How Keynes Would Advise You To Invest

Most people know John Maynard Keynes as the father of “Keynesian” economic policy, which big-government statists have used as a theoretical justification for increased government intervention in the private economy. The thoughts underpinning fiscal deficits are Keynesian: that government increases its fiscal spending during hard times to stimulate aggregate demand so that more people become employed and the hard times ultimately subside. What’s lost in this argument is that Keynes believed the fiscal stimulus should end during good times – that part of the message gets lost in current politics.

John Maynard Keynes

Keynes As A Money Manager

What’s less known about Keynes is that he was also a money manager. In addition to managing his own wealth, Keynes for years managed the endowment for one of the colleges of his alma mater, Cambridge University. According to this article, Keynes was successful, earning a compounded annual return of 12% for 22 years ending with Keynes’ death in 1946. These years included the Great Depression, so 12% was pretty darn good for that time. In his personal portfolio, Keynes went from being nearly wiped out in the 1929 Crash to the equivalent of $13 million in today’s dollars by his 1946 death (according to Wikipedia). That’s outstanding!

Methods

How did Keynes manage money? A lot like Warren Buffett does today, and a lot like Benjamin Graham, Buffett’s teacher, did back in the day. Keynes bought stock in companies with strong balance sheets and strong, growing sales and held his positions for a long time, and avoided selling during down quarters or years. Keynes owned a relatively small number of concentrated positions because he preferred to have a strong level of familiarity with the firms in which he invested. Unlike Buffett, Keynes did not take full control over the companies in which he invested, at least through the Cambridge endowment fund, because Keynes preferred to have these investments more liquid in the event the money was needed by the college.

IMO

This shows that there is not a lot new. Buffett’s investment methods are considered state of the art even today, but Keynes was investing the same way almost 100 years ago. It also shows that the Keynes/Buffett Way of investing in strong companies at a favorable price and holding for the long term remains a superior way to build wealth over a long period of time.

Yield Curve – Return to Normal

Remember September of this year? It was only 2 months ago that the yield curve partially inverted, which caused some investors and talking heads in the financial media to aver that this is strong evidence that the US economy is heading into a recession soon because inverted yield curves have presaged a recession in the past.

Un-Inversion

Now, as I write this, the yield curve is back to its normal upward-sloping arc. Whereas in September, at its widest diversion, the 3 Month US Treasury was in the 1.9%-range whilst the 10 Year Note was below 1.5%, now it is the 3 Month with the lower yield at about 1.6% and the 10 Year at about 1.9% (Source: Treasury.gov). Nearer-term rates are lower than longer-term rates almost entirely across the spectrum. Am I hearing from those same pundits that the recession risk has been averted? So far, crickets.

IMO

What do I think? I didn’t believe that the inverted yield curve in September was signaling a recession. I thought that it was signaling an overbought situation at the long end of the curve. I wrote that there were many other factors at play that signaled no recession, such as low inflation, high employment/low unemployment, and sufficient cash in the financial system. As for the return to a normal, upward-sloping curve, I don’t think that necessarily signals that there is any less probability of a recession. I think it does mean that the predictive power of the shape of the yield curve is not that robust. Then there is the next thing to ponder: Quantitative trading algorithms are founded upon such probabilities as “inverted yield curve likely equals upcoming recession”. Algos are based on the probability of something that has happened in the past will happen again. Any algo that traded in September that there will be a recession due to an inverted yield curve is likely underwater now. Algos work until they don’t. If you are looking at investing with someone who has an algo strategy, caveat emptor. Higher than 50% probability doesn’t equal certainty.

China Trade and the Stock Market

The stock market seems to whipsaw with every new development in the saga of US/China trade negotiations. Headlines today as I write this are good, and so the S&P 500 is up about 0.5%. That could reverse tomorrow if a bad headline or a bad Trump tweet comes out. It has been this way since early 2018 when President Trump and his administration began threatening tariffs. The stock market seems to want resolution on this US/China trade issue above all other issues out there. Why is US/China trade so important to the stock market? In one word, Uncertainty.

US/China Trade Negotiations

History

China was allowed into the World Trade Organization in 2001. China’s production and trade volume with the US and the rest of the world has skyrocketed since then. China’s labor and production costs were cheap then, although less cheap now. Since 2001, it has been a given that US companies (such as Apple) can produce goods in China at a low cost and that US consumers can purchase goods made in China (at Wal-Mart, for instance) also at a low cost. This is one of the main reasons inflation has been kept in check for all of these years.

Trump

That “given” perhaps has changed or may change with the introduction of tariffs by the Trump administration, especially those aimed at China. We are currently in the negotiation phase of what the new trade landscape will look like, and negotiations can take some unusual and unexpected turns. While we are in the midst of negotiations as we are now, we don’t know what the end result will look like. Both the US and China have a lot to gain and a lot to lose.

Uncertainty

Because of the uncertainty of the trade landscape going forward, corporations don’t know what their Cost of Goods will be, and so they don’t know what their profits will be. “Financial Risk” is the probability that a future actual result will diverge from a projected result. Because of the trade negotiations, investors don’t know and can’t project a financial result, and so they don’t have a good barometer to read the actual results. Too much uncertainty means too much risk, and too much risk means some investors shy away from the market.

Record Highs

Counterbalancing this argument is the fact that the market is at or near all-time highs. To me, this means that we would be even higher had this US/China trade situation been resolved earlier. It also means that the US’s hand in negotiating the trade relationship becomes stronger as the market highs demonstrate that US investors are able to see through some of the uncertainty.

IMO

Look for the stock market to make even higher new highs if trade negotiations with China continue to make progress or even result in a trade relationship both countries benefit from. I am not the only one making this prediction, but I hope you have a better understanding that it is the economic uncertainty that results from the negotiation process that is the source for a lot of the volatility that we have seen in the stock market especially since early 2018.

Commission-Free Trades: Watch Out!

Schwab was the first to introduce commission-free trades a month or so ago, and the other major discount brokerages quickly followed suit. Now anyone who has an account at one of these firms can trade as much as they want with no transaction cost. Sounds great, right? What could go wrong?

Beware when someone offers you something for free!

Over-Trading

A lot can go wrong. First of all, most real money that is made in the stock market is made by buying and holding quality positions for a long period of time. Frequent trading can be profitable for a short time but it is very difficult to make money by trading all the way to the top. This is the Efficient Markets Theory in action. You might ride a hot streak for a while, but eventually returns will revert to the mean over the long term.

“Popular” Stocks

Another side of this is that no commissions might cause investors to invest more in the “popular” stocks of the day. This type of momentum-based trading can work out for a while, but as with popular culture, the fall from grace can be violent and swift. This is why especially amateur traders don’t make real money in the market: they buy what is popular when it is expensive and then they sell when the popularity turns.

Poorer Corporate Governance

Another ramification is that corporations may become less accountable to their shareholders. If their shareholders are only temporary squatters, then there is less motivation for corporate management to run a clean house. Long-term investors tend to be more committed to keeping a management team in check. Although it is not yet a publicly-traded company, witness SoftBank’s jerk of WeWork’s collar. This happened as a result of SoftBank’s long-term investment in WeWork.

IMO

My point is to encourage investors not to give in to the temptation to increase their level of trading in their accounts just because there are no commissions on trading. The formula for successful long-term investing have not changed, and investors need to keep to the formula. Don’t get into any bad behaviors in your own accounts!

No Recession

I have been saying the US economy is not going to fall into a recession at least for the next 2 years despite what might be happening in other countries. This article in the November 4 edition of the Wall Street Journal offers further support to my position.

Unemployment Factor

The WSJ article discusses a theory developed by Ph.D. economist Claudia Sahm. Sahm’s theory is that the US economy is in a recession when the 3-month average unemployment rate has risen 0.5 percentage points from its previous 12-month low. In other words, Dr. Sahm believes a spike in the unemployment rate is the canary in a coal mine warning that a recession is afoot. The theory has successfully called every recession for the past 60 years. Currently, the reading is just a tick above 0, meaning we are not in a recession and not in danger of heading into one.

It makes logical sense: Companies fear an oncoming recession or even a slowdown that doesn’t result in a “recession”, which is 2 consecutive quarters of negative GDP growth. So, they start to lay off workers. Currently, instead of laying off workers, companies are facing a different dilemma: Not enough qualified workers to fill open job listings. We are not heading into or already in a recession if corporate profits are strong and growing and companies are looking to hire rather than layoff workers.

Ramifications

If you believe the US is not heading into recession any time soon, what would you do, or what would you change in your investment outlook?

  • Risk On: You could opt to go farther out on the risk spectrum in your investment portfolio. This means, perhaps, instead of being 60%/40% stocks to bonds, maybe you bump up to 65%/35% or even 70%/30%. The environment is good for corporations, so own more of them relative to your other holdings. My recommendation is a diversified portfolio of ETFs or low-cost mutual funds so that you are well-diversified and not subject to company-specific risk.
  • Relax: If you are working and worried that a recession might cost you your job, don’t. Unless you mess up individually in some way, in general, you should keep your job due to the strong labor market.
  • Stable Interest Rates: Former Treasury Secretary Larry Summers recently stated US interest rates could fall to zero or below if we have a recession. This isn’t happening, in my opinion. The Federal Reserve stated that they are on hold with any future rate reductions. I believe there is a better chance rates will go up than down from current levels. The international rates market, with rates in Europe and Japan at zero or below, is a ballast on US rates, so therefore I predict stable rates in the next 12 months or so.

IMO

Take my advice based on what you pay for it, but I believe the US economy will remain strong and will not tilt into recession for at least the next 2 years, based on unemployment that remains low, coupled with strong and growing corporate earnings, low interest rates, and plentiful cash in the system. If you are currently hiding behind a tree for fear of recession, then you should heed the All Clear siren and go about your business.

Robocalls and Elder Abuse

Nobody likes receiving robocalls. Is there anyone out there who wakes up and says, “Gee, I hope somebody calls me today to tell me I am under investigation by the IRS and that I can avoid penalties by using such and such of a service!”? Between my home phone land-line (I’m a dinosaur, I know) and my cell phone, I get probably 20-25 such calls Per Day! Both numbers are on the Do Not Call list, so that may help but it doesn’t eliminate the problem.

Worse For Seniors

I am able mentally to write these calls off as an annoyance, but that may not be an easy thing to do for someone with some level of cognitive impairment. In fact, a number of these robocall scam perpetrators specifically target vulnerable senior citizens. I was just at a conference where several types of scams targeting seniors were mentioned. Hopefully you don’t, but unfortunately, you may have first-hand knowledge of seniors who have been scammed. Seniors can have their identities stolen and all of their life savings taken away from them by scammers through these robocalls. It is a major, major issue, and one that most people on all sides of the political spectrum agree on.

What To Do?

Don’t Answer!!! The AARP, the US Senate, the IRS, the FBI, and local police all agree that if you don’t explicitly know who is calling, you should not answer. If the call goes to Voice Mail and they leave a message, at least you can listen to that and have time to think about it so that you are not making a snap decision. The Voice Mail may also be forwardable to the police.

Set your phone to 3 rings, with no tie-in announcement either through your own answering machine or through your cable TV. You should be able to get to any call in 3 rings. If there are only 3 rings and then the scam call is gone, then there is still an annoyance factor, but not as much as 5 rings or more.

Get rid of your landline, and give out your cell phone number Only When Necessary. It’s difficult to “live in the shadows” in this day and age but doing so might help you avoid getting scammed.

Be Very Sceptical: This might be difficult for someone who is otherwise a very nice person, but there are bad people out there who mean to do you harm, if not physical harm, and your best defense is to be alert to the issue and stay away.

IMO

I can’t think of punishment too harsh for someone convicted of attempting to scam senior citizens through robocalls. For their part, the phone companies are making progress and doing what they can but the problem is too big. If you are a senior, or if you are responsible for the care of a senior, then make sure you or your charge don’t get taken in by one of these scams.

Boeing’s CEO Eats Dirt

On October 29 and 30, Boeing’s CEO Dennis Muilenberg testified before a US House of Representatives committee about crashes of Boeing 737-Max jets in Ethiopia and Indonesia that resulted in the deaths of over 300 people. This being Congress and there being television coverage, Muilenberg’s testimony turned into a spectacle that included among other topics a public shaming of Muilenberg because of his high salary. I, as a Boeing shareholder and as an American citizen and taxpayer, was deeply offended by Congress’ browbeating of Muilenberg.

Boeing CEO Dennis Muilenberg getting scolded by Congress because of his high salary

Why The Crashes?

According to this recent article in the New York Post, Boeing’s desire and need to get on the “right side” of the environmental movement may have caused it to make poor decisions about the design of the 737-Max. True, competition with its rival Airbus was part of the driver, but fuel efficiency was the underlying goal. Boeing put wrong-sized engines on wrong-sized fuselages and tried to fix the problem with software that didn’t always work. Consequently, planes in Ethiopia and Indonesia flown by poorly-trained pilots crashed. Fuel efficiency and environmentally-friendly planes were more important to Boeing than safety. If Congress wants to browbeat Muilenberg because of those decisions (made well before Muilenberg became CEO), that’s at least a logical leap. However, Muilenberg was browbeaten because, horror of horrors, Boeing wanted to maximize its profits, and because he is well-paid as CEO. Last I knew, maximizing profits is not yet wrong in this country, although the movement toward “stakeholder” management may move the needle in that direction.

Defense of Boeing

Boeing made this country great. Maybe not just Boeing, but they played a big part in it. Think about how many people fly around on Boeing planes and how many goods are flown around on Boeing cargo planes. Do you like clicking icons on Amazon and having stuff show up at your front door? Then thank Boeing for building a vehicle that transports all of those goods around the country. Boeing is the #1 exporter of industrial goods from the US to international markets. What really galls me is, what congressperson or even what entire congress has contributed or created one fraction of one iota of what Boeing has contributed to making this country great, and oh, by the way, to employ millions of Americans either directly or indirectly? What gives them the right to browbeat Dennis Muilenberg about how much he makes and to demand that he give up his salary until Congress says it is ok?

IMO

I do the Wall Street Journal Weekend Edition crossword puzzle every week. Last week, Clue #11 Down was “Suffers Insults”. The answer was “eats dirt”. Muilenberg played a good corporate citizen and ate dirt for 2 days in front of a bunch of losers in Congress for stuff he was not personally responsible for and for other stuff (his salary) that are not illegal here in the US, at least not yet. My hope is that this Congressional browbeating will soon be forgotten, which is true about much of what goes on in Congress, and Boeing and its customers can continue their businesses of making this country (and the world economy, for that matter) profitable and one that provides millions of jobs for people around the world. The 737-Max software issues are proving to be more time consuming than originally estimated. Let’s hope Boeing doesn’t make more decisions that sacrifice customer or passenger safety to the altar of environmentalism.

Full Disclosure: I am proud to be a Boeing shareholder.

Biogen and Alzheimer’s

Last week, Cambridge, MA-based Biogen (Ticker: BIIB) reversed itself and said it would go ahead and seek FDA approval for its Alzheimer’s therapy Aducanumab after announcing in March 2019 that Aducanumab did not result in statistically significant improvements in Alzheimer’s treatment. Biogen stated that a closer review of its testing data revealed that Aducanumab was in fact statistically effective among patients who received the highest doses during trials.

Note the drop in Biogen stock in March and its rise last week.

Treatment, Not a Cure

Aducanumab is a treatment that delays the progression of Alzheimer’s dementia. It is not a cure for Alzheimer’s, but it is hoped that this treatment may someday lead to a cure.

Cost/Benefit

Although there is no mention of possible pricing in Biogen’s press release, Aducanumab will no doubt be very expensive. Let’s say the drug is effective in delaying the progression of dementia by 2 years on average, meaning a senior with Alzheimer’s dementia will enjoy 2 more years of being “with-it”. And, let’s say a year’s worth of Aducanumab will cost $500,000 – probably not too far off of an estimate, given that Biogen has spent possibly $3 Billion so far, with more to go to get final FDA approval. The question is: is it worth it? The answer probably depends on your position. If you (or your parent, for whom you are making medical decisions) is 90 and has achieved all that they want, you might decide to let nature take its course and opt not to spend the money. However, if there is something left to live for, you might decide that it is worth it and to pay the money. As medications become more complicated and expensive, especially with regard to Alzheimer’s, which is proving to be an incredible puzzlement, these are the types of questions that patients and their caretaker families will have to decide.

Financial Plan for Your Upcoming Alzheimer’s

The Alzheimer’s Association estimates that over 1/3 of people 85 and over have Alzheimer’s disease. Should we make plans for it now? Should we plan to save $1 Million so that we can have our 2 years of Aducanumab? My answer is that there are too many unknowns at this point. We don’t know the price of Aducanumab (or any other medication or treatment that might soon come out). We don’t know if Medicare or any other drug plan will pay for it or at least help. However, we do know that we will all get older and hopefully live a long life. As such, we need to make plans, such as:

  • Save what you can so that you have some money for medical care when you are older.
  • To that end, if you are in a health insurance plan that allows for a Health Savings Account, take advantage of it because the money that you invest in an HSA can be invested with principal growth tax-free as long as the money is used for qualified medical expenses.
  • If you are able to do so, purchase long-term-care insurance. Better to do it when you are younger because premiums will be cheaper.
  • Don’t mortgage your house to the maximum and refinance into a HECM reverse mortgage so that you can draw upon it to pay for your health care when the time comes.
  • Have children and encourage them to have children in turn so that you will have younger family members to help when you need care when you are older.

IMO

I think the concept of saving $500,000 or $1 million for Alzheimer’s treatment when you don’t know if you will even get Alzheimer’s is too difficult of a proposition fraught with too many unknowns, such as whether or not you will opt to go for any expensive treatment that may extend your abilities for a relatively short time. It is better to prepare for what you do know, which is that you will grow older and your health is likely to deteriorate as you do.

Power Outage

During this time of the year in California, where I live, dry, usually hot Santa Ana winds are common. The combination of single-digit humidity levels and high winds are perfect conditions for spreading wildfires, such as those which resulted in the deaths of 85 people in the Camp Fire in 2018. I believe California is merely the first state to experience this and other power companies in other states will follow suit. The electric grid is growing less dependable, in my opinion. Severe weather events will always happen in some capacity.

Cut the Power

California’s utilities, Pacific Gas & Electric the most prominent but not the only one, are responding by cutting off power prior to the onset of the forecasted Santa Ana condition in areas deemed to be high risk for wildfires. In early October, a good chunk of Northern California, including the Napa Valley wine region, was cut off from power. PG&E is already likely insolvent due to liability suits from previous fires, and so they decided to limit their liability by taking preventive action.

How would you like it if, as a customer who has their utilities cut right when you want to run the air conditioning, to be without power? It seems like a step back in progress, as well as a huge inconvenience. It likely will affect property values in the affected areas.

What Can You Do?

Fortunately, due to improved technology, individual homeowners have more options now when the power goes out. One is to install solar panels and a battery. A Tesla Powerwall battery combined with a Tesla-owned SolarCity solar panel system is one option, but there are other battery manufacturers such as LG. It’s expensive, with a Powerwall battery system at about $14,000 and a solar panel system $20,000 or more based on size. Wealthy preppers might be able to afford it and it is “clean” but probably out of the price range for many homeowners.

Generac

Generac Stock Is Up 70% YTD

Another less expensive option is a home generator. Generac (GNRC) is a market leader in this space, and GNRC stock is up over 70% YTD 2019. A homeowner can buy a Generac system that can power your whole house for under $10,000, which may sound like a lot compared with a small generator you can buy from Home Depot, but it is a better, more dependable option. A homeowner can hook a Generac directly to a gas line and can have the generator automatically click on in the event of a power outage. As with most other things in life, it is best if you plan ahead and install a Generac (or another generator system) at a time when you don’t need it.

IMO

I don’t own a Generac (although I am thinking strongly about it) and I don’t own GNRC directly. GNRC has gone up a lot and is now trading at 20 times earnings, and so I advise caution as to timing your purchase of the stock if you buy it at all. Nevertheless, I believe the combination of severe weather throughout the country coupled with utilities less willing to take liability risk during these events coupled with declining population in some rural areas (such as my native Upstate New York, New England, farm areas, and other areas not participating in economic growth for any number of reasons) will result in more frequent power outages. Homeowners will adapt by becoming more self-reliant and buying either a solar and battery system (expensive) or a high-end generator system (less expensive).

Banks and Zero Interest Rates

We have two pieces of information that are in conflict. On one hand, former Harvard President and US Treasury Secretary and current Harvard Economics Professor Larry Summers said recently that US interest rates could go to zero or below if we have another recession. On the other hand, Bank stocks are up, with JP Morgan (JPM) at an all-time high of about $120 as I write this. These two information points are in conflict because zero interest rates have been bad for European banks and they would be bad here in the US. Is Summers correct, or are investors correct for buying bank stocks such as JPM?

Summers

Summers’ statement was prefaced in that “if” there is a recession, “then” interest rates in the US would drop to zero. In his comments, Summers says he believes we are headed to a recession but probably not in the next 12 months. Summers served as Treasury Secretary under President Clinton and is a critic of the Trump administration’s economic policies.

Negative Rates In Europe

Negative rates have been a disaster for banks in Europe and they would be a disaster here in the US. Deutsche Bank (DB), for example, is at a near all-time low at about $8, and other European banks have performed similarly. It is very difficult for banks to make money when rates are zero or below. They have to rely on fee income, which may be strong but not nearly as lucrative as is traditional lending. Rates have lingered at zero or below in Europe for several years, as they have in Japan. By selling bank stocks down to their lows, investors indicate that they don’t see a good future in European bank stocks.

US Banks Reach Highs

Investors in US banks, by contrast, see a bright future. JPM’s stock reached a high on October 16 after a strong earnings report. Other large banks such as Wells Fargo (WFC) and Bank of America (BAC) followed suit and also reached highs. Investors are indicating that they don’t see a recession looming and that economic growth and bank earnings will continue to be strong.

IMO

I side with those who are buying US bank stocks, although I don’t own any of them directly. I agree that we are not headed to recession any time soon and that corporate earnings, including bank earnings, will continue to grow. Summers has a bias and is trying to do his part to put forward the notion that the US economy is not as strong as the statistics suggest and so voters should consider his side in the next election. The stock market is a leading indicator, and that bank stocks are at a high indicates that investors on balance believe a recession is not imminent and therefore interest rates will not be turning negative any time soon.