In the News Today

Six months ago two sailboats left from San Francisco, one was captained by the boats owners, the other by a seasoned Captain (one that has been in out in the ocean for over a decade on a multitude of different boats).

Today, the owners that are sailing by themselves are stuck in high seas, roughing it out because they believe that this is how everyone else is doing. Little do they know that a boat that left from the same harbor sailed far around the storm and is still on course for the boat owner’s destination.

For those of you that are my clients, you know which boat you are in.
For over a couple weeks now, advisors have been fielding clients’ calls, “How much more is it going to go down?” “Do I get out now?” I can hear that echos from far way. I tried to help a client transfer her clients’ money from Wells Fargo last week. I could not get anyone on the phone, instead I heard this message, “We are experiencing higher than usual call volume. Please do not leave a message as we will not be able to return it.”

For those that have been around a while, this is a classic market correction. One foretold by many of the managers we use (as evident by most of their lack of correlation to the market). So while it is nice to know that right now we have missed much of the storm that is affecting others, I am sure there are questions of whether we will end up running into this storm in the future.

While I would love to point to one piece of evidence to say what created the storm, it would be conjecture at best. For years now, I, along with most of my clients have been worried about the growing deficit, which has added undue weight onto our debt. For those that hated Econ 101 class. Remember the defecit is what you are short currently, e.g. if you don’t have enough money to pay your bills this month and you have been putting it on the credit card, the lack of funds is the deficit, the borrowing on your credit card is your debt.
For years, the average consumer had loaded on so much debt (housing, etc.), that they couldn’t afford to pay it and started to default. We can blame the banks, lenders, etc., but at the end of the day, the consumer made the decision to make the purchase(s). We all know how that story ended.

Over the last few years a similar story has been playing out in governments throughout the world. Governments have been borrowing money and loading up the debt. And similar to the consumer, they are living in hope that they can make enough money (tax revenues) in the future to pay the debt they have accumulated.
Now, as my clients know, debt itself is not always bad (home and education are allowed). The idea, though, is that they have to be able to afford it. In our country’s case, our debt load is increasing faster than our revenues. For you “home gamers” that simply means as we grow the economy (measured in GDP- Gross Domestic Product), the government hopes to collect more money. Think of it this way: If you get paid 5% for something you sell, every year the price of the product you sell goes up, but your commission stays at 5%. However, you would make more money each year. So to put this into government terms, taxes are the commission the government earns on the products/services its people produce. As long as those prices (food, wages, services etc) go up, the government makes more money (assuming taxes don’t go down).

Now take the above analogy and follow this country over the last few years; we lowered overall taxes (cut our commission), gave money away (stimulus program), and have increased the debt we have, e.g. increasing our overall expenses. All the while we have gone through a few years now of low to no domestic product growth. If you and I did this we would be in bad shape!

This is the simplest explanation I can give you for the market correction… but that really is just the tip. Because all of what I just mentioned should have been in the market… right? What they call “smart money”, that is people that buy and sell stocks and bonds for a living should have known all of this. If they did, then they should have discounted the prices of bonds and equities in relative terms to the information that they have, right? If they had been following what was apparent in the market, then we would have slowly grown out of the pull back of late 2008 and early 2009. This part is going to blow people, but I don’t think it needs to be changed.

The answer is that the market doesn’t get this stuff right (in the short term) often. The reality is that the market tends to move forward in a “heard” fashion. For nearly a decade I have argued that we need to not concern ourselves with the heard. Much of what is in a client’s portfolio has little to do with the heard. Actually, some of what is in clients’ portfolios is actually betting against the heard.

I am going to leave you wondering about this heard and why the “heard” approach is wrong. If you want to get into this deeper take look over my white paper on Risk Assessment vs. Absolute Return.

To move away from the heard, let’s talk about some things that you can do. Let’s talk about some areas you do have control over.
What should you do?

1. If you have a loan that is over 4.675% it is likely time to refinance. If you are one of these people, and I have not contacted you, please send me an email. As everyone knows, I don’t make money off of your refinance. My only incentive is to help you!

2. Get to know your household “income statement” What are you spending? Are you spending in areas that you value?

3. Be ready for rebalancing your portfolios in late October/early November. I will GUESS that we will be choppy for the next few weeks. Once summer is over we may pick up some traction as the government is likely to announce some measures to get the economy moving more. By late October/early November, we should have some vision of direction. While we don’t “time the market” we do believe in being aware of our surroundings.

4. Most important: Go out and have fun with your family and friends. Spend time learning something new about what you are passionate about. See how you can create more value in your work environment.

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