When Experts Disagree

For the last two months it seems all we have heard about is disagreement. I am not talking about political disagreement. I am referring to investment disagreements and convincing opposing arguments put forth by experts I read, with mixed signals in the markets as well. Here is a list of the six main points of disagreement and what we are doing about them.

Six Points of Disagreement

1. Are stocks overvalued? This is an old story. Stocks are overvalued all the time. In the ‘70s they were overvalued at six times earnings. Now they are overvalued at twenty-eight times earnings. Overvaluation has not kept diversified investors from making excellent returns for decades. Investors welcome the chance to buy stocks at lower valuations. We are getting our dip of -5% this week. I believe there is significant long term positive pressure keeping dips from going too far for too long.

2. Are bonds overvalued? We’re in new territory here because yields are so extreme. We are all looking for the same thing: some kind of safe yield in bonds. 1.35% in T-bills doesn’t seem like enough, yet it is the only truly safe place to be. T-bills are safe but after taxes and inflation, the return is negative. Yes, there is great disagreement about interest rates – do US bonds pay enough and where are rates going. We are not buying any bonds longer than 2-3 years and we are holding T-bills as we invest.

3. Is gold great or awful? Gold, a haven in uncertain times, looks like it is going above its old high of $1800 per ounce this year. I think it will go over $2000 per ounce this year, because those big round numbers get attention. Most investors don’t own enough gold to make a difference in dire times. Morgan Stanley and Goldman Sachs say that gold is worth about half of today’s price because it has no yield and it is finally going out of fashion to display it. We do own less gold than we did because it has no yield. However, it is a store of value and belongs in every portfolio.

4. Can central banks do anything? Central bank activity is also at an extreme. Central banks cannot do any more, as all four central bankers have reminded us. Jay Powell, Mark Carney, Christine Lagarde, and Haruhiko Kuroda are not going to cut rates or build their balance sheets materially. Even if they did so at the start of a recession, their impact would be barely noticeable. I don’t think they should even try.

5. Should governments spend more? Governments can always spend more money and there is a lot of pressure to do so in the US. That is why our current deficit is over $1 trillion this year. “As of now…” is the phrase Steve Mnuchin uses when he is asked a question he doesn’t want to answer. “As of now” no US government official likes the phrase “modern monetary theory”(unlimited government borrowing in a major currency) but the large governments and their currencies are getting close to MMT. Japan is there. We are headed there, and so is Europe. There will be a price to pay in the future, but as of now we and others can start to practice MMT.

6. How much will the coronavirus affect the global economy? The economic impact of a virus is a 21st century event. A virus did not cause economic disruption in the 20th century, except for the 1918 flu, because investment capital was small then compared to population. For people it was a disaster. For our economy, it didn’t have much of an impact. The four 21st century viruses (Zika, Ebola, MERS, SARS) did affect the global economy, but only temporarily. Will the coronavirus be any different and will it be long lasting? Warren Buffett thinks the coronavirus will be scary but will not have a long-term stock market effect. I agree with him.

The turning point and the pulled punch
Something is going to change this year. Turning points do not all come at once and their individual impact may in fact seem quite small at the time. The Fed cut the Fed Funds rate three months before the stock market took off in August 1982.
Or, Warren Buffett may be right – there may be a brief and sharp decline. He sounded optimistic in his latest annual Berkshire Hathaway letter to investors, suggesting that stocks would continue to do well for this decade. Except he mentioned the possibility of a brief 50% decline in US stocks along the way, a pull on his optimistic long-term punch. I don’t see a 50% decline because I don’t see a crisis like the one in 2008. A 30% decline along with a recession is also at least two years away.

Your mandate and our judgment call
We share a mandate with clients to keep and grow money through uncertain times, and these times are as uncertain as ever. We follow our mandate by knowing where all the experts stand and assessing each client’s spending liabilities over decades. There is always a connection between cash on hand and known upcoming spending.
After all that we make a judgment call based on our group experience and group expertise.
We focus on getting good after-tax cash flow while we wait. The key is not selling during a decline, because even the 20-30% declines are short-term.
If you have a strong opinion on any one of these six disagreements and how we navigate through them we would like to hear from you.

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