facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog search brokercheck brokercheck

Extreme Behavior

Extreme Behavior

            Every day, I find something that just blows my mind. Today I found four things.  Two are just illustrations that support some of our recent commentary.  This will be short and sweet.

Adventures in Parenting- Supporting Your Adult Children

            I don’t have adult children yet but they are close.And honestly, I can’t say what I would do if one or both of my boys came to me desperate for financial help.  I’d probably help them.  But take a look at this chart and tell me where you find the desperation.  Is it the financial support for vacations?  Is it paying for their entire cell phone bill or their car payment?   What?

             60% of parents surveyed cover some or all of their adult children’s food and groceries.  Let’s be real for a second and nod in acceptance at the fact that most young people don’t shop for groceries or make food.They eat out – always, every meal.Ok maybe that’s a little extreme but honestly, let’s call this subsidy Bar and Restaurant, not Food and Groceries.  I hope this is just a generational extreme in bad behavior. 

            As I mentioned in my last update on this subject, we need to teach our kids how to survive on their own, invest their own money, value saving and differ consumption if resources aren’t there.  Easier said than done but looking at this chart, we can all see what happens later if we make it easy for them now.  I’m sure my kids will hate me, but they will be independent.  “It’s not my job to be their friend”.

Emerging Markets Diverging

            What do you see in this chart comparing the S&P 500 and Emerging Markets?  I see two sides of the globe that have been tracking together very closely for a long time until May of this year.  Let’s be clear that something external is forcing these two worlds to diverge and that something will eventually go away bringing these two return streams back together.  This is extreme behavior and we’re expecting a reversion to the mean of recent performance.Get ready to buy emerging markets.

Brazil and Turkey may have just bottomed.   Stay tuned.

Passive Investing in the S&P 500 Will Underperform

            Here’s another chart showing extremes in behavior.This time, it’s the fact that the S&P 500 index has outperformed practically everything to a historic extent.And by historic, I mean that extreme level where this behavior tends to reverse course.  Note that most “active funds” outperform only because they have the capacity to follow trends and cut exposure when market conditions in general get tough.  As discussed last week, that’s us. 

            If history repeats, funds (or managers) will outperform the S&P 500 for the next 4-5 years by mitigating market risk and putting assets into defensive securities.  When this starts is anyone’s guess but I’m going to say soonish.

Last one.

US Households Own a Lot of Treasuries

            In fact, US households have purchased more than $800 Billion in Treasury bonds in just the second quarter of 2018 and that number is larger than the purchase totals for the rest of the world combined.  Note – some people are still worried that China owns our bond market.  Not true.

Macintosh HD:Users:Sam:Desktop:Screen Shot 2018-10-03 at 2.02.25 PM.png

            For the sake of the US buyers, I hope they are buying ONLY short term bonds or bond funds.  Long term bonds are down almost 10% YTD in price.10 year bonds are down over 5% YTD and the Barclay’s Aggregate index is now down over 4% YTD.  Those are bad numbers but they could get a lot worse by the time the bond market really washes out.  After today’s bloodbath in bonds, we’re standing right on the edge of the cliff and I actually hope prices hold here.  I don’t think anyone is ready for an interest rate spike and price collapse in their very healthy allocation to Treasuries.  I suspect we’re seeing some real fear play out with this increased demand for Treasuries.  And ultimately, owning a bunch of bonds is going to be the right trade.  But folks, we are clearly in a Stage IV environment and have been for almost three years.  This is the stage when you own stocks, a heavy allocation to commodities and go very light on bonds.  Clients can look at their blended asset strategies with us and see those allocations exactly.  But to have been buying bonds with this much money anytime in the last year is some extreme behavior. 

That’s it for now, 

Stay tuned, lots of jaw dropping action these days.

Sam Jones