03
Sep 2024
Vacuum Saleperson Vs Your Financial Advisor?
The final week of summer '24 brought some noteworthy news from the investment markets. Three to be aware of all underscore the divergence in investment positioning between America’s retail investors, aka “the last to know” and America’s most successful professional managers.
First, consider that Americans are more bullish on stocks and less interested in hedging wealth in safe assets like gold than they ever have been. Per Elliott Associates, a $75 billion asset manager in its letter to clients:
Individual U.S. stock holdings as a percentage of financial assets have reached an all-time high of 41.6%. In 2009, this metric was as low as 18.8%. In 1982, it was 9.4%. Even during the dotcom mania of 2000, when this statistic last peaked, the percentage only stood at 38.3. Mom and pop and day-trader-son-or-daughter-in-the-basement are all in! (In case it isn’t clear, Elliott is mocking the bullish retail investor here).
Individual U.S. stock holdings as a percentage of financial assets have reached an all-time high of 41.6%. In 2009, this metric was as low as 18.8%. In 1982, it was 9.4%. Even during the dotcom mania of 2000, when this statistic last peaked, the percentage only stood at 38.3. Mom and pop and day-trader-son-or-daughter-in-the-basement are all in! (In case it isn’t clear, Elliott is mocking the bullish retail investor here).
On Friday news was also released that Warren Buffet continues to sell stocks as he positions his assets more defensively than perhaps ever in his career. Included in Buffett's aggressive sales are what advisors refer to as safe-paying blue chip stocks like Bank of America. Observers believe Buffett has never been more wary of the markets based on his holdings – a stark contrast to the hobbyist American investor who is so exposed to markets in his advisor-led accounts.
Another major story revealed this week that for the first time a major brokerage firm, Merrill Lynch Bank of America, has thrown in the towel on trying to defend how its clients portfolios are positioned and is essentially admitting the text book approach used by advisors is broken. Instead of using a benchmark 60% equity / 40% fixed income portfolio, Merrill Lynch is admitting that 40% allocations to real assets are more of an ideal target than heavier weightings to financial assets. Recall gold and silver are the most liquid forms of real assets because they are currencies. Unlike other real assets gold is easily held and traded outside of the financial system giving investors rare counter party diversification that other assets struggle to replicate.
Thirdly consider a few more excerpts from Elliott Advisors. Like many hedge funds, Elliott is able to pick and choose its investments where it sees the most opportunity unlike for example a technology ETF that must always be long technology stocks or a health care mutual fund that must always be long health care stocks. The candor from such funds is usually far more honest about what is transpiring. On the heels of Nvidia’s earnings and earnings watch parties (watch parties for earnings? If that isn’t a sign of exuberance, what is?) consider these informed words from Elliott's management:
If we look past the hype and the hysteria of AI “transforming human life,” what is left is a software-development project that so far is not producing value commensurate with the hype (except for what we believe to be very bubbly stock market value) the current Magnificent Six (NVIDIA, Microsoft, Apple, Google/Alphabet, Amazon, and Facebook/Meta; there used to be seven, but Tesla’s battery died) has created a huge distortion in the stock market. These six stocks accounted for two-thirds of the year-to-date increase of the S&P 500, and they accounted for 113% of the second quarter’s gain – yes, you read that correctly; the other 494 stocks declined as a group in the second quarter. NVIDIA alone accounted for 31% of the year-to-date increase in the S&P. Apple was 31% of the S&P’s second-quarter gain. Those two stocks alone generated 75% of the S&P’s second-quarter gains
…[inflation] has been (as we have pointed out) deliberately and cynically underreported by governments.
The so-called developed world has little collective memory of the process of inflation, especially the U.S., where the last meaningful bout happened more than 40 years ago. For that reason, citizens are not sufficiently alarmed when their governments start aping the fiscal and monetary policies of Zimbabwe or Weimar Germany. They may have read about those episodes where people’s life savings evaporated and their lives were destroyed, but those things happened far away and long ago – Zimbabwe and Weimar Germany cannot possibly be relevant to us, right? (sarcasm intended – Elliott is saying such wipeouts absolutely can happen here).
Also, for many companies, building cash reserves is taking precedence over capital expenditures. In the absence of lower interest rates, this may all turn into a wave of restructurings, workouts and bankruptcies. Elliott is determined to enter that environment with capital intact and the ability to scoop up bargains, but we are also concerned about the damage that such environment may do to the economy and financial system.
(*** Note Elliott has guided investors through numerous market panics – In their eyes, now however the risks are so big, they are concerned about the entire financial system being bludgeoned.***)
(*** Note Elliott has guided investors through numerous market panics – In their eyes, now however the risks are so big, they are concerned about the entire financial system being bludgeoned.***)
The case for gold just gets stronger. Nobody is happy with the U.S. dollar as the global reserve currency, but all of the alternative currency candidates are even less attractive. Monetary discipline is gone. There is no major central bank that considers itself to have the primary and inviolate obligation to maintain the value of fiat money. The growth of global money supplies in their various forms is very large, but central bankers seem to feel an unjustified comfort from developed country currencies having failed to collapse despite the past two decades of excess. Gold is a solid answer to this constellation of dangers. Gold has preserved its value for thousands of years through thick and thin, and it has proven especially valuable in times when monetary degradation became a matter of state policy. Gold has industrial and consumer uses, but its most important uses are as a medium of exchange (albeit a clumsy one) and as a store of value (timeless and reliable). Despite this history, gold is currently scarcely present today in institutional portfolios. Portfolio managers who are perfectly content to hold cryptocurrencies in their portfolios tend to own little to no gold. That is a topsy-turvy view. Gold is difficult to mine and its supply cannot be quickly expanded. Cryptocurrencies are worthless and can be created out of thin air. … Elliott has a meaningful position in gold, and has had one for some time… One interesting but under-discussed aspect of gold is the fact that while gold can be supplied by current owners selling during periods of rising prices, we think the under-ownership point is likely to be more powerful in a scramble to own gold. Recent market history supports the point about the potential for stocks and other assets to move upward abruptly when they become suddenly desirable to own.
This ratcheting up of risk represents a unique and growing forward risk to portfolios. As historical levels of risk (in terms of valuations and leverage ratios) are ratcheting up, many stewards of capital continue to believe they will be able to spot the cracks in the dam not a moment too soon nor a moment too late. But when the dam breaks, they may find it hard to get out of the way just in time. To repeat: Capital, careers, scholarships, bureaucracies and more could be tragically swept away in a flood of leverage reversal. At the same time, the opportunity set for those who have money, equilibrium and portfolios intact may be extraordinary.
We think Elliott’s management team has a pretty good sense of, and experience with, the risks that have been growing (irregularly but inexorably) in markets and financial systems for decades. However, we admit that in our 47 years of existence, Elliott has not been able to discern in advance which sectors, trades, countries, or asset classes were going to have the highest chance of cracking, much less any sense of the timing of a crack-up. The current situation seems quite ripe for a significant, perhaps epic, unwind, but almost nobody is thinking in those terms: no peers, no regulators and no managers of billion- or trillion-dollar-asset pools. Today most everyone has more or less the same stuff in his or her portfolios: private equity, venture capital and indexed stocks, with a sprinkling of hedge funds or quant funds, together with a solid chunk of the Magnificent Seven stocks. Long-term bonds are not very big in institutional portfolios (here is a good question: so who owns them?) because yields are so low and the inflation genie is out of the bottle, perhaps permanently. We think that almost all investors are unhedged, except for the few with a modicum of either hedges or securities that in some, but not all, market environments are expected to negatively correlate with their long positions.
To be clear, the italicized words above are not our own - These are the words of a $75 billion manager who is signaling that American financial advisors are positioning families entirely wrong.
As one Wall Street sales manager queried, "Do you know the difference between a door-to-door vacuum salesperson and a financial advisor? The vacuum salesperson didn’t go to an Ivy League school."
If you’re close to a financial advisor, that may sound harsh but that is the candid truth – Large firms don’t care in the least what an advisor knows or doesn’t know.
The large firms just push advisors out the door to “gather assets” then direct the financial advisors into strategies that the firm deems acceptable and appropriate. It is ironic because the firms that have made such large mistakes with client assets often disregard great insights from talented advisors. These same firms are happy to throw these advisors under the bus at the drop of a hat after having enslaved them and often their families on leashes so tight their leashes are better called shackles.
The large firms just push advisors out the door to “gather assets” then direct the financial advisors into strategies that the firm deems acceptable and appropriate. It is ironic because the firms that have made such large mistakes with client assets often disregard great insights from talented advisors. These same firms are happy to throw these advisors under the bus at the drop of a hat after having enslaved them and often their families on leashes so tight their leashes are better called shackles.
Especially in light of the fact that even good advisors are ushered along a conforming cow path of financial advice dictated by big brother brokerage firm, families need to ask themselves:
Do you want to be aligned with the greatest investors of our generation or do you want to be invested like the masses?
Do you want to be aligned with the greatest investors of our generation or do you want to be invested like the masses?
Bank of America surveyed accounts and found that barely 2% of American finanicals advisors have directed their clients to material gold allocations. That is a clear sign advisors are not aligning with successful money managers who have navigated bear markets over the years. As Elliott eloquently said above, even the most sophisticated investors know that they are unable to predict the exact moment of market correction. Probably more than any other time in our careers, you must be ready for that event before it happens because as Elliott says, and as Buffett is telegraphing with his defensiveness, a pending correction could be “epic”.
Gold carries no guarantees but in the great depression when the stock market declined 80%, gold emerged up 70%. From the peak of the 2007 market, through the Lehman crisis, stocks were down more than 30% and gold was up 17%.
Gold’s precedent of outperforming in some of history’s most stressful financial events means it warrants a place in your portfolio.
Layer in the liquidity that gold gives you as a currency that is traded outside of the financial system, and the fact that it has preserved wealth through the millennia and it is totally absurd for Americans not to have material allocation to Gold today in portfolios.
Looking for an easy way to do so?
Do you have a handful of small retirement accounts that you may even view as a nuisance that you are not overly enthused about? Such accounts can be perfectly situated for physical gold. Call us and we will consolidate them for you while getting your assets to more defensive allocations in gold.
Do you have annuities or other insurance products where you are shackled to value the US dollar and the competence of the US government? Don’t feel trapped! Call us as we can help you protect a portion of your wealth from your annuity exposure in gold and silver.
The election, the new year, or the next Fed meeting – all of these events that investors mention as a reason to procrastinate take a backseat to the reality that America can’t pay its debts.
You don’t want to use events such as that as an excuse to not make a decision. You don’t want the regrets of having been fooled into not making the easy conversion to gold to protect your wealth.
You don’t want to use events such as that as an excuse to not make a decision. You don’t want the regrets of having been fooled into not making the easy conversion to gold to protect your wealth.
In our next issue we will update you with some of the notable developments surrounding the silver markets.
Call us. We look forward to crafting a solution with you. God bless.
