I have been personally trading part of my life savings since 1980. I have been personally trading all of my life savings since 2007.
I have survived the “Savings and Loan” disaster in 1987, and the “Housing Loans” disaster in 2009; not to mention the “dot.com Bubble” in 2002, the “Recession” in 2007 and the “Y2K” joke. I’m still doing well despite these disasters. Recently, I have enjoyed the extraordinary rise in the market indexes. Point being ... I’m probably qualified to say something about the stock market.
The rest of this column is about what Alan Greenspan once called “irrational exuberance.” We’re there again. Problems I see; listed below:
1. For the last 12 months, the Dow has increased at the rate of 27 percent against a historically average 7 percent; not sustainable.
2. Without the detailed math, here, the Dow is justified, because of the corporate tax rate reduction, in gaining a maximum of about 23 percent from its closing price of 22,057 on Sept. 11, 2017, to about 27,000. Sept. 11, 2017, was the day that the Dow started its historic rise based on the anticipated increased earnings resulting from the corporate tax rate coming down from 35 percent to 21 percent.
3. My greatest short-term losses have both come from the overnight recognition of economic disasters; i.e., those in 1987 and 2009. Regulations have minimized repeats of these so what’s next? I think it’s the national debt and/or our underfunded pensions and promises of Social Security and Medicare. See below for my view of the national debt problem only:
The national debt at about $20 trillion dollars or $170,000 per taxpayer (household). That’s about the taxpayer debt of the house he/she lives in. Not too high of a price to pay to live in and enjoy the United States. The difference in this and the house-like debt is, however, that we have a house to back up the loan and we have the means and intent to pay for it. That doesn’t exist for the current national debt; just our promise to pay our debtors, investors in U.S. bonds, Treasury bills and the like.
When that promise loses its credibility interest rates must go up to attract new investors. Investors must be paid for the risk of non-payment of their loans. Interest bearing loans are assumed to be safer than stocks so as the interest rate goes up the attraction of stocks goes down. As the attraction of anything goes down so goes its price.
So we were riding a high tide on a boat buoyed by our promise to pay, while at the same time we rejoice in our new tax bill that will lower our taxes, lower the government’s income and its ability to pay off the national debt. For evidence of this flawed plan see the national debt results of the last three tax lowering presidents; Kennedy/LBJ (increased), Reagan (tripled), first Bush (doubled). Trump; credibility; do you still believe in the tooth fairy? My advice; watch your stock investments like they were a sack full of rattlesnakes.
Editor’s note: The column was submitted Jan. 17 while stock indexes still were at record highs.