Perhaps the question I hear most often these days when I talk stocks to other money managers and anyone else is: Where are we in the cycle? It's like everyone's ready for the other shoe to drop and for the next market crash to come sooner rather than later.
I take pride in my completely independent economic analysis and how I've managed my career on Wall Street navigating the huge swings in our economy and stock markets that I've seen during that career. To be sure, I'm wrong a lot, like everyone else, and I'm no oracle, but anybody who's followed me on TheStreet since I launched my old tech hedge fund right out in real time for readers in October 2002, just as the Nasdaq bottomed down 75% from its 2000 highs, knows I've been decisive when it comes to putting my money where my analysis is. I closed out that hedge fund exactly five years later, in October 2007, right before the market crashed 60% again. In 2007, I did a series called "This Won't End Well" for Real Money (see, for example, "Short Confidence in Long-Side Bets").
I quit my job as an anchor on Fox Business in 2010 and started investing my money and career very aggressively into the App Revolution and what I predicted was about to become the single biggest bubble in stock market history.
I review all of this not to brag, but because I'm struggling with the conclusions of my own bullish economic and stock market analysis, which has driven me to review some of my old articles and notes. In each of those cases, I felt like we had a clear ending to the cycle, the bottoming of a major downturn and stock market crash (from 2000-02 and 2009-10) or the popping of a huge bubble (in 2000, though I wasn't trading or publishing economic analysis back then as I was still just a young kid from New Mexico cutting my teeth on Wall Street).
So back to the original question, where are we in the cycle? With Republicans and Democrats both so focused on corporate earnings and the stock market, people often make the mistake of thinking of those things as "the economy." The corporate economy is what you're most interested in when you look at the stock market because the stock market is made up of only corporations. The broader and/or Main Street economy is what you should be looking at when you are trying to understand the broader economic cycle. So let's just lay out some of the economic realities and some analysis about them and how it all applies to the stock market here.
Apple's (AAPL) the richest company in the world and it's probably the most obvious "trickle down" beneficiary of the 0% interest rate world we live in. Apple has nearly $200 billion in net cash on its balance sheet. But interest rates are so low that Apple has actually gone out and borrowed money at 1% or less, taking yet more cash out of the broader (i.e., Main Street) economy and putting it directly into the coffers of the richest company on the planet (full disclosure, I own AAPL and have owned it the better part of 13 years, but let's keep it real). (Apple is part of TheStreet's Action Alerts PLUS portfolio.)
Meanwhile, the Main Street, small-business, consumer economy itself has indeed been improving for the last two or three years, as some of the scraps of the trickle down of 0% interest rates and corporatist economic policies do reach the masses.
So giant corporations are getting to borrow trillions of dollars at rates far below what the natural market would set them at, and they get to buy back shares and pay out dividends and do financial engineering things with their stocks and lobby politicians for yet more subsidies and protections and so on, all in the name of "helping the economy."
Well, what about the long-term impact? Giant corporations reap the benefits of being able to invest what little of that excess money they're getting their hands on into their factories and research and development and creating new technological, manufacturing, food production and other revolutions. And how about all the millions of entrepreneurs who are trying to compete against these giant companies that have much lower tax rates, much higher access to much cheaper money and are even getting factories and refunds and direct welfare checks for tax games or making blockbuster-budget movies or keeping their money overseas from the government?
The long-term impact of the unlevel playing field that comes with all that is depressing and could eventually lead to another outright depression. But long-term is a long time and it can be many more years or even decades before the full impact and weight of all these factors combine to crash our economy.
But that doesn't mean we won't have another 50% or greater market crash in the next few years or decades. In fact, we all know that at some point in the next few years and/or decades, we will indeed suffer another market crash.
And that can lead to big selloffs in the broader markets and your favorite stocks. I do expect I'll become outright bearish about the stock market again, like I was back in 2007. I'm just not there right now. I don't see a catalyst like I did with the real estate crash of 2008 taking down the broader economy along with Wall Street right now. Certainly, a Black Swan event could change all that at any time. Of course, we can account for that potential in our portfolio playbook by being less aggressive in our long positions than we were when the DJIA was indeed down 50% from its highs back in 2008 and 2009.
Finally, if we can continue to find and invest in the most revolutionary companies on the stock market and stay flexible with some cash, avoid taking wild trades or using excessive leverage, we're going see more triple- or quadruple-digit gains in our portfolio, because great growth stocks go up along with their earnings growth. We're trying to find stocks that can grow their earnings tenfold, and when a company's earnings go up tenfold, the stock will be up a bunch, too.
For the near term, I made a few trades on Friday and have scaled into some more stocks and a bit more long exposure in the last week or so. I'd reduced my number of long positions and overall long exposure back when the markets were at all-time highs.
I'll be doing a live video discussion of all this economic and market cycle stuff on Scutify Live and on Periscope and will record it for publication as a Cody Underground podcast that I'll be sure to post on Columnist Conversation later.