Monthly Archives: June 2015

Summer Time Blues

The Economy: eh … mas o menos. The universe has been sliding sideways lately … must be the summer time blues. Central Bankers continue to be the story du jour. The latest hat trick is that the World Bank followed the IMF in begging the Fed not to raise interest rates. Financial markets were ecstatic with this interventionist pablum … for the usual 15-second sound bite. Then they continued sideways some more. Like the painfully boring Fed Interest Rate story, the Greek Comedy has become last year’s stale and forgettable issue. Greece has a GDP equal to Apple’s (AAPL) cash hoard. Bye bye. The concern isn’t about Greece. The concern is about the precedent of a member leaving the EU. It’s never happened and there’s concern that a Grexit will open the floodgates and signal the end of the dream of the United States of Europe. The point here is that we believe that Grexit, the EU and Europe are much ado about nothing. These countries of diverse cultures have seen numerous military, political and economic unions throughout history. If the EU collapses, it won’t be the end of the world. It will be the historic norm. We, in the U.S., are largely insulated from the drama.

Food For Thought: Since the Fed’s Interest Rate story is so old news, we were worried about how we were going to fill this space in the future. But wait, This Is America! … and coming to rescue the news void is  … The Donald as Al Haig with the 1981 Reagan Assassination Attempt, “I am in charge,” Caitlyn Jenner as Helen Reddy in 1975 with, “I am woman, hear me roar” and Rachel Dolezal as  J.H Griffin in the 1961 book, “Black Like Me.” We are clearly at the apex as the most highly developed multi-cultural country. … and I’m sure that the rest of the planet wants to be just like us. Who needs social norms, mores, folkways, traditions or even laws …all you need is love and lots of Owsley Stanley. Beyond the valley of the dolls we continue to see the stock market as being in a topping process with a correction sooner than later. We believe hedging strategies are appropriate here. Contact us if you’d like a complimentary evaluation of your portfolios.



The Economy: Summer is off to a good start with U.S. data that is on the upswing. We’re not cock-eyed optimists but we do tend to wake up with a smile. The Good: Real estate is strong. Home prices are up. The Wealth Effect is intact. The Fed is stuck like a deer in the headlights. The Bad: Venezuela is a basket case. Brazil’s economic miracle is a sham. The Ugly: The Greek Tragedy is baaaaaack … like Freddie Krueger. We have our Bad, Bad, Red Chinese Ballet of the Gonna Do It, Gonna Do It Fed. Across the pond they’ve got the Gonna Do It, Gonna Do It Greeks. So Do It. Both youse clowns.

Food for Thought: Global Mandarins strut with the hubris that life can be risk free if centrally managed by themselves and their fellow Illuminati. Commie Pinko drivel that somehow seeped through the rubble of The Wall after it fell.  Let the mismanaged economies go. Dismantle the TBTF banks. End financial repression and allow interest rates to find their level. Give capitalism a chance to breathe.  We’ll hope for the best and plan for the worst. Prudent wealth management begins with sound investment strategies. If these markets are giving you vertigo, contact us.

Manchester Union Tribune

The Pen is mightier than the Sword! Read on:

From: Guy Haselmann (Scotiabank GBM) Global Macro Commentary – A Clockwork Orange

• As an 18-year old college freshman taking ‘Pysch 101’, I watched the highly-disturbing Stanley Kubrick film-version of A Clockwork Orange.  The story takes place in a dystopian futuristic London and exposes the extreme battle of good versus evil.  After the sociopathic and violent gang leader Alex was captured, the government decided to deploy a modern behavioral modification method to reform him.  This experimental treatment was  highly-controversial. The government’s idea was to use the cruelest members of society to control everyone else.  While well intentioned, the unintended consequences were poorly understood.

• Extracting out the violence, I can’t help but notice the symbolic similarities of the motif-ridden story with the 2008 financial market fallout and subsequent attempts at economic rehabilitation.  Leading up to 2008, unsavory behavior of both borrowers and lenders conspired with lax rules to provide the conditions for the crisis to manifest.  Today, there are daily articles about how restrictive regulations are stifling banks and market-makers and causing a deleterious impact on market liquidity.  The intention of regulators is to deter risk taking in the banking system with the goal of preventing a similar banking-style crisis from ever re-occurring.

• The film forces the viewer to weight the values and danger of both individual liberty and state control.  It forces us to consider how much liberty we are willing to give up for order, and how much order we are willing to give up for liberty.  The central idea of the film has to do with the freedom of the individual to make free choices, but free choice becomes problematic when it undermines the safety and stability of society. It reminds me of the markets price discovery mechanisms (or lack thereof).

• Bond rates and stocks are in the midst of the greatest detachment of prices from economic reality in history.  Even during the Great Depression of the 1930’s, when unemployment was 25% and there was confirmed deflation, the US 10-year rate never traded below 2.00% yield.  How then is it possible that the US 10-year note traded below 2.0% last month with the US economy near full-employment and inflation relatively stable near 1.5%?

o The answer to the question is that price levels have become influenced by regulatory rules and central bank hoarding.  They are also a function of shifts in investor behavior to the ‘respondent conditioning’ of central bank policies that foster moral hazard and risk seeking activity.

• By promising to ‘do whatever it takes’, central banks have conditioned investors to buy the dip and over-weigh the riskiest assets.   Despite the Fed being possibly out of fire power, the ‘classical conditioning’ response remains strong.  However, it can wear off.   In the movie, Alex was actually ‘cured of the cure’; he had so much of the ‘medicine’ that it eventually became ineffective.  In the end, the experiment failed:  the state replaced Alex’s violence with its own; he was freed; and eventually the original problem resurfaced in a different form.

o This seems analogous to the Fed trying to eradicate systemic risk in the banking system.  Yet, in the process, the Fed has fomented large asset price inflation; compromised market liquidity; and as Richard Fisher says, “the Fed is now the largest hedge fund in the world”.

• Prior to being ‘cured of the cure’, side-effects materialized or became counter-productive to the process (as they were in experiments by B.F. Skinner or Ivan Pavlov).  For global central banks, the long term problems of financial repression are clear. Any policy that punishes savers and frugality, and rewards borrowers and profligacy is not prudent in the long-run.  Moral hazard and reduced investor discipline results from debt monetization.  It also reduces incentives for politicians to control public finances.

• Any process that is unsustainable will eventually end.  Ever-growing reliability on debt-driven consumption and increases in levels of entitlements in order to drive economic growth, boost living standards, or manage inequality concerns, is untenable and a ruinous direction.  Even Keynes said that a government should borrow money to close the GDP gap and get the economy back on track, but once it is back on track, the borrowed money should be paid back.  Seven years into this crisis, the level of debt in major economies has increased.

• There is no “free lunch”.  At some point the underlying issues will have to be addressed with the correct policy tools.  The end to political polarization in Washington may require a financial crisis.  QE4 will never happen as it would compromise the Fed’s independence, so the next financial burden will require a congressional response.

• Regardless, at this point, Fed policies and its $4.5 trillion balance sheet have reached their practical limit and may have even become a source of systemic risk and market uncertainty.  In this light, it is time to pull back.  I suspect the Fed will hike rates no later than the July FOMC meeting. (Re:  ‘Data Dependency’, see May 13 note “Lone Voice”.)

• “What is it going to be then, eh? – Anthony Burgess, A Clockwork Orange.  By: Guy Haselmann  |   Director, Capital Markets Strategy

Memorial Day

The Economy: Economic data continues to look like a disheveled Spirit of 76 with a bent fife and dented drum. The exception was Housing starts, resembling Chris Evans’ Captain America as they surged to a 7-year high. Interestingly, builders confidence was down for the same time frame. Bipolar numbers or bipolar builders? Overall, we’re hearing that things seem to be slowly improving. The Fed minutes were released this week. As expected, given the confused data points, the Fed remains dovish and pushed the interest rate lift-off into the fall. Some are saying the sluggish economy will see lift-off deferral pushed out into 2016.

Food for Thought: We are quickly moving into the summer. We have the official start on Memorial Day this Monday. Find a cold one or a tall one. Mix liberally with a good book and enjoy yourself. Join us next Friday, May 29th from 2-5PM at the San Diego Yacht Club for a social. Great food, drinks and the best ambiance in San Diego. Have a safe and relaxing holiday!

Greek Bankruptcy

The Economy: This week has been all about corporate earnings reports and the Fed. Economic reports have been mixed with consumer confidence up to a 7-year high and home prices and durable goods slightly lower. Earnings have been a bright spot with U.S. businesses continuing to show positive results. The Fed met for two days and released results of the confab. As scheduled for a year, the Fed ended QE. Financial markets had a muted response with stocks and bonds down slightly. But the Doomsday Crowd was out in force. The mainstream media’ s 24/7 news mandate means that viewers must be fed a never ending stream of negative titillation. Instead, let’s focus on improving corporate profits, rising employment, low oil prices, benign inflation and the Fed’ s intention to keep interest rates at historic lows.

Food for Thought: The past 2-weeks have seen more volatility in the stock market than we’ve had in years. Many are feeling sucker-punched by the 3-5% pullback that was gone in a blink. Stocks remain the only game in town through January 2015 … at least. One of these days this raging bull will stop. But nobody can see when that will be. It’s long in the tooth but not the longest bull market by any means. Bear markets need a recession and that simply isn’t in the cards.

Yellen Speaks

The Economy: Economic data remains weak. The June interest rate liftoff that was a near certainty in January has been pushed out to at least September. After a near vertical rise, the dollar is falling. After a near vertical plunge, oil is rising. We see both moves as overdue but temporary. Interest rates are rising and the Fed will probably lead by following. Fed Chair Yellen put a shot across the bow with comments about the speed at which market rates could increase as well as comments that stock prices were “generally quite high” and that they represent “potential dangers.” She’s right on both counts and is stating the obvious. Interest rates will go up and stocks will eventually go down. We applaud her candor and her attempts to let some of the air out of the bubbles.

Food for Thought: April is typically the strongest month of the year for stocks. Now we’re in that “Sell in May and Go Away” period. Truth or Dare. We continue to see markets as being in a topping process. We are using a two pronged approach of core strategic and tactical allocation. We have been taking profits, averaging down on existing positions when appropriate, and raising cash. There are abundant shorts out there for the stout of heart. The recent market weakness should serve as warning that in stocks can actually go down. … and remember that there is always opportunity in chaos. But you have to keep your powder dry. Joe Kennedy cashed out of the market when he heard his shoe shine boy talking about stocks. Bernard Baruch exited in 1928 saying he wasn’t greedy. Perhaps the sign of the apocalypse is that Costco is now selling $3000 bottles of scotch and $3000 bottles of brandy.

San Diego Beaches

The Economy: 6-years into it we’re still waiting for the recovery to catch fire. This week economic data again disappointed. The question is increasingly becoming, “When will this litany of under-performance end?” Even with the inherent errors in data reporting, the lack of statistical integrity, the political manipulation and corruption of the reporting entities, the numbers still disappoint. Just the fact that we’re still calling this a recovery is indicative of the uneven performance of this “expansion.” So the question becomes, “How do you play this situation in which the mainstream media spouts self-interest-conflicted optimism while the numbers disappoint.” We would say, “Be optimistic but play it conservatively and cautiously.”

Food for Thought: Gordon Gekko famously said, “Greed … is good.” Let’s tone it down and say that, “Self-interest is good.” Nowhere is this more evident than in the media. … and by media I mean all media: academic, governmental, journalistic and social. So the safe play is to treat it all as entertainment. … and if you treat it as entertainment then rest assured that the old adage, “95% of everything is crap” applies. Review your investment portfolio in light of the jingoistic noise of the media and see if you’re set-up to benefit in the future.

GDP, The Fed, and Talking Heads

The Economy: This week GDP came in much worse than expected. Pundits were quick to blame the winter weather, the strong dollar and the crash in oil. Data has been soft all year. Perhaps the economy is slowing and all the king’s horses and all the king’s men can’t put Humpty together again. Amidst the Economic New Speak, the Fed ended their 2-day meeting this week. Their closing statement was noteworthy for what was not said. Fed transparency is ending as we continue to approach interest rate liftoff. However, June appears to be off the table as does all future references to the calendar. What is old is new again as “Data Dependent” is the new mantra … as has always been the case.

Food for Thought: We use the review process of tax season to encourage you to revisit wills, trusts, charitable giving, powers of attorney and health care directives. End of life decisions should be made in advance with family members clearly understanding that after “no heroic measures” there is comfort care. Having your ducks in a row will prevent some of the ghoulishness of the hospital at this tramautic time. Please contact us if you, or someone you know has questions. When my mother passed, we were very well prepared. However we were astonished at how little we actually understood the end of life hospital/hospice experience. The legal structure you create is only the beginning.

Your 401(k)

The Economy: Economic numbers continue to come in weak. With a global backdrop of slowing economies, the Fed is indicating that interest rate liftoff may be delayed until later in the year. We’ve been on Fed Watch for a while now. After almost a decade of financial repression, we see the coming interest rate increases as a seminal event. After 34 years of declining interest rates, there’s nowhere to go but up. We will be embarking on rising interest rates that may last for the next 30 years. In financial modeling, there is the hallowed “50% Retrace.” It’s not the same as “reversion to the mean.” The 50% retrace regularly occurs at the mid-point of the high and low. The interest rate highs of 1981 were 15% on Treasury Bonds and 21.5% on the Prime. For the sake of modeling, plug in 7% and 10% and see what that does to your organizational or personal finances.

Food for Thought: When you leave a job, you have some important decisions to make—especially about your 401(k) or other qualified plans.  The money in that account is yours, of course, but there are rules and restrictions about what you can do with it.  And penalties and tax implications to consider.  You’ve probably received information from your employer.  But that material can be confusing.  And it doesn’t take into account your unique situation and needs. At a time like this, some professional advice is really worth a lot.  I can help you sort through the options and figure out what makes the most sense. Specifically, we’ll look at ways to help you avoid unnecessary taxes and penalties and make sure your retirement money is invested appropriately—so that it’s in line with your goals and needs. If you’re leaving a job, let’s discuss your options. Contact me to answer your questions and set up a time to meet.

China Rising

The Economy: Economic data remains weak. Retail Sales, Industrial Production and Capacity Utilization disappointed. China reported slowing growth. To add insult to injury, ECB Duce Mario Draghi was assaulted by a young woman protestor as he tried to put a positive spin on the EU’s QE. She probably couldn’t take any more acronyms. Central Bankers are now on notice that their time may have passed. Bad news is good news. Slowing growth was cause for celebration as global markets rallied on prospects of further stimulation. More cow bell; more methadone. My office looks out over a beach community. Today the sun is shining and the streets are filled with bathing suits. Consumer confidence!?! To paraphrase Farragut, “Damned the economy. Full speed ahead.” Everything is beautiful and the deck chairs need rearranging.

Food for Thought: For the past couple of decades, China has been a driver of the global economy. “Made in China” has become ubiquitous as their products have swamped the competition. The Mandarins are trying to change this. They want to move from an export economy to a consumer economy. The average income in China is $5,000/year. This includes a middle class of 300 million people. How they’re going to build a consumer economy on $5,000 incomes is the challenge. Don’t mock the disparity. In 1928, a U.S. Presidential campaign slogan was, “A chicken in every pot and a car in every garage.” At that time, only 35% of U.S. homes had electricity. If we pulled it off, the sons (and daughters) of Mao can.