The Economy: It is finished. The long wait for the Fed ended today. At the end of their two-day meeting they announced a ¼ increase in interest rates. Money center banks immediately followed by raising their prime rate from 3 ¼ to 3 ½ percent. After almost a decade, we are now in a tightening cycle. The Fed indicated that 2016 will see 4 increases of ¼ percent each. This guidance will be data dependent but it gives markets an indication of where we’re heading. Bonds sold off on the news. Stocks took off on the news. Happy Holidays!
Food for Thought: As a Thought Experiment, imagine a meteor that is 1-mile across. Imagine that meteor striking the earth in the middle of the Pacific Ocean. Off the shipping lanes, sight unseen. At the exact moment of impact there is little effect. Then the consequences begin. How this scenario unfolds for you depends on your specific situation. For example, do you live in Hawaii or Montana? Do you grow your own food? On and on. The Fed’s action is like that meteor. The ripples are just beginning. Bond funds are already feeling the impact. Marginal players will be priced out of some financial deals. Variable rate loans will become more expensive. Savers will begin to see improved returns. This is one of those seminal events that should be used to re-evaluate your portfolios and financial plans. Wrap that re-evaluation into your year-end tax planning.
The Economy: All eyes are on the Fed meeting next week. This is the long awaited meeting where Interest Rate Liftoff is supposed to be announced. Nothing else this year, in the realm of finance or economics has commanded the attention, anticipation and anxiety of this meeting. The Fed goes into this meeting with its credibility in question and its 7-year old policy of Quantitative Easing (QE) widely viewed by some as a failure. Having masterminded financial engineering on an unprecedented scale the Fed is clearly at a loss as to how to normalize interest rates and the financial environment. Like the unanticipated consequences of the 2008 Lehman Brothers collapse, ending QE and normalizing interest rates is fraught with unknowns. While a ¼ point increase is considered insignificant, the Fed itself has no idea what it will bring. The fact that they are going to pull the trigger during the holidays, another unprecedented action, is further evidence of supreme hubris or cluelessness … or both.
Food for Thought: Our recommendation as we go into the last few weeks of the month is to be prepared for whatever the Fed serves up. Like Y2K, Liftoff could be a non-event or it could be the beginning of dramatic changes. It’s a given that financial markets are disconnected from the economy. So whatever gyrations we do or don’t see, should be taken with initial skepticism. Whether Liftoff will actually result in the end of QE is up to speculation. This is a presidential election year and the Fed is arguably the most political of animals. Regardless of what they say, they won’t be doing anything to raise the ire of their political overlords on The Hill, Pennsylvania Avenue or at either The Democrat or Republican National Headquarters. Stay liquid; stay nimble.
The Economy: It’s High Holidays with the crush of parties. But the past week has been too action packed to ignore. The letter “V” comes to mind. V for Victory; V for Peace and Love; V for the Long bowman’s insouciance; V for Volatility; V for Vertigo. V for the roller coaster ride of uninterrupted highs and lows that characterized the week. If you didn’t like what you were seeing in business, the economy, politics, finance or culture, you could wait a few minutes and be assured that things would change. Economic numbers that were released remained mixed to weak with the ISM Services Sector coming in lower than expected and following the ISM Manufacturing Sector down. The Fed continued to stand in the eye of the hurricane, upraised fist pumping the sky while muttering, “I think I can, I think I can.” Across the Pond, Super Mario botched his “I’m Just a Gigolo” routine with an expanded QE that was less than had been hoped for. Global markets gave both Bankers the Bronx Cheer and cratered 2% in a matter of hours. Terrified that financial markets might actually go down, Super Mario was back on Friday announcing that there were no limits to what the ECB could do and that trees do grow to the sky. Markets responded by rocketing up 2%. Ride the wave; The Emperor has no clothes.
Food for Thought: Optimism is high at holiday parties this year. The eggnog may have something to do with it. My finely honed recipe of powdered sugar and Mount Gay is renowned for the healthy glow it produces. Having said as much and not wanting to play Ebenezer, it is year-end. Tax time is next up. Review wills, trusts, financial plans and goals. As we move forward into the brave new world of increasing interest rates, reassess the inputs you use to monitor the health of your organization. Think global, act local. Stay ahead of the game as the unintended consequences of rising rates unfold. Have a very Happy Holiday.
1. Know yourself.
2. Know the system.
3. Do your homework.
4. Keep history in mind.
5. Acknowledge luck.
6. Stick to your timeframe.
7. Beware of forecasts.
8. Don’t follow the herd.
9. Be flexible
10. Be nimble
Turn the other cheek
Eye for eye, tooth for tooth.
Money isn’t everything.
Money makes the world go round.
Look before you leap.
He who hesitates is lost.
If at first you don’t succeed, try, try again.
Don’t beat your head against a wall.
Absence makes the heart grow fonder.
Out of sight, out of mind.
The early bird gets the worm.
Haste makes waste.
All good things come to those who wait.
Never put off till tomorrow what you can do today.
Don’t cross the bridge until you come to it.
Two heads are better than one.
Paddle your own canoe.
The Economy: We’re the quintessential optimists so it’s with the risk of sounding like Chicken Little, that we again note the economic data is weak to mixed. The manufacturing sector is worrisome. Earnings season has ended with the note that corporate profits declined. Higher sales of cars and trucks are due in part to subprime auto loans. (Yep, subprime loans, the red-headed-bastard-sons of the Financial Crisis and subsequent Great Recession) Compounding this fog of uncertainty is the recent spate of terrorist activities. The Beirut bombing, the Russian airline bombing and the assault on Paris have heightened the sense of worry. The Fed released the minutes from their last meeting today. They were interpreted as being hawkish and in favor of interest rate Liftoff in December. Financial markets were ecstatic. But lost in the excitement is that fact that the minutes are pre-terrorist attacks. So we remain skeptical that we’ll see Liftoff in December. The much anticipated 25 basis point (1/4%) hike shouldn’t have much of an impact. It’s the unanticipated consequences that are causing the willies. After a decade of zero interest rates, no one knows what those consequences will be. Now that France has declared war on ISIS those consequences are more unknowable.
Food for Thought: The Russians have had boots on the ground in Syria for more than 40-years. To say that Putin and Company preempt the U.S. in Syria would be a gross understatement. In the aftermath of the Paris attack, the French are reaching out to Russia as an ally. With this diplomatic caress, Russia is on its way to being rehabilitated. Sanctions will quietly go away. Putin, bare-chested astride his white charger, crossbow in hand shooting whales, is the man of the hour.
Our prayers are with the French nation in the aftermath of the assault on Paris.
The Economy: The jobs report last Friday came in better than expected Unemployment dropped to 5%; the lowest since 2008. The U.S. economic expansion appears to be on track Yet, there is little consensus on how well the economy is doing. For those saying that this is one of the longest economic expansions in history, an equally vocal group points out that it’s one of the weakest. For those saying that earnings season was strong, others point out that earnings growth is in decline. As we move into the holiday season, attention is beginning to focus on next year. 2016 is just 7-weeks away. Between now and then there’ll be a raft of statistics. But if a lid can be kept on Syria, the Spratly Islands and the European immigration scene, we expect an uneventful end of the year.
Food for Thought: The deep budget cuts known as Sequestration, have been kicked down the road to 2018. San Diego should benefit as increased defense spending flows into the economy. Looking further out into the future, Northrop Grumman has won the contract for the next generation of Air Force bombers. Word is that drone technology will eventually replace the pilots. San Diego is Northrop’s unmanned systems center. As the unmanned models become reality, this should become more of a growth business for San Diego.
Qualcomm (QCOM) was down 15% after reporting earnings this week. If you had $5 million in QCOM, you lost $750,000 overnight. The premier San Diego company which faces changes in the mobile space, has announced massive layoffs and a stock buyback program. Some are calling for the company to be split up. The carnage in QCOM is the perfect example for why employees should diversify out of company stock in their retirement plans. Stories of employees who become instant billionaires dominate the media. Much more common are employees who are impoverished when their company stock heads south. Just as the odds are against you winning the lottery, they are against you being employed by the next Apple, or Tesla or Facebook. Invest with common sense.
Life is fragile, be positive.
Do well by doing good.
You deserve everything you have.
If you are not making mistakes you are not alive.
See with your eyes,
There’s no shame in fear; there’s shame in being paralyzed by fear.
You have free will.
Make the choice not to be cynical.
You are as lucky and as blessed as you can be.
Never trifle with someone.
The hardest three words: “I am wrong.”
Resentment cripples you.
Create your universe.
The most important decisions are the things you decide not to do.
Deals with the devil never work out,
Evil consumes itself.
Victims are permanently disappointed.
Understand the snobbery of the poor.