Contrarian Investing to Help Calm the Nerves

On Friday, the U.S. will have a new president.

And many investors are wondering what that means for them.

After the election, the “Trump Rally” pushed stock buying to new all-time highs. But it’s likely that we’re headed for a “Trump Slump.”

While I’m still bullish about the market overall, there’s too much uncertainty surrounding Trump’s agenda.

And I don’t want to be caught unawares when the market starts to cool.

One of my investing philosophy tenets is to always search for proof of the contrary… I look for facts and data that mainstream and average investors overlook. It’s called “contrarian investing”…

It’s simple, when you think about it. It means that bearishness creates bullishness (and vice versa). It happened with investors last year. Trillions of dollars – repeat, trillions of dollars – are sitting on the sidelines, uninvested, and ready to drive markets up at any time. Much of the money still hasn’t made it back in since it was taken out at the 2008 and 2009 market lows… which were hundreds of percent lower than where we are today.

The excessive buildup of cash is visible in other places, too.

For one, many bonds offer negative yields. This seems counterintuitive. Why hold a bond that chips away a little bit of your principal every day through negative yields? These aren’t investments. The buyers – usually big institutions and insurance companies – don’t expect to earn a return. They just want to keep their cash “safe.”

Somewhere in the neighborhood of $13 trillion sits in negative-yielding assets like Japanese or German bonds. Given a better opportunity, all that money would surely like to earn a better return.

Here’s more evidence… Bank of America Merrill Lynch conducts a monthly global survey of fund managers. In a recent report, fund managers reported that they held 5% of their assets in cash. That’s the highest level since November 2001 – two months after the World Trade Center attacks…

That means through the financial crisis, recession, government shutdowns, Greece’s collapse, September 11, and all the other risky situations that have been in the headlines since 2001, fund managers held less cash than they do now.

Finally, let’s hear what Larry Fink has to say. Fink is the CEO of BlackRock, the world’s largest money manager, with $5.1 trillion in assets under management. It sees a lot of money flow around the world through its “Aladdin” transaction system that gives it an informational edge.

By Fink’s estimate, $50 trillion in cash is sitting on the sidelines. That’s an unfathomable number. It’s fifty-thousand-billion dollars. For comparison, the entire U.S. stock market is $25 trillion (as of 2015).

That’s an unprecedented potential wave of cash. Even a small amount moving into the market would send stocks soaring.

If you look at gross domestic product (GDP) growth, manufacturing, and inflation the evidence suggests our economy is healthy overall. I’m thankful for that.

From a trader’s perspective, I’m thankful for the trillions of dollars in cash sitting on the sidelines. In my newsletters, our confidence in the markets has kept us invested over the entirety of the bull market run… a move that trillions of dollars have missed.

When they finally see our side of things, even in just a small way, we’ll be handsomely rewarded. And that’s when we’ll head for cover.

What We’re Reading…

Here’s to our health, wealth, and a great retirement,

Dr. David Eifrig and the Retirement Millionaire Daily Research Team
Baltimore, Maryland
January 18, 2017

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