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11.13.2019 - Free Investing Newsletter Bookmark

The Most Important People
 
There’s a lot of thoughts, opinions and beliefs, that seem logical on the surface. But then, if you really put your thinking cap on and delve into the nitty-gritty, you find out that your original assumptions, simply don’t stand up.

 
There’s a myriad of reasons for this, from flawed research, to popular beliefs, to group-think, to you name it. But probably the most common reason for coming up with a faulty assumption is belief bias.
 
In logic, an argument can be invalid even if its conclusion is true, and an argument can be valid even if its conclusion is false. It’s a confusing concept, and people are easily fooled when an argument’s validity and believability don’t match up, especially in the case of invalid arguments with conclusions that are believable.
 
Think about the things you were told as you were growing up, that sounded fairly logical, but after some examination, was found to be completely wrong. “lightening never strikes twice in the same place” was a common one. Or “it takes years for swallowed gum to digest” was another.
 
We’ve all heard of the “three wise men from the east” but in the bible, there’s no mention that there was three. Likewise, we hear that Adam and Eve ate an apple in the Garden of Eden. Yet the Bible only mentions a “forbidden fruit.” We’ve all heard of someone being “blind as a bat” yet bats have excellent vision along with echolocation. I could go on and on.
 
Well, one of the things you’ve most probably heard concerning the economy and how things work is that “rich people create jobs.” The argument is supported by the next statement “I’ve never had a poor person give me a job.”
 
On the surface, this seems logical and the argument valid. But I will ask a question. Are the rich people creating jobs, OR are they reacting to a stimulus? Stick with me here.
 
If you have ever owned a business, or managed one, you know that employees are most often your biggest expense. Between payroll taxes, wages, unemployment insurance, etc, you have to be very careful about how many people you hire. Too many employees can bankrupt a company.
 
This is why of course that when economies turn lower, layoffs begin and soon the unemployment numbers go up. So, as an addendum to “rich people create jobs” we have to also include “rich people eliminate jobs” to the argument. But we still haven’t gotten to the crux of the question. Why do rich people create jobs?
 
Are there hoards of ultra rich people just hiring folks for no particular reason? Not that I’ve ever seen. So there must have been an empirical reason why they created a job in the first place. Well, there is. It’s called demand.
 
Rich people don’t create jobs. The people that create jobs are the MIDDLE CLASS, by demanding more products and services. The rich respond to the demand by expanding their business and hiring folks.  
 
The single biggest driver of job growth is a strong middle class. A middle class with the means to buy their daughter a car, or remodel their house, or eat out at nice restaurants. It isn’t the rich that drives the economy, they don’t have the scope.
 
Let’s suggest that you were pretty rich. Maybe you’re Jay Leno type rich, and you have 32 cars. Do you think that him and folks like him have the effect on the economy that 150 million middle class folks have?? Well, they don’t. Last year GM made 2,950,000 vehicles. Ford sold 2,497,000. THAT is the power of the middle class.
 
When WWII ended and all those brave service men and women returned home, they sparked off the greatest wealth generating middle class the world had ever seen. In every metric, from housing to industry, to services, production, manufacturing, etc, the middle class was booming.
 
The baby boomers those returning vet’s gave birth to, continued to expand the middle class and by the 80’s, the middle class was the NORM. There were more people in the middle class than ever before. Demand for products of every description, exceeded the ability to produce them. Jobs were created to meet those demands.
 
The most important thing an economy can have is a thriving middle class. Unfortunately, our middle class has been having a rougher go of it lately. As of March of this year, consumer debt exceeded 4 TRILLION dollars for the first time ever. To continue to live the middle class lifestyle they knew in the 80’s, 90’s,and early 2000’s they’ve had to use ever increasing debt to do it.
 
Earlier this year, this headline was making the rounds: Delinquent car loans hit record highs. Seven million people are now 90+ days delinquent on their auto loan. This isn’t surprising considering that the inflation that the Fed’s say doesn’t exist, is killing people financially. The starting price for a Ford F150 pick up is 28,400. STARTING. Upgrade to the Lariat package and it starts at 42,000. For a truck.
 
But hey, there’s no inflation right? And all these jobs we supposedly have are real, right? And the middle class is thriving, right?? Unfortunately you know the answer. The fact is, when the US middle class finally taps out from lack of wage growth, soaring inflation, and too much debt, this economy is going to take a hit worse than the 2008/09 hit.
 
It was and always will be about the health of the middle class. That folks, is who creates jobs.
 
The Market:
 
 
Today was an interesting mess. We had big red futures this morning ahead of the open. But then the magic levitation began and we started inching higher. But it was going to be an interesting day no matter what. Why? We had Powell speaking at 11 am, and we had the first day of the Impeachment hearings.
 
Well they liked Powell well enough and we had the DOW up about 80 points shortly after he started talking. Things seemed to be going along well. But right around 2 pm, it all evaporated and the DOW almost went red. The S&P did go red.
 
What the heck was that about? Our old friends China again. There were reports that the US-China trade talks had hit a snag over farm purchases. That panicked the algo-bots and caused the drop. However, they once again fought it off, and by 3 pm we were once again up 80 points.
 
In the past week, I’ve read the opinions from an awful lot of so called guru’s and there’s a handful of take aways they all have in common. They all think that a pullback is likely. They all seem to think 2020 will be extremely volatile. They all tend to think the market is overvalued by a large margin, and it appears that the global “rich” are moving out of stocks and into cash. Sales of stock by company insiders is nearing record highs again.
 
That’s a lot of smart people that can make a ton of arguments that the market could/should be falling, or at least correcting for a while. But it isn’t. It’s still fighting off every negative that’s thrown at it. How? Well here’s the biggest way:

N.Y. FED TAKES $77.093B OF SECURITIES IN OVERNIGHT REPO OP
 
They have been creating “liquidity” for weeks now and it isn’t little liquidity, it’s always 70, 80, or 90 billions per day. It’s obvious that whatever the banks aren’t using for reserves, is getting pushed into the market.
 
But there’s also another interesting hand in play that I’ve harped on many times in the past. Central banks are buying stocks. In fact, our “buddies” the Swiss, have just hit a record number of US stock holdings.
Swiss National Bank Now Owns Record $94 Billion In US Stocks After Q3 Buying Spree
 
So, we’ve got a million reasons for this market to roll over. We’ve got the S&P up over 6% above its 200 day moving average. We’ve got GDP estimates falling every couple weeks and instead of 2.8% growth we’re now UNDER 1%. What’s on the other side? Unlimited Fed money, Central bank buying stocks, momentum, and stock buy backs.
 
I think a fair statement is that at some point this thing blows up. Because of the momentum and the insane Feds, my feeling was and still is that we might get a short term pull back and then one last mighty surge that runs things to February.
 
But I also have to think that yes indeed 2020 is going to be incredibly volatile and the closer we get to the election, the wilder it can get. But even now, I liken being in this market to walking on eggs while playing musical chairs. Each day we wonder when the bubble meets its pin and down we go. When this pops, everyone’s going to try and get out at the same time, and it’s not possible. People will get slammed. It’s scary.

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