It’s been a crazy few weeks in markets. And with all of the market volatility, it makes sense to take a breath and think about how to invest in the current environment. So let’s look at four areas – stocks in general, startups, crypto and cannabis stocks.
These are just my thoughts. And I may be wrong. But these are crazy times. And the X-factor in everything is the Federal Reserve and other central banks. If they keep easing monetary conditions and lowering interest rates, anything could happen.
My view continues to be that the market is running higher purely because of central bank (Fed) actions. The yield on a 10-year U.S. Treasury moved below 1% for the first time ever on Tuesday.
I think rates are headed even lower. And that’s the way the Fed wants it. It drives up stocks and other risk assets, increases confidence, and keeps people spending.
Fundamentally, the U.S. stock market remains expensive. Companies are knee-deep in debt and have been driving their own share prices higher with buybacks.
Jesse Felder, a financial analyst I follow, did a great job showing how overvalued the market is the other day.
The orange line shows the current U.S. total stock market.
The teal line shows what Jesse calls the “Buffett Yardstick.” It’s a tool used by Warren Buffett to compare the stock market with the underlying economy. When it’s high, that means stocks are expensive versus the actual economy.
We are currently at 2000 bubble levels. Stocks are currently equal to roughly 180% of U.S. gross national product (GNP).
Felder then quotes Warren Buffett on the meaning of this metric…
The chart shows the market value of all publicly traded securities as a percentage of the country’s business – that is, as a percentage of GNP. The ratio has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment.
So stocks are expensive. But that doesn’t mean they’re necessarily going to go down, as I explained recently. And shorting this market is extremely risky. Central banks are pumping a lot of liquidity into the markets, and it’s possible they’ll go up for that reason alone.
Regardless, I don’t like the situation. I am mostly avoiding most U.S. stocks. I love gold, silver and good miners here. I’m holding my crypto. I’m also investing in cheap but relatively stable emerging markets, like Russia, where the broad index yields more than 6% and trades at a price-to-earnings ratio of around 6.
I continue to invest in high-quality U.S. startups. This is a disruptive time, and innovative nimble companies have big opportunities. I am increasingly interested in companies that are bootstrapped, or at least highly capital-efficient.
It’s possible that getting further funding could get harder over the next few years. Breakout startups won’t have much trouble raising money. But for startups that haven’t hit it big yet, it could get harder to raise cash. So I’m looking for startups that don’t need a lot of outside capital to operate.
I continue to hold my cryptocurrency portfolio. Haven’t touched it in years. As I’ve explained recently, I continue to be most bullish on bitcoin. It’s the one crypto that has millions of users and is fulfilling its purpose.
In case you missed it, we changed our portfolio allocation. Here’s the new model:
- 70% bitcoin
- 10% litecoin
- 10% ethereum
- 10% monero.
I am less bullish on altcoins here. It’s not clear how they will do if the market sees continued volatility. I feel more comfortable in bitcoin.
I provided a recent update in case you missed it. We sold Aurora Cannabis (NYSE: ACB) and Elixinol Global (OTC: ELLXF).
The entire sector has been down big, and our remaining portfolio has been battered with it. I feel good about these companies in the long term, but continued volatility in the near term is indeed possible. If you decided to build your position slowly (dollar-cost average) in these stocks, now seems like a fine time to buy. I continue to recommend keeping your position sizes small, as this is a high-risk area and we’re in a high-risk time.
That’s all for now.