How Our Brain Deceives Us into Thinking It is NEVER a Good Time to Invest

Jill Green |

The following video is one of the best educational presentations we’ve seen. The presenter explains how our brain directs us to avoid making decisions or taking actions that are actually in our best interest and how it feels awkward to fight these signals, even though we should. I recommend watching it.

The U.S. Economy – Concerns vs. Reality

As the old saying goes – bull markets climb a wall of worry. The stock market has been slowly grinding higher against headlines related to the potential trade war with China, political tensions with North Korea and Iran, the 10-Year U.S. Government bond breaking 3.0%, and future Federal Reserve rate hikes. The economic implications and concerns associated with each issue are more noise than reality.

First, China and the U.S. both don’t want a trade war. We are currently seeing more blustery talk before they actually get down to brass tacks. It may not be an easy negotiation, but any progress will be positive, especially for the U.S.

Next, geopolitical issues and all the associated handwringing and saber rattling make for great headlines, make for great headlines, but they have minimal to no impact on the economy and stock market long-term.

Yes, it is true that interest rates have gone up in the U.S., but from historically low levels. The rate increases are directly associated with the strong economic growth we’ve seen in the U.S. as compared to overseas. As a result, the interest rate on our government bonds are higher than our overseas counterparts. Thus, we can expect to see foreign investors buy our intermediate to longer dated bonds to obtain higher yields. This increased demand can hold longer-term rates down, while the Federal Reserve increases shorter term rates. This can result in the yield curve leveling out, or another way to put it, creating an usually small gap between what short-term 2-year bonds pay vs. what 10-year bonds pay.

Along this line, just like you look underneath the hood of a car to get a sense of how well it is running, the same can be said of the economy. The following are some items that point to a smooth-running U.S. economic engine in the near term, which should also be quite positive for investors as well.

  • U.S. government bonds are paying higher interest rates than bonds from other developed countries for the first time in almost two decades, which is a new sign of investors’ struggle to reconcile expectations for faster U.S. growth with concerns about the impact of deficits and inflation. That being said, Luke Hickmore, a senior investment manager at Aberdeen Standard Investments noted in a recent Wall Street Journal (WSJ) article that, “There is little on the horizon threatening to change the dynamic of robust expansion in the U.S. and “stagnant” growth in Europe. This may result in the U.S. dollar gaining another 5%-10% on top of the 5% it has gained since February."
  • U.S. companies are ramping up spending on their businesses at the fastest pace in years, a long-awaited development after years of tepid growth. 2018 is on track for the fastest pickup since 2011 and a record for the first quarter of a year. The jump has been aided by the U.S. tax-code overhaul, which is putting more cash in companies’ coffers.
  • U.S. industries pumped out more goods in last month to meet growing demand from consumers and businesses, another sign the economy is gaining momentum. Households are buying more consumer goods, and companies are stepping up investment in equipment as they gain confidence in the economy. Factories, in turn, are stepping up output.
  • Unemployment in the U.S. has fallen to one of the lowest levels of the post-World War II era. At 3.90%, the jobless rate is at its lowest level since December of 2000 and there is essentially one job opening for every unemployed person in America. For some sectors of the job market, there are more jobs than there are qualified people to do them.
  • U.S. companies are putting some of their cash to work through buying back their shares, and they are doing so at a record pace. As a matter of fact, S&P 500 companies are on pace to have returned almost $1 trillion to shareholders for the 12 months ending March of this year through dividends and buybacks. Basically, a combination of fewer shares outstanding and a higher dividend payout is truly a win-win for shareholders.
  • This positive economic trend and optimism is not exclusive to the U.S. More European executives are optimistic about their company’s outlook, said Merrill Lynch strategist Manish Kabra, who reviewed 411 transcripts from first-quarter European company events. “The mind-set is positive but slowing down,” Mr. Kabra said. As of May 14, 2018, 58% of the 363 companies in the Stoxx Europe 600 that had reported quarterly results beat analysts’ earnings expectations, according to JPMorgan Chase & Co.

Cryptocurrencies Are Not All the Same

Purchasing cryptocurrencies such as Bitcoin, Ripple or Ethereum, may sound like a quick way to get rich. However, business icons like Warren Buffet of Berkshire Hathaway and Jamie Diamond of J.P. Morgan have basically stated that it is a fool’s game.

In a similar vein, the May 18, 2018 Wall Street Journal reported some of the fraud and deceit associated with new cryptocurrency offerings. In a review of documents produced for 1,450 digital coin offerings, The Wall Street Journal has found 271 with red flags that include plagiarized investor documents, promises of guaranteed returns and missing or fake executive teams.

Investors have poured more than $1 billion into the 271 coin offerings where the Journal identified red flags, according to a review of company statements and online transaction records, which equates to nearly one in five of those reviewed. Some of the firms are still raising funds, while others have shut down. Investors have so far claimed losses of up to $273 million in these projects, according to lawsuits and regulatory actions.

Recently, the Securities and Exchange Commission issued warnings to investors that many deals in the booming private market for cryptocurrencies could be violating securities laws, and on May 16, 2018 launched a website touting a fake coin offering as an example of what to avoid.

Since December, the agency has filed civil charges against companies and individuals in four separate cases involving initial coin offerings known as ICOs. At least a dozen companies put their offerings on hold after the agency raised questions, an SEC official said in February.

At the heart of most coin offerings is a company’s “white paper,” a document that typically details mission statements, team biographies and the technical specifics of a project. 

Of the 1,450 white papers downloaded from three popular websites that track coin offerings, the Journal found 111 that repeated entire sections word-for word from other white papers. The copied language included descriptions of marketing plans, security issues and even distinct technical features such as how other programmers can interact with their database.  At least 121 of the projects didn’t disclose the name of a single employee and several of them listed team members who either didn’t appear to exist or were real people who said their identities were being used without their knowledge.

The Journal also identified more than two dozen companies that promised investors financial rewards without any risk; something the SEC prohibits. These white papers went as far as pledging weekly payouts or doubled returns. The SEC has recently taken action against ICOs making such guarantees.

Interest in bitcoin and other cryptocurrencies exploded as a frenzied rally pushed coin prices to all-time highs late last year. Now reality has set in for many in the industry as regulators step up their scrutiny and issue warnings to investors about fraud in the lightly policed market.

Unlike public offerings, ICOs generally happen outside the strict framework of regulation and don’t require filing much official paperwork, if any. That leaves it to investors to do a lot of the detective work about what’s real and what’s not.

“There are going to be some legitimate players that emerge from this, but it’s going to be a handful. A lot of it looks like penny-stock fraud with lower barriers to entry,” Mr. Bennett, now a partner at law firm Baker Botts LLP, said of the broader coin market.

Bottomline, BUYER BEWARE is the best advice I can provide as it relates to cryptocurrencies.

Tony Moeller, CPA

 

The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any investment or strategy. A risk of loss is involved with investments in the stock and bond markets.

Photo by Gerd Altmann via Pixabay