Enjoy the Exuberance

In the runup to the 2008 / 2009 Great Financial Crisis (GFC) not a single person I encountered was oblivious to the problems brewing. Regardless of your financial acumen, I’m guessing you knew that someone without a job, being approved to buy a $400,000 home, was simply unsustainable. I can remember buying my first rental property around 2003 and being approved for the loan over the phone. In fact, I began to fully understand the process by which I bought rental properties with no money down. Many will remember this or maybe you participated within the process yourself.

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Let’s say a house could be purchased for $200k but required an 80% loan to value. The bank would allow you to close two loans at once, one for 80% of the value, or $160k, and an immediate 2nd loan for 20% or $40k. Sometimes you had to put the $40k down for the first loan, but could immediately repay yourself with the 2nd loan, thus replenishing your cash outflow in a matter of minutes. I knew people who did the initial 20% through a credit card advance. Once the property was rehabbed or rented, you would quickly refinance the property at the new value depending on either the work done, the rental income or a combination of both. Let’s say that in a few months you could refinance the property for $250k, at which many banks would then refinance up to 100% loan to value (since it was beyond the initial purchase), you would then net the $50k tax free! This gave you a fresh round of capital to rinse and repeat the process.

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Obviously, this didn’t last and thus sparked one of the greatest financial downfalls our country has seen since the Great Depression. You can look back and blame the banks, the rating agencies or even the risky borrowers, but at the end of the day, the speculation that fueled the rise in real estate was simply unsustainable and a correction was inevitable.

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As I sit at my turret today, I am pleased to once again see the green on the screen. Despite a decline in Nvidia shares, the semiconductor weakness doesn’t seem to be dampening the bullish spirits as I see general small caps rising over 1% with the Dow over 44,000 and the S&P notching another move towards all-time highs.

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Investors have a newfound level of confidence after the election and the general sentiment in the air is as positive as I’ve seen it in a long?time. Needless to say, this is a far cry from the negative sentiment we felt and saw just a few short years ago when I wrote?“As Sour as I’ve Seen It.”

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I too am optimistic! I’m excited about the advancement in technology I am seeing within the AI space as well as energy and infrastructure. I’m excited about the idea of eliminating government waste, encouraging capital spending and possibly the ability to keep more of my income through lower taxes.

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While I’m excited as a citizen, I can’t help but express my growing concern as an investor. You see, in order for us to fix the fiscal challenges our country now faces, the time and pain it may require could be considerable.

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For example, one of the biggest challenges our country faces has been the escalating prices of goods and services. While it is true that the rate of inflation has slowed considerably, the level of prices is still far beyond where they were before Covid. In my opinion, people don’t want a slowing rate of price increase, what they really want is price decline. Ask yourself how prices would actually decline to make goods and services more affordable. Do you think a business would cut prices out of the goodness of their heart? Or would it require a build up in inventory which is a result of a waning economic growth in order to encourage new buyers? Unfortunately, in order to have significant price depreciation, in my opinion, this only happens through an economic contraction, not expansion.

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How about our government’s fiscal irresponsibility? While I am not a fan of government waste and believe it should be examined and eliminated, make no mistake that this same government waste has been what has been flowing back into our jobs market for years now. The growth of government jobs over the last decade has been on a meteoric rise (see chart below). What happens when we begin cutting these jobs? Is it necessary? In my opinion it is, however, the economic ramifications are difficult to measure and may not be positive.

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?Probably my biggest concern is our national debt.?At present our national debt is over $35 trillion while the interest on this debt has been estimated to be $892 billion for 2024.?To put this in perspective this is 14% of our federal spending for 2025 or right in line with our total spending for national defense. In my opinion, this is simply not sustainable.

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Similarly to 2007, I don’t know a single person who isn’t aware of this issue. Speak to even a high school student or a freshly graduated college student and they are well aware of our national debt and the challenges this poses, yet in my opinion the newfound enthusiasm for stocks does not remotely reflect any real concern.

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My opinion is really quite simple. In order for us to fix the longer-term issues in our country, considerable discipline will be required, which may take the form of spending cuts and economic headwinds most are not anticipating. We are.

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While I too am enjoying the market returns and stock enthusiasm, make no mistake that my increasing level of caution will not go away any time soon.

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This year we began to slowly take steps towards a more cautious position for our clients and will continue to do so into 2025. As long-term investors we never confuse intelligence with a bull market, nor will we ever get caught up in the hype of exuberance.

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Let’s keep our emotions in check and remember this is a marathon and never a sprint.

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?Until next time

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~ Quint

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Did you know??Joule works with clients all throughout the United States. With our process of utilizing technology and online planning portal, there is no geographic limitation to whom we can help. If you need a second opinion or want to explore what an advisory relationship with Joule would look like, review more info on our?site?and we’d be happy to discuss your current situation.

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