When investing is hardest
Last night I ran across this piece by Ben Inker of GMO, and it struck me that what he’s saying is much like what I’ve been saying, except he says it better. It’s an implicit case for the more advanced versions of the Financology Model Portfolios. He adds additional insight with his classification of bubbles, explaining how the current bubble is very different from those in 2007 and 2021, but very much like the bubble of the late 1990s. This is fortunate for us, because this kind of bubble can be efficiently dealt with via more surgical modifications to how we might invest normally, as opposed to abandoning the whole enterprise and just retreating to one risky asset like cash. Without further ado, here it is:
It’s Probably a Bubble, but There Is Plenty Else to Invest In
Hopefully without doing excessive violence to Inker’s analysis, it boils down to keep your distance from the bubble assets. In this case, it’s mostly US stocks, and more especially supercap growth. In particular, stay away from where all the excitement is, artificial intelligence and related jazz like quantum computing, etc. To put it in inclusive rather than exclusive terms, global value. The news is good: you don’t have to completely forget the normal rules of diversifaction; along with the other major asset clssses, you can and should own stocks.
How do the Model Portfolios fit in? They’re basically designed to cover the global market portfolio … stocks, bonds, commodities, except to specifically isolate and underweight overvalued bubble assets. As opposed to starting with nothing and specifically adding desirable assets, we start with everything and specifically subtract the bad stuff. So it retains as much of the benefit of diversification as possible while sidestepping the bubble.
Inker specifically includes international small caps and emerging markets, along with anything “deep value”. Notice our 20:20:30:30 flagship Model Portfolio includes ETFs specifically dedicated to international small caps – VSS – and emerging markets – VWO, along with international (XS) value funds IGRO, SCHY, VYMI. It is underweight US stocks, but includes a swath of quality and value ETFs – DRGO, SCHD, VYM, VFQY, VFVA. Collectively, these ten funds, along with REET, cover virtually the entire world stock market except for the pricy bubbly stuff.
It also includes the cap weighted global index fund VT, so it does include an allocation to virtually everything, including the questionable supercap growth. Dial in more or less according to how much exposure you want, proportionally reducing or increasing the other eleven equity funds. Invest normally while taking control of your bubble risk.
Nvidia’s Business Is Booming. Its Stock Is Falling. What Gives?
It’s the old Bill Clinton problem. It depends on what “is” is. The apparent paradox lies in the sloppy use of the word “is”.
Let’s correct these statements. We only know with certainty that Nvidia’s business has been booming. We know that its stock has been falling. What “is” is is but a fleeting moment between past and future.
What the stock has been doing is reflecting investors’ past assessment of the future. Saying “is” muddies the distinction between two very different things. When you stop playing fast and loose with verb tense, paradox dissolves into clarity.
Readers: This kind of prose is ubiquitous in the financial media. Fuzzy wording and fuzzy thinking go hand in hand.
Read critically!
Using Tensors in Machine Learning: A Complete Guide
Overwhelmed by inscrutable tech talk surrounding artificial intelligence? This article, while highly technical, explains the essence of how modern AI works. At its core, it turns on mathematical objects called tensors, also used in fundamental physics. Tensors are multidimensional arrays of numbers. As mathematical entities, they lend themselves to digital processing. This article explains how things like images, videos, words, sentences, and other data are transformed into tensors that can be mathematically manipulated in digital space.
Silver having another BIG day………i wonder if Solid state battery might require a lot?
We see soon………
Mike
Hi Ho Silver!
Little silver (platinum) up big too. Both nearly 6%.
Breathtaking gains in the silver mining fund SLVP. I’m not really big into mining stocks (when I want metal I buy metal), but bought some shares when they’d been given up for dead in October 2023. Up three and a half times in a scant two years. The gold mining fund RING almost as much.
BTW I see a lot of commentary in the media claiming that gold and silver mining stocks are cheap. They are not. The “cheap” claims are based on comparing the historical price of the stocks with the historical price of the metal. That’s irrelevant. The rub is that as a group these stocks yield a fraction of a percent – price to dividend ratios over 100 – and in spite of huge gains in metals prices, dividends have gone about nowhere in years. Show me the money. No dividend growth means there’s no sign of improvement. They were cheap when I bought them back in October 2023 and February 2024, but with prices 3-4 times higher for the same dead dividend, they are, contrary to bullish claims, not anymore. They’re the hard asset crowd’s answer to high flying tech stocks.
A bullish view on a metal is never sufficient reason to buy the stock of a related mining business. When you buy a metal, you get metal. When you buy stock. you get a share of ownership in a business, whose value depends on a lot of other things besides the value of the metal. Whenever you see exhortations to buy mining stock as a “leveraged play” on a metal, you’re seeing a woefully incomplete case.
If you like the metal, buy the metal. If you like the business, buy the business. But don’t buy either one just because you like the other.
I swear if I hear the words Black Friday one more time I’m gonna scream.
SCREEEAAM
[click]
Gen mike Flynn has just called for the arrest of the “Green Goblin” & mates in Ukraine………..a clear sign of which way its going.
Mike
Gold clinches fourth straight monthly gain, closes in on record high as markets solidify rate cut bets
“Over the next couple of years, I think we’ll substantially be cutting, and maybe cutting out completely … income tax,” Trump said. “We could be almost completely cutting it because the money we’re taking in is going to be so large.”
That will be right after I have a chat about it with the folks in the flying saucer that just landed in my yard.
It would take a spending restraint miracle too. Even then it only might work if corporate taxes are raised, but Mr Trump’s last corporate tax move was to cut. SS taxes would also probably have to go up. Tariffs alone aren’t gonna do it.
December will begin with investors owning little stock. Is a year-end rally at play?
“Wall Street thinks you don’t own enough stock…”
Distilling this incoherent melange of random factoids down to its essence, Wall Street doesn’t want you to think about stratospheric stock valuations.
Sorry am not posting as much, Mum going though a very rough time her mental health not good. The British Prime Minster & his number two are being targeted right now….even the BBC is on them…….not a good sign.
Mike
Best to your Mum, Mike.
Mega is confused:-
Largest hedge funds allowed to borrow even more to juice returns
The world’s largest hedge funds are being allowed to use “very high levels of leverage” to ramp up returns on their bets in the gilts market, the Bank of International Settlements (BIS) said.
The global watchdog based in Switzerland said raised the alarm on the miniscule scale of the so-called “haircuts” on these bets – the difference between the market value of collateral put up and the cash lent.
BIS said the 10 biggest hedge funds were effectively being give a haircut close to zero, meaning they were able to even borrow even more to juice returns.
It comes after the Bank of England warned that hedge funds could trigger a sell-off in UK government debt in the event of a market shock that made the debt levels on their bets unsustainable.
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The Bank of England has sounded the alarm about foreign hedge funds buying up UK debt, warning that their speculative trades could spark a crisis.
The British Government is becoming increasingly reliant on a small group of opaque foreign investors to finance its large deficit, Threadneedle Street officials warned.
Buying UK government bonds, known as gilts, allows hedge funds to bet on tiny differentials between current and future prices.
However, they also often borrow against the same gilts to juice the returns on their investments.
Hedge funds borrowed £100bn secured against gilts in November – the highest since records began in 2017.
The Bank is worried that this could all collapse like a house of cards in response to a financial shock, potentially sparking a doom loop of fire sales as hedge funds offload gilts to cover losses on these loans.
“The small number of funds running crowded and heavily leveraged trades in the gilt repo market increases the potential risk of sharp moves as funds could need simultaneously to deleverage in response to a shock,” the Bank said in its financial stability report.
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Your thoughts?
You seem to have a good handle on it. The conservative in me wants to holler no, this is insane! The libertarian in me says live and let live. If somebody wants to do something crazy, let ’em, as long as they bear the full burden if it goes wrong. No innocent bystanders to be affected.
But that’s the trouble, isn’t it? As soon as some of these kids playing with their high powered chemistry sets blows up the lab, the whole school rushes in to rebuild it, bigger and stronger than before. Weakening every other part of it in the process.
That’s just wrong. Private profits, socialized risk. Take your pick. When something blows up, let the chips fall where they may. Let the parties that chose to profit from risk take the losses just the same, going out of business and going broke if that’s what it comes to. If the risk can’t be contained to people that make the choices, then it can’t be allowed in the first place.
Financial markets aren’t just there to provide investors with returns. They are supposed to allocate finite resources to provide the most human satisfaction. Investors do well by providing the service well. This is how the West built some of the highest living standards ever. Stock and bond markets are part of this. When you get into second and third and fourth degrees removed, though, it bears less and less resemblance to capitalism and more to just gaming the system. Easy money foments abuse.
Attack on Sterling?
Soon?
Mike