The Economy: The economy appears to be expanding quite nicely and business optimism continues to rise as it approaches new records. The Left Coast, with its gateway to Asian trade, technology and Pentagon spending continues to boom along. Construction cranes fill the skies. New homes are stuffed into every nook and cranny. Roadwork and infrastructure projects are everywhere. New cars abound. Recently launched multi-million dollar yachts overwhelm the docks. Planes are jammed. Restaurants are packed. Exotic vacations are booked years ahead. The stock market confirms this rock ‘n roll fantasy narrative with many indices at or near their highs. Understand that only 3 tech stocks account for 70% of index gains this year. So the question is, “Can you be a cockeyed optimist and a contrarian at the same time?” The answer is yes. Now we’re entering earnings season with projections for year-over-year increases of 20%, Is this the beginning, the end of the beginning or the beginning of the end. Only Elon Musk knows for sure. China, Russia, North Korea, Syria, Turkey, UN, NATO, Trade Wars, Immigration Wars, SCOTUS Wars, Mid-Term Election Wars, Culture Wars, Religious Wars … and rising interest rates. Not to worry.
Food for Thought: Youth is wasted on the young and the wisdom of the ages is simply wasted. We will continue to emphasize the importance of interest rates and what the yield curve is telling us. While there will always be a bull market somewhere, most investors have a significant portion of their financial assets in fixed income. The old saw, “Stocks, bonds and cash.” The beginning point for most portfolio allocations is about 40% in fixed income; e.g. the bond market. So when I emphasize having an exit strategy, I’m particularly talking about having an exit strategy for fixed income. Contact me if you have questions on how to risk proof your portfolio.
The Economy: The economy continues to expand, the deficit continues to grow and the Fed continues to tighten. Sooner or later the tightening will bite … if Fed Chairman Powell can hold the line and not initiate QE-4 at the slightest hint of economic distress. What … worry? Every investor knows the Bull is long in the tooth. The question on everyone’s mind is, “When do I sell and what do I do next?” The bi-polar investment community continues to parse goat entrails, tarot cards, cloud formations and sentiment at the bottom of wine bottles in the age old quest to divine the future of the economy and financial markets. Glass half-full or half empty … when’s the next leg up or when does it implode? Do you care … or is catching that flight to Kauai more important than risk-proofing your assets? The 3 rules of Money are simple to understand: a) 1+1 will always = 2; b) If it sounds too good to be it is; c) Save it or spend it. The time of buy and hold may be nearing an end after almost 10-years. Passive investing as well. Every market crash has produced an altered investment landscape. ETFs may be the wild-card here. Do you have your next move or are you gonna ride this rocket back down and into the ground? If you’re doing it right, you should be sleeping soundly because you have a high probability of achieving your goals. Can you handle the truth?
Food for Thought: How to transfer investment or retirement accounts: Recently we’ve fielded questions from investors who want to transfer their investment or retirement accounts to a new advisor. Retirees in a 401k, people changing jobs and investors who just want a change have the same question, “How do I move my account?” The answer is a simple and easy 3-step process:
Step 1: Open an account with your new advisor; 30-minutes.
Step 2: Email your most recent account statement to your new advisor; 30-seconds.
Step 3: Have your new advisor initiate the transfer process; 0.
The transfer process is seamless, automated and does not require you to have contact with the advisor you are leaving. Most accounts transfer through an automated process called the Automated Customer Account Transfer Service (ACATS). In most cases, the transfer is complete in three to six days. No muss no fuss; no tearful exit interviews; no broken hearts. No more cousin Billy, your advisor for decades, knowing too much about your personal affairs. Move on to the land of milk and honey. Just Do It!
The Economy: The U.S. economy appears to be powering ahead with unemployment at a 48-year low. There are more jobs available than there are job seekers to fill them. Average hours worked are up; construction spending is up; manufacturing is up; factory orders are up … the list goes on. Economic strength continues to give the Fed leeway to raise rates. Another 25 basis point (1/4%) hike in June is a given. The longer Powell is at the helm of the Fed, the more observers believe that he’s cut from different cloth than we saw with Greenspan, Bernanke or Yellen. Some observers liken Powell to former Fed Chair Paul Volcker. It was Volcker who trounced inflation in the early 1980’s with interest rates in excess of 20%. The economic pain of Volcker’s reign was enormous. But it ended an inflationary cycle that threatened to spiral out of control. It also laid the groundwork for the robust expansion of the 1980s and 90s. The stock market took off with Volcker and has never looked back. The rocket ride accelerated with Greenspan. … almost 40-years of stocks and real estate going up with only the occasional pause. No wonder my doctor friend blithely talks DOW 100,000 as if it’s already here. The trick for Powell will be to keep the good times rolling while simultaneously taking away the moonshine punchbowl of free money.
Food for Thought: The “China Card” is huge; whether you’re talking politics, military or socio-economic. Check out today’s “Video of The Week” below for a compelling take on why culture may limit China’s rise. Then look at how San Diego,riding the crest of a building boom, has about $3.5 billion in downtown projects underway. Papa Doug Manchester’s Pacific Gateway project represents $1.5 billion or 43% of this amount. The Gateway project is the redevelopment of the 12 acres near the Broadway Pier. That aside, housing units are driving much of the building boom as the urban lifestyle is attracting both working folks and retirees. Prices reflect the demand with higher prices the norm. Downtown is happening. While the Gaslamp draws tourists, San Diegans are flocking to Little Italy for its charm, restaurants and the weekly Saturday farmers market.
The Economy: Economic numbers come in two broad categories: 1) Hard data such as trade balances or housing starts and 2) Soft data such as sentiment or confidence surveys. Hard data is based on numbers. Soft data is based on how the respondent is feeling at that moment in time. You can dispute the numbers but the argument will remain grounded in statistics. Surveys based on feelings are completely subjective and should be taken with a dose of skepticism. Numbers this week neatly fell into these two categories. Hard data was mixed with initial jobless claims up, existing home sales and durable goods down. Soft data and surveys were positive with optimism and odds of a December rate hike falling below 50%. Geopolitical concerns have continued to weigh on markets as NOKO, Iran and trade wars remain unresolved. Stocks swooned over the Italians … But it’s officially summertime so don’t worry be happy. Grab the beach toys and head for the water.
Food for Thought: In keeping with the never-ending 73-year old Italian Opera Buffa, check out the Video of the Week link below. Few know that Christopher Walken is an accomplished hoofer. Lighten your day and watch him here or there. Courage! The latest Sign of the Apocalypse is another Italian Meltdown. Financial markets are having a hissy fit. It’s almost as if traders are trying to stay relevant in a world where the only thing that matters is what the Central Banks are doing. … and that remains unchanged . The 2012 ECB vow that they will do “whatever it takes” to keep the punchbowl full of moonshine remains in force. With the exception of the Fed, global central banks remain committed to free-money, for all, forever. How this ultimately plays out is anybody’s guess. Many investors see asset bubbles in both stocks and real estate. Others see compelling bargains. Both have seen years of gains. But while we know that all trends reverse, we don’t see anything to indicate an inflection point. Pick your poison. … onward into the Summer Doldrums.
Music of The Week: Beegie Adair’s “Dancing in the Dark”
Video of The Week: Christopher Walken Dances
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The Economy: US economic acceleration continues with no recession bells ringing. This gives the Fed leeway to continue with its two pronged tightening action of raising interest rates and shrinking its balance sheet. This double whammy has never happened before so all bets are off as to how this will play out. Will the asset bubble slowly deflate or will it burst? This is the only question that investors need think about. This is the tide that raises or lowers all boats. Understand that we are wildly optimistic and bullish on America. We can make a sound case that this is still the American Century and will continue to be long into the future. The China Supremacy narrative ignores massive challenges. Beyond the glittering new cities are a billion peasants living in abject poverty and farming with medieval hand tools. After decades of the 1-child policy, the population is ageing faster than the economy can handle. With lowest-cost labor now in Southeast Asia, many unemployed Chinese workers are leaving the cities and returning to the already impoverished countryside. As Jordan Peterson is fond of saying, “Never underestimate the Americans. They are the most robust people the world has ever known.”
Food for Thought: Ageing parents are a concern for Boomers. Deteriorating mental and physical health is only the tip of the iceberg. Even the soundest financial plan can be destroyed by unplanned expenses … and they are going to occur. The dark side of extended lifespans is the incredible expense of living incrementally longer. Forewarned is forearmed. Unless you abandon your parents to the street, you are going to be involved. Plan accordingly. Having a plan is based on knowing what is where. Google: “family inventory worksheet” for checklists that will provide guidance. Remember the old Chinese proverb: “The beginning of wisdom is to call things by their right names.” Use the Family Inventory as a basis for helping your parents.
The Economy: Continued economic expansion is the order of the day with San Diego benefitting from Pentagon spending, tourism and hi-med tech. Defense/State Departments “Pivot to the Pacific” is in full swing with no slowdown in sight. Air, land, sea and sub-sea drones are expanding at an increasing pace with projections that pilots are the next dinosaurs to face extinction. The Trump administration’s goal of sharpening military readiness plays into this evolution. Trump continues to act on campaign promises and realign years of US policy: Paris climate accord gone. TPP gone. UN under review. Marginal allies re-evaluated. Iran nuke deal gone. Torpedoes be damned; business be damned. Yet, despite cries that armageddon is nigh, the economy continues to expand and stocks continue to hold fast. As we go to press, the major indices have turned positive for the year. … could change any time but the rally of the past week, led by oil, has been impressive. Year over year oil is up 50%. This time around oil is rallying on geopolitical instability and not demand. Think global, act local.
Food for Thought: Long time readers know that we’re not fans of the central banks. But to deny their impact is supreme idiocy. We look askance at market manipulations, chronic bailouts of TBTF banks, central bank crony capitalism and other signs that the Illuminati are hand in glove with the Giant Vampire Squid. However, don’t stand in the open and fruitlessly curse the weather. So we continue to warn that with the Fed on a tightening cycle, investors should have an exit strategy. Signs continue to accumulate that this is a late stage bull market in stocks. The inverse relationship in bond-land is a fact of life. Buy and hold has worked since 2009. We’re cockeyed optimists like only San Diegans can be. But nothing lasts forever.
The Economy: After being dissed and dormant for a decade, inflation is front and center for financial markets. Concerns are being voiced by many. Fed members are among the loudest. Is inflation real or is the Fedspeak a stalking horse? Only your hairdresser knows for sure. While technology has driven labor and hardware costs down, a comparison of basic items in the grocery stores shows price increases of 40% or more over the past decade. The “Lies, Damned Lies and Statistics” crowd is complaining that economic numbers don’t measure the appropriate output. One recently asked how we could have tight labor markets with no wage growth. The cry is that the laws of supply and demand don’t seem to apply in the Goldilocks Economy. Meanwhile, stocks are off their January highs and moving sideways. This breather is either the calm before the storm or the pause that refreshes. Regardless of the metrics, the only thing that matters is whether you can sleep at night. Watch inflation; watch the Fed.
Food for Thought: China has a new Emperor. It took a few years after the death of Emperor Mao. But the song remains the same: a thousand years of dynasties with the occasional disruption. The Qing Dynasty ended in 1912. More than three decades of internal strife between warlords followed. Then the communist warlord Mao Zedong assumed The Mantle. A new Imperial Chinese dynasty was born: the Communist Dynasty. Now a successor to Mao has emerged: Emperor Xi. Likewise Russia. The Romanov Dynasty ended in 1917. Eventually the warlord Stalin emerged as the new Tsar. Then Brezhnev and now Tsar Putin. Triumvirate Great Power politics reignited. Will Turkey make it a fourplay? The investment opportunities are countless.
Music of The Week: Atlantic 5 Jazz Band’s “Bar Music Moods – The Piano Edition Vol. 1”
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The Economy: The U.S. economy appears to be accelerating from its modest expansion over the past several years. While purists may argue the validity of the numbers that are released, they are the numbers that move markets and investors. After years of insisting that inflation is too low, we may be seeing that monster rearing its ugly head. The Fed’s Beige Book shows inflation increasing across a broad range. Consistent with increasing inflation, the Fed is now warning that higher interest rates are on the way. They have 4 hikes planned for 2018 and are leaving the door open for more. In the meantime, information overload is the order of the day. The actionable news is further confirmation that the Fed is in a tightening cycle. Loans of all types will continue to become more expensive. Those economic sectors that benefited from a decade of low rates may see increasing headwinds as rates continue to ratchet up.
Food for Thought: Stock markets are suddenly a hot topic of conversation. After years of the lockstep rise in global asset values, stocks have shown that they can go down as well as up. But let’s face it, making changes to an investment portfolio is like watching paint dry when compared to wine tasting or hiking Nepal. Sailors know that a rising tide floats all boats … and the reverse is true. The last bear market showed that diversification is no protection when all asset classes are getting crushed. But that message will have to be relearned. The FANGs may be particularly vulnerable. Regulatory issues could loom as Americans are waking up to the privacy/government surveillance/freedom of speech issues posed by big tech and social media. Anti-trust happened to the railroads, big oil, autos and airlines.
Music of The Week: Govi’s “Andalusian Nights”
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The Economy: Comrades Unite! Commissar Chairman Powell has arrived … and in the famous last words of Alexander Haig, “is in control.” The Star Chamber Bucking Bronco that we know as the Federal Reserve showed its new face to The Swamp today. In a welcome break with hoary tradition, Powell has real world experience as a businessman. Imagine the folly of having a businessman run the central bank of the greatest capitalist country in the history of the planet. But alas our joy, like a second marriage, may be the triumph of hope over experience. In his appearance on The Hill, Powell stated that 1) Further QE remains as viable monetary policy (All Hail Mammon); 2) The Fed saved the Post-Crisis World (All Hail Self-Praise); 3) Banking regulations are pillars of strength (All Hail TBTF). Long story short; The Beat Goes On. … the economy continues to expand; some indicators positive; some negative … .
Food for Thought: It’s human nature to assume that the future is going to look like the immediate past. So stocks and real estate will go up forever. Interest rates will remain low forever. Central Bankers will be able to manipulate the global economy forever. The political pendulum will swing left forever. China is a benevolent capitalist player forever. The dollar will remain the world’s reserve currency forever. Renewable energy subsidies will remain forever. The Manchurian Candidate has landed and Vlad Rules forever. The crypto-currencies world should be ignored forever. … If you see chinks in any of this armor, that is where “the next big thing” is shining like a diamond in the rough.
Music of The Week: Paul Carrack’s “Live at the London Palladium”
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The Economy: The CPI and PPI prints were hotter than expected and have helped to juice the stock market indices to a 50% rebound. The feel good mood has been further enhanced by the Olympics. Winners all. Inflation indicators watched by the Fed are are heating up. … and bond vigilantes seem to be on the loose with interest rates accelerating higher. As has always been the case, the Fed will follow the markets. There are few consumers who remember interest rate hikes that crimp economic activity. Fewer still who remember being priced out of a home or auto loan because interest rates moved against them. … remember when an 8% home mortgage was to die for? How many real estate players could handle those metrics today. How about those halcyon days of 16% home mortgages? Fun!
Food for Thought: Annuities and life insurance have evolved in ways that work well with investors seeking income or the possibility of establishing an estate. In specific situations they may be a prudent investment for retirees. Contact us if you have questions about creating or supplementing your retirement income.
Music of The Week: Sade’s “Lovers Rock”
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