Market Insights - Beware the Euphoria

The markets are showing a lot of strength today. The dollar's strong. The S&P, the Dow, the Nasdaq, crypto, gold, and most commodities are all strong. 

We've seen the markets, financial assets, and tangible assets all show some major exuberance, some all-time highs in just the last few weeks. All this has happened since the Great Financial Crisis of 2008 when the Federal Reserve Treasury came to the rescue, as they’ve done many times, flooding the market with money (quantitative easing).

All this continues to devalue and debase our currency. Everything increasing in value is just a reflection of the loss of the dollar's purchasing power.

If you’ve owned assets, a business or businesses, or even financial assets in recent years, you've generally made a lot of money. It feels like you just can't lose.

However, this is a time to be very careful. Perhaps even a tiny bit fearful. Not pessimistic. Realistic. I’ve seen many make the mistake of trusting their recent winnings too much.

The current market cannot continue, even with this new administration that intends to come in and cut waste.

Realistic Optimism 

I'm a fan of moderating and keeping taxes down. I'm a fan of closing the border and reducing the spending of millions of dollars on illegal immigrants.

I'm a fan of reducing tensions geopolitically and the attempt to bring peace to Russia and Ukraine. I’m a fan of stopping the billions of dollars going to Ukraine just to foment the military-industrial complex.

Regardless of all these changes (and even because of them) and what the Trump administration plans to implement, there will be a correction in the marketplace.

There will be no soft landing. Donald Trump has a mandate he will try hard to push through. In the long run, his principles make sense. But there will be a price to pay. Different sectors of the marketplace, different businesses, and different investment classes will take a hit.

Not everybody can be saved. I can't tell you which sectors are going to be affected. We can make guesses. We can make predictions. However, the key point is if you've made a lot of money in any asset class, it might be time to move to higher ground.

Focus on Protecting Your Wealth

It might be time to take many chips off the table. Take your profits and invest them in something not quite so sexy.

It’s not as fun to do when the common way of thinking is, “Well, if I took money out of the market a year ago, two years ago, three years ago, six years ago, I would have missed all this.” You would have, but I’m not saying you must take all your money out of the more speculative markets.

Speculative investments are attractive because things always seem to go up. But can all-time highs really persist?

I would be and have reallocated my capital to boring treasuries, money markets, or precious metals. These investments have a lot of downside risk protection because there's no counterparty risk. 

But what about inflation? The debasing of our dollar is rising, and if you keep your money completely safe, inflation will be eating into it. This is where discipline and knowing where to invest comes into play.

To beat inflation, you must learn to invest your money outside the no-risk asset classes I just mentioned. We must have some money in riskier assets, but at a risk premium. A risk premium means the potential benefit is proportional to the risk and within our tolerance.

Today, the yield projections in all asset classes are very narrow, if not unrealistic. This is a time to be cautious about making projections and not understanding the amount of risk you take on.

Warren Buffett, one of the smartest investors of all time, is sitting on more cash than anyone else. 325 billion dollars of his cash is in treasuries when he could put that money anywhere he wants. Buffett took money out of Bank of America and Apple. He's reading the tea leaves.

This doesn't mean you can't stay invested in certain asset classes. I certainly am. But you must know what you're investing in, how it works, and how to adapt it if necessary. A deeper dive is required more than ever before.

If you're unwilling to take the time to do that, then I'd say only make risk-off investments. Just wait. You can always return at the dollar cost average when the market starts to correct. 

A Real Estate Correction vs a Stock Market Correction

Real estate is already going through a correction. It's not fast. It's not furious. It's not an elevator drop, unlike what the stock market and financial markets will do.

The financial markets go up like an elevator and drop like an elevator. This is why you have to be cautious, because it’s all based on sentiment. 

There's a negative wealth effect most don’t want to think about. When people start selling because they're afraid, they lose margin and net worth. What’s worse is that others' reactionary fear starts devaluing your investments in the financial markets even if you don’t sell yourself. Once it begins, the financial markets drop faster and faster, a swirling vortex to the bottom. 

That’s why I like tangible assets. There's less volatility, but there is still volatility. There are changes in the market cycles, but I can do a deeper dive into my investments and their risks.

I also can have closer proximity to my investments to pivot when necessary or construct a deal with more protection or adaptability. It's what I've done for over 40 years alongside others.

I believe in collaboration. I believe in mining other people's experiences who also bring access to specific assets you can't get in the financial markets.

The financial markets disallow insider information. Alternative investments like real estate do not. Another reason I’m a big fan of alternatives.

Wherever you invest today, be cautious. There's volatility ahead, no matter how optimistic you might be. I, too, am optimistic about America in the long run, but you must be careful in the meantime.

I recently had a conversation with a friend about this exact topic. We discuss how to prepare for our long-term optimism in the real estate markets and how to protect against the realistic devaluation that will occur. You can dive deeper and listen to our full conversation here.