Occam's Razor

In a recent post, I suggested leading a logical life. It’s logically the logical thing to do.

Of course, it’s hard to say what is logical, as there is a lot of murkiness in the world. To deal with the murkiness, sometime toward my late forties I hired a financial adviser who gave me all sorts of logical advice about how to manage our finances. It was good advice. He must practice his own advice because after he retired I found another financial adviser so the good times could keep coming.

His advice costs me a few thousand bucks a year, but I figure it’s worth it. I likely wouldn’t be as successful financially on my own, as the ins and outs of markets leave me bewildered. Markets really don’t make a whole lot of sense. One sensible piece of advice that investors will hear from reputable advisers is not to time the market. Find a sound financial strategy and stick to it. Ride the ups and downs in the market. Always think long term.

It’s been good advice. As I noted in previous posts, our wealth is a result of investing regularly, but it was greatly assisted by the collapse of markets in the Great Recession. By accident instead of design, I ended up buying lots of funds when they were grossly undervalued and watched them steadily appreciate over the last decade.

Buy low, sell high is great advice too, but you never really know when a stock or a fund is a good value. Currently the cost of buying into the market is quite high, by historical measures. I don’t trade in individual stocks. Like most Americans, I trade in funds: mutual funds and ETFs for the most part, along with various commercial and government bonds. It makes sense: any individual stock can have huge fluctuations. I find safety in market baskets of similar funds instead.

Every year when I think stock prices can’t get higher, I seem to be proven wrong. 2018 turned out to be a no-growth year because of a selloff in December 2018, but 2019 was phenomenal, with funds up more than twenty percent. It’s crazy but looking at our investments, since we retired in 2014 we’ve nearly doubled the value of our portfolio mostly by doing nothing but periodic rebalancing.

Given all this, it would seem foolish to start cashing in our chips. And yet today, that’s exactly what I did. I didn’t do it with our entire portfolio, just with the part I control. Our financial adviser oversees our assets in TD Ameritrade, but I oversee the funds in my Thrift Saving Plan (TSP), the federal government’s 401K system for its employees when I was one of them. Until now I’ve been mirroring in that fund the plan our adviser has been recommending in our TD Ameritrade account: 60% stocks, 40% bonds. Today I issued an order to the TSP to rebalance these funds to 40% stocks and 60% bonds.

Crazy? It might be. While no one can time the market, for a long time I’ve been queasy about being so highly invested in stocks. Our financial adviser said not to worry because my pension means that we can assume more risk, and thus reap greater rewards. And he’s been right. I keep waiting for this house of financial cards to collapse, but it doesn’t seem to be doing that.

While not an active investor, I do watch a fair amount of financial news and look at trends. Certain mega-trends that have me worried. What I keep seeing is that we’re doing the same stupid stuff that led to the Great Recession. It really looks like we have a credit bubble underway. If this bubble pops pretty soon, I’m going to look smart. If it doesn’t, I’ll look kind of silly. But consider these statistics:

• Corporate debt is now higher than it was before the Great Recession: 46.5% of GDP in 2019
• Credit card debt is at an all time high of $930B, which is $60B more than at its peak before the Great Recession
• Auto loan delinquencies are at an all time high too, past the Great Recession rate. Some 7 million Americans are 90-days or more behind on their payments
• Overall household debt is at a new high of $14.15T, as of the end of 2019
• Student loan debt is at $1.4T at the end of 2019, and no one realistically expects most of these loans will be fully repaid
• Wage growth has been mediocre. One percent real wage growth per year is certainly better than no wage growth, but it’s hardly a shot in the arm to the economy, which is probably why debt is up so much. The real cost of living is much higher than this mediocre wage growth which means most Americans are treading water financially. To the extent lower wage workers are doing better, it’s largely due to raising the minimum wage in more progressive states and localities.

The Fed is keeping the economy primed by injecting cheap money into the economy, which is encouraging the record high debt statistics. Because Trump’s tax cuts benefited largely only the rich, who can’t spend much of this new wealth, the Fed has to prime the economy instead.

On the plus side, mortgage default rates are half what they were before the Great Recession, which is probably because it’s still harder to get a mortgage than it was before the Great Recession, when pretty much anyone could get one with no money down.

All of this strikes me as showing that our economy is fragile and built on large amounts of unsustainable cheap credit. Certain sectors of our economy are in recession. Many nations are already in recession. Then there is the fallout from trade wars and now a coronavirus to worry about. Given all these risks and the huge credit bubble, my gut tells me that things are overdue to fall, perhaps spectacularly again. And when they do, the Fed will have few tools to use.

In general, stock prices strike me as crazily overvalued, pumped up by cheap credit and stock buybacks financed by cheap credit. All this cheap credit is encouraging unhealthy levels of debt by all sectors.

Obviously, I could be wrong on all of this, but reallocating about $100K in our portfolio from stocks and toward bonds lets us reap these inflated stock prices before most catch on that these assets are wildly overvalued. Also, when stocks return to more reasonable prices, we could buy them cheap again.

We’ll see what happens but I’m betting I made a smart move today.