Over the past year since I started doing these videos, I have said many times that I expect the stock market to crash at some point in time, the only question is when. That does not mean I do not own and buy stocks. Yes, while my holdings include gold, inflation protected Treasuries and short positions, I am also long stocks and have been regularly buying.
To summarize why I have been saying stocks have to crash is that the $10 trillion gain in the market value of all US stocks since March 2009 is solely due to US Government and Federal Reserve being able to both print huge amounts of money to pay bills while reducing interest rates to zero at the same time. Now if all the money printing was resulting is US economic growth accelerating if not today maybe tomorrow, one could excuse today’s high stock prices. But not only is US economic growth not accelerating, the growth rate will decline next year due to around $150 billion in higher taxes at a time when total after tax take income has been growing by $400 billion a year.
Some of you might think that is a contradiction, saying I will buy stocks while expecting both a market crash and slowing economic growth. It is not a contradiction to me. And here are two reasons why.
One, there is still a rapidly growing worldwide broadband economy that even our dumb governments have not yet been able to screw up. That is why I own now and have owned for a long time Apple (AAPL), Salesforce.com (CRM) and Amazon.com (AMZN). Believe it or not, if Facebook (FB) has another good quarter monetizing its friends, and now that all the insider shares are unlocked, I probably will start buying FB. For the record, I owned Google (GOOG) for a long time before selling a year or so ago. My concern is not that I think Google is a bad company, but I do have a concern that while GOOG does own search, search is in danger of becoming commoditized by value added vendors.
Two, in all conversations I have with investors, I recommend dollar cost average buying of companies using free cash flow growth to shrink the trading float of shares. Some companies grow cash whether the economy is good bad or indifferent.
Remember, there are two ways companies can give money back to shareholders. The first and most obvious is via dividends. Less obvious, but historically better for shareholders in terms of higher stock prices, companies can reward existing shareholders by using free cash flow to reduce the total number of shares outstanding. Think about it, if the company reduces its share count by 5%, that means shareholders now owns a 5% bigger stake. And that is even before considering the possibility of higher dividend tax rates.
Over the past year or so, portfolios of companies that are using free cash flow to shrink the float have not only significantly outperformed all dividend ETFs, but also the overall market. And going forward into a world of little economic growth, where money printing and debasing the currency is the standard, I only want to own companies that consistently grow free cash and use that cash to shrink the float. Or I want to own technology market leaders while they grow market share.
To summarize, in an elevated stock market and facing an economy where economic growth is anemic at best, yes I remain short Europe, the big banks and emerging markets. But I am long tech and float shrink, and will add to both positions over time if the market remains at or around current levels or plunges.
Below you may find the video.