A Bubble in Bull$hit
If the illusion is real
Let them give you a ride
If they got thunder appeal
Let them be on your side
Let them leave you up in the air
Let them brush your rock and roll hair
Let the good times roll
--Good Times Roll - The Cars (1978)
In brief:
the stock market (s&p 500) is up over 20% this year, driven by corporate buybacks (not earnings)
our moderate risk portfolio is up over 13% YTD, in line with our 60/40 benchmark
we see opportunities in dividend paying stocks, healthcare, tax free bonds, and gold
a China trade deal likely drives stocks higher, but expect a recession next year
there is a massive bubble in bull$hit: Wall Street, Silicon Valley, industry regulators
ego and fear are exploited to sell you private equity, ESG funds, and index annuities
duh, your money should be with a fiduciary
Despite the self-inflicted trade war and global economic slowdown, the stock market (s&p 500) is up 20% this year. Goldman Sachs published an interesting research piece in which they 'imagine a world without buybacks'. Bottom line: stocks would likely be considerably lower if it not for corporate buybacks. According to the report, since 2010, US companies have spent on average $420 billion annually buying their own stock, (instead of expanding the business with new plants and employees). Contrast this with only $10 billion spent by households (you and me), mutual funds, pension funds, and foreign investors. I mentioned this ‘illusion of prosperity’ in my newsletter ‘More Buyers Than Sellers’ in August last year.
Although markets are elevated, we believe there are opportunities in cheap, high dividend paying stocks, healthcare (aging demographics), tax-free bonds, and gold. Our balanced, moderate-risk portfolio is up over 13% (YTD, net of fees), which is consistent with our 60/40 benchmark. Many are wondering if stocks are in a ‘bubble.’ This is debatable, but I believe the obvious bubble, is the massive bubble in bull$hit.
WeWork, the office-space sharing company, was on the verge of selling shares to the public at a $47 billion-dollar valuation. After harsh public scrutiny from the likes of NYU professor and best-selling author, Scott Galloway, it appears the IPO is not happening. Galloway’s initial takedown in August: We What the F**K. Galloway believes the company is worth less than $10 billion and calls out Wall Street bankers for 'flinging feces at retail investors'. Now, the same brilliant venture capitalists and hedge funds who were bamboozled into thinking WeWork was a tech company, have scapegoated the CEO.
JPMorgan, Goldman Sachs, Bank of America, Barclays, Citigroup, Credit Suisse, HSBC, UBS and Wells Fargo were all listed as underwriters in the WeWork IPO, expecting to pocket approximately $120 million in fees. U.S. banks are beholden to large, institutional clients. They don’t give a $hit about you, because you don’t pay their bills. These same banks recently sold the public overpriced shares in Uber and Lyft, both of which are down more than 30% since going public (in a bull market!). I’m not bashing the companies, I’m commenting on how their stocks are sold to you. Bankers are hired to overhype the companies to raise the most amount of money for the founders and early investors. But we’re taught to buy at the lowest possible price. Thus, bankers are working directly against you. Speaking of banks…how much is your bank paying you these days to ‘borrow’ your money? Interest rates have fallen dramatically this year, so after taxes and inflation, you’re likely losing money (purchasing power). Meanwhile, the muni bond index (tax free) is up over 8% in the past year (MUB).
Venture capitalists (‘the smart money’ lol) got duped out of nearly a billion dollars from Theranos, the health tech startup that promised a myriad of diagnostics from a single drop of blood. The entire operation, headed by Elizabeth ‘the next Steve Jobs’ Holmes, was one giant fraud (watch: The Inventor: Out for Blood in Silicon Valley)
source: World Hero to World Zero!
I continue to see the financial services industry exploit fear and ego to sell you self-serving, high fee, opaque products. It is still buyer beware out there, folks.
Private equity funds…Wall Street’s favorite ‘ego mouse trap’ today. Better to let Josh Brown, CEO of Ritholtz Wealth Management, describe the silly craze surrounding private equity: (delusions and entitlement - The Reformed Broker). Like tech stocks in the 90’s and bitcoin in 2017, everybody wants access to private equity (buyout funds that acquire and sell private companies). Private equity funds tout their wonderful track records but Warren Buffett has publicly disputed their returns. Blackstone is the PE king, run by Trump pal, and Mitch McConnell’s single largest individual donor, Steve Schwarzman. Blackstone shares are up 63% year to date, and up 16.5% per year for the past decade. I ponder if investors would have fared better in Blackstone stock, than in their large private equity funds, after you net all fees. Another interesting tidbit, Blackstone has been implicated in the deforestation of the Amazon. By the way, Schwarzman’s income was $568 million in 2018, and $786 million in 2017. One must wonder…is his extraordinary income due to high fees in Blackstone funds, or due to fund performance??? Hmmm…
ESG funds…stands for Environment, Social and Governance. There has been huge demand for investment funds that screen for socially responsible companies. But I believe most ESG funds are a classic bait and switch. Wall Street knows they have an image problem. Millennials watched their parents get screwed in the Great Recession, losing jobs, houses, businesses, and their self-worth. These same kids have forced college endowments to sell fossil fuel holdings. They want portfolios that reflect their social beliefs. Portfolios that do not own weapons and private prisons, that instead, hold companies that are moving to be carbon neutral, and have good records on diversity and equality. Obviously, this is all highly commendable. The problem is that the fund companies are not delivering on this—not by a long shot. The data is sketchy at best and the vetting process is different from fund to fund. I’m a big fan of Vanguard’s low cost index funds, but the Vanguard Social Index fund is a $6 billion 5 star rated fund that holds Facebook (destroying democracies globally, watch: The Great Hack), Google (YouTube still has a pedophile problem), Wells Fargo (today's poster child for bank scandals), Pepsi and Coke (Diabetes anyone???), McDonalds (factory farming pioneers), Conoco Phillips (oil driller), shall I go on??? Don’t let any large investment firm decide for you what’s socially just or environmental, there’s a high probability that their so-called ‘standard’ is far below yours. Better to simply donate to causes you feel strongly about. ESG funds are selling you a pipedream.
Index annuity presentations exploit people’s fear of running out of money. The sales pitch goes something like this: ‘guaranteed income for life…attain all of the upside of the stock market, with no downside!’ You may not have heard of index annuities, but there’s a good chance your parents are being sold this junk, and the insurance reps are collecting commissions of 6%-8%. State are warning consumers of annuity scams that target the elderly. Protect your parents and loved ones…recommend that they speak with advisors held to a fiduciary standard. Of course, we’re happy to help.
Before you invest in a private equity or hedge fund, watch this 4 min video on Warren Buffett's 10 year bet with hedge funds (hint: he crushed them).
Regulations are supposed to protect consumers. But in this country, corporate insiders write the rules in their favor—only the illusion of consumer protection is the goal. Common sense dictates that if you’re managing money for others, you should be held to a legal fiduciary standard, that forces you to always act in your clients’ best interest. But Wall Street and the Trump administration successfully blocked the fiduciary legislation that Obama and the Department of Labor wrote in the wake of several Ponzi schemes (remember Bernie Madoff???) Instead, the SEC passed their own industry-friendly version this summer called 'Regulation Best Interest' . It’s a joke. In a Morningstar podcast, Harold Evensky the ‘dean of financial planning’ called it an 'an unmitigated disaster' (at the 41 min mark). Of course, the new rule protects Wall Street, not you.
I didn’t want to write about ESG, private equity, and index annuities, just as I didn’t want to write about Bitcoin in December of 2017, when I labelled it a classic bubble. But as your fiduciary advisor, I have a duty to provide advice that is in your best interest.
Your portfolio should be led by your financial plan, your present and future liabilities, and your risk tolerance, not by what’s trending. The market is up, and we’re participating, without the bull$hit.
Thank you,
randy
This commentary is for general information purposes only and is intended to provide education about the financial industry. Further, this commentary reflects the personal opinions, viewpoints and analyses of Randy Hamilton providing such comments and should not be regarded as a description of advisory services. The views reflected in the commentary are subject to change at any time without notice. Nothing in this piece constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. To determine which investments and strategies may be appropriate for you, please consult your financial advisor prior to investing and remember all investing involves risk and possible loss of principal capital.