”


Three dozen political pundits yelled at each other on TV in front of an audience of 75 million. Meanwhile, a couple hundred million people were reasonable and productive in front of an audience of zero.


Just over 1,700 patents were filed at the U.S. Patent and Trade Office, with a few expected to change the world over the coming decades. “Pretty damn cool” said Sarah Donald, a PTO spokeswoman. “I wish more people paid attention to this kind of stuff.”


Facebook stock fell $0.23 to close at $169.16. Four-hundred seventy one news outlets covered the move. No one knows why.


Analysts expect more of the same tomorrow, with the trend continuing into next week.”


Man – he is good.


While at The Beach…


Many more very sharp people called for “the top” in markets this past week.  They are simply too high, overpriced and just are not supposed to be that way.


Here is the record of top-callers so far for your files (a little outdated but you get the point)

There were also a couple more bright spots you may have missed:

At the same time, it was reported that some of the biggest heavyweights in the hedge fund world continue to have appalling years – some even still in the red.


Sad reality?  There is good news and bad news.  Ready?


The good news:  Patience works for you over time.


The bad news:  Patience works for you over time.


Jobs reports were solid for July and retail sales continued to improve at a steady clip.


All in all, a nice summer already.


About All Those Records….


It can be confusing listening to headlines speaking of strings of records.  It can be further confusing to understand which index being referenced is the true picture of the market. The answers can be puzzling.


If one looks at an equally-weighted S&P 500, you would use say, the RSP.  It shows a gain YTD of 8.33%.  The NYSE Composite which is the broadest of measurements shows a YTD gain of 8.39%.


The Skew?


Five stocks in the S&P 500 represent almost 22% of this year’s gains.  Apple alone holds slightly over 12% of the entire gain of the S&P 500.  The passive ETF world (wonderful marketers) is steadily turning investors into robots – even if they do not yet understand the mechanics.


Another patient way of looking at this:  The SPY reached an early summer high on June 9 at a high price of 245.01.  It then went into a lull for a few weeks.  It closed on Friday at 247.41 (after multiple new highs).


The difference?  A move of $2.40 – or .975 percent higher – than the early summer high.


I point this out to you because the chatter about “records” can often confuse and instill more fear that “the big one” is surely closing in on us.


Thanks but we will stick to our knitting and focus on the Barbell Economy.  It moves up and down – to and fro – at times.  However, it has historically tended to keep you focused on the important growth elements over time.


In Closing


There is still the chilling concern that rates are about to explode.  That the Fed will somehow topple us all.  My hunch?  We are done with rate hikes for now.


Further, it is market fear which drives rates….and the world remains awash in that fear.


How can one tell?


Look at the 10-year yields.  TEN years folks – no upside – just interest:

The real mind-bender?  This is early.  It’s a long game.


The generational dynamics moving through our economy are setting the pace for decades to come.  Not weeks or months.


As referenced last week, I will be afraid when everyone else is excited – and the money is following that perception.


With more than $10 Trillion sitting scared in the bank, trillions more in bonds and passive ETF’s, and sentiment still weighted abnormally bearish, we are nowhere near that period.


Think demographics – not economics.


Patience always positions itself as the tougher requirement – especially during the worst of the summer churn and haze.


Bring on the darn summer swoon already.


(and read Morgan’s piece above again)


Enjoy the beach and travel plans ahead.  Time with loved ones and friends is sacred – enjoy, be well and please travel safe!


Until we see you again, may your journey be grand and your legacy significant.