U.S. household equity is now worth a whopping $100T.
If the Federal Government defaults on its debt, it can, in theory, of course, nationalize 21% of private assets and be done with it.
The world today is so wealthy that if Jeff Bezos were to take his entire net worth and ask a residential real estate broker to buy single-family homes with it, the agent could fly to Phoenix, AZ and within a month, that money would be gone, as if it never existed.
$140B is a drop in the water in today’s world.
With regards to investments, tens of trillions of dollars are looking for the best risk/reward ratios at any given moment.
Literally, millions of people wake-up every day, in all corners of the world, and attempt to answer this question in the best possible way. Between part-time investors, full-time investors, pension funds, hedge funds, sovereign wealth funds, CEOs, and private equity groups, we are all looking to achieve the highest return possible, adjusted for risk.
In other words, we’re all looking to create the ideal balance between total returns potential and risks assumed.
In 2008, for example, the entire investment community voted for no risk tolerance at all, so we saw investors selling their stock positions, without regard to the total returns potential – they simply wanted out.
In order to invite them to take risks again, the Federal Reserve made the alternative choices, namely bonds and the interest rates they pay, a non-alternative, essentially, by slashing interest rates to zero.
When a blue-chip stock, such as Hormel Foods, one of the biggest winners from my post-crisis portfolio, can pay a dividend yield, which is infinitely higher than a bond and offer valuation upside, you buy the stock over the bond.
Today, Hormel Foods is not a bargain at all. Not only has its price risen from $7.60 at the depths of the 2008 meltdown to around $40.00 today, but its current dividend yield of 1.89% is lower than the yield the Treasury Department pays on the 2-yr bond, which is 2.8%!
Today, investors do have a choice.
The S&P 500, the most important index in finance, has an average dividend yield of 1.76%, which is even lower than Hormel’s.
This situation explains why gold and silver are less attractive when short-term bonds, such as the 2-yr bond, pay close to 3% yield, with inflation still moderate and stable.
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In the end, investors can now take on less risk and get paid well for it, so they will, at some point.
The tax cuts have made stocks far more profitable than they would be otherwise, so investors still choose stocks over bonds, but the jolt from the tax reform will soon be done away with, at which point stocks start looking expensive again.
Portfolio Wealth Global anticipates yields on bonds to start heading down soon, which will help stocks look more attractive once more.
This is the reason we will keep monitoring this spread, since it was only as wide in 2008.
As you can see, there is predictability to these cycles, and learning these relationships will help you be a profitable investor, a contrarian when you need to be, and a trend follower, when those times appear.
The cannabis bull market continues to be the most profitable of 2018. Finding an undervalued company is becoming much harder, which is why I’m excited about two businesses we are actively conducting due diligence on. They have all the makings of another big winner.
Best Regards,
Tom Beck
Research Partner, PortfolioWealthGlobal.com
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This work is based on SEC filings, current events, interviews, corporate press releases and what we’ve learned as financial journalists. It may contain errors and you shouldn’t make any investment decision based solely on what you read here. It’s your money and your responsibility. The information herein is not intended to be personal legal or investment advice and may not be appropriate or applicable for all readers. If personal advice is needed, the services of a qualified legal, investment or tax professional should be sought.
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