On this week’s show, Karl explains why you should care about the dollar and its poor performance over the past few months. Do politicians in the U.S. really want a strong dollar?
Karl Eggerss: Hey, everybody. Welcome to The Eggerss’ Report. It’s your investing playbook. Thank you very much for joining me. Appreciate it as always. On this episode, we’re going to get into what was moving in the markets this week, and got some really important stuff to share with you. A lot of this has to do with the current environment we’re in. It has to do with the, really, the psychology behind investing and trying to make you a better investor and really just keep you on track.
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This week had a lot going on. We had this big economic forum and summit in Davos, Switzerland. I didn’t get that assignment to go over there and do that, but not sure a lot comes out of that. We did see on Friday, we saw the President Trump speech. Very interesting. Very, what I thought was a good speech, especially considering the speeches we’ve heard in the past from other presidents, this was “America first” speech. It was, everything’s good, we’re open for business, American first, but he said the interesting thing, which was American first, but you should, as a leader of your country, you should put your country first, just like we want to put ours first, and that’s the way this works.
It’s not America is the best and the greatest and everybody else is not. It is that every leader needs to put their country first and trade and get the best deal of their country. That’s what this speech was about, and it was obviously touting the stock market and the unemployment rate, especially for minorities, all of these things, but it was a bold speech that we’re not going to get, pardon the French, we’re not going to get screwed anymore on trade deals. Those days are over, and look, the market, at the end of the day, this stock market is about profits going up, but sentiment plays a very big part, and there’s no doubt that people are more upbeat about the economy and the stock market. We see it in just all kinds of ways, and that could continue for a while.
Obviously, as this improves, and the sentiment is, it’s which one gets ahead. Does the sentiment get too far ahead of what reality is? Just like in ’08, things were bad, but did the prices get too low for the actual news, and now, are we getting the opposite? But what’s interesting is, we’re seeing, I mean, we’re having some of these earnings, right now, for 2018, earnings are looking like they may go up by 16% as some of the estimates. For the whole S&P 500, 16%. Now, it was 11.5%, so you’re seeing upward revisions in earnings whether it’s financials, telecom, all these different areas, technology. These are areas that are seeing adjustments up, and as that happens, the stock market’s adjusting appropriately because, again, that’s what it’s made of, are profits of companies.
I mean, you’re seeing, obviously, the market’s off to a very good start, especially areas like, I mean, biotech has been really strong, up probably over 8% just this year, emerging markets, very strong, up, I think emerging markets are up something like 10% this year. I’m sorry, biotech was up 8% this week, but up about 13% for the year. We’ve been seeing health care doing extremely well. We’ve been seeing gold miners doing extremely well, silver and just, there’s a lot of stuff doing well this year, but some of the biggest movers on the year have been biotech, steel companies, energy, emerging markets, discretionary, I mean, semiconductors. All those things are doing well, which is, it’s broad-based. It’s a very broad-based rally, and we’re, still, not seeing signs of weakness.
Now, are things stretched, and have we been taking some off the table? Yes. In some of our strategies, the ones that are concerned about more volatility reduction and tactical, we’ve been scaling back a little bit, taking some profits on some things and just parking that in the money market, and that’s how you do this, and you look for an opportunity in something else. It doesn’t mean the market has to fall, but opportunities will present themselves, so we are still very stretched, but in terms of the broad market, it is still in a stealth, healthy, bull market.
Now, probably the biggest thing this week, we obviously had that speech on Friday from President Trump early in the morning, was, we got the longest span in history without a 5% correction, and again, will it happen this year? Probably so. Will it freak people out? Probably so, but really, the big news this week, to be honest, was this, really, dollar talk.
Now, before you turn off the podcast and say, “That doesn’t have anything to do with me,” it really does. It has a lot to do with you. What’s been happening is, over the last several years, the dollar has lost a lot of its value. I mean, if you go back to the 1800s, a dollar’s probably worth a nickel of what it used to be worth. You go, “Wait a second. It’s this little square piece of paper. What do you mean it’s only worth so much of what it used to be worth?” Well, it’s how much stuff does it buy, and it buys a lot less stuff than it used to. That’s called inflation. We know the dollar’s getting weaker, but it’s also relative to other currencies, so how strong or weak is the dollar versus other currencies? The reason this matters is because countries use their own currency as a way to speed up or slow down or strengthen their economy. If we want our economy to do well, the dollar gets weaker, people buy more stuff here.
Over the years, we’ve seen leaders say, “We want a strong dollar,” but they really don’t. It’s been interesting because you know this dollar started to fall when President Trump was talking about it in a negative way, and sure enough, it went down. Now, here’s the interesting thing. Usually, when the federal reserve starts to hike, people think, “Oh, that means the economy is better. That means our dollar in the US is stronger,” and we showed evidence of that in our client newsletter several months ago that that’s not the case. Quite the opposite. When they start to hike, sometimes, the dollar starts going down because it’s already anticipated this hike. That’s exactly what we’ve seen, is the dollar has been getting much, much weaker.
Well, this week, the dollar had a very tough time of it. Again, if you’re looking at it saying, “Well, why does that matter to me?” Well, it matters to you because it does make stuff around the world more expensive. By the way, the dollar, just since the beginning of ’17, so a little over a year, is down about 14%. That’s a big move for a major currency against a broad basket of other currencies. You’ve seen gold start to rally. I mean, look. Since the beginning of ’17, gold is up, the price of gold’s up about 20%. Same thing with some of these gold miners. They haven’t really, they’re up about 26%.
Those things started to move this week, and we’ve seen that in the last few weeks, gold, all these metals starting to move and kind of, is it inflation? Well, if it’s inflation, you might see the dollar strengthening, but instead it’s weakening.
The reason all this is important, especially for retirees, is that the dollar movement is directly correlated to your purchasing power. While most of these commodities around the world are priced in dollars, so as the dollar goes down, it makes stuff more expensive for you to buy. The dollar falling is making things more expensive. This goes to the point of, if you’re sitting there saying, “I want to be safe; therefore, I have a lot of money in CDs and money markets,” you can see why that’s a false statement. You’re not being safe because everything’s going up around you, and it’s getting more expensive, and so when you take those dollars and buy stuff, you’re falling way behind. You’re poorer and poorer and poorer, and that’s what we’ve seen.
It’s just the opposite of 2008. In 2008, everything around you where it’s going down in price, real estate, stocks, housing, you name it, everything was losing value, and so holding on to a dollar or a treasury bond made a lot of sense, but that’s not the case right now. If you say, “Well, I don’t want to invest in stocks because it’s risky,” the bigger risk may be that you’re holding something that’s going down in value. That’s the biggest problem is people believe the cash they hold on to is a fixed asset that does not lose value. It certainly does, and it’s doing it in a big way this week, and so we started to see some kind of exchanges through the media about where the dollar might be going and what’s going on with the dollar. Then of course, they try to get on the same page. Friday, President Trump says, or Thursday, “We’re going to, the dollar, yeah. We need a strong dollar.” We’ll take that with a grain of salt.
That was probably the biggest news on the week, but we are off to, and this is another thing, we’re off to one of the best starts in history for, we’re off to the best start for the stock market since 1987. If you look back what happened when the markets got off to this good start, let’s call it more than 5% through the first three weeks of the year, generally, you’re going to have another 3% on average gain for the rest of the year. Now, you have had some big draw downs. 1987, I think we know what happened in 1987 as far as a decline and finished the year poorly, but, obviously, fell when we had the ’87 crash, but you’ve had some big draw downs.
Again, that wouldn’t surprise us to see some type of pullback. Again, it’s going to feel much bigger than it is because we haven’t had this 5% correction in such a long time, the longest streak ever, but one thing, I talked about it last week, is staying in your lane. All that simply means is don’t try to compare yourself to your neighbor who’s in a completely different situation than you. I want to reemphasize that today because, again, I’m seeing more and more of it, and it’s natural in a bull market. It’s natural to, I mean, an extreme example would be in the dot-com bubble, and this was literal, I would have widows calling me that were clients and say, “Can we participate in any of these IPOs that are coming out I’m reading about?”
I’m not exaggerating. That was some of the chatter back then. You’re going, “Wait a second. You have this finite amount of money. You’re living off of it. You’ve told me you wanted to be safe.” There’s a disconnect there. We’re not seeing things to that extent yet, but we are seeing things like you put together an income portfolio for an individual, and that income portfolio’s meant to be income-producing, stable, low volatility, not really correlated to the stock market at all, and somebody says, “Well, the stock market’s doing much better than what that income portfolio is doing.” You say, “Well, yeah. That’s the point. It’s supposed to be different. It’s not supposed to keep up with the stock market,” but guess what? When the stock market’s going down 20% like it did in 2011 and had a nasty 2016 pullback, that portfolio didn’t do that. It’s important to stay in your lane, so to speak, and to just focus on your goals and have strategies that match your particular goals because you really don’t know what’s going on with your neighbor and what their specific situation is.
The other thing I want to talk about is if you are in a mutual funds specifically or an advisor with a strategy, not so much ETFs, but something that’s actively managed, if somebody has a system or an approach and has a good philosophy, they’ve shown success doing this over the years, sometimes, they’re going to deviate in terms of performance, and that’s very natural. It’s also natural for investors to want to bounce around from strategy to strategy because everybody always wants the best returns every single year.
You think about the Warren Buffetts of the world, some of the best traders of all time, and those folks, obviously, have had years where they did not do very well, long stretches maybe, three, four years, because whatever they were doing was either not in vogue or the market’s not recognizing value if they’re a value person. In the last ’90s, it was about pure momentum, so Warren Buffett was falling behind. Everybody was like, “He’s lost his touch. It doesn’t invest in technology.” Market was rewarding growth and was paying a ridiculous premium for that. Meanwhile, he had some good companies that just weren’t getting rewarded. Then of course, the dot-com bubble happens, and then obviously, he comes back in vogue again, and he’s a hero.
I think it’s important to stay on that strategy, whatever it is. Some of the most successful people even, let’s just use real estate as an analogy, people that are in real estate, if they’re good at flipping homes or if they’re good at lending money or if they’re good at buying apartment complexes, it doesn’t mean they’re always going to get the returns they want or there’s always a deal there, but if they stick with it, they’ve shown to have success over the long term because they have a strategy that makes a lot of sense.
If you have a fund and it’s not doing what you think it should do, look at how it’s constructed and why. In other words, is it supposed to keep up with the stock market? Is that what it’s meant to do or not because if you have somebody that’s invested in international stocks, you can’t compare that to domestic stocks. If somebody has huge, large concentration of stock positions, they’re not going to move like the S&P 500. You can’t compare something that has 20 stocks with something that has 500 stocks, and they’re going to ying and yang. Again, it just goes back to diversification and realizing that a portfolio is constructed of different pieces, and those pieces sometimes are meant to move differently from one another. That’s really important to understand that over long term.
Last thing I was going to leave you with is, what’s interesting is I came across a chart today, and it was basically where all the money is invested around the world. It’s broken up by tiers of net worth. What’s interesting is, under a million dollars, most people are going to have their network is in their house, and probably in their vehicles and some in a retirement. Then they have actually the biggest percentage of liquidity. Generally, the less somebody has, the more cash they have, and I think there’s an interesting point there that if they were to get that money invested and not [inaudible 00:19:25] the liquid, they maybe will move up into the next tier.
But what’s interesting is as you move up the net worth tier, each tier by tier, so 100,000, a million, 10 million, 100 million, a billion, one consistency among this that I’ve seen is that as the bigger some of these people get, business interests is the biggest correlation. It’s kind of the chicken and the egg, but people that have over a million dollar in net worth tend to have some business interest, whether it’s their own and that’s how they got there, it is invested in somebody else’s, but it’s business interests.
Real estate is, actually, for billionaires, is not a big percentage of their net worth. Business interest is the biggest. That’s probably the most consistent theme I can see between these tiers, but I think the thing that screams out at me is residence, their personal residence isn’t a big percentage, their vehicles are minute, but as you start to look at people that have less than $100,000, a lot of cash on hand, percentage-wise, and a lot of in vehicles, and that’s not good. I mean, you’re probably looking at maybe 15-20% of their net worth is in their vehicles. That’s assuming it’s paid off. A lot of people are upside down on their vehicles.
Just wanted to toss that out that the correlation I see is that people that don’t have a lot of money tend to have a lot of cash and vehicles, things that are not going up in value, to be honest, and the people that have the bigger chunks of money are the ones that are invested in businesses, what else here, stocks, assets, things that, and really, it boils down to that. You’ve got a dollar bill. What are you going to do with it? Are you going to put it in something that’s depreciating or appreciating?
Just to wrap up here, as far as the market’s concerned, we’re still seeing one of the bigger things this week was interest rates, and I think that we’re still seeing interest rates kind of, they’re at a new high that we haven’t seen in a while, probably since 2014. The next line in the sand’s going to be 3% as we mentioned a couple of weeks ago, and we’ll see what happens at that point, but if this economy keeps accelerating, and GDP came in lower than expected, but markets still kind of ignored that because it’s kind of backward-looking, but if this economy keeps accelerating, expect those rates to gradually to continue to rise, and that’s going to continue to put pressure on utility stocks, income-producing securities, public REITs, things of that nature, and probably at some point, you’ll start to see consumer staple-type stocks get hit. It depends on which ones and what they’re doing, but some of these that are real high dividend paying and they’re almost like a glorified bond, those will get hit at some point.
As we move along in this market, you’re going to have to start looking inside the portfolio and dissecting what do you really own and starting to figuring out do I need to tweak some things because something tells me, 2018, by the time it’s all said and done, won’t look like 2017 in terms of what was working and what wasn’t.
The first few weeks have a little bit, but I think there could be a change, and you need to adapt to that. Again, the first thing is always to figure out, what are you trying to accomplish, and then look at the environment we’re in and figure out what you’re going to do about it and put a portfolio together that makes sense.
Hey, just a reminder, if you want to email us, Karl, K-A-R-L @eggersscapital.com. You can call us 210-526-0057. Eggersscapital.com‘s the website. Tune in every Monday morning. We are on KTSA in San Antonio. It’s streaming. You can go to 550 KTSA in San Antonio. I do an interview on the Trey Ware Show just to give an update on the markets, really, whatever he asks regarding the economy or the markets. We post that on the site too, so again, if you want to get that information, just sign up for the blog. It’s totally free, and we’ll get you on there and get you start getting some of that information so you can hopefully become a better not only investor but just better with your money overall. A lot of you are doing great things, and it’s really, sometimes, it’s just some tweaks.
I had a gentleman in this week. We were looking at doing Roth conversions from his IRA, and we’re trying to get them done by age 70 so he will not have required minimum distributions. He wants to leave it to the next generation. He’s in an extremely low tax bracket. We don’t just invest money here. We’re looking at stuff from this bigger picture, and that’s really important because the investing is just one piece of the puzzle of your financial world. How much protection do you have from risk in terms of your overall life, what things are going on in your state, are you optimizing social security, those are all things we try to do here at Eggerss Capital Management and help people with.
Have a good weekend, everybody. Take care, and stay well. We’re getting a lot of flu going around. I haven’t had the flu, but I had a lot of the crud a few weeks ago, and healthier now, so anyways, have a great weekend. We’ll see you right back here next week on The Eggerss Report.
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