If you feel a bit jostled around – don’t fret – even most of the pros do and the “experts” as one can readily see, don’t have a clue either.

It is my humble opinion we are witnessing a slow but steady “passing of the baton” as our barbell economy continues to forge ahead and reshape the landscape before us.

Times are a changin’ – and quickly. 

Even more quickly than before.  Who would have ever thought that launch day for new Apple products would become a yawner?  These products, which have changed our lives in a matter of a single digit number of years, are now so “normal” we expect them to change things always.

Are we sure there is something wrong with the sys tem?  Our could it be our perspective of and/or gratitude for it?

I digress.

So What’s Next?

Likely more chop.  See our video reviews from last week and you will note the markets are hovering in the new trade range noted at the time – having leapt over and washed out the lower regions of the old trade range.

I suspect this chop remains for a bit longer to quell any remaining good feelings.  Soon, the political and adminstration change in the near future – and the election for it – will take center stage.

Let the giveaways commence.

Investors always have a choice between owning risky stocks or risk-free 10-yr Treasuries.

Currently, the earnings yield on stocks is about 350 bps higher than the yield on 10-yr Treasuries.

From an historical perspective, this is a relatively rare occurrence. Note the last time we saw these erratic waves was in the mid-70’s.  LOL!  That was when the DOW was about 550.

My read?  Pretty clear that investors today are not very confident that corporate profits can hold at current levels. They fear that earnings are going to decline, and so they demand an unusually high premium for holding stocks instead of Treasuries.

Notice they have felt this way in an increasing trend way back to 2002!

By this measure, stocks offer attractive valuations for those who believe that earnings are unlikely to fall. 

Euro-zone swap spreads remain relatively low as well.

The chart above suggests that systemic risk in the U.S. and the eurozone is low – so far, there has been no contagion from the energy sector to the broader economy…even though the experts swear to us otherwise.

Rest assured–the bond boys don’t play nicely.

Were the “energy collapse” anything more than a huge gold mine for upcoming M&A, you and I would be paying for it dearly already.

It is easy to forget that in the very long run, corporate profits tend to track the growth of nominal GDP over time.

Stock prices are theoretically driven by the discounted present value of future after-tax earnings. The market cap of equities (using the S&P 500 as a proxy) should therefore tend to track the inverse of risk-free Treasury yields (because they are the appropriate discount rate). And as the chart above shows, they do.

Treasury yields are very low from an historical perspective, but the market cap of equities is not out of line with historical trends, being roughly the same today as in the early 1960s.

(Thanks to Calafia Beach for the great charts as always!)

The Bigger – Much Bigger – Picture

Here is the deal – millions and millions and millions of kids, age 15 to 21 today, will move out over the next 5 years.  They will get a place of their own, a car of their own, a couch of their own, storage boxes of their own, a pet of their own, TV’s, game consoles, video memberships, content channels, refrigerators of their own and the food to fill it.

At the very same time – millions and millions and millions of adults, age 63 to 69 today, will pass the baton and move into the next phase of their lives.  They will travel more – pass assets onto their kids more, take more generic drugs, visit doctors, strive for life continuance, eat better, exercise more, start second businesses, form companies to help kids start new businesses, take cruises, go to vacation resorts, board airplanes, visit grandkids, etc., etc., etc.

Here is the Choice

We can focus on Greece if we prefer.  We could focus on China if you must.  We could wait and bite our nails to see what monster is next after China – and be assured, there will be one.

Or, we can raise our vision a little higher up on the scale.

Yes, I k now it sure feels better wrapped in that blanket of fear and scarcity and assured doom.  But remember, it is a security blanket we have collectively learned to like – and you are wrapping yourself in it.  No one else is doing it for you.

The Track Record

Remember…the real wealth is found when focusing on “what’s next” instead of “what’s now.”

Let me explain this way…if you will take a moment of pause with me:

How excited would you be to watch game 38 of a team who has lost 35 of their previous 37 games?

Think about it – and then think about this:

The experts fueling the latest round of fears in the crowd – and the crowd listening to same, also:

Felt it was a big risk to invest in the future at DOW 1050 in 1983

Felt the world was ending on October 20, 1987 – the day after the crash – at DOW 1775

Felt the real estate collapse in the early 90’s was a sure bet the future was bad – at DOW 3300

Were certain the Russian and Asian currency crisis in late 1998 painted a dark picture on the horizon at DOW 7500

They are the same crowd who loved stocks in late 1999 as they finally caught on to the then 17 year long bull market run.  They were sure stocks grew to the sky.

And then they hated them again in 2003 after the tech bubble burst – when the NAS was 70% lower than it is now.

They loved housing stocks by late 2007 – when all you needed was houses to rent.

They swore off the US as a stock market opportunity in the collapse lows of 2009

They spent the last many years piling into, by the truckload, bonds at 50 times earnings and of course, emerging markets….all of which are now suffering terribly on the “China Adjustment”.

Speaking of the China issues – they will be fine – they just won’t rule the world.

By the way – that is a good thing.  Their “slowdown” is paying handsome dividends the world over as things get cheaper : )  

In Summary

Fearing these events is blocking the investor from understanding the key question for real, long-term wealth opportunity.  Sure it takes time – all good things do.

But we must learn to ignore “what’s now” and focus instead on “what’s next”.