It is Going to End Badly

It is Going to End Badly

Alan Greenspan called it Irrational Exuberance.  Others have called it heady or intentional blindness.  But however you look at the stock market’s performance since Donald Trump was elected, it is clear that reason is not operating and that exuberance in winning.

It is going to come to an end, and pretty soon regardless of whether you are enthusiastic or not about the Trump presidency.  That is what is so distressing now – people have put aside rational thinking and have climbed aboard a train that will go over the edge, and soon.

When it all does come to an end, reason will return and folks will be kicking themselves for being suckered into a moment of exuberance.

It always happens that way.  But, never has the rise been quite so dramatic and the fall so likely to be equally steep.

Scratch any investor and they will agree that the precipice is there and that a major drop soon is very likely.

But scratch them again, and they will tell you it is just too good now and they just can’t stop.

So, it will be the few (and it always is) who will step out now and reap the benefits tomorrow, a week from tomorrow, a couple of weeks from tomorrow.

Timing is not perfect, but reason is rational.  It is going to end badly and we all know it.

Why Interest Rates May Not Rise Quickly, or Much at All

Why Interest Rates May Not Rise Quickly, or Much at All

In response to this article cautioning against buying long-term municipal bonds, I wanted to outline some reasons that interest rates may rise slowly, or not much at all. Here are some items that also need to be considered when factoring in whether to invest in municipal bonds:

Global interest rates are incredibly low.  The market for securities becomes more global every day and investors worldwide have a choice between buying bonds almost anywhere in the world with low transaction costs.  So if interest rates in Germany and Japan stay minuscule, it is unlikely that Uncle Sam is going to pay so much more.

Economic growth is likely to remain subdued.  Demographics are destiny, and we have an aging workforce and are pretty close to full employment.  Economic growth is largely based on two factors – size of the workforce and productivity growth.  The workforce can get a little bigger, but if GDP growth was under 3% when unemployment went from 10% to 5%, how is it going to rise above 3% going forward?  Also, in a service oriented economy there are limits to how productive we can become.  What tools are making us more efficient at our jobs that don’t eliminate workers and reduce the size of the workforce?

An aging population means people need investment income.  Ten thousand baby boomers turn 65 every day, and they will need income in retirement beyond what they are receiving from Social Security and pension.  Bonds provide a more reliable source of income than stocks, and despite low rates they also offer a higher rate of income.

The stock market is incredibly expensive.  Using long-term valuation measures such as Shiller - PE and stock market capitalization to GDP, investors are paying a very high price for stocks.  If earnings disappoint, some money will come out of stocks and likely into bonds, keeping a lid on rates.

The budget deficit is going to rise, limiting fiscal stimulus.  The Federal Reserve already has a massive balance sheet of bonds and the interest they earn gets paid to the Treasury Department.  As those bonds mature the Treasury gets less income, increasing the deficit.  Then consider increased Social Security and Medicare benefits, and the impact of rates that have already risen nearly 1%, and the ability of our government to lower taxes or increase spending to stimulate economic growth become severely compromised.

Short-term rates may stay fairly low.  The Fed has been extremely cautious in raising rates, largely because they don’t see much inflation or wage growth.  Even if they do raise rates 4 times or 1% over the next 2 years, the longer end of the yield curve may not move up nearly as much as short-term rates, as has been the history during periods of Fed tightening.


Securities offered through Kestra Investment Services, LLC.,(Kestra IS) member FINRA/SIPC.  Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS.  J Matrik Wealth Management is not affiliated with Kestra IS, Kestra AS, or Five Star Professional.

Universities are Ripping Off Americans

Universities are Ripping Off Americans

During the last election, Bernie Sanders, Elizabeth Warren and Hillary Clinton led the charge, calling for free universal higher education for everyone.  They called it a human right and decried the fact that upon graduation millions of Americans who now enroll are saddled with thousands of dollars of college debt upon graduation, weighing them down for years, sometimes decades.

The argument that unlimited access to higher education is a right that every American should enjoy is a separate and very political matter for discussion at another time. 

What is far more compelling and immediate is the fact that higher education costs have skyrocketed in recent years, are ridiculously and irresponsible high, and are continuing to increase annually unabated and way above annual, national cost of living increases.  Pricing by higher education (public as well as private) is a rip off of huge proportions.  And the institutions are the perpetrators. 

Average tuition and room and board this year, 2016-2017, is around $30,000 for 4-year public institutions, $62,000 for ordinary private institutions and $71,500 for elite private colleges and universities.  And, that is the average.  Costs are significantly higher still at the better 4-year private colleges and at the very best elite institutions.  We are coming very close to reaching and exceeding $100,000 per annum.   

These figures are simply ridiculous.  Universities are a monopoly and they are reaping huge profits to the detriment of the very people they claim to serve.  Coincidentally, they are also legally defined as “non-profit institutions.”  What a joke!

Of course, government provides subsidies to the poorest and loans to many others.  But as costs rise exponentially year after year, tax-payer funded government expenditures increase dramatically, as does student loan debt.  In fact, at current prices, student loans have already become lifetime burdens for many. 

Universities control access and, thus, have infinite opportunities to increase charges at will.  And, they do, recognizing that government will shell out directly and through loans for many and that consumers will pay almost any amount for their children. 

The prices they charge are extraordinarily high under any scenario.  If they were the very best of institutions and delivered superb results, they would still be cheating Americans.  But, they are, every one of them, decidedly poor at what they do and how they do it.  In a subsequent article I will show how far they miss the mark on educating young people and providing the skills required for men and women of the 21st Century.

For the moment, let me suggest that universities never will get better at what they do on their own and never will bring costs in line with what is appropriate without some dramatic challenge by their most important constituency.  A total and sustained boycott by students and parents, lasting a year or longer, is the only action that is likely to force these institutions to act responsibly.  So, take a year or two off after high school and force America’s colleges and universities substantially to lower tuition and fees and to hold the line on increases for at least a decade out.

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