What have I learned on how to deal with the financial world’s fallibility? First, you hardly ever get normalized GDP growth of 3%. If you exclude periods of negative growth our economy really grows at a 4% rate.
When everyone is bearish on stocks and bonds, assume everyone has been overexposed to gloom and doom. Time to invoke a trendline forecast for economic growth and what this will do for corporate earnings power.
I’ve learned to hate the FRB. For them, going back 50 or 60 years, I was just another odd lot investor. Our maximum leaders frequently snatched away the punch bowl and pressed margin rates to 90%. Poor schleppers like me had to unload inventory in a faltering market setting.
Nobody should ever forget or at least research how Paul Volcker took interest rates up to 15%. Was it 1982 or ‘83? The market sold down to book value and 1o times earnings. Jimmy Hoffa wouldn’t get away with 7% wage increases for his Teamsters. The country, even General Motors, would become competitive with Volkswagen once more, and so it did.
Currently our market doesn't quite believe the FRB is going to do a helluva lot to stimulate economic growth, maybe to 4%, not a paltry 2%. Why are home mortgages ticking at 7% in a sluggish GDP setting? The country needs to see no more than 6% home mortgage rates, cheap car loans and more tax breaks to get us rolling along at a 4% GDP momentum.
I can’t explain why the market sells at 20 times forward 12 month earnings unless the relief in FRB largesse is around the corner. Talk about 3 successive half pointers in the discount rate could get us down to 4% in Fed Funds, but who’s to say if that’s enough without stimulating the money supply as well.
Your mindset should never be the Fed is your friend with timely and aggressive action.
If you're late playing a NASDAQ rally with your entry point near the peak of a rally, damage to your net worth can more than cut you in half. See the NASDAQ chart above.
At its peak in 2000 Yahoo sold at 100 times revenues while Cisco sold at 100 times forward earnings power. It never leaves my mind that the average life of even a prime growth stock lasts for no more than 5 years. Nobody owes you an annuity.
There were 50 changes in rates under Greenspan between from 1987 and his retirement in 2006. But the country kept spending, thereby negating some of Alan’s productivity. Alan’s 50 rate change total suggests his ego was involved and pursuit of his strongman image got in the way of effective monetary
Next chart shows wages as a percent of GDP trended downward from the 1982 peak near 70% of GDP to near 60%. Even today in the face of big wage settlements nobody regards them as a crucial economic indicator. Real GDP stayed within its normalized range of 3%
There’s no fundamental rate norm. The Fed will go to double digits when inflation is unruly. When the economy needs stimulation rates can hang near zero.
Time now to buy stocks that can benefit in a soft economic landing. I bought Ford and General Motors and sold Eli Lilly. Once you have your theme in place, fill in the names.