Why You Are Speculating Instead of Investing

People buying assets—stocks, bonds, commodities, real estate—are ignoring the assets’ returns-on-investment, and instead pinning their hopes that what they buy today will go up in price tomorrow.

This isn’t “investing”—it’s speculating.

Why is this happening? Easy—read on.

Tell me if this rings a bell: You spent a lifetime putting together a little nest egg, and you want to invest it in something that makes a decent return-on-investment. Something safe and boring, because you don’t want to spend a sleepless night worrying about your money.

Instead, you’re tossing and turning at night because you are not investing—you’re buying assets and hoping they go up before you sell them.

Now imagine a million other investors
and you’ll start to get the idea.

In other words, you’re speculating—you’re gambling. You’re hopping onto a stock for barely-logical reasons—then dumping it at a moment’s notice—then rotating into bonds because of some dodgy tip you heard from a buddy of a friend—then rotating out of bonds in a panic because of what some idiot on CNBC just said. Then you wonder if you should buy gold? Uh, no wait, agro-commodities—no, no, no, wait, uh, industrial commodities? Or REIT’s—or, no, ETF’s? Which one? . . .

Christ, whaddo I do . . .

It’s frightening, isn’t it, this buying into and cashing out of different assets—this perpetual momentum-chasing and constant speculation. As frightening as driving a convertible down a twisty mountain road at 100 miles per hour, with no brakes and iffy steering: It’s suicidal—yet there seems no way to get off this horrible ride.

Why are you chasing momentum and speculating? Why is your broker making more money off of your portfolio by way of fees than you are from profits?

Easy: Because today, there is no asset class which is giving consistently reliable, mid-level returns-on-investment.

And this is a deliberate policy . . .

Let’s look at the current investment landscape as it really is: Bond yields are nothing, dividends of stock are pathetic, rents are ridiculous compared to prices. And if you go into mutual funds or any of the other “financial products recommended by my investment advisor” (i.e., “hellfire turds with infinite hidden fees peddled by my local minion of the Demon Bankster Oligarchy”), you’ll probably barely keep pace with inflation . . . assuming of course there isn’t another market “correction”.

Those black swans are coming . . .

In short, nothing and no one is giving a nice, safe 7% or 8% a year that lets a retail investor like you or me sleep soundly at night.

That’s all you’re asking: A nice, steady return-on-investment. You’re not greedy, you’re not asking for 15% a year, not even 10%—just a measely 6.5% to 7.5% return, and you’d be a happy camper. Am I right?

But at best, once you factor in fees (which are the profit-killers in retail investing), no retail asset class gives you better than 4% a year, maybe 6% if you’re very lucky. To put that in context, to earn a measely $24,000 a year at 5% after all fees, you need investable assets of almost half a million dollars. And that return would be before taxes. After taxes, that would be . . . $18,000? $13,000, if you live in a high state-income-tax state like California?

$13,000 a year of net return-on-investment off of $480,000 in liquid, investable assets. [Long slow heartfelt whistle . . .]

Note that number: Close to half a million dollars in investable assets—that is, liquid assets. According to Federal Reserve figures, less than 1% of households have that kind of liquid, investable assets. Not real-estate or other physical assets or property. Liquid. Half a mill.

Half a mill, invested safely and prudently, gets you . . . 13 grand.

Jeez . . .

That’s what’s driven normally prudent, cautious people like you and me to speculate wildly, to take insane chances with their nest egg: Chasing returns. I’ve been writing about bitcoin and cryptocurrencies as of late, in the hopes of dissuading people from piling on to that chimera. They have no idea about bitcoins, and they could care less—all they know and care about is that it’s going up. They are chasing returns. And these are not greedy people—they’re just desperate. Meanwhile—and I hate to say it, as this might be you—people who don’t know any better are starting to play options and get into way-sophisticated, way-dangerous financial bets that could hurt them badly.

All because they have money, but that money is not making much. These people chasing returns aren’t greedy or evil. But they realize that, as they grow older, they won’t be able to count on Social Security to get them through their old age. They’ll need a nest egg that will produce enough income to get them through the thirty years after the end of their working life.

Because it is thirty years—and don’t ever let anyone tell you otherwise. Most people, especially those working corporate jobs and getting through a career as opposed to those who own their own business, will likely be sidelined by age 50, 55 tops. That is the reality of Corporate America: Unless you are in the rarefied upper-echelons of your company, you will be cashiered or otherwise sidelined by the time you’re 55—long before you become a liability (i.e., a pensioner) to the company you gave your working life to.

If you get sidelined at 55, and the average lifespan is about 80, 85, so then you need income that will get you through 25 or 30 years.

Once again, and with feeling: Jeez . . .

The origin of this insanity is well-known, and can be summarized in two terms-of-art, six words in total: Zero Interest-Rate Policy, and Quantitative Easing.

ZIRP and QE, as they are known, are the Federal Reserve policies that keep interest rates low. Low interest rates mean asset-price inflation, which translates into low returns-on-investment across the board.

To explain in simple terms: Low interest-rates from the Fed allows banks to borrow cheap money and go out and buy assets. Since you have more demand for the same assets, those assets naturally go up in price. As they go up in price, their return on investment decreases as a percentage of their purchase price. If a stock costs $100 and delivered 10% a year in dividends, with the higher asset-price of $200, that ROI is halved. The same mechanism (basically) works across all other asset classes.

You know the easiest way to spot asset-price inflation? The art market, and the market in collectibles. Art and collectibles are the ultimate greater-fool asset: You will make no money off of buying art or a collectible until and unless you find someone willing to pay more than what you paid for it.

Notice how lately, contemporary art prices have become insane? A Francis Bacon triptych just went for $142 million, a Norman Rockwell for over $40 million. Baseballs are going for six figures, and other ridiculous collectibles—rock concert posters, vintage video games (I’m not kidding)—are also going for absurd sums of money.

But you don’t need to go to the rarefied world of Sotherby’s and Christie’s, or the webpages of eBay—you can go down to your local Century 21 and see how housing prices have “rebounded”.

Nothing has changed in the American economy since 2009—the economy is still struggling, unemployment is still high, debt loads are still monstrous. But home prices are surging like it’s 2006 all over again.

Why? ZIRP and QE. The fact is, asset-price inflation is the whole point of the Fed’s twin policies: The Fed wants assets to be overpriced, and thereby give the impression—the illusion—that the economy is better than it actually is. With home prices up, people feel rich . . . even if they really aren’t. With stocks overpriced, 401(k) accounts are higher than ever . . . even as the stocks underlying them give dividends that are microscopic.

And it’s working, too: This morning, I read what I call a Cheerleader-Headline: “US Household Wealth Reaches High of $77 Trillion”. It’s an Associated Press story, and it sure does sound great, doesn’t it?

The only problem is, it’s not real. All those assets underlying household wealth—home prices, stock prices, bond prices—have all been artificially inflated by ZIRP and QE.

Since assets are on the rise, and since returns-on-investment are paltry, people see the rising asset-prices and say to themselves, “If only I’d gotten into XYZ stock or ABC bond, I would have made a pretty penny when the price of that asset popped, instead of being stuck here in this 4% ROI grind.”

After all, the 4% ROI grind—cruddy though it is—wouldn’t be so bad, if inflation were zero. But it’s not. So the 4% ROI grind is in fact eking out a measely, microscopic 1.5% to flat-1% return-on-investment.

Meanwhile, speculators are making out like bandits.

Repeat after me, with a disheartened and defeated sigh: Jeez . . .

So ordinarily prudent investors like you or me join the bandwagon: They start to speculate. And soon they—me—you—are miserable, getting hammered with each “sure thing”, making increasingly foolish bets to recoup the losses on previous “investments”. In short order, what was once conscientious investing that had turned to impetous speculation soon descends into pure, mindless, panicked gambling—

—and all of a sudden, your nest egg has taken a nasty hit: A loss of 20%, 30%, 40%.

And no one to blame but the guy in the mirror.

Jeez . . . Where’s the hemlock already.

They say that the first step to a cure is to identify the root cause of the problem. And we have: It’s the Fed creating an environment of cheap money. This is creating a “boom” market that is based on speculation—not real value. Returns-on-investment are exceptionally low, encouraging people to speculate, driving up the prices of assets, which in turn lowers returns-on-investment, further encouraging people to speculate. Rinse and repeat.

This spiralling asset bubble—because it is a bubble, and it is spiralling out of control (I mean, really, Twitter has a market cap of $25 billion on exactly $0 revenue?)—is why returns-on-investment are so paltry, encouraging speculation.

So! What’s the next step?

The first thing, after recognizing why we are in this period of irrational aset-price inflation, is to realize that this period will end. Like in a game of musical chairs, some players will realize this won’t end well, so they’ll scramble for a chair—and then everyone will be rushing for a seat.

When that happens, when this asset-price game of musical chairs finally ends, it will be nightmarish for all involved—but there will be tremendous opportunities after the crash.

Just as asset-prices have soared ridiculously, asset-prices will collapse more than they deserve, once this game of musical chairs ends.

Now, the next step is to figure out what to do. That’s what we do at SPG, try to figure out scenarios about what to do and how to invest once this period of cheap-money/asset-inflation ends.

But for now, in this essay, realize that you aren’t alone in having sleepless nights. Rest assured that it’s not you who’s crazy and the markets sane: It’s the markets—goosed by the Fed like a junkie high on heroin—that are insane.

Recognize the insanity, and prepare for the crash.

At my Strategic Planning Group, we’re working on what do when the SHTF. To see what it’s about, check out the SPG Preview Page.