NICK MURRAY SAMPLE ISSUE 2017 INTERACTIVE

To the Prospective Subscriber

Nick Murray Interactive, now in its seventeenth year, combines four complementary resources:

An eight-page newsletter, Most months, a Client’s A Q&A/objections- Full access to the entire published on the last day of Corner essay for transmittal handling clinic (Ask Nick). archive, which now exceeds each month, containing essays (subject to your own Subscribers may email me 1,700 pages (and counting), for advisors only such as compliance procedures) directly with client/prospect together with a search you see here, on economics, to clients and prospects, only issues they’re encountering, function which can help practice management and by email or snail-mail of and I’ll formulate a response, guide you to specific issues. financial planning. The the pdf we provide. usually within two business emphasis is always on days. Selected exchanges are giving you actionable real- (anonymously) reprinted in life scripts—what to say, not the newsletter. just what to think.

My goal is simple and straightforward: that every subscriber find in every monthly issue one idea, one script, one tactic, or one book or article review which instantly repays the entire cost of their annual subscription. I invite you to read the tes- timonials on the newsletter’s home page, to see how well our subscribers think we’re doing in this regard. I love producing this resource for its growing roster of subscribers, and would welcome the opportunity to do so for you, too.

My point is that equity is completely different from other classes of investments. It’s the only one that captures human ingenuity, which is the ultimate asset.” “ —Eddy Elfenbein, in his Crossing Wall Street blog, 3/10/16 The Advisor’s Fee as “Big Mistake” Insurance

FROM 10/16 ISSUE again why I’m paying you all this money to underperform Longtime reader Chad Hufford sent along a wonderful the S&P 500.” The other approach is to have a conscious quote from Lou Holtz, in a recent interview. The legendary program of reinforcing it—of reminding people that, be- coach was, of course, talking about football, but Chad quite yond planning, our essential function is keeping them on the correctly experienced his thought as being right up our alley. plan in times of great stress. Coach Holtz said: People need to be reminded, subtly but more or less sys- “You don’t need the big plays to win; you just have to tematically, that if they’ve gone a year without attempting eliminate the dumb ones.” to go to cash in a bear market or move significant assets into This is, year in and year out over a long advisory relation- some hot new fad, your value not only hasn’t diminished but ship, the very essence of our value proposition: our willing- has if anything grown: that the premium paid is well-earned ness and ability to save our clients from the horrendous costs in the fact that the house has not burned down. of The Big Mistake, in all its hydra-headed manifestations. One none-too-subtle way of putting an exclamation point This becomes intuitive to us—the core of our professional on your value proposition, as was suggested in this space in identity as investment advisors—to the point where we may August (“Seeking introductions post-crisis”), is to write a strong lose sight of one uncomfortable fact. request for introductions/referrals to all clients whom you’ve To wit: it is never permanently intuitive to the clients. behaviorally guided through a stressful episode. This catches It’s certainly one of the two points people must actively them at a moment when their appreciation for you should be accept in order to hire us in the first place—the other, ob- near a peak, and it says in no uncertain terms, “That was viously, being that we are financial planners rather than exactly what you’ve been paying me for.” economic forecasters, market timers, and/or performance But today we’re addressing the issue of how to top up clients’ handicappers. understanding of—and appreciation for—paying the better A plan is an active, living thing. It is, above all, a presence in part of their annual fee for the privilege of hearing you say, at our clients’ lives. They can go back to it whenever they like, and random but always critical moments, “You mustn’t do that.” see it unfolding: the wealth accreting, the goals getting slowly This conversation has to be had at a minimum of once a year. but inexorably closer to reality, despite the occasional and al- The most logical moment is in your rigorous, hands-on annual ways temporary setbacks. review meeting—the content of which you may soon start think- But our inestimable value as inhibitors of The Big Mistake is ing about. But however and whenever you repeat it, don’t think essentially—especially when the plan is obviously working—an of doing so any less than annually, and never in passing, or obliquely. absence. In that sense it’s somewhat analogous to the various Assuming for the moment that your fee is one percent of forms of casualty insurance. All of the premiums people pay for the assets under management, the question was, is now, and insurance against the destruction of their homes and their cars ever shall be: are expenditures they devoutly hope will be “wasted,” in that Does it seem probable to you that my advice will ei- catastrophe won’t overtake them. ther (a) cause your lifetime return to rise more than The longer they go without collecting on those insurances, one percent per year because of more appropriate in- the happier they are. And in a perfect world, this would also be vestment choices, and/or (b) save you the equivalent true of our fee. But the world is not perfect, and people’s grati- of more than one percent per year in time, worry and tude for our priceless behavioral advice will inevitably atrophy record-keeping, and/or (c) save you one percent per the longer they go without needing to use it. year if not much more in the cost of mistakes I might Conscious understanding of—and appreciation for—our fee help you avoid making?” as the essence of Big Mistake insurance is thus a lot like Vitamin This is, quite clearly, a statement disguised as a question, de- C in the human body: the clients’ psyches can’t store it. liberately underlining the fact that it doesn’t matter what we There are a couple of approaches we can take to this sad know about the wildly positive nature of our value proposition; fact of life. One is to ignore it, assuming that if the clients it matters only how the client perceives it. The “question” has to aren’t complaining, they still understand and appreciate our be asked again a minimum of once a year. How and when you function. Then one day we get the email that says, “Tell me do so is entirely up to you. But do it.

2 NICK MURRAY INTERACTIVE • SAMPLE NEWSLETTER 2017 Aqaba, From The Landward Side

FROM 11/16 ISSUE that we are much more likely to experience a market meltup In David Lean’s magnificent film Lawrence of Arabia, the than a meltdown in the next block of time, precisely because protagonist’s first great coup—the miracle that binds the Arab no one considers this even a remote possibility. Revolt to him personally—is the taking of the Red Sea fortress But at whatever speed and on whatever trajectory, have no city of Aqaba from the landward side. doubt that mania is coming. It literally, in Polonius’ words, must Lawrence’s epiphany is that all the Turkish guns at Aqaba are follow as the night the day. This has much less to do with eco- trained on the sea and cannot be turned around, as the city‘s nomics or finance than it does with human nature, which is rear is protected by a desert too vast to be crossed. Lawrence quite immutable. and his ragtag force cross it, and thereby triumph. So it seems to me that, as rational long-term business strat- If you don’t find this too terribly much of a stretch, I think we egists, we have a couple of choices. One is to say, in effect: advisors are a little like Aqaba. All our professional guns are trained “Thanks, but I only have so many hours in a day and so many on managing and defeating the existential terror which has become ergs of energy, and—as you yourself noted—I’m still getting our clients’ default setting since the dot.com bubble burst, nearly shelled from all parts of the sea every time the market hiccups. seventeen years ago—to the point where we are defenseless against Sufficient unto the day are the evils thereof. I’ll deal with ma- attack from the other direction. And, the great cycle of investor nia in its season, whenever the hell that turns out to be.” This psychology being what it is, that attack is surely coming. is at least a conscious, thought-out response. It’s wrong, but at This newsletter has maintained with mounting stridency that least it’s aware. the public’s proclivity to panic at even the most quotidian cor- Alternatively, as you’re beginning to think about your year-end rection demonstrates that the great bull market which began communications/meetings, you might consider—in one para- close to eight years ago has much further to run. Citing the graph of your annual letter, or in a few minutes of conversation three great manias of the last hundred years—the 1920s, the during the meeting—raising this issue. Remind people that the 1960s and the 1990s—we have held unequivocally to the be- market cycle is driven at both extremes by excesses of emotion, lief that no great, secular bull market can finally end until the and that your long-term value to a client family is as a behavioral investing public is utterly mindless of any risk other than that coach, there to serve as an antidote to new-era euphoria every bit someone else is getting richer than they. as much as apocalyptic fear. The implications of this are quite profound from the stand- If nothing else, this will serve to remind people of where we point of an advisor attempting to create a robust business strat- are on that cycle: to wit, much closer to the bottom than the top. egy. To begin with, there is the simple but very telling fact that And if that’s all this exercise did, it would still be well worth doing. you can be a fifteen-year veteran of this profession and never A day is coming when your phone will ring. And instead have seen a serious outbreak of performance mania. It is all but of sounding like the last ten thousand calls you’ve gotten in certain that you were not trained to deal with one—the equity the last two decades—“Shouldn’t we get out of the market markets were in free fall when you got here—and you have cer- because of this (fill-in-the-blank) crisis?”—the voice on the tainly had no useful subsequent experience. other end will suggest that you are not getting them any- Moreover, even the minority of advisors who’ve been here where near enough hot performance. You know not the day long enough to experience the dot.com mania in full force nor the hour; you just know that call is coming. And then have largely if not completely forgotten what it was like, since another just like it. And then another. it gave way at the turn of the century to not one but the two Any financial planner worthy of the name underperforms in biggest bear markets since the 1929-32 experience. Their cli- mania markets. She wears that underperformance like a badge ents and prospects have long since trained all their guns on the of honor, because it signals two critical things. First, that the sea, to the point where the 2016 Wells Fargo Retirement Study portfolio with which she’s endowed her client is the one best found six out of ten respondents more focused on avoiding suited to his long-term goals rather than to the fad of the mo- loss than on maximizing the growth of their retirement invest- ment. And second, that she is continuing to practice disci- ments. Dealing with fear is just about all these advisors have plined diversification: her clients don’t own enough of any been doing as long as they can remember. one idea to make a killing in it, nor enough to get killed by it. And even I—or should I say especially I—am keenly aware You don’t want to be just starting to dust off these arguments that the first signs of performance mania may still be a long way when the calls and emails about “underperformance” are com- off. That belief is, after all, the very wellspring of my frothing- ing at you like tracer bullets. You want to start a quiet but regu- at-the-mouth, table-pounding bullishness: I stoutly maintain lar program of inoculation against mania…right about now.

NICK MURRAY INTERACTIVE • SAMPLE NEWSLETTER 2017 3 CLIENT’S CORNER The Terrible, Horrible, Terminal, Apocalyptic National Debt Crisis

[This essay is typical of the pieces I make available to newsletter subscribers most months, in pdf format, for direct transmittal to clients, though not in newsletters or any websites, which would open these essays up to the non-sub- scribing world. I retain the copyright, which must be cited. PLEASE NOTE THAT THE INCLUSION OF THIS ESSAY IN THIS SAMPLE ISSUE IS FOR ILLUSTRATIVE PURPOSES ONLY; NON-SUBSCRIBERS MAY NOT SEND IT ON TO ANYONE, WHICH WOULD CONSTITUTE COPYRIGHT INFRINGEMENT.]

FROM 6/16 ISSUE is it immediately visible on the horizon. And how does any Just the other day, I was at a lovely club in downtown Jackson- clear-eyed observer of the situation draw that conclusion? Why, ville, Florida, waiting to speak at a luncheon meeting of about a simply by looking at the world’s continuing willingness—nay, ea- hundred financial advisors. gerness—to finance our debt at negligible interest rates. Suddenly, one of the advisors came bursting out of the On the afternoon that I write—indeed, at the very moment— room where the audience was finishing their lunch, and ac- the interest rate on the U.S. Treasury’s 10-year note is precisely costed me. “One question,” he said, “and I want your honest 1.8490%. (Can we call it 1.85%, just for simplicity’s sake?) That answer.” (As if I ever give anyone any other kind—maybe he is, when the whole world woke up this morning, the blended was thinking of himself.) outlook of all the investors on the planet was that the U.S. is so “The United States is bankrupt,” he began. I was constrained overwhelmingly likely to make timely payments of principal and to stop him there, and to report, in no particular order, that (a) I interest in today’s dollars over the next decade that they were will- was unaware that the United States was, is currently, or is about ing to lend us money at a paltry 1.85%. to go bankrupt, and (b) that wasn’t a question. The implications of this factoid for Debtmageddon catastroph- He babbled on—I couldn’t follow most of it—until I simply ists seem especially foreboding. had to excuse myself on the grounds that I was preparing a You see, to hold the view that America’s sovereign debt is talk to a hundred people. As he wandered away, I thought, about to hit a wall, and to incinerate us all in a fiery crash, “Wow. This is getting pandemic. Now it’s not just the inves- is to say that you know something that the consensus tors who are getting the Debtmageddon phobia; the disease is of the whole world’s wealth clearly does not. This cer- spreading to advisors who should know better.” tainly doesn’t, in and of itself, make you wrong. But it does Hence this little essay. oh-so-gently suggest that you may be somewhat overconfident To begin, let’s see if there’s anything about this situation in your assessment of the situation. that we can all agree on. I propose three stipulations. (1) The (However anecdotally, let me interject here the personal ob- total federal debt is just now crossing $19 trillion, counting servation that every single time in my half-century career as an what the government owes itself in things like the totally mis- investor that I was convinced I was right and the whole world was named Social Security Trust Fund. (2) The debt has about wrong, I was sadly and sorely mistaken.) doubled in the last dozen years, and now exceeds U.S. GDP. Next, we must face the fact that Debtmageddon—or indeed (3) It continues to grow at a rate in excess of U.S. GDP growth, any economic extinction theory—is premised on an extrapola- a trajectory which must at some point become unsustainable. tion. It is undeniable that on its current trajectory—growing at I don’t think any reasonable observer denies any of these three a rate in excess of our country’s GDP—the debt must become statements. I would, however, draw your attention to three words unsustainable at some point. The critical assumption is implicit in the third stipulation: at some point. The questions before us in the phrase “on its current trajectory.” But as Herbert Stein, all, it seems to me, are (1) when and in what form will that point Chairman of Presidents Nixon and Ford’s Council of Economic arrive, and (2) how does the individual investor make rational Advisors, famously said: if something cannot go on forever, it investment policy out of these three stipulations in the meantime. will stop. Debtmageddon holds that Stein’s Law does not obtain We must, first of all, not shrink from the fundamental idea that, here—that this time is different. In this view, the particular thing on its current trajectory, the growth of the debt will become un- that currently can’t go on forever will not stop. Instead, we will sustainable at some point. But that point isn’t here yet, nor drive over the cliff, never braking nor turning the wheel.

4 NICK MURRAY INTERACTIVE • SAMPLE NEWSLETTER 2017 It’s a theory, I guess, but it’s totally unsupported by the his- unknowns: they were all anybody talked about, because they were torical record. For while granting that democracies don’t usu- universally seen as heralding The End of Economic Life on the ally make the hard decisions until the spaghetti is hitting the Planet as We Have Known It. fan, we Americans do seem ultimately to make them. No less And when existential financial/economic crisis finally did show acerbic an observer than Winston Churchill noted that about up, from whence did it come? Why, from the American single us when he said that one can always count on America to do family home—where no one was looking for it. It was the ulti- the right thing—after we’ve tried everything else. mate Unknown Unknown. Third, for this longtime student of investor psychology, Finally, there is the overriding issue, for the individual inves- there is the problem that Debtmageddon is the ultimate tor, of how to make investment policy out of Debtmageddon—if, Known Unknown. And in my experience, it’s never the when and in whatever form it eventuates. Since you’re not going known unknowns that get you. to be able to postpone your retirement until you can make a clear Think back—if you can even remember some of these incipient assessment of this situation and get your portfolio in shape for it, “crises”—to all of the things everybody was sure were going to de- what do you do today, tomorrow or next week? rail the markets, if not the economy, if not human life on Earth, just This is not at all a rhetorical question—it’s where the rubber since the turn of this century: Y2K, 9/11, the SARS quarantine meets the road—and I will cheerfully leave it to you and your (a billion Chinese wearing surgical masks on TV every night), the financial advisor to explore together. inevitable stock market crash when the baby boomers hit retire- I simply ask: is your financial planning going to be based on the ment age and started selling, bird flu, the debt ceiling crisis/gov- realities of your life—hopes, dreams, goals, retirement date—or ernment shutdown, swine flu, the implosion of the eurozone, the on an apocalyptic speculation? fiscal cliff, Ebola, ISIS. These were the quintessence of known © June 2016 Nick Murray. All rights reserved.

The Back Of The Card program, trying to explicate the behavioral value propo- FROM 5/16 ISSUE sition to someone who spends most of her time and en- I suggested in March, when I published my latest official ergy among timing and selection people. With no con- unofficial arbitrary bear market chart, that a laminated scious thought, the percentages you see below popped out. copy be handed to every new client during the onboard- “That’s very clear,” she said. And I thought, “It’s also the ing process, and sent to all clients annually. Because two back of that card.” Today, dear reader, it is my gift to you. things are mission critical in our journey as Behavioral So without further ado, as they say: Investment Counselors. First, we must prepare our equity investors to watch WHAT WE DO/HOW WE EARN OUR FEE an average of a third of their peak capital sum appear to disappear on an average of every five years or so, Quantifying goals, crafting a long-term plan, funding the plan with a long-term portfolio and not panic. Second, we must clearly establish in our Coaching clients to continue working the plan clients’ consciousness that when the time comes, we will . . . 20% serve as the antidote to the capitulation impulse, and through all the cycles of the economy, and all the fads and fears of the market that that function alone is the preponderance of Analyzing/interpreting the economy...... our value proposition. 80% and current events Then I guess I started thinking about what we might put ...... on the back of the card. When I do stuff like that, and an Timing the market, calling tops and bottoms 0% answer doesn’t immediately come, I hand it over to my un- Identifying consistently top-performing . . .0% conscious—which is almost immeasurably smarter than I investments am—in the spirit of, “Here; noodle with this while I do ...... Total other stuff.” ...... 0% Sometimes it works, and sometimes it doesn’t. Please advise any questions at any time. 100% In early April, I was talking with Consuelo Mack Thank you for your trust and confidence. about our upcoming interview on her WealthTrack PBS (signed)

NICK MURRAY INTERACTIVE • SAMPLE NEWSLETTER 2017 5 Ask Nick

FROM 7/16 ISSUE that the annual meeting is the tent situation haven’t changed, to reinforce CLIENT COMMUNICATION: pole for the entire client communica- their commitment to the plan, and to THE PROTOCOL tion protocol. The not-so-good news is measure the progress of the plan to- that you haven’t established what else ward its goal, and certainly not in relation Do you have a recommended client is in the tent. to some benchmark(s). Q service model? I do a comprehen- The short answer is that this should Second, you are certainly not going sive financial planning meeting with each always be done during the onboard- to report anything quarterly—for- client once per year. I struggle to com- ing process, at which time you work it mally, informally, by smoke signals, or municate with my clients between meet- out with the client. The principle is: any other way. Nothing that happens ings. Some industry coaches recommend you never walk out of the onboarding meeting in 90 days can have any bearing on a calling your clients monthly but I have no without firmly and clearly establishing the long-term plan, and quarterly reviews idea what we would talk about. communication protocol. inevitably degenerate into perfor- Any thoughts on frequency and meth- It rests on two bedrock ideas, again to mance measurement—how we did vs. od of client contact? be established the day the folks board the S&P during the latest meaningless the Ark: blink of an eye. The good news—and I consider First, you’re certainly going to have Beyond that, it should be as individual A it very good news indeed—is that a deeply meaningful annual review as fingerprints. you’re a financial planner, and intuit to make sure the goals and/or family I would approach the subject on that

Establishing Your Behavioral Value Proposition In One Simple Question

FROM 12/16 ISSUE Note that I did not suggest that this answer would convince It is not merely countercultural but counterintuitive for us to anyone of anything; that is an outcome over which we have maintain (a) that successful investing has nothing whatever to (and indeed seek) no control. Moreover, this tactic turns on do with selection and timing, and (b) that the advisor’s value to our causing the prospect not only to remember but to ac- his/her clients is unrelated to analyzing the economy, timing knowledge to us his self-inflicted wounds of the past. We the markets, or handicapping future relative performance. will surely find that some and perhaps many prospects will Thus, we start every conversation with a prospective cli- turn away from us, simply because they don’t want to face ent about investing—and about our potentially great value those past mistakes. The initiative I’m about to propose is to him—from deep in our own end zone. We accept this in thus a wonderfully efficient disqualifier when we find our- the sense of there being no alternative; it comes with being a selves talking to someone with a fatally diminished capacity truth-telling Spartan. The question for today is: how might we to accept responsibility. assert the priceless value of behavioral coaching in the clearest, least It’s a three-count movement: (1) our question, asked gener- abstract, most specific way—in a matter of a few seconds, and in a ally or in specific, at your option; (2) the prospect’s answer (or way the prospect cannot fail to understand? refusal to provide one, which is endgame); (3) our categorical The answer is simple, straightforward and—most impor- statement—embedded in which, in all its glory, is our value. tantly—goes right to the heart of most investors’ painful expe- The Question: Assume we have stated our value proposi- riences prior to meeting us. tion in general terms. (“My value to my clients is about 20%

6 NICK MURRAY INTERACTIVE • SAMPLE NEWSLETTER 2016 first day of onboarding as follows: “When we enter bear market territory— What I know and they don’t is that “I suggest the following communication down 20% on a closing basis, which we ex- once or twice a month (“I read a lot of plan, if you’re comfortable with it. First and pect to happen one year in five or so—I send good commentary”), I’ll be sending them foremost, you must call me any time out a little first aid kit, commenting generally something from a Wesbury, or a Paulsen, for any reason whatever. Please on the situation, but reminding everyone that or some other clear-thinking commenta- don’t ever hesitate. this is how we earn equity returns—by brav- tor. Come to think of it, I guess if I’m you “Next, I’ll certainly call you if and when ing the downturns. I’ll also ask everyone if I might send them the occasional Client’s something is going on that’s important enough they have some additional money they can add Corner. The upshot is that they’re going to require a decision of some sort. Since we’ll to their account before the sale ends. to hear from me—however informally always be acting on our plan, and never react- “Day in and day out, I read a lot of good and even randomly—a couple of dozen ing to current events, this will rarely happen. commentary, and once in a while I’ll send out times a year, anyway. “When something is happening in the mar- a piece that I think is noteworthy, and helpful In addition to all its other uses, if this kets that I think most of my clients will be in clarifying the path we’re on. genial, relaxed approach runs into a lot concerned about, I’ll probably send out one “Other than that, not much. It’s deliberately of pushback on Day One, it may be an email to everybody. For example, whenever the relaxed, informal, friendly—but most of all important sign that you’re in the process market enters correction territory—down 10% open, in both directions. of making a mistake. In that sense, this on a closing basis—I’ll almost always send “Does that sound comfortable to you? Or do is one last way of de-selecting the crazies everyone an email. we need to tweak it in some way?” before they get on the Ark.

planning and 80% behavioral coaching at critical market to fear, to realize that all declines have historically turning points; everything else is pretty much a refinement.”) been temporary, and for very good reason—made all Assume further that the prospect affects not to understand the the difference. I persuaded them not to make the very behavioral part, or discounts its importance to him. We ask human Big Mistake, and the gains from that strategy far him a question, either in general or specific terms: exceeded the cost of my coaching. Can you see now the (SPECIFIC) “During the great financial crisis of 2008–09, when value of having an advisor who functions, in essence, as Big the equity market went down by over 50%, did you sell all or a sub- Mistake insurance?” stantial part of your equity investments?” That concluding statement of our essential value—no mat- (GENERAL) “Have you ever sold all or a substantial part ter how slowly you say it, for emphasis—cannot take one full of your equity investments during a crisis and a major mar- minute to make. ket decline?” Nor can you fail to elicit the right response, even and especially The Only Honest Answer: “Yes.” when it isn’t the response you wanted. Someone who responds Our Value Statement: “Had I been your advisor at that time, to the initial question by denying that he ever sold in a panic, you wouldn’t have done that. (Pause) You can’t have failed to or to the value statement by implying that you’re still not worth notice, perhaps painfully, that most if not all of the equity invest- what you cost, is giving you the right answer: “I will not admit ments you sold in a/the crisis are now substantially more valuable. that I need your help and/or I do not want it.” Take him at his My behavioral coaching of my clients—not to give in word. Or proceed at your own risk.

NICK MURRAY INTERACTIVE • SAMPLE NEWSLETTER 2016 7 RESOURCES

FROM 11/16 ISSUE nomic growth is the closest thing humankind has to a magic As recently as 1975, half the world’s population lived in bullet.) If Mr. Norberg is not the sparkling writer that Matt 1 extreme poverty, as commonly defined. By the turn of the Ridley was in the previously most important book on this sub- century, only one in four did. Today a mere one in ten does— ject, The Rational Optimist—and if it may seem at times that he and the trend is still improving. From the dawn of man until I has never met a statistic he didn’t like—in the end his conclu- graduated high school, a majority of global adults were illiter- sions are as ennobling as they are inarguable. A drop-dead ate; today 85% of adults are literate, and again that rate is still critical read for advisors, and a worthy holiday gift for your rising. For the last 25 years, 285,000 people have gained access more thoughtful clients and better prospects. to clean water every day. Yet the public in general—and heaven knows the investing The word “bubble” is thrown around so much these days public in particular—believes that virtually everything is get- 2 that it has ceased to have any objective meaning. No one ting worse. Poverty, violence, inequality, the environment, you with an adult memory of the equity market at the turn of the name it: people are convinced the world is going to hell in a year 2000—never mind 1968—thinks we’re in a stock market handbasket. Just this past month, a poll released by the Dutch bubble, and no one who can rent The Big Short thinks we’re in a firm Motivaction found that only one percent of Americans real estate/housing bubble anywhere but northern California, surveyed realized that global extreme poverty had fallen by half and maybe not even there anymore. The critical faculty, as over the last twenty years. That’s exactly why the most impor- always, is an adult memory. tant book published this year is Johan Norberg’s Progress: Ten For those without said faculty (and/or who’ve never read Edward Reasons to Look Forward to the Future. Intellectually, it’s my Book of Chancellor’s classic Devil Take the Hindmost), Ben Carlson’s Septem- the Year. (Emotionally, that honor still goes to Bob Benmosche’s ber 18 posting “The Greatest Bubble of All-Time?” is a fond look sadly posthumous autobiography, Good for the Money.) back at the stock and property market bubble which enveloped Ja- Mr. Norberg is a Swedish scholar, and a senior fellow of the pan in the 1980s, and from which the country has never recovered. Cato Institute. In Progress, he sets out to document the unprec- Return with Ben now to those thrilling days of yesteryear when, on edented (and accelerating) positive trends in ten of the major a per-square-foot basis, the grounds of the Imperial Palace were areas of human experience, from food and sanitation to life ex- held to be worth more than all the real estate in California, or even pectancy and even freedom. (Unsurprisingly, he finds that eco- Canada. We had real bubbles in those days.

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Not Just a Rally: An Inflection Point This Just In: E into market history, and torturing the data until they confessed 11 Bottom of The First Median Household Income Index (HII) and Unemployment T to some or another crackpot theory. I’m keenly cognizant—and- Rate by Month: January 2000 to December 2015 WHEN IT CLOSED FOR EASTER WEEKEND, 10 FOR THE FIRST TIME SINCE IT ERASED THE ENTIRE MARKET heaven knows you’d better be too—that I may be about to do

The Dreaded “Earnings the very same thing. That isn’t going to stop me, you under- the S&P 500 had in six weeks essentially 104 A

decline of 2007–2009 and emerged into new high ground in the R YMENT 9 stand; I just didn’t want you thinking I’m not self-aware. erased all its decline of the fabled first spring of 2013, the S&P 500 has now gone a full year without 102 The spasm you’re about to read, which must have been incu six weeks of 2016, which set records for surmounting its last peak in May 2015. Heaven knows, it was 8 Recession” Is Over being the worst start to any year in the

bating for some time, was finally called forth by the ubiquitous 100

0) entitled to take a breather: in the 74 months following the 2009 .

American equity market since 1492. 7 O headline which appeared in such erudite financial journals as UNEMPL ED

lows, it had soared well over three times, even ignoring dividends. - T S&P 500 Index Quarterly and its ilk on April 29—to the effect that, at 2,068 This was the second time in six months 98 IT HAS BEEN THE POSITION OF THIS But that isn’t the most interesting thing about this great bull USA Today

6 S newsletter (and of every economist and Earnings & Estimates in Dollars days, the current bull market was now the second longest in” that—after nearly four years without a cor DJU market. No, the genuinely fascinating aspect is the extent to 96 market strategist for whom we have any And then again, maybe it’s not. rection, and having tripled in six years—the which the market is feared and even hated—and during how American history, eclipsing that of 1949–1956. 5 $33 market corrected savagely, and as quickly respect) that, as the horrific headwind of much of this great advance the world has continued to flee “Well,” I thought, “maybe it is. - 94 recovered. For all that, it remains essentially-

energy finished blowing itself out, earn- $32 equities, right up to the present moment. - At the very least, it depends on how you define a bear market. 4 0

ings growth would accelerate in the sec- For example, this bull market is only two-thousand-and-what range-bound, languishing within five per 10 = 2000 JANUARY 92 A

Much was made in this newsletter, during the early years SEASONALLY

$31 (

HII HII 3

cent of its all-time high last May.

ond half of 2016. And so it has.

ever-the-hell-it’s-up-to-now if you don’t count the quite terrifying

of the advance (2009 through 2012), of the fact that equi 90

$30 But that’s not the whole story any- Jan. Jan. Let it be noted (as First Trust’s Bob Jan.

ty investments remained in net liquidation. Then, last year event of 2011, which—at “only” 19.4%—scared the bejeezus Jan. Jan. Jan. ’14 ’15

more. Indeed, it isn’t even most of Jan. Jan. Jan. ’11 ’12 ’13 Carey recently did) that from June 20, $29 out of very nearly everybody. You will not have failed to notice 88 Jan. Jan. ’09 ’10 and this, we marveled at the public’s response to two average Jan. Jan. Jan. ’07 ’08 2014 through February 11, 2016, the the story. For while this first quarter’s Jan. Jan. ’04 ’05 ’06 Unemployment Rate intra-year corrections (after 43 months without one, during that this newsletter’s Official Unofficial Arbitrary Bear Market ’01 ’02 ’03 $28 March) counts it—if only for consistency, since it ’00 Household Income Toprice ofsubscribe, a barrel of crude oil fell from please visit www.NickMurrayNewsletters.comdepressive-manic market episode was which the S&P 500 went from 1,100 to over 2,100—a 90% Table (NMI playing out, it seems quite clear that the $107.26 to $26.21, a drop of 75.6%. $27 gain). During these two long-overdue speed bumps, net equity also counts the two nineteen-percenters of 1976 and 1998. economy reached an inflection point. - Unsurprisingly, then, 2015 turned out to outflows soared to levels not seen since the Great Panic. So for this bull market to be the second-longest, one would Source: Sentier Research $26 To begin with, the recovery itself re be the worst year for S&P 500 earnings Tentatively after August 2015, but in full cry after The Worst have to be hewing steadfastly to the arbitrary benchmark of a Sentier Research’s survey (above), which since the plague year 2008. The weak- $25 corded some significant milestones. Chief dates to 2000. And household income has 1Q17 2Q17 First Six Weeks in Human History, we suggested that as long as- 20% peak-to-trough decline on a closing basis. sion began in December 2007. Moreover, 3Q16 4Q16 Est. among them was the breakout, at long last, been the clear and most vexing laggard, ness continued into the first quarter of 2Q16 Est. Est. The foregoing exercise in pedantic semantics is true, as far as it- $24 Q15 1 Q16 Est. the general response to the most quotidian corrections remained it has been accelerating rapidly: month-to- this year with something of a vengeance. 3Q15 4 of household income. Median household GDP having surpassed its pre-recession 2Q15 what we termed existential panic, we might be years and hun goes—but it doesn’t even begin to hint at my larger point. Which month gains during the last several months And then, inevitably, it was over. After income adjusted for inflation—the last high as far back as 2011. dreds if not thousands of Index points from the next secular top. is simply that most of what are technically classified as bear mar - have been the most rapid in the history of bottoming on February 11, crude oil rose to missing piece of the recovery—is finally Household net worth meanwhile also Source: Bloomberg. As of 10/11/16. Turns out we didn’t know the half of it. - kets were mere blips in the larger scheme of things. They were $48.24 by the end of the third quarter—a higher than at the point the Great Reces hit a new high—as it has regularly been Let me preface the potential folly I’m about to commit by temporary interruptions—oftenexpansions whichshort and/or remained shallow—of ongoing. longer gain of 84.1%—and as I write is over $50. doing long since. But the key difference acknowledging that, for going on half a century, I have seen lit Here’s what I think: I think the facts are When, as the trees put forth their first - about a buck less than its 2015 counterpart, journalism will be - now is that the value of U.S. housing has erally countless examples of misguided souls going back deeply meaningless, and magic numbers like 20% buds of spring, it became evident that able to beat that drum one more time—never mind that earn- finally surmounted its housing-bubble even more so. I think the only thing that mat earnings could only rise, financial journalism’s Groupthink Cen ings will surpass those of 2Q16. - high, nine years after that peak. Again, ters—that governs and drives the very longest - tral decreed the primary reality of the situation to be, and I quote, And then the fun really starts. Because the current consensus financial net worth has been making new at an acceler- ebbs and flows of equity values—is the domi - the “earnings recession.” This fiction was to be sustained—even as full-year 2017 estimate is something like $133—which would be- records all along since 2011. But hous but to nating public perception of equities. earnings themselves recovered (see the accompanying chart)—by a record. Let me say that again, a different way: - ing is a much more broadly based en I think, therefore, that there have been My point is that equity is completely different comparing quarterly earnings not to the previous quarter’s ating pace, we are heading into a record year for the earn gine of net worth, and it has a palpable since the end of the Second World War two the same quarter the previous year. ings (and presumably dividends and/or share repurchas It is not inequality which from other classes of investments. It’s the only effect on far more families. great—dare I say secular—bull markets, Thus, while 2Q16 produced a significant improvement in es) of the Great Companies in America and the World. one that captures human ingenuity, which is Most significantly, even as the stock during which public perception climbed an earnings over the first quarter, journalism caterwauled about I’m not even remotely interested in the $133 number in and is the real misfortune; “the ultimate asset.” how much lower they were than in 2Q15—because that’s what it does. When, as the consensus forecasts, 3Q16 comes in at “it’s dependence.” — Eddy Elfenbein, in his Crossing Wall Street blog, 3/10/16 —Voltaire

8 NICK MURRAY INTERACTIVE • SAMPLE NEWSLETTER 2016