In Soviet Russia the economy bought you. With a full complement of hilarious "in Soviet Russia" memes available on the Internet, I will refrain from posting any in this column. Suffice it say, however, seeing a 42.1% increase in U.S. real disposable personal income for the second quarter of 2020 largely offset by a 32.1% decrease in real GDP was something that 30 years of following the U.S. economy had not prepared me for. Those figures are reminiscent of a Soviet-style state-controlled economy, and the countries that have those are not known for their transparency in the release of economic data, so it is, understandably, taking the U.S. markets some time today to figure out these numbers.
Without going into a full-on Reaganesque sermon, let me just tell you that declining GDP combined with increasing GDI (the lesser-known measure of gross domestic income) is, without a doubt, the worst possible combination of factors for producing growth in capitalist society. If the sum total (much more than 100%, actually) of the increase in national wealth is produced by the government, then there go all those long-held, beloved capitalist notions of investment, return on investment, etc., out the window.
Lest anyone think that we are heading for some kind of Bernie Sanders-style paradise owing to the impacts of Covid-19, please digest the following paragraph from this morning's BEA data release...
The decrease in real GDP reflected decreases in personal consumption expenditures (PCE), exports, private inventory investment, nonresidential fixed investment, residential fixed investment, and state and local government spending that were partly offset by an increase in federal government spending. Imports, which are a subtraction in the calculation of GDP, decreased. The decrease in PCE reflected decreases in services (led by healthcare) and goods (led by clothing and footwear). The decrease in exports primarily reflected a decrease in goods (led by capital goods). The decrease in private inventory investment primarily reflected a decrease in retail (led by motor vehicle dealers). The decrease in nonresidential fixed investment primarily reflected a decrease in equipment (led by transportation equipment), while the decrease in residential investment primarily reflected a decrease in new single-family housing.
Read that paragraph aloud to yourself and try and determine the "good news." Spoiler alert: there is none. If you believe in any way, shape or form that growth is good for the economy, then this latest GDP report had no good news for you. If you own stocks, I am going to go out on a limb and guess that you are in the pro-growth camp.
So, what to do? Do we freak out over a single government report that contains delayed data - through June 30th - and abandon our long-held plans for building retirement income? No, that would be a mistake. In Soviet Russia, 401ks invested in you, but in The States, it is probably best that you continue to contributor to your 401k.
One change that you can make, however, is to increase the allocation you have in that 401k toward bonds. This morning's GDP report was the most pro-bond government release I have read in the past 30 years, and I do believe there will be more such reports to come. It is time to take risk off the table, especially in the highly-valued sectors of the equity markets, which generally comprise NASDAQ/tech stocks. The economy just isn't growing fast enough to support the current 23.0x trailing P/E on the Nasdaq. There's no conversion from 2019 EPS to 2020 EPS and that makes an expensive index even more so.
At the end of the day, a government that is increasingly printing money to hand out to its citizens is one in which you want to be a creditor (a bond-holder) not an investor (an equity holder). There is just too much cheap money being printed and thrown around and it makes me want to go 100% bonds, or, even more interestingly, into "hard assets" like silver and gold, which have performed quite well in 2020.
When the arch-monetarist becomes a gold bug, then you had better watch out. I think that precious metals markets are doing a better job of converting positive fund flow into real returns than corporate managements (those who run the companies in which you hold stock) will be able to now, though. Hence I believe it is time to increase the share of your wealth that is composed of hard assets. It took a once-in-a-lifetime confluence of events to lead me to that investing point, but I am not going to ignore the extraordinary economic numbers that are being released, and will always act accordingly to protect the wealth of my clients.