Bull
We are quickly approaching a new
record on the stock market. Not just a high water mark but a time period
record.
We are approaching the record number of bull market months in a row since the previous record which was 1994-2000. The best it’s been in 85 years?
For some this is great news, people
who lost their entire retirement 7 years ago are starting to be able to
entertain the idea again. I personally have a different perspective. Ever since
this recovery began (in the stock market) I have been saying that it is not
sustainable and the bubble will burst again and this next time will be worse
than the last.
I am sorry to say this but our
recovery is a bigger facade than subprime mortgages.
Analysts will tell you that this
time it’s different and that the metrics are different. They want you to
believe that we are in such a position of strength that a fall to the same
degree is not possible. That is a Lie. Sure people can point to numbers to
prove a point; you can also point to scripture to back up whatever ridiculous
claim you want to make that doesn't mean its right.
Bubbles
Banks were able to pad their numbers
by taking loans from the federal Gov at 0% and turn around and sell that money
to the American people at anywhere from 4-30%. Now tell me what new wealth was
created from that? I can show you calculators and spread sheets where the math
adds up to more money but wealth and prosperity, bull markets and strong economy
must be built on something much more than cool math. It must be built on
principals of creating. A strong economy exists when new value is brought to
the world on a daily basis. Not just by the few but by the many. New value is
being made certainly; we are seeing the rise of the most educated and most entrepreneurial
generation the world has ever seen.
Student
Debt Bubble
Unfortunately a majority of this
generation (Millennial) is saddled with a large amount of debt. Debt previous
generations did not have to face. I am not talking about debt that shows value
like a mortgage, I am talking about a debt to an idea, specifically the idea
that you are smarter or more valuable of an employee having been to a
university. Studies show that the average college
grad has right at $30k in student loan debt. In much of the nation it is
still difficult to find a job. (Rant about this coming in just a moment). I
know many students with over 6 digits of student loan debt who are stuck in
jobs that make them 40K a year and the high end of salary in their industry is
only around 80K. More and more school districts are looking to hire teachers
who have a Master's Degree, which means even more debt and not much more
income. Some states and districts are even removing the pay bump for the extra
degree.
Tuition Costs at universities both
public and private continue to rise significantly faster than income and
inflation. A new "non-profit" university pops up almost every day on
the internet. Why is it, that education has become so expensive? Or a better
question, why is education so profitable? The university that I went to and
loved taught me more about how to work for a corporation than it did about
doing business. I have learned more about creating something successful and
work flow efficiency from listening to free podcasts. So why is it that our
world places such a high value on a decorated piece of paper with a calligraphy
signature?
A bubble in the market happens when
things are valued significantly higher than they are actually worth. From where
I am sitting that translates into a significant bubble of student loan debt
that will have an impact on the US economy.
Market
Bubble
Unfortunately, student loans aren’t
the only bubble I see. Warning, I’m about to nerd out a bit.
On the stock market there are some
complicated ways of determining a value of a publicly traded company that is
solidly based on the company’s assets and debts. The positive value of a
corporation is classified as “Shareholder Equity.” The equation is Assets-
Liabilities = Shareholder Equity. Shareholder Equity is classified on a balance
sheet under a liability because a balance sheet has to balance. If the company
goes under the shareholders are owed that amount.
Because of this there is an easy way
to calculate what a specific stock is actually worth. This is called the book
value of a stock. The equation is (Shareholder equity – preferred equity)/ # of
Shares outstanding.
Even though this can be calculated
easily, it’s not reflected in stock prices, and right now I see more disparity
than I did in 06-07. (I wish I had some examples saved from then)
Here is an example of the inflated
market. Google stock (GOOG) has a book value per share of $135.98, yet it
closed today at a price of $560.55(Source). You
can feel free to look for these large speculative differences on your own by
picking a stock and looking at its key statistics.
Jobs
Bubble
Perhaps the worst type of bubble is
the jobs bubble. We have seen a steady decline in our national un-employment
rate, as of today it is 6.3% according to the Bureau of Labor and Statistics.
What you don’t see in the headlines is that there has been a higher rate of
people leaving the workforce altogether and going onto Social Security
Disability. There are currently 8.9 Million Americans who have been removed
from the workforce and moved onto this other statistic which helps to reflect a
lowered unemployment rate. This isn’t a political statement; it’s simply the
numbers of it. (Don’t believe
me?)
Busts
There is one thing that is a certain
way to protect against the busts that these bubbles will create.
“Do not store up for yourselves
treasures on earth, where moths and vermin destroy, and where thieves
break in and steal. But store up for yourselves treasures in heaven, where
moths and vermin do not destroy, and where thieves do not break in and steal. For
where your treasure is, there your heart will be also.” – Matthew 6:19-21
Yet at the same time you don’t want
to be guilty of violating the parable of the talents and become too scared to
invest. I am not a financial advisor and I am not going to say what you should
or shouldn’t invest in specifically. I will say in general that once the busts
happen is when you should invest heavily. The whole principle of buy low sell
high… right now the market is high, when it busts, it will be low. Keep in mind
the companies that will likely be worth the most when we Millennials are ready
to retire are most likely not publicly traded yet.
Bottom line, when the bubbles burst,
don’t be afraid that is when we will rise to the occasion. Invest heavily in
companies that you believe are creating real value and moving toward the
future.
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