Key Takeaways

• Trump, like Reagan is passionate about change, but he inherits a completely different America from an economic, military and globalization perspective.
• Not sure if today’s stock market is overvalued? Warren Buffet uses a handy ratio that we’ll share.
• Once the elections are over, root for whichever party is in office to make America thrive based on our underlying principles.

 You’re not shy, you get around You want to fly, don’t want your feet on the ground You stay up, you won’t come down You want to live, you want to move to the sound Got fire in your veins, burning hot, but you don’t feel the pain Your desire is insane, you can’t stop until you do it again

— 1981 hit song, “Urgent” by Foreigner

Introduction

It is neither my job nor my desire to comment on politics and elections. But, with our President- elect’s proposed policies being compared to Ronald Reagan’s, I feel the need to step up. As a financial and investment commentator, I thought it would be important to reflect upon the backdrop of Reagan’s America (1981) versus President-elect Donald Trump’s America today. This is not an opinion piece about whether or not Trump’s policies will work–I always root for America no matter which political party is in office. Whether or not I agree with Presidential policy rates is far less important than being a patriot who believes that America will thrive based on our underlying principles. It shouldn’t matter which party is in charge.

The world economic backdrop that Trump is walking into looks vastly different than the one Reagan inherited. Here we’ll discuss the many differences between 1981 and 2017 in terms of U.S. military spending, stock market valuation, interest rates, globalization and immigration.

Military spending

When many people think of Reagan, the first thing that comes to mind is his legendary “tear down these walls ” speech and the collapse of the Soviet empire. Some would say the Soviet collapse was accelerated by Reagan’s military buildup, including the Star Wars program. But, remember, Reagan stepped into office during a post-Vietnam military drawdown that began with the Carter administration. By the time Reagan completed his second term, he had expanded the U.S. military budget by a staggering 43 percent over what the country had spent during the height of the Vietnam War!

Today, coming out of the post-9/11 war on terror, it’s a very different story. President Bush II ramped up military spending to $700 billion from $400 billion during his term and it was not until President Obama’s second term that we started to see a decline in military spending. Now it looks we’re going the other way (again). Trump wants more military personnel, more ships, more aircraft and enough Marines to fight two wars. But, he wants the money to come from “cuts in waste.”  When it comes to government spending, cutting waste is much easier said than done.

National defense spending: Carter to Obama Administrations

Source: Third Way

Now let’s  take a look at the financial markets of three decades ago compared to today.

Stock market valuation: 1981 vs. today

In 1981, Reagan’s inaugural year in office, the price-to-earnings (P/E) ratio of the S&P 500 Index was a historically low 9. By contrast, the market’s P/E ratio is about 26 today. Reagan entered office during the final phase of a secular bear market that began in 1966. By August 1982, the Dow had closed at its secular low of 776. Following a 1981-1982 recession, Reagan’s economy grew at a real rate of 16 percent. Compare that to today when real U.S. growth is plodding along at a paltry 2 percent almost a decade after the Great Recession.

With the stock market at its all-time high and the economy in slow-growth mode, is there still a relationship between the economy and the markets? Well, investing guru, Warren Buffet, uses a ratio comparing the economy (as measured by GDP) to the stock market capitalization to determine whether or not the stock market is overvalued . A ratio used to determine if a stock market is overvalued or undervalued. It is equal to stock market capitalization divided by gross domestic product times 100. The result of this calculation is the percent of GDP represented by stock market capitalization. A result of over 100 percent is a sign the market is overvalued. A result of 50 percent or less is a sign the market is undervalued. This shows the drastically different valuation during the two Presidents inaugural years.

Read more: http://www.investorwords.com/18956/stock_market_capitalization_to_GDP_ratio.html#ixzz4T2Wn57Ol

In 1981 Market Cap to GDP was 32%…Today it’s 120%.

www.dougshort.com

Interest rates

When Reagan was elected, we were coming out of the 1970s when interest rates were a sky-high 20 percent and the big hammer Paul Volcker  was just running out of ammo on the upside. Fast forward to today with rates bottoming near 2 percent. This is especially important because the overall debt in the U.S. economy was on a 30 year downtrend since the end of World War II when Reagan took office.

U.S. Treasury Bond interest rate comparison: Reagan vs. Trump

Debt as a portion of the U.S. economy: Reagan vs. Trump

According to Stephanie Pomboy of Macromavens, non-financial obligations now total 251 percent of our nation’s GDP. Compare that to a level of just 135 percent when Reagan came to office with $2 trillion of corporate debt coming due in the next two years . National debt in the chart below is over 100 percent of U.S. economy compared to 35 percent when Reagan kicked off his tax cuts.

Source: Just Facts

Immigration and the U.S. workforce.

Reagan took office at the end of an 80 year sideways move in immigration, while Trump takes over during a 25-year boom in foreign workers coming to our country. This boom means different things to different social classes. To some, the boom is a positive driver in terms of more educated talent, entrerprenurship and low-cost labor all in one. To others, the boom means competition for American jobs needed by our own long-time citizens. Reagan didn’t even have the immigration debate on his economic plate while Trump made it a key focus of his campaign.

Conclusion

Although both Trump and Reagan have burning hot fire in their veins for change , the economies they inherited have different urgencies. The major economic factors such as debt, interest rates and stock market valuations the two Presidents faced are not just different, they are polar opposites. It could be argued that Reagan kicked off globalization, but Trump is now dealing with a world economy that has added over a one billion people to the workforce, thus driving down wages and upending job safety in developed countries like the U.S. Again, I root for whoever is President to enact postive change for our country, but the economic canvas you start with is not blank. If Trump’s goal is to paint an economic masterpiece, then his vision will have to look very different from Reagans.

You say it’s urgent, make it fast, make it urgent Do it quick, do it urgent, got to run, make it urgent Wait it quick, want it urgent, urgent, emergency, urgent, urgent, emergency Urgent, urgent, emergency, urgent, urgent, emergency So urgent, emergency

— 1981 hit song, “Urgent” by Foreigner

All source links in this post will take you to third party website – we are not responsible for the content therein.

The End

The Doors

This is the end, beautiful friend
This is the end, my only friend, the end
Of our elaborate plans, the end
Of everything that stands, the end
No safety or surprise, the end
I’ll never look into your eyes, again

It Could be The End of not just Bobby Axelrod in 2017

Picture from Showtime Series “Billions” based on New York hedge fund world.

Truth be told, I liked actor Damian Lewis much better in the movie Homeland than in Billions. Although as a costume drama, Billions should win an Emmy. The film really nailed Wall Street wardrobes–fleeces for everyone.
After spending 18 years on a trading desk, of course I watched Billions. What red blooded American doesn’t love greed, envy, sex, manipulation and testosterone sprinkled with a heavy dose of Machiavellianism? Plus, Billions stars my favorite actor, Paul Giamatti, in a fabulous role that will leave you feeling “Sideways.”

When I first started in the financial advisory business, there were several well-known, albeit abstract market indicators such as “The Tallest Building Signal” or the “Magazine Cover Indicator.” If you don’t remember those gauges, the Tallest Building Indicator referred to the phenomenon in which the country boasting the world’s tallest building at the time would inevitably see its economy collapse not long after construction was completed on that massive edifice. The Magazine Cover Index was based on the theory that a person or subject featured on the cover of a major business magazine would experience a reversal of fortune soon after publication—kind of like the Sports Illustrated cover jinx for athletes.

For instance, if the top of a market–or a high flying money manager–graced the cover of a widely read business publication, then performance would soon start to go south. Or, once a major business publication signaled the end of market cycle, the opposite would happen. The most famous example of the Magazine Cover Index was Business Week’s infamous ‘Death of Equities’ cover, published on August 13, 1979, right before a multi-decade generational bull market ensued.
In the 1990s, bombastic TV personality Jim Cramer and CNBC exploded the stock picker savant image before the 1999 bubble burst. It was similar to the deluge of house flipping shows that invaded cable TV in 2007 before the world economic order nearly imploded in 2008 due to risky financing of U.S. homes. That leads us to wonder if actors Damien Lewis and Paul Giammatti have just “top ticked” the hedge fund boom?

Did Billions star Bobby Axelrod top tick hedge fund assets? “Billions” launched Jan 1, 2016

Let’s rewind for a second. The hedge fund industry has grown from a niche sector for the ultra-wealthy to a nearly mainstream financial asset class today. Less than 500 funds with $250 million under management existed in the 1990s. Today, there are roughly 12,000 hedge funds with over $3 trillion in AUM. Three out of four hedge funds (75%) are located in the U.S. God Bless America and all of our risk-taking glory. After the 2008 financial crisis, the world was primed for a “hedged” product and U.S. financial entrepreneurs gave the public everything it could handle. The problem is that if you dine with cannibals, sooner or later, you can be eaten. And right now, we have some financial vegetarians who are dining with cannibals. That’s not a good combination.

Some of the most successful hedge fund managers in history have recently lamented that there are “too many hedge funds” out there. The surge of American intellectual talent that’s piling into hedge funds to chase the same few ideas has resulted in a “lack of alpha” generation. As many of you know, alpha refers to the excess return that a fund generates relative to its benchmark index. Here are the recent hedge fund performance stats:

Hedge Funds Alpha

1998-2002  +8.0%

2003-2007  -0.7%

2008-2016  -4.5%

Source: “Incredible Shrinking Alpha,” by Larry Swedroe

Hedge Fund managers and traders do not come into the office at 6 am, fire up their Bloomberg terminals and try to underperform with your money. They are trying desperately to make you outsized returns, but there are just too damn many managers chasing the same ideas. California’s, New York’s and Nevada’s state pension funds are just a few of the institutional accounts that have removed hedge funds from their asset allocations.

In the last eight years, New York State’s pension fund paid $3.8 billion in fees to poorly performing hedge funds, according to a report published by the state’s financial regulator. According to the report, hedge funds were the worst performing of the six asset classes making up the state’s pension allocation—kind of ironic considering New York’s proximity to the hedge fund epicenter. It is true that pension funds are traditionally horrific market timers, but this latest trend feels more like a secular move than poor timing by institutional investors.

Hedge funds were once reserved only for the super-rich. Now, thanks to liquid alternatives, the mass affluent can theoretically gain access to the same “Masters of the Universe” who run hedge funds.  “Liquid alts” is an industry term for hedge funds that are offered through mutual funds or exchange traded funds (ETFs). They allow the average investor to access hedge funds through his or her retirement accounts. It seems Bobby Axelrod also managed to top tick the growth of liquid alternatives.

“Billions” Launched January 1, 2016 on the First Downtick for Alternatives Growth in 10 Years

Alternative Assets Go “Sideways” into launch of Showtime’s hit show “Billions” after a decade of exponential growth.

Conclusion

The free markets have a messy way of delivering progress–it’s called “creative destruction” which leads to lost jobs, ruined companies and vanished industries. This is the paradox of progress, but 100 million people died trying out Communism, the closest competitor to creative destruction. The pain and gain of capitalism are inextricably linked. America has always been built on creative destruction. In 15 years, we have seen the rise and fall of tech bankers, mortgage brokers and natural gas drillers. Some hedge funds will survive and thrive, while others will face the end. But, America will move forward either way.

This is the end, my only friend, the end
It hurts to set you free

 

But you’ll never follow me
The end of laughter and soft lies
The end of nights we tried to die
This is the end

Read more: The Doors – The End Lyrics | MetroLyrics

 

“I recommend that every man own the roof that sheltereth him and his,” Arkad says. “Nor is it beyond the ability of any well-intentioned man to own his home.” Arkad argues that “to own his own domicile and to have it a place he is proud to care for, putteth confidence in his heart and greater effort behind all his endeavors.” — “The Richest Man in Babylon”

Key Takeaways

• There are nearly 90 million Millennials in the U.S. today. Don’t stereotype them as debt-strapped city dwellers who will never seek the suburban dream.
• Many members of Gen Y have good incomes and are in the prime years for getting married, starting families and yes, buying suburban homes in good school districts. They just start a little later.
• Rents have never taken up a larger of the American worker’s paycheck. Would you bet on this trend continuing?
• We believe strongly in real estate as a long-term investment, particularly in multifamily housing.
• Private real estate investment generates “alpha” in a tax-efficient manner and is an excellent source of income in a world of near-zero or even negative interest rates.

Continue reading →

The Rolling Stones were not talking stocks when they wrote “Emotional Rescue,” but as the song says, we all need a knight in shining armor. As discussed in last week’s article, investing is all about the 7 inches between your ears. Much like sports, relationships or work, optimizing your wealth has a lot to do with controlling your emotions.

Continue reading →