Dear Diary,

First, we check in with the markets.

What’s new?

Not much. The Dow crossed the 17,000 mark yesterday.

Janet Yellen is supposed to address the world today from Jackson Hole, Wyoming. It is hard to imagine that she will say anything surprising… or even meaningful. Commentators all over the planet are waiting to analyze each word… hoping for a hint of what is coming.

They want to know when we will be leaving this wacky world of price fixing by central banks. They want to know when we will get back to more normal interest rates and a more neutral monetary policy.

We think we have the answer already: Only when we have no other choice.

The world’s largest economy, and its capital markets, depend on cheap credit. Take it away, and asset prices will collapse… and the economy will go into a recession/depression.

Yellen can’t allow that. It goes against all her training, her convictions, and her most treasured delusions. She will fight the inevitable downturn with more liquidity and more free credit… until the whole shebang blows up.

Then, and only then, will things go back to normal…

Going for Broke

The Congressional Budget Office (CBO) issued a report last month. Hardly anyone even noticed it. But its news was shocking…

Turns out, the US will go broke 20 years sooner than projected. Not in 2050 as previously forecast, but in 2030 – just 15 years from now.

Fifteen years is a long time. Anything can happen. But our job is to look ahead. And when we take a peek at Social Security’s finances, we’re glad we’re not counting on it to fund our old age.

The CBO says Washington’s deficit has increased 400% in the last six years. It is now $15 trillion short of the amount required to fulfill its commitments over the next 75 years.

So, what does this mean?

As it also turns out, we were sitting at our window at the Mount Juliet Hotel, in County Kilkenny, Ireland – looking down at the north-flowing river beside it when we were suddenly overcome with an insight so profound we had to grip the arm of our chair with one arm to steady ourselves… and reach for our glass of Jameson with the other.

Government is widely seen as “a force for good.” Republicans often think it is only a force for good overseas… particularly when it is invading another country.

Democrats often think it is a force for good at home as well as abroad. At least Hillary Clinton thinks so. There is little doubt it has done her a lot of good. She’s spent almost her entire life on the government payroll – never having to provide a marketable product or render a real service to anyone.

Historically, as well as intrinsically, government has been a means for some people to control and exploit other people – as slaves, soldiers or taxpayers.

But compared to historical standards, government now seems almost benign… as though it really is concerned with the welfare of the people it ruled.

After all, isn’t Social Security a good thing?

Doesn’t it prove that government is now civilized… and that we should all get behind Hillary and other well-intentioned politicians so they can do a better job of helping us?

Civilization and Wealth

Stop! We’re feeling a little sick.

But not so sick as to forget the point: How come government seems more benign now than it did in the past?

Has it finally abandoned the brute force of Genghis Khan’s army or the naked aggression of the Third Crusade?

Social Security appears to offer no particular advantage to the ruling elite (except helping them to remain the ruling elite by getting reelected). And aren’t the governments of the richest, and most civilized societies, also the most civilized?

Glad you asked those questions. Because we have a good answer:

Civilization goes hand in hand with wealth; the more civilized a nation, the richer it is. Wealth goes hand in hand with power; the wealthier a society is the more lethal it is (because it can afford more firepower and more advanced weapons).

In other words, it is not military success that breeds civilization; it is the other way around.

What does this have to do with Social Security and the stock market?

We’ll try to remember… over the weekend… and have an answer for you on Monday.

Regards,

Bill

Market Insight:

Should You Do As Warren Does?

From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners

Another sign of a market top?

Warren Buffett’s investment and holding company, Berkshire Hathaway, Inc. (NYSE:BRK.A), is sitting on a record cash pile. From Reuters:

Cash at Berkshire Hathaway stood at just over $55 billion as of June 30, an all-time high and two and a half times the level he’s in the past said he likes to keep on tap to meet extraordinary claims at his insurance businesses. That’s also up more than 50% from a year ago

Buffett’s preference for cash runs directly contrary to recent moves to cut cash by Mom & Pop investors.

According to the July asset allocation survey from the American Association of Individual Investors, individual investors have cut cash in portfolios to 15.8% – a 14-year low.

There are two possible reasons for this big divergence…

1) Buffett likes to “swing for the fences” and make big investments when the right one comes along. So, he needs to be more patient than your typical Mom & Pop investor.

 
2) He can’t find investments that are good bargains because asset prices are too frothy right now. So, he is waiting until the next correction – or crash – puts quality assets on sale.

 

Whatever your take, at Bonner & Partners, we recommend all our readers have some cash in their portfolio.

How much cash?

That depends… But generally speaking, you want to hold more cash, relative to other assets, when asset prices are above their historic average. And less cash, relative to other assets, when asset prices are below average.

Cash gives you flexibility. If you have a decent-sized allocation to cash in your portfolio, you can use it to pick up bargains when they come along.

The other benefit of cash: It offers cheap portfolio protection in bear markets… and market crashes.

If, say, you are 100% invested in stocks during a crash… and the stock market goes down 30%… your portfolio is going to take a roughly 30% hit.

If you are only 50% invested in stocks – with the other 50% in cash – during the same 30% stock market crash, your portfolio is going to take only a roughly 15% hit.

Cash limits your losses. Meanwhile, it increases your potential gains because you can buy “on sale” assets, as those around you panic.

Most investors value cash based on the available money-market rates. But this misses the point.

A better way to view cash is that it’s bounded, on the lower side, by its return (on deposit, or whatever). But on the upper side, it gives you the potential for the kind of outsized long-term returns you get when you invest in beaten-down assets at extreme market lows.

The kind of strategy, in other words, that’s second nature to a former Benjamin Graham student such as Warren Buffett…

P.S. Another Buffett “secret”… He has long collected dividend-paying stocks to provide income for Berkshire Hathaway. His stake in Wells Fargo alone earns Berkshire about $650 million annually at the current dividend rate.

If you are interested in an unusual – but effective – way to add extra income to your portfolio, keep an eye out for tomorrow’s Diary of a Rogue Economist Weekend Edition. It will include a special invitation for Diary readers to learn more about this unusual income strategy.