Risk and the perception of risk are two different things.
Until we believe this fact, we are trapped in a cycle of small thinking. We are right where the mavens of Wall Street want us to be, a mass of sheeple fearful about investing outside the box, content to invest in mutual funds along with everyone else.
“There is no competition outside the masses. Strive to be outside the competition.”
Wall Street wants us to believe they are the wise wizards running everything exactly as it should be. They’ll take good care of themselves…uh…I mean us, if we let them.
The Fed continues to print Trillions of dollars. Hyperinflation is a serious possibility given all the money being created out of thin air. What does that mean for you and your investments?
I really hope the market keeps soaring. It would be great to see our 401(k)s turn into 1604(k)s, or even 3208(k)s, in the next decade or two. But there will soon be powerful pressure fighting this upward surge. It’s the basic principle contained in the Law of Supply and Demand.
Supply and demand are the foundation of this article as we examine an important question. Who will buy all the stocks in the markets when the Boomers cash out to fund their retirement dreams?
First, consider this: Why are the markets moving higher? Where is all this money flooding the markets coming from? Can this go on forever? Then consider this: What will happen when the Boomers sell off $30T in assets in a short period of time? Are there enough buyers for all those sellers?
Later we’ll circle back and explore how you can get off this merry-go-round and invest outside the masses. We’ll look at how you can hedge this possible crash in the market if and when the laws of supply and demand actually function. For now, let’s start with why the markets are moving higher and where the money is coming from.
What’s Driving the Markets?
These issues are intertwined. The Fed is printing money again under the guise of propping up the economy in a Covid crisis. Not just printing money, but also buying Exchange Traded Funds (ETFs). Yes, the Fed is investing alongside you right now. The Fed is buying stocks, either directly as mentioned in Marketwatch, or indirectly as the trillions of dollars they already printed flow into the coffers of financial institutions, who then turn around and invest that money in the stock market. The market is now at all-time highs. The Fed’s trillions have done this.
First, the demand side. It’s easy, right? People pay more for things that they really want, and less for things they don’t want as much. Garlic ice cream would have to be given away, while Haagen Dazs salted caramel commands a nice premium. The same holds true in the stock market. As long as more money chases a fixed quantity of desirable stocks, prices will rise.
But our insatiable desire for goods is only one part of demand. Those desires are being funded by an increase in the money supply. Since 2008, over $15,500,000,000,000.00 ($15.5 Trillion) have been created out of thin air by central banks around the world. The US accounts for $7.5 Trillion of it. Governments have printed Trillions of dollars. It had to go somewhere.
For a long time, it went to rescue failing brokerage houses. It went into bank vaults to prop up the balance sheets and horrendous sub-par liquidity issues that banks created for themselves in the 2008-9 housing bubble debacle. So, this money really had no velocity at all. It was just sitting there “doing nothing.” But now, as stated in a May 2020 USA Today article, “The Fed’s goal: To keep markets functioning after they had seized up in fear” during the Covid panic.
The lesson here is that creating more money, as they did in 2008-2009, doesn’t alone create inflation. The money must be circulating. Printing money in May 2020 to “keep the markets functioning” is all about movement. Or in technical terms, velocity, or movement of money from one good or service to another.
The stated goal of the Fed is to make the money move– that is, to stimulate the economy. And that leads to inflation. Prices go up.
To Infinity and Beyond? Or Does What Goes Up Have to Come Down?
Second, let’s look at the supply side. When there’s scarcity, people bid up the price. When there’s an excess of supply, the price goes down. So how about the supply of stocks? Is it increasing, staying the same, or decreasing? Here’s some alarming news:
The supply of stocks has fallen by nearly 50% since the late 1990s. When there’s a fixed supply of money chasing a falling number of goods, we see price inflation. But now we have a growing supply of money chasing a shrinking supply of goods. Anyone besides me see a perfect storm coming here?
The number of stocks available for purchase is falling and monetary supply is increasing. This means more money (demand) is actually chasing a smaller supply, pushing stock prices even higher.
But stocks will not be in short supply for long. When the Boomers sell off their mutual funds and stocks to pay for expensive long-term care, medicine, groceries, trips to Europe, etc…the supply of shares for sale in the market will go up significantly.
And here’s the kick: financial advisors are having trouble connecting with the children of Baby Boomers. Those feisty kids are a bit “rebellious.” They are not so likely to use mom and dad’s advisor. These are huge problems…for advisors, and for longterm investors.
So the critical question is: who’s going to buy all these now high priced stocks when the Boomers sell off to support their retirement lifestyles and to satisfy their RMD requirements? According to CNBC, “Over the next 30 to 40 years, $30 trillion in financial and non-financial assets is expected to pass from the baby boomers — the wealthiest and one-time largest generation in U.S. history — to their heirs. Therefore, navigating this latest transition will be critical.”
But their kids don’t seem to want stocks.
Now, I’m not a bear, and I hope I’m wrong. It would be wonderful if the market could grow, grow, grow and hit 100,000 or more. That would be a tremendous outcome for society and for all the Baby Boomers hoping to enjoy their retirement lifestyle dreams.
But will the markets keep soaring? Can they? Perhaps the Fed will buy the stocks at the newer, higher valuation to prop up the economy. If not, and unless there are huge buyers lined up (but there aren’t!), who wants to own these stocks at record high prices? A fire sale of epic proportion is coming.
What’s the Alternative?
For the grounded, savvy investor, smart investing always comes down to the basics of supply and demand. Companies that supply a product that people want or need earn a profit for serving the consumer’s desires. Great companies always focus on these basics. Zig Ziglar, a great business practices trainer, had a powerful saying that formed the foundation of the philosophy he taught:
“Help enough other people get what they want, and you can get what you want.”
True business is always about serving a consumer. Find the demand in the marketplace and serve that. Do it well for a fair price and you will earn an honest profit for that service. Then compete against others to build better products, offer finer service, and lower the price for the consumer. This is the hallmark of capitalism.
Out of curiosity, I wonder how credit default swaps on mortgage-backed securities served a consumer? Where was the client in this equation? Or was this simply a way for fat cat Wall Street brokers to make money in the markets, from the markets. Gaming the system as it were. If so, it was destined to come crashing down. And it did.
No one ever really predicts the exact top of a bubble. As a young investor, I exited the equity markets in 1997 when I saw the tech stock prices and PEs getting silly. Yes, I got out a bit too early. The run up lasted another 3 years. Perhaps it was “irrational exuberance,” as Milton Freidman also said. I don’t know. But when I can’t see the tangible value to the stock owner, I have to wonder. What am I paying for? Exuberance? I’d rather get out a little too early than a lot too late.
There is no competition outside the masses. Strive to be outside the competition. But how do you invest outside the masses? What does this really mean?
One powerful way to invest outside the masses is to place yourself ahead of the curve. Seeing over the hill or around the bend a bit. It also means diversifying outside the stock market with some of your portfolio. The challenge most people face when thinking about alternative investments is the issue of risk. People fear the unknown and generally fear being outside the masses. It’s a herd mentality.
But are “real risk” and the “perception of risk” the same thing? Sometimes yes. Sometimes no. Hard analysis of the facts lets us find out. But you have to really care about the facts. Sadly, most folks don’t.
The famous 20th century economist John Kenneth Galbraith sums up the issue very well: “Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof.”
Here’s an example: Many people drive cars, yet they are deathly afraid of flying. This is insane, because statistically flying is 60 times safer than driving. However, people will zoom down the freeway texting on the way to the plane and then white knuckle the flight.
A Risk Worth Taking
So, how does this tie back into investing? At first glance what appears or feels risky, may actually be a lot safer than what we believe. Flying is far safer than driving. Yet for many people it feels exactly the opposite.
Another example. Ownership of property in Latin America, or even ownership in a development company working in the region, may feel like a great risk. But is it? What if a small amount of due diligence on your part could uncover the facts and reality of such an investment?
What if you examined some overseas investment data under the light of objective scrutiny and it showed that owning a hard, tangible asset overseas was indeed less risky long term than owning a stock market index or mutual fund from Wall Street. Are you ready to act?
Ask yourself this: Are you someone who can look at the facts and make an informed decision with logic and rationality? The time to act is now. But how? More on that in a moment. Right now, a bit more about the consumer need facing retirees and how it can be served.
As the 80 million US Baby Boomers begin to sell off their vast $30 Trillion holdings of securities, the price that they receive will be determined by the laws of supply and demand. Unless there’s intervention by the Fed that is.
The markets could keep moving higher, spinning up from the Trillions of dollars printed to date and the Trillions more coming soon. Ultimately the Fed’s money printing will spur inflation, eroding the value of the dollars saved for retirement, or force consumers to spend more dollars to achieve the same purchasing power for the goods and services they need.
But no matter what the price they receive when they sell their stocks, (likely lower), many of these Boomers will still have some cash in hand and will need to spend it on their retirement. The harsh reality awaiting them though, is this: With less cash or purchasing power, what options do these Boomers have for a high-quality retirement, one that comes close to meeting their champagne dreams?
Enjoying your Retirement Investments
According to a Zogby Survey of 103,000 US Citizens, over 11% of have expressed an interest in living or owning property overseas. In addition to the US Baby Boomers, nearly half (45%) of the Canadian Boomers plan to spend at least a month or more outside Canada in retirement, according to a TD Waterhouse survey. Already, 613,000 retired US Citizens are registered at an embassy or consulate outside the United States and over 8 million North Americans call themselves expats.
You see, this trend is not “going to happen.” It is happening. Boomers are moving south to take advantage of the significantly lower cost of living and an amazing higher quality of life. They are living it right now, a luxurious lifestyle on a fraction of what it costs in California, Texas, or Florida. Millions are already enjoying this very affordable reality.
Imagine living in a country where a one-hour massage costs a mere $12, movies and popcorn for two are less than $8, and organic produce is delicious and affordable. A full-time maid costs less than $200 per month. A maid? What does that mean? No more chores ever. Time to enjoy all the fun activities you’ve always dreamed you would.
Are you ready to seize the opportunity to serve these consumers headed south of the border? With less money than they anticipated for retirement, how many more Boomer retirees will consider the affordable option of an exceptional life outside North America?
Smart, forward looking investors will put themselves in the path of progress in the same way that Levi Strauss did, building hardware stores to serve the gold miners. More and more people will hear about the golden life south of the border from friends and family already there. They will want to have it for themselves too.
Will they buy? Will they rent? Will you be their landlord? Who will build their home or condo? Would you like to own part of the company that develops the resort community they will call home? The options to invest outside the masses in this sector are wide open…for now. Time is always of the essence in the world of opportunity.
Old Levi ran a boring business of selling shovels, boots and jeans; boring, but exceptionally profitable. He served the needs of consumers and he got there first. You can too.
You may be already tuned into the incredible lifestyle opportunities outside the North America and see how owning a home or condo in the tropics will provide you a wonderful lifestyle. Request your Global Property Resource Kit if you are considering a property overseas. It’s a powerful due diligence tool for you to have and use.
If you are a property investor, you can be a landlord to the millions of visitors coming south for a vacation or the annual snowbird experience. Own a rental property and earn diversified cash flow while geographically diversifying your portfolio. Request your Investors Guide to Latin America here.
Or better yet, if you are an Accredited Investor, actually own part of a business that serves these arriving consumers. You can, just like old Levi Strauss, help provide something that is desperately needed and desired. You will earn a nice profit for that service.
Our company, ECI Development has served these retiring Baby Boomers well for 24 years. A seasoned team of professionals is ready to take the company public. If you are an Accredited Investor and would like to learn about how you can participate and be a part of our company prior to an IPO, let me know. Request ECI Materials to review information about investing in the company, including a business plan, financials, and a PPM.
The megatrend of retirement south of the border is already happening. And it’s accelerating rapidly. Take notice. Do some research. Examine the facts. See if want to invest outside the masses and ahead of the curve. You’ll be glad you did. Be in touch.