I want to take a break from writing about the things I see that may go wrong to celebrating the many things that are going RIGHT!

  • The quantity of all resources consumed per person in Britain (domestic extraction of biomass, metals, minerals and fossil fuels, plus imports minus exports) fell by a third between 2000 and 2017, from 12.5 tons to 8.5 tons. That’s a faster decline than the increase in the number of people, so it means fewer resources consumed overall.
  • LED bulbs in your house save about three-quarters of your electricity bill for lighting.
  • The productivity of agriculture is rising so fast that human needs can be supplied by a shrinking amount of land. Thanks to modern technology, we use 65 per cent less land to produce a given quantity of food compared with 50 years ago. By 2050, it’s estimated that an area the size of India will have been released from the plough and the cow.
  • We are using less water to grow the same amount of food.
  • Forests and woodlands have expanded in the past 50 years, and are still doing so. It is hard for us to imagine that around 1900 Connecticut had almost no forest. Logging, farming, livestock, and other human activities had decimated the forests. Yet today you can fly over Connecticut and all over New England and see large, lush, forested areas. Humans are using 70% less wood for fuel. Wood used for paper is about the same, but comes from far more efficiently managed forests.
  • Air quality is improving all over the US and Europe, and actually most of the developed world and much of the developing world. In the US, despite dramatic population and GDP growth in the past 50 years, sulfur emissions dropped 50%.
  • Dolphins now inhabit the once-polluted Potomac River for the first time since the 1880s.
  • In the UK, most people diagnosed with late-stage melanoma10 years ago would die within months. Only one in 20 lived five years. Now the five-year survival rate is 52%, or 10 times higher than it was a decade ago, thanks to new treatments.
  • The US Food & Drug Administration last year approved a new cystic fibrosis drug combination that shows amazing results. It doesn’t just relieve symptoms but attacks the disease’s genetic root.
  • In the US we think of pneumonia as an older-people condition, but worldwide it is a major child killer. As recently as the 1990s, pneumonia killed more than two million children a year. That number has since dropped by almost two-thirds, thanks to better treatments as well as wider vaccination against the pathogens that cause it.
  • The terrifying Ebola virus is on the run. The disease that once killed thousands of Africans and threatened to spread quickly through airports around the world is becoming treatable. A new triple-antibody cocktail developed by US scientists reduces the mortality rate from 70% to as low as 6% when administered early enough.
  • The number of malaria cases in India dropped 50% from 2017 to 2018, and mortality decreased among the smaller number of people who were infected. A lot of it comes from simple mosquito nets reaching people who never had them. Treatments improved as well.
  • The American Cancer Society just reported the largest-ever one-year drop in the US cancer death rate, driven mainly by lower lung cancer mortality. Newer drugs, better surgical techniques, and better diagnosis are all helping.
  • NASA could send astronauts back to space this year for the first time since the space shuttle retired in 2011.
  • The huge drop in global poverty.

 

 

 

  • Child mortality is down significantly, as is the number of people without an improved drinking water source. Life expectancy is up everywhere (except for middle-age white males in the US). Genocide and war deaths are down significantly. So is crime in the US. The number of deaths from natural disasters plummeted well over 90% in the last hundred years. Death rates from air pollution are down significantly in the last 25 years.

I could go on many more pages about the world getting better. But I hope you get the point: Good things are happening and we should celebrate them. It doesn’t mean we should ignore less pleasant realities, nor does it excuse us from helping those who need it right now. Some problems can’t wait.

 

Do Not Underestimate the Effect of a Bear Market on Your Portfolio

 

Bear markets in most charts appear as a minor speed bump on an otherwise smooth destination to larger portfolios.

Understand, to most investors it’s carnage. Average bear market losses can be devastating. Novices who do not comprehend the risks of stock investing, only rewards, have the potential to be blindsided, become distrustful and avoid stocks for a lifetime; pre-retirees or those who seek to begin a distribution plan within 3-5 years depend on their financial professionals to help them minimize losses significant enough to dramatically derail their plans. We have taken this seriously.

Industry pundits and strategists tout that bear markets are rare. Those who fall for such a dangerous fallacy may eventually lose the ability to stay retired. If you dare to believe market cycles are ‘no big deal,’ or every cycle is a bull – Prepare to suffer the consequences.

 

 

Based on history, secular bears appear roughly 40% of the time, not 20% that seems to be the popular, erroneous statistic touted by financial media.

However, take a look on a point basis. This is the chart that will mean the most to you!

 

 

On a point basis, bears almost (and in some cases, completely), wipe out the gains of the previous bull.  Now, you can repeatedly tout the line how ‘stocks always come back,’ but by then, with the withdrawals made from the portfolio, you may not be able to stay retired.

 

The Power of Stock Buybacks

 

Lets use Apple as an example.  Here are some interesting stats:

In the 5-years from 2015:

  • Earnings per share (EPS) grew by just $2.69 per share, or $0.53 per share annually.
  • Sales only grew by $26.45 billion, or $5.29 billion/year.
  • Shares outstanding, however, declined by 1.13 billion

 

 

However, during that same 5-year period, Apple’s share price has risen by 210%. Just in the last year, Apple shares are up 84% and earnings are up just 2%.  This is not a growth story.  It is an exuberance story.

 

 

The only reason Apple “appears” to be cheap is because of the massive infusion of capital used to reduce the number of shares outstanding. As a business, it is a great company, but it is a fully mature company, which is struggling to grow revenues. With a P/E of 27 and price-to-sales (P/S) ratio of 5.36, investors are grossly overpaying for the earnings growth and will likely be disappointed with future return prospects.

This is true for the other two 4-comma companies ($1T market cap); Microsoft and Alphabet (Google).

 

 

Can Stocks Go Down?

 

The belief the markets can no longer have a correction is fueling an equity chase in companies with the poorest underlying fundamentals. The last time that we saw asset prices surge by 20%, or more, in a single month, particularly in companies with no revenue, negative valuations, and poor business models, was in 1999. Qualcom (QCOM) in late 1999 is a good example.

Unfortunately, for investors in QCOM, by the end of 2000, that 95% gain had been reversed to a 10% loss by the end of 2000. But QCOM was not alone, the only difference is the vast majority of other companies like Global Crossing, Enron, Worldcom, Lucent Technologies, Sun Micro, and many others, no longer exist in their original forms, if at all.

Another good example is Cisco Systems (CSCO). If you had bought it at the turn of the century, you would still be down 10% in your position 20-years later.

 

 

Today, we are seeing the same chase in companies, which exhibit similar characteristics to what we saw in 1999:

  • Poor business models with little, or no, ‘protective moat.’
  • Little or no earnings
  • Excessively high or negative valuations
  • Prices are bid up on “hope” these companies will mature into valuations in the future.
  • 37% of the companies in the Russell 2000 Index failing to pull a profit.

 

Interest Rates

 

Van Hoisington and Lacy Hunt report explain why inflation, real growth and interest rates will be lower in 2020 than in 2019.

Key Points:

  • Last year’s major decline in long-term Treasury rates, despite a large tax cut and increased federal spending, again confirms that federal debt accelerations lead to lower, not higher, bond yields.
  • Economic momentum is slowing worldwide. The growth rate in world trade dropped from 4.9% in 2017 to 3.4% in 2018 to -0.4% in the first ten months of 2019.
  • Monetary conditions are still tight, even with the Fed cutting rates. Bank loans are decreasing despite M2 growth.
  • Velocity of money in 2019 was near the lowest level since 1950 – characteristic of over-indebted economies.
  • In the first half of 2019, each additional dollar of US debt generated only 40 cents of GDP. Excess debt is triggering the law of diminishing returns.
  • Corporate debt surged to a record 47% of US GDP in 3Q, three percentage points above the financial crisis peak.
  • In real terms, after-tax corporate profits have been declining, not rising.
  • The US has substantial and growing excess manufacturing capacity.

Bottom Line: Hoisington and Hunt believe global disinflation and lower growth will continue this year. Inflation for certain goods and services is still a problem for many consumers. Central bankers and government leaders seem not to realize this. Their policies may make the situation worse, not better.

 

Farm Purchases From US China Trade Deal

 

Last week, the US and China signed a “Phase 1” trade deal, in which China agreed to sharply increase its purchases of US farm products. This chart shows the annual farm purchases made by China for the last 20 years. You can see they fell after the trade conflict began in 2018.

 

 

As written, the deal requires China to purchase $12.5 billion more this year than the $24 billion it bought in 2017. Then in 2021, Chinese purchases are supposed to be $19.5 billion over the 2017 baseline. That would put China’s total farm purchases at $36.5 billion in 2020 and $43.5 billion in 2021, far higher than ever seen before. That’s not impossible, but it does mean US farm production will have to grow considerably, and/or the US will have to sell China some of its farm exports that would have gone to other countries. We won’t know for a long time if this deal will actually help US farmers. But those lower sales in 2018–2019 definitely hurt them.

 

How Does the US Use Our Land?

 

 

The US is a big country, even if you exclude Alaska and Hawaii. The lower 48 states total 1.9 billion acres. This map gives you a rough idea how we use all that land, based on US Department of Agriculture data.

 

 

The biggest single land use is agriculture (shades of yellow in the map), and within that category livestock is by far the largest land consumer. More than one-third of the contiguous US is used for pasture—41% if you include cropland devoted to animal feed. Timberland (shown in green on the map) accounts for 25%. We hear about urban sprawl—and urban areas are growing—but it is still relatively small. The urban areas where 80% of the US population lives uses only 3.6% of the contiguous US. We have 2 million acres of golf courses, 3 million acres of airports, and 100 million acres of park and protected wilderness areas. The Pentagon uses 25 million acres for national defense.  Land is an economic resource, one of the key elements of production. Are we using it optimally? Cows probably think so. They are the major occupants.

 

Consumer VS CEO

 

This Goldman Sachs chart shows an interesting discrepancy between two “confidence” surveys, one of consumers (dark blue line) and one of corporate CEOs (light blue).

 

 

Starting in the year 2000, both groups began losing confidence ahead of the 2001 recession (gray bar), but CEO optimism bounced back sooner. Then before the Great Recession, CEO confidence started dropping even as consumer confidence was still rising. And again, CEOs regained their confidence much faster than consumers did. Today, we have a huge gap between consumer and CEO confidence. Consumers are far more confident than they were before the last recession, while CEO confidence is much lower. One of these groups must be wrong. I suspect consumers are overly optimistic, but only time will tell.

 

What Happens When the Fed Stops Pumping Cash?

 

On Oct. 11, the central bank announced it would begin purchasing $60 billion of Treasury bills a month to keep control over short-term rates. The magnitude of the purchases resembles the quantitative easing program the Fed conducted during and after the financial crisis. The increase in the Fed’s balance sheet has been in near lockstep with the stock market’s climb.  Again, what happened when the Fed stops QE??

 

 

Not understood, especially by the Fed, is that the natural rate of economic growth is declining due to their very practices, which incentivize non-productive debt. While QE and low rates may boost growth a little and for a short period of time, they actually harm future growth.

 

The Gap Between Stock Prices and Earnings

 

There is currently much hope that the economy is about to emerge from its sluggish growth over the past couple of quarters to support lofty earnings expectations and, potentially, a rise in corporate profitability. As noted previously, the last time the S&P 500 was this deviated from a period of “flat” corporate profit growth was from 1995-1999.  1999 was the top before the S&P lost 50%+ and the Nasdaq lost 70%+

 

 

All content is the opinion of Brian Decker