For my second Monday Minute article, I want to point you to one of my favorite websites for big picture investing/economic commentary, The Felder Report. Jesse Felder is bearish on most aspects of publicly traded markets, and he has been for quite awhile.
His most recent article is about how much cash is hated right now, with people buying bonds with negative interest rates and overpriced dividend paying stocks rather than just holding onto cash and waiting for investments to become more reasonably priced. Towards the end of the article, Jesse noted how Warren Buffett’s cash position has increased significantly in recent years and how Warren Buffett sees cash as a call option on all other assets with no expiration date and no strike price. In other words, by holding cash, Warren Buffett is keeping his options open to buy any other asset class in the future when the price is right. This is the exact reason that I have been trimming stock positions, avoiding bonds as much as practicable, and moving towards a dynamic cash allocation structure. “Cash is king” should be our mindset rather than “cash is trash”, as the opportunity cost of holding cash right now isn’t very high, especially when compared to projected asset class returns and the risk of significant losses in stocks and bonds over the next few years.
Jesse’s prior article is about a stock market valuation method similar to Warren Buffett’s preferred method of measuring the U.S. stock market’s capitalization compared to its gross domestic product. This new method compares the U.S. stock market’s capitalization to its gross value added (“GVA”), and it may be more accurate because it includes foreign revenues earned by U.S. companies, even if those revenues remain overseas as is often the case. Jesse then points out a flaw in this new method and suggests that when you factor debt to create a numerator of enterprise value instead of market capitalization, an already overpriced market by most measures moves well into bubble territory, which Jeremy Grantham (another titan of asset management) defines as two standard deviations above its long term average. The article is a quick read, and it highlights Jesse’s rare ability to understand, critique and improve big picture economic and valuation concepts. In thinking about stock market valuations, Jesee’s EV/GVA measure should be high on the list.