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: 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: 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: Sex, Taxes and Bitcoin; need I say more? As has been the case for quite a while, the US economy continues to go its own way on slow but steady growth. China is having some type of inscrutable implosion in the commodities sector; the UK is stumbling and fumbling around Brexit and the Middle East continues on its path of peace on earth and goodwill to all. For Americans it’s Ho Ho Ho as the scythe has swept through Hollywood, New York and now Washington. The Emperor has no clothes has taken on literal meaning. Ho Ho Ho on Taxes as Santa’s gift bag rains goodies from the sky. … and of course, HO HO HO for Bitcoin up 50% this month. It’s High Cotton! Merry Christmas, Happy New Year and Happy Holidays!
Food for Thought: Our Thoughts and Prayers go out to those enduring hardship this Holiday Season. From our men and women in uniform, separated from loved ones and facing danger; to those affected by the Southern California fires. Tis the season to count our blessings and be grateful.
Music of The Week: Rod Stewart’s “Merry Christmas”
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The Economy: Synchronized global growth, central bank easy money and politics as usual remain the norm. China finished up its Party Conference and deified Xi alongside Mao and Deng. The ECB and the Fed met and left their respective rates unchanged. No surprise there, as global growth is still viewed as delicate. So Synchronized but delicate would be a more accurate description of global growth. But the Fed is taking the lead in normalizing monetary policy. In October it did shrink its balance sheet by about $10 billion. They also indicated that another interest rate hike was on tap for December. Thursday, Trump is expected to announce Powell as the new Fed Chair. Powell is seen as dovish and if selected is expected to maintain the lower for longer policies we’ve come to know and love.
Food for Thought: Stocks continue to march higher. A week without new records now feels like a personal insult. The rally may continue through year-end as investors pile into the markets to make up for lost time. Algorithms are appearing daily that show how markets will go up for years to come. Everyone is an aggressive risk-taker when they are making money. But how do you feel about losses? Know your risk profile.
Music of The Week: Tim Bowman’s “Circles”
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The Economy: Economic data was light last week; what was released was weak. The stream of conflicting data continues unabated with Europe flipping between Teutonic Strength and Greco/Italian Tragedy. Japan is showing strength while dodging North Korean (NK) missiles. China boasts of their booming economy while trying to contain their Haircut-Impaired-NK-Doughboy. Geopolitics again stole the spotlight from the economy as Fed-Speak was absent except for comments from The Bernank. Big Ben opined that the Fed might keep its bloated balance sheet for the foreseeable future. … couldn’t shrink it without tanking the economy. Rumor is that Grandma Yellen is trying to apply the Art of the Deal to The Donald himself. The Trade: She stays at the Fed for another term in exchange for keeping interest rates low. … not bad if she can pull it off … and why not. The Federal budget has little room for an increase in debt service … might take away from all those shiny toys that The Pentagon wants.
Food for Thought: “Peace through strength” was a phrase championed by Ronald Reagan. The current “America First” rhetoric apparently does not mean withdrawal from the world. Rather, it appears to be a policy of strongly protecting American interests, with force. North Korea is problematic but hardly a Gordian Knot. As we look out on the investing landscape we see geopolitical risk as increasingly likely to effect financial markets. Stock markets have stalled as this reality comes home.
Music of the Week: Tom Jones’ “Tom Jones”
The Economy: The numbers released this week underscore the difficulty in evaluating the economy. Consumer confidence is at all-time highs; as is bullish sentiment. Auto Sales disappointed. ADP Jobs report on Wednesday were blow-out; far above expectations. Yet the very similar NonFarm Payrolls were far below expectations on Friday. Oil has rallied, dipped and rallied back on each OPEC announcement. Fed Minutes were released and showed a more hawkish stance towards raising interest rates. They also contained a comment that stocks may be overvalued. The nuclear option on Gorsuch was exercised without causing a ripple. This is the conundrum of soft versus hard data. Soft data is about how you feel or what you think. Hard data is information that has some basis in statistics. With the manipulation of statistics you now have to frame hard data in terms of what might be fake news. For example, are any numbers provided by the Chinese Communist Party real? For better or worse, they certainly drive the markets. For the U.S. the consensus is that the Trump rally is intact regardless of the healthcare fail, the headwinds of tax reform, a looming trade war with China and as of today, a possible hot war with Syria/Russia. We continue to hear that regardless of the macro picture, bank lending standards remain tight.
Food for Thought: The relentless upward bias of the stock market stumbled Wednesday when the Fed Minutes were released. Two comments were taken as bearish for stocks. First, further interest rate hikes are coming in 2017. Second, the statement that stocks may be overvalued was viewed as a warning. Together, these comments stopped the rally and caused the largest reversal in 15-months. Markets closed down dramatically. But like so many other issues that should have paused this bull market, the reversal was forgotten overnight. Stocks had a positive day as the prospect of a Syrian war and the adage, “buy on the sound of cannons, sell on the sound of trumpets” was heard. Last week Tillerson indicated that Syria was best left to the Syrians. Today, Trump bombed ‘em. U.S. military intervention in Syria. Perhaps it’s the Art of The Deal, but it seems that there’s a lot of U.S. saber rattling going on. We have U.S. troops in Poland, on the Russian border, for the first time in history. We’ve turned-up the anti-Russian volume on Ukraine. We’re threatening North Korea with unilateral action. We’re flashing the sabers at China over the South China Sea. Perhaps the Central Banker stock market, which has morphed into the Trump Bump market will evolve into the global war market. To Infinity and Beyond.
Music of the Week: Billy Idol’s “Charmed Life”
The Economy: The only data of note was that Existing Home Sales surprised to the downside. But all talk of the economy was framed by the new administration. True to his word Trump began working the day of his inauguration with an executive order that formally put Obama Care in the crosshairs. Monday there were executive orders withdrawing from TPP, renegotiating NAFTA, freezing Federal hiring except for the military and freezing all new and pending regulations. Tuesday were executive orders for the Keystone and Dakota Pipelines. Wednesday were executive orders for the wall and to bring “Sanctuary Cities” to heel. All of these are seminal events that will have enormous economic impact. Their final forms are unknown, but with the Republican legislature and SCOTUS appointments you can expect dramatic changes. The military is expecting a windfall; many non-profits are feeling the chill wind of fewer Federal grants.
Food for Thought: China appears to be the centerpiece of a new U.S. foreign policy that openly acknowledges the adversarial relationship between two super powers. Gone is the benign acceptance of Chinese activity in the hope that U.S. companies will benefit. There appears to be a muscular, new U.S. approach that puts American national self-interest first. Expect confrontations as the U.S. reasserts its military and economic hegemony in Asia. “… you don’t need a weatherman to know which way the wind blows.”
Music of the Week: US Military & Patriotic Favorites: “U.S. Navy Classics Vol.1”
The Economy: Call it The Pause that Might Refresh: Global economies appear to be coasting into the new year at a steady state. Neither expansion nor contraction is on the horizon. Some of the negative interest rates in Europe have returned to the positive side of the ledger. If the Chinese Communist Party organs are to be believed, growth there is powering along at 7%. Brexit is unfolding with the usual court challenges to the will of the people. The Fed meeting was a non-event and I’m beginning to think that an interest rate hike may not happen in December. Bookies have the probability at 70-80% but I don’t see a compelling reason. If the Presidential Candidate known as The FBI Suspect is elected interest rates may stay lower for 4 more years. If the Presidential Candidate known as The Russian Spy is elected, Janet and the 7 Dwarfs may push interest rates through the roof … in a hissy fit of spite before they are fired. Call it life in a 3rd world country.
Food for Thought:
1944: 18-year olds storm the beach of Normandy into almost certain death.
2016: 18-year olds need a safe place because words hurt their feelings.
Music of the Week: Roy Rogers’ “Happy Trails to You”
The Economy: The Song Remains The Same. Global slow growth; China head-in-the-sand; Europe in Brexit Denial; the Russians ignoring sanctions to re-establish their traditional presence in the Middle East. Macro data seems to confirm a global economy that is continuing to slow. What this means at the local level is more difficult to determine. With 60% of the U.S. budget going to entitlements, there is direct taxpayer support for the U.S. economy. As the world’s 6th largest economy, California is awash in money. Yet, in our ongoing, informal poll, people continue to say, “I’m waiting for the other shoe to drop.” If this is optimistic-unease it may explain why most financial markets have gone nowhere for the past 15-months.
Food for Thought: Only 18-days till the Theater of the Absurd closes. One Champion is accused of being a Russian puppet. (Huh?!?) The other Champion is accused of being the darling of a corrupt Justice Department and the FBI. (Please!?!) In a more genteel age, “I am not a crook” and “I did not have sex with that woman” were seen as the epitome of lowbrow. No more. As the greatest economic and military power in history, as the world’s beacon of hope and enlightenment, we have set new benchmarks for gutter crawlers, petty dictators, morons and idiots.
Debate #1: Stupid
Debate #2: Stupider
Debate #3: Stupidest
Father, take this cup from me.
Music of the Week: Halie Loren’s “After Dark”