The Case Against Stocks

The case against stocks. Now, it's gonna trigger some people. Thomas P., I know you're out there. This will trigger some others. Off the top of my head, I can't remember who else is a big stock jock. There's many of them, that's okay. This is not to say don't own stocks. Okay, good, right about the bottom. But I'm gonna make an argument against stocks. And this, again, I'm not saying don't own stocks. I think what you should do, actually, is you should do what I've done. The third, the third, the third portfolio. That's not very good. And what you want here is cash. It's paying 4.8% right now. You want bonds, let's say 4% right now. And you want stocks, all right, stocks. But Josh, stocks are up for the year, 7.5% or whatever it is. Yeah, I get ya. We're gonna make a case why you don't wanna go 100% stocks, the case against stocks, all right. So check this out while I erase this. I love being down here, man. I love being back on the whiteboard. I love it. It's been a long time, actually. Bust out the old PVC pipe. Is there anything PVC can't do? What's this, a 3 quarters? Yep, 3 quarters right there. See that? No, I can't, it's always right there. 3 quarter PVC pipe. What do you think PVC can't do? Do-do-do-do-do-do! All right, so how do stocks make money? And by the way, this is gonna be my course. This video won't be my course, but we're gonna go deep in my investing for a regular people course. Remember how stocks make money. Stocks make money by two things, and two things only. Dividends and earnings growth. That's it, two ways, two ways around, and that's it. Earnings growth plus dividend yield in equal stocks. Now you also have plus minus of PE, price to earnings ratio. So basically, people are willing to pay for a dollar of earnings. Sometimes, like right now, people are, I think the S&P 500 is like 22 or 23 PE, something like that. In 1999, it was at 35. 1982, it was at eight. All right, so if people are willing to pay more for a dollar of earnings, you can make money, temporary, until people say, I'm not willing to pay more for a dollar of earnings. It's all temporary, price expansion, PE expansion or PE contraction. That's temporary, just based on what people's preferences are. That's not based on anything other than, I feel stocks are a good buy, okay. But this is where stocks make their money. Dividend yield plus earnings growth. All right, so earnings growth, we know right now, dividend yield's about 2%. All right, so dividend yield's about 2%. Earnings growth is based on what? Well, it's based on the economy. I mean, I get it. We'll have all kinds of people say, the GDP doesn't determine stock market returns. At the end of the day, a stock cannot outperform the stock market in terms of the index. Maybe a individual stock can. The stock market, we'll just use VTI, the total stock index, cannot outperform the growth of an economy. It just doesn't, it can't. All right, so if the economy is growing, you would think stock market would grow too because of earnings growth. If the economy is stagnant, you would think stock market would not grow because of earnings growth. Makes sense, right? Yeah, of course it does. So now we look at what happened post-World War II. All right, post-World War II, what do we have? We had a couple things. And if you weren't on my local channel, you'd miss this because I talked about it today on the local channel live. It's still not quite perfect. I want to get that down a bit. All right, that's it. So I want to bring this up a little bit here. Hold on just a second, folks. There we go. Make this a little bit closer. All right, good, we got more space there. This is so professional. Dude, I don't care. Who's that guy that people say is very professional? Safeguard wealth management or something like that? That ain't me, baby. All right, there we go, that's pretty good. All right, that's good. All right, so what happened after World War II? All right, because remember, post-World War II is when the markets took off. From 1946 to 1968, the stock market went gangbusters relative to bonds. All right, so you take that 20-year timeframe and you exclude that. Stocks and bonds look pretty close, all right? But it's that 22 years from 1946 to 1968, the markets just took off because it's post-World War II. Why? Well, because we had what? Low debt. Dude, none of these guys are working very well. I need some better ones. Low debt, there we go. Hopefully you guys can see that. Yes, and high population. The silent generation, we're pumping out babies left and right, dude. You know, freaking Grandma Smith drunk a cup of tea and she's getting pregnant. You know what I'm saying? They're having babies left and right. Low debt. We had debt after World War II, I grant you, but that got quickly regulated and the debt from the 1940s, late 1940s to basically 1965 was minimal. It was, it's just a fact. All right, so what has happened since? We've had an expansion of debt. Expansion, not just for the government. I didn't talk about government yet, but also in terms of the personal consumption as well. All right, so the households have an expansion of debt as well. And I'm not one to sit there and say, oh my goodness, we're all gonna die. Not like that. But we've had an expansion of debt, like it's just insane is all there is to it. We've also had a decline in population in terms of babies being born. My man Carl, who goes by pooping while standing, said 40% of men under the age of 45 don't want to get married and have no desire to have children or something like that. That's not good. And you can only import so many people. At some point though, the importing of the immigrants is gonna stop because there's gonna be a fight for resources that are getting more and more scarce. As resources get scarce, the price for those resources go up, the competition for those resources go up, and all of a sudden there's gonna be an unwelcome place for people coming in and taking your resources. That's just a fact. It's already gonna happen in Europe. You can see it's in my way. It will happen here as well. He'll be a little bit behind. Why do you think Japan limited their immigration? Because of the competition for limited resources. It's just that simple. Will that come back and bite them in the butt in 20, 30, 40 years? Probably, because they're a dying population. There's no other way around it. North Korea, South Korea, all the Asian countries, China, Korea, all dying. I don't know about Thailand, but I imagine the same thing. Europe is dying. You know what I'm saying? The United States is a slow death. Not quite as bad as Europe and Asia, but it's happening, man. It's all there is to it. And on top of that, we're having more and more regulation to make our resources be even more scarce. So we're gonna have a declining amount of resources and more people fighting for those limited amount of resources, which means we're not gonna have this population growth. The only reason the United States doesn't have population growth is because of immigration. That's it, man. Catholics aren't having kids. Mormons are having kids, but even that is dropping, too. So there just ain't any kids being born. You gotta pump them out, man, pump them out, but no one's doing it anymore. But our debt is going through the roof. What is debt indicative of? It's a drain against future consumption. All right, so how does an economy grow? The United States economy grows how? Our GDP is based on what? 70% of the GDP is based on personal consumption. All right, personal consumption, PCE. PCE is personal consumer consumption expenditures. I can't remember what the C stands for off the top of my head. It doesn't matter. PCE is divided into two categories. We got goods and we got services. All right, when I was growing up in the 70s, we didn't have a TV. We couldn't afford a color TV. We didn't have a car. We didn't have an air conditioning unit. We didn't have a gas grill. We didn't have a microwave. We didn't have any of this crap, you know what I'm saying? Because it's well too expensive for us to buy. We couldn't take plane tickets. None of that crap we could. Going to the 80s now, with massive amounts of cheap foreign goods being sent to the United States, all of a sudden, we couldn't afford that. I mean, when I say the 80s, I'm talking the late 80s by that point. Now, if you're younger than me, 52, you might not be aware of that, but like my kids, they've always had air conditioning. They've always had color TV. They've always had a microwave. They've always had gas grills. Always had access to meat. We didn't have any of that crap growing up. But you're so poor. Okay, I wasn't that poor. We're poor, but everyone was poor back then for the most part, back in the 70s. If you're older than me, you know exactly what I'm talking about. So now, though, we can't have all that stuff. Why? Because we've imported so many goods. And as I've written in my book, Relax and Retire, Debunking the Inflation Myth, the price of goods hasn't changed much since 1950, in terms of what the amount that we're spending on goods. I get it. Actually, if you look at the price of goods, TVs, computers, all this stuff, it hasn't changed much. I think it's gone up by one to 2% or something like that. Hasn't gone up much. All right, it just hasn't. Services, the reason for that is because we're importing it, importing it. So look at what a cost of a TV was relative to your income from 1970. Look at what a cost of a TV is now compared to your income. It just hasn't gone up that much. It hasn't. Microwaves, the whole thing. You've got to look at relative to income, because income's a driver of your ability to afford this. All right, so you don't just say, well, the price of a TV in 1975 was 80 bucks, and now it's 300 bucks. So you're wrong, Josh. You've got to look at relative to spending power, essentially. And when you look at relative to spending power, the price of the goods that we import haven't gone up much. Services, on the other hand, have gone up, I don't want to say exponentially, but they've gone up a lot. Services is the cost for your nurse, the cost to hire a doctor, the cost to hire a plumber. All that stuff has gone up, because we can't really import that service. Now, we can in some regard, you know, cheap labor, landscapers, roofers, and stuff, and that's what put American-born laborers out of business, I get ya. You can't really hire out a Guatemalan immigrant who can't speak the language to wire up your house. I mean, you could, I grant you, but no one's gonna do that. So you're gonna hire an American. American's gonna demand a fair wage and American dollars. And that way, the price of service has gone up, because we cannot import electricians and all that. That's a good thing. But it's a good thing, because we want the American wage to be paid for that guy. You know what I'm saying? Financial advisors, you can't import that. I mean, they're trying to, I get it, they're trying to, but they haven't done that yet. Too much. So anyway, so what we see here is we see the price of goods flatlining. What has that done to growth? Well, it gives us more disposable income to buy other stuff or to spend on services. All right, so all these things, we've had disposable income, which you could use, because the price of goods has flatlined, just to basically bid up the price of services, and to buy more goods, all right? And that's just a fact. So let me ask you a question. What happens when the United States says, you know something? We've spent all this money, we sent all this money overseas. Well, it's not the United States, actually, it's gonna be the other countries. And they say, we sent all this money, so here's the US, we take our dollars, all right, and we ship them over to China, and they send us goods. We'll say a TV. That's not really a TV, that's supposed to be an antenna. That's a TV, an old-fashioned TV. So they take our dollars, all right, and they ship us our goods. That's how it works. And then they turn around and buy our bonds, by the way. So what happens now for the Chinese who are building those goods? Well, they start to demand higher and higher wages, because their quality of life needs to improve as well. So they start to demand higher and higher wages. What does that do to our price? Well, inherently, that makes our price go up as well. All right, you hear me so far? So the Chinese, the Vietnamese, the Indians, all these people, they're not living off slave labor anymore. They're pretty close to it, but they're living off higher because the demand for their wages has to go up. Why? Because they're getting more and more into the middle class. That's just a fact. So when that happens now, we have to pay more for foreign labor, for foreign goods. What does that ultimately mean? It means less disposal income for other things. All right, now on top of that, going back to the debt, less disposal income for other things, to include services and other goods. But on top of that, we have massive amounts of debt that we have right now, as a country and as a family unit as well. What does that do? Again, it pulls consumption from the future to today. It's like a sugar high. And my man Dougie, Dougie B. Fresh sent me an article today talking about student loans. When they deferred under CARES Act, they said, you can defer payment on student loans. You know what people did? Did they pay down debt? Did they add to their wealth? No, you know what they did? They took on more debt. Isn't that crazy? University of Chicago did a study. Shock, I was stunned by this. University of Chicago, they did a study and they said, when they allowed for deferment of student loans under the CARES Act for direct, it was a DL, direct lending from the treasury for student loans. So you had two different groups of people, the student loan recipients from the bank, and the student loan recipients from the government. They can't, the authority given to Biden did not allow him to defer private banking student loans, but it did directly from the U.S. treasury. So the people who received deferments on their student loan payments from Biden essentially, what they did is they did not pay down debt. You know what they did? They increased their debt by mortgages, auto loans, and other consumer debt and credit cards. So they actually have more debt now and a higher monthly payment to service the debt because we allowed them to defer their payments. Crazy. So what does that do? What does debt do? That means there's less money to spend in the future. Less consumption. Huh, less consumption. Less goods to buy, less services to buy because they've already bought it. They already took the debt. And that's me, that's you, that's everybody. Now the country as a whole. So we have two things. We have less demand because the debt levels are so high. On top of that, we're gonna have higher prices because the labor that we were accustomed to selling us cheap TVs in the 1970s and 80s when China was just literally as a freaking, you know, living in huts. Now they have regular homes. They're regular middle-class Chinese. Now they're poor compared to us, don't get me wrong, but relatively worth 30 years ago, they're freaking living large. And they're not gonna demand, they're not gonna say, yeah, we'll take, it's okay, don't pay us any labor. We want to be paid more. And guess what? China has a population decline as well. Thus there's less people to do that labor as well. What happens to wages when there's less people to do it? It goes up. Scarcity increases prices everywhere. And labor and goods, it doesn't matter. What do you think a share buyback is? So Amazon's got a million shares outstanding. They say, we're gonna buy back 50% of our shares. What do you think happens to the price? You think it just goes up by the 50% from they're gonna buy back the shares? No, it creates scarcity. So now there's 500,000 shares outstanding, which means the price is gonna go up because they've made the stock more scarce. They've eliminated some of the supply. When the supply is limited, i.e. scarcity, the prices go up. It's just basic economics. How does a stock grow? It grows by price to earnings expansion and contraction. People, are they willing to pay more for a dollar of earnings or less? As disposal income gets reduced because of massive amounts of debt, we've got to service the debt somehow. We've got to service that debt. As disposal income gets reduced because of more debt service. And as prices on other stuff, the goods we've been used to buy for cheap go up because there's more and more scarcity in the labor and the people who are still in the labor in those countries still doing it, they want higher wages as well. What does that do? That leaves less money to bid up a dollar for price to earnings ratio, which means if you're relying on what I call the greater fool theory, and again, in my new course, I talk about that a lot. The greater fool, it's not ready. It'll be ready by the end of this month. If you're relying on the greater fool theory, that someone's going to pay you more than what you pay for your stock, but that someone might not come to fruition because that someone's like, dude, I got no money. I got heavy debt load and I can't afford these prices. So I got to wash my back. I don't have more disposal income to buy your stock. You bought it for 50, I'll pay it for 40, but I'm not paying for 55. I don't have the kind of cash flow. So P.E. contraction, i.e. what people want to pay for a dollar of earnings. On top of that, dip meals are still about 2%. And then the big one is earnings growth. As prices go up, cost of labor goes up, the scarcity of basic things like energy, frankly, becomes more and more scarce because all the regulations and Biden just canceled the pipeline that Trump had issued in Minnesota. I mean, it's just idiotic. You know what I'm saying? I mean, this is just, it's not doomsday, but it's going to make the inputs cost of goods sold, businesses, they sell the widget for a buck. Is that their profit? No, that's the revenue. What's the profit? You take your revenue, the dollar for the widget, you subtract the cost of goods sold. We sell it for a dollar. COGS are 80 cents. That's a 20% profit margin. What happens when things be more scarce and inputs get more expensive? I.e. labor, energy. What happens? Then this 80 cents becomes 90 cents. And now we've reduced our profit margins to 10%. What's the stock based on? Earnings growth. If profit margins are reduced from 20% to 10%, what happens to earnings growth? Is that earnings growth or earnings decline? That's inherently an earnings decline. So all these people out there will say, oh, but Josh, from 1926, and you gotta look at it post-World War II. Post-World War II was a boom like we hadn't had. Abundant people, I.e. more people competing for jobs, which means you could keep the wages low. Union busing happened, rightly or wrongly, and the unions, of course, they went over the top. Everything goes over the top. The pendulum always swings. On top of that, cheap foreign labor. Immigrants imported to the United States, basically exporting our manufacturing base. That made the products cheap, which made the prices cheap. And on top of the prices were cheap, brought to what the mass middle class could afford to pay, the Scanlon family from 1970 to 1980, 70s to the 80s. We couldn't afford it, now we could. You know what I'm saying? And that meant massive profits for stocks. And we've seen a run since 1948 to basically at the end of 2022. We'll never see it again. Just as those days are gone. Less people, more labor costs, more fight for scarce resources, the more cost of inputs. But AI, yeah, AI, okay. It's kind of like when I hear batteries. Josh, don't you know, we're gonna live off battery power for solar? Man, we've been hearing that since Edison. Do you not know your history? They've been talking about battery powers to funnel batteries from the solar, from the photovoltaic electricity, to store electricity, photovoltaic and wind power. I don't even hydro if you want, but I mean, either way, it doesn't matter. But solar, photovoltaic and wind power, we've been talking about batteries. We can live off batteries and it hasn't happened. It's not gonna happen, it's just not. And you can say it will, that's fine. It's like me saying AI's gonna be driving our vehicles. It's not gonna happen, it's not. And AI might replace some copywriters. It might replace some, what's it, screen guilders, whatever that thing is in Hollywood. It's not gonna replace electrician. And less and less people are coming up in the electrician ranks, which means what happens to the cost of getting electrician? It goes up, dude. It's just rocket science, it's not rocket science. Price of electrician goes up, what happens to your disposable income? It goes down, you're gonna be buying less goods. Less goods means what? Less widgets a company can sell, less widgets a company can sell, plus higher inputs to the cost of goods sold. What does that do for the earnings? It reduces the earnings. If you look at stocks, how does it grow? Dividend yield, earnings growth, plus price expansion, contraction, P-E ratio. People will be less inclined to buy a stock for 50, they'll be more inclined to buy it for 40. As such, P-Es go down, dividend yield maybe stays flat, might grow up a little bit. If the price of the stock goes down, the dividend yield will go up, but the dividend itself doesn't necessarily go up. And on top of that, earnings growth sinks. That's the case against stocks. That doesn't mean it won't happen. It's blindingly obvious for all to see. Remember, my friends, the S&P 500 is a market cap weighted. So the more the companies grow, like right now, I think it's like five stocks have run the whole S&P 500 for this year or something like that, something like that. So those stocks are running the S&P 500 because of AI. The AI boom's like, oh my goodness, I've never heard this before from the late 1999. The internet boom is gonna, I mean, this is literally a rehashing of what happened in 1999. The price-to-earnings ratios aren't in the bubble that they were back then, I grant you, but still, it's the same God thing. So now you've got these few companies taking off like a freaking bat out of hell. And what does that do? It makes the S&P 500 and VTI grow with it because VTI and S&P 500 are market cap weighted. The bigger the companies, the companies that grow the most, get more and more, they're the higher, bigger and bigger constituents of the S&P 500. Thus, the more they grow, the more the S&P 500 grows. It's like the self-fulfilling prophecy. But then all of a sudden, some have droopsh, and people are like, oh, yeah, these things are too high, and that means that growth doesn't just flatten, it goes down even more, like what happened in 2000, 2001, and 2002. The tech bubble popped 9%, 12%, and 22% respectively in the S&P 500. Why? Dividend stocks did fine. It's the growth stocks that took the S&P 500 from 1995 to 1999, only averaged 35% a year. And when that stuff happened, your dividend stocks didn't get killed, but the S&P 500 did because the constituents were so heavy on tech. And the same kind of things happen now. Again, that doesn't mean you get out of stocks, but man, prepare. All right, if you like what we do here and you wanna support the channel, buy me, I gotta say this at the beginning, buy me a cup of coffee, it's the doobie-do. You know, five bucks, a cup of decaf. You wanna buy three cups of decaf, I'll greatly accept it. Buy my book, Relax and Retire. It'll be in the doobie-do because it's a great book. It talks about how we've been, the difference between services and goods and personal consumption expenditures, PCE, personal consumption expenditures, that's what it is. And why that's so important for GDP. 70% of GDP is PCE, all right? That's you and me spending. If we're heavy in debt, that means less spending. That's just a fact, dude. If prices go up, that means less spending. That's just a fact. That means GDP goes down or at least levels off. So where does the growth come from? Love your thoughts, we'll see ya.