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Legendary Investor Burton Malkiel Says Gov’t Had No Choice, Had To Prevent ‘Total Collapse’

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Legendary Investor Burton Malkiel Says Gov’t Had No Choice, Had To Prevent “Total Collapse’

Legendary investor and author of “A Random Walk Down Wall Street” Burton Malkiel recently sat down with Marketwatch to give his thoughts on the rise of the day trader, the Fed’s actions since the pandemic roiled the stock market and whether passive investing has permanently put active investing out of business.

On the Rise of the Day Trader

First, he was asked about the rise of the “Robinhood investor” or day trader during the coronavirus lockdown. To this, Malkiel said it’s mostly a spillover effect from the lack of sports gambling. He said the leap from gambling to day-trading is a small one, but most likely unprofitable in the long run.

“I believe that for many of these people, it is a substitute for sports gambling. You know, in a way I am sympathetic. I don’t think there is anybody who devotes a life to studying and working on the stock market who doesn’t have something of a gambling instinct. I am the first to admit that I have gone to the horse races, I have sat at the tables at Las Vegas and Atlantic City, so I do not think there is anything wrong with gambling for entertainment. The problem that I see is that this is the diametric opposite to investing,” says Malkiel.

“For me, investing means buy and hold, as you said. The thesis of Random Walk was that you are much better off not buying individual stocks, but buying an index fund. To go and day trade and think that you are investing, that’s what I think is absolutely wrong and is likely to be simply disastrous for people. All the evidence is that day traders in general lose money. It’s not that they can’t make money in gambling, I’ve actually won from time to time. But over the long run, this is a losing proposition.”

Large Fund Managers

Malkiel says that the widely-held belief that the large fund managers are ruining the ability to actively manage a portfolio is false. He gave Vanguard, BlackRock, and State Street Global Advisors, that run passive index funds, as examples.

“There are plenty of active managers, hedge funds and private equity buying individual stocks. Indexing is not affecting valuations in the market. If there’s too much money going into Apple and Microsoft and some of the neglected stocks are really too cheap, believe me, money is going to go into those. There will always be people who think they can beat the market. This is a very well-paid business. People will say, buy our actively-managed fund or our hedge fund because we’re going to root out the real values. Indexing could be a lot larger and the market would still function just fine.”

On the Role of the Fed

Malkiel was also asked about the large role the Federal Reserve has taken in the markets since the coronavirus pandemic started, and whether the belief that the Fed will always be there to backstop losses has permanently skewed the risk-reward ratio.

“I don’t think there’s any question about that,” Malkiel said. “A lot of people write about the disconnect between the real economy and the stock market because the stock market’s been going up and the real economy has been cratering. The answer is that the activities of not only the Federal Reserve but the European Central Bank, the Bank of Japan, they have been putting trillions of dollars of stimulus into the economy.”

“In terms of whether this is the right policy, I think given the unusual nature of this recession or, if you want to call it a depression, I don’t think the Federal Reserve had a choice. To prevent our economies from total collapse as the shutdown occurred, this was absolutely necessary to prevent even more suffering than we’re having now. But sure, it had a massive effect.”

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Gold Will Climb To $2,200 An Ounce By Year End, Says Industry Insider

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Gold Will Climb To $2,200 An Ounce By Year End, Says Industry Insider

Ronald-Peter Stoeferle, the managing partner of Incrementum, says gold is in a “stealth” bull market. Additionally, he expects prices to climb above $2,200 per ounce by the end of the year.

Speaking with Kitco News, Stoeferle says proof of the stealth bull market in gold is actually silver outperforming gold and junior mining stocks outperforming senior mining stocks.

“It’s pretty obvious, we’re in a stealth bull market in gold. What are the reasons for that? First of all, we’re seeing that gold is rising in every currency. Gold is up 27% in US dollar terms, we’re seeing that silver is outperforming gold, so silver is up almost 50% since the beginning of the year, so the gold/silver ratio is falling is a great confirmation for the strength of gold. Then we are seeing that actually the mining equities are outperforming the price of gold itself, so we are seeing outperformance of the large caps versus gold, we are seeing the juniors outperform the seniors, those are all confirmations.”

A Sign of a Healthy Bull Market?

He says the recent pullback in gold prices is also a positive sign of a healthy bull market. Stoeferle says there was too much optimism as prices climbed and sentiment got too high.

“We saw that when gold went over $2,000 everyone was writing about gold and sentiment felt a bit too positive. Then we came down, but it seems that there’s so much capital waiting on the sidelines at the moment that we just don’t see any deeper correction. Can gold go to $1800, $1850? Of course. But it is just normal and healthy within the course of this bull market to take a breather.”

Institutional demand will take gold to $2,200 an ounce by the end of the year, according to Stoeferle.

“September from a seasonal perspective is one of the very best months for gold and I think we can easily go to $2,200 or even higher by the end of the year. The important message is we are in a stealth bull market, I think this party has only just begun, and we are seeing the most important driver going forward is the institutional demand is coming back and I think that is what is really going to move the price of gold.”

Benefits of Higher Inflation

He says that gold investors, mining stock investors and central bankers make odd bedfellows; all three benefit from one thing: higher inflation.

“Just look at inflation-sensitive assets like TIPS and also gold, silver, the commodity space, they are all rising pretty strongly in the last couple of months, so I think the market is already telling us: be careful, inflation is on the horizon. And that’s actually what the Federal Reserve and central bankers and politicians want. So you could say that gold investors and mining investors are basically sitting in the same boat as central bankers, which feels a bit odd.”

Very few investment managers have lived through a period of strong inflation or even stagflation, and Stoeferle says that means many will be caught under-invested as gold prices rise.

“The average investment manager nowadays is 52-years old so they have never experienced a period of long, strong inflation or even stagflation. So I think this will catch many, many investors on the wrong foot. And at the moment, 0.5% of all assets are invested in gold. So basically there is no allocation at the moment and this will change, and I think really this year marked the beginning of the public participation phase.”

That small allocation to gold will change as people start looking around for the best inflation hedge, says Stoeferle.

“I think with inflation being really what central banks and politicians want to see and want to achieve, many many investors will have to consider “what’s the best inflation hedge out there?” and I think gold made a really solid case not only over the last few decades but over the last couple of centuries.”

Allocation for Gold

Finally, he says a rule of thumb he has come up with is for 8% of your investment portfolio to be allocated towards gold. However, he acknowledges that there are many variables for each investor.

“We crunched the numbers and we came to a rule of thumb of 8-10%. But I think it doesn’t make any sense to stick to those numbers because it depends on the rest of your portfolio, it depends on your time preference, it depends on your risk preference and so on, but if you believe that inflation will become a concern, if you think that real rates will stay very low, if you believe at some point we will have to deal with our debt, then I think you should have a pretty high allocation to gold and also the mining space.”

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The Pandemic Is Transforming to Digital Economy

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Even before coronavirus, paper money and coins are generally considered dirty. With a full-blown pandemic, people are less willing to go outside and buy items. And even when they did, they avoided carrying cash to use it to pay for everything. By September, the pandemic has changed the way people look at cashless transactions. And the companies handling this digital economy? They’re laughing their way to the bank.

RELATED: We Underestimate How Strong The Economy Will Be In 2021

Cashless is King

Last February, mobile payment company Square reported that 5.4% of its stores are cashless. By April, the number of stores jumped to 23.2%. The number went down to 13.4% in August when the government eased restrictions.

For the same Square vendors, 37% of transactions were cash. Once Covid-19 went full-blown, it dropped to 33% by August. Compared to the year before, it stood at 40%. Under normal circumstances, a 7% drop usually takes three years to happen. 

Only 13.2% of Square outlets accepted online payments last February. By August, that number rose to 40%. Meanwhile, contactless payments increased 6.6% from February to August, settling at 70%.

Square economist Felipe Chacon thinks the new normal has included methods of payment. He said: “These new findings show a significant and stabilizing increase in cashless adoption rates compared to pre-pandemic, with business owners reliant upon contactless and online payments and consumers utilizing those alternatives. This signals that COVID-19 has already had what will likely be a lasting impact on consumer behavior.”

Fintech Outperforming Traditional Banks

As cashless/online payment gained ground, financial tech owners began growing too. CNBC reports that the total worth of Square, Visa, PayPal, and MasterCard is $1.07 trillion. This amount eclipsed the market value of America’s big six banks. Together, the value of  JPMorgan, Bank of America, Wells Fargo, Citigroup, Morgan Stanley, and Goldman Sachs is below $900 billion.

Investors have rewarded these companies, pushing their stock prices to new highs. Visa has grown from $180.82 in August 2019 and is now $215.71 a year later. Mastercard shares now cost $366.12 last August 28, but it was $281.37 a year before. Paypal increased from $109.05 in August 2019 to $204.48 after a year. Square rose from $61.84 to $155.93 in the same period.

These companies are now pushing forward to make their brands provide more. Square announced last Tuesday that Cash-App users can now get their wages ahead of payday. This encourages cardholders to connect their app with their direct deposit payroll. Venmo, a PayPal subsidiary, also lets users access earned wages. Meanwhile, banks need to deal with increasing loan defaults and low-interest rates. 

The March of the Apps

With the pandemic, people have now ditched passbooks and purses and switched to apps. It’s not only bank apps, but also an investment and financial planning apps. People will likely stick with the apps even after the crisis blows over. 

In a CNN interview, Plaid CEO Zach Perret noted the increase in users. He said: “What we’ve seen is that consumers during this period have increased their reliance on digital financial services built by banks but also, built by non-banks.”

Plaid is the digital infrastructure provider that links bank accounts to the apps. From March to May 2020, Plaid’s partner firms recorded a 44% increase in new users compared to last year. Despite the pandemic, Plaid had to hire an extra 20% of workers to keep up with demand. “I think the pandemic has made it incredibly clear that digital financial services are here to stay,” Perret said. Visa and Plaid have earlier announced that the former will buy the latter for $5.3 billion.

PayPal expects 70 million users new accounts this year, double the rate from 2019. Even the traditional banks saw its users shift to its digital persona. Bank of America CEO Brian Moynihan reported an influx of a million mobile account users. 22% of them were senior citizens who used to resist the bank’s digital versions. Merill Lynch’s digital log-ins spiked more than 100% from 2019. Even Robinhood, the popular stock trading app, outpaced gambling apps. With American millennials stuck at home, they used the time to bet on stocks. Robinhood traders were instrumental in fueling a Wall Street rally earlier this year. Last May, the app reported adding 3 million new users.

Watch this as CNBC’s Closing Bell talks about how fintech demand has been affected by the pandemic:

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Digital transactions are fast becoming part of the new normal. Not only are they designed for the pandemic, but they will also offer convenience after the outbreaks have passed. Do you have digital accounts in place at present? If not, what is holding you back? Share with us your opinions on how you plan to participate in the digital economy.

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Wall Street Legend Warns: Market Will Fall Through Oct. 10

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Wall Street Legend Warns: Market Will Fall Through Oct. 10

A Wall Street legend is warning investors that market stocks will fall between now and October 10. He also cautions that gold won’t act as a hedge against losses.

Larry Williams, who often appears on CNBC’s Mad Money with Jim Cramer and is highly sought after in both the US and Europe for his insights, says we are entering a period that will see a significant and sustained selloff in the markets over the next few weeks.

“We’re most likely going to have a pullback in the market here,” says Williams.

Williams uses a time-tested recipe to make his market calls, relying on a mix of fundamentals, seasonal trends, technical signals and insights pulled from the Commitment of Traders report put together by the Commodity Futures Trading Commission (CFTC).

Williams says the best way to make money in the coming weeks is the “Machu Pichu trade,” believe it or not. He discovered this signal in 2014 while traveling to the ancient Inca ruin with this wife. This pattern has shown that over the last 22 years, selling on the seventh trading day before the end of September has netted short-term profits 100% of the time.

This year, the seventh day before the end of the month falls on September 22.

Williams has also found that selling on the 11th through the 20th trading day of September has resulted in profits 80%-95% of the time. There is one exception, however. Sales on the 17th trading day have resulted in profits 75% of the time, slightly below the average.

This year the 11th through 20th trading days are September 15-28. Williams says the trades should be short term, usually a few days or less. He says historically stocks peak for the month during this period. They start trending downward through the middle of October, a pattern he expects to repeat this year.

Gold Won’t Protect Against Losses

Williams warns that gold won’t necessarily rise during a down market and protect against losses, despite that being a popular belief. He says gold has slumped alongside stocks during many of the major market selloffs. This is something he expects will happen over the next three to four weeks. Williams advises to sell gold into rallies and wait for the drop before buying back in.

He says there’s a gold pattern that plays out every year: gold peaks in mid-September and then slowly drops for the rest of the year. Adding to the concerns about gold prices, Williams says the seasonal gold pattern is already weak. This adds to the bearish outlook.

“Gold has not been able to stay in step with what happened in the past, therefore the seasonal pattern should work this year,” he says.

Williams is bullish on the US dollar, saying the “smart money” is buying right now.

“I’m wildly bullish over next six months,” says Williams, “There’s a pretty good rally coming in the dollar.”

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