The Economy: The economic numbers have been dwarfed by bungee jumping global stock markets. However, economic numbers do not support all the gloom and doom talk generated by the wild ride in stocks. Global and U.S expansion remains steady. Global and U.S. monetary policies remain very accommodative. In spite of 5 interest rate hikes in the U.S., inflation adjusted interest rates remain at historic lows. Tax cuts, stimulative deregulation and a Federal Reserve committed to supporting the stock market should continue to juice U.S. economic expansion.
Food for Thought: The Bungee Jumping stock markets have been dominated by money managers, pension funds, hedgies and other professionals. Individual investors have remained firm in their belief that markets will rebound and continue to move higher. The brief 2-day, 10% drop is already forgotten. That 10% drop is seen as nothing more than as having eliminated the “no 5% pullback in 400+ days” boogeyman. The assumption, based on a decade of monetary policy stimulus, is that the way is now clear for the next leg up in stocks. However, as I pointed out yesterday in my special report, investors approaching retirement should be increasingly cautious. The market volatility of the past few days are rumblings that shouldn’t be ignored by those who no longer have decades to recoup losses. The zeitgeist is that stocks will go up forever … so you have to stay on the dance floor. We simply recommend that you dance closer to the exit door.
Music of The Week: Lara & Ryes’ “Exotico”
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The Economy: All systems are go on a global economy that shows signs of continuing to expand. Easy money from central banks remains the order of the day. Trump tax cuts and deregulation have bolstered business confidence. The holidays showed Americans on a spending spree. Naysayers see the band on the Titanic bravely playing as she went down. Optimists see hundreds of billions in repatriated US corporate profits, tight labor markets, inflation and Trumponomics as the next leg up in the economy and the 9-year bull market in stocks. Ray Dalio of Bridgewater has called this a new bear market in bonds as Jerome Powell was confirmed by the Senate as the new Fed Chair. Powell is seen as dovish and a continuation of the Bernanke/Yellen school of gradualism in monetary policy. But it pays to remember that markets tend to drive the Fed and not the other way around. Interest rates are rising. Gold has broken through its $1,300 resistance and oil is at multi-year highs. With global expansion, investors are complacent that central banks will keep stock markets and real estate moving up forever.
Food for Thought: Davos, billed as the Global Economic Summit is in full swing. Over time it has morphed into another rich kid’s confab with the glamorous and notorious. It is known as the Bastion of The Globalists. This year Donald Trump will upset the apple cart as he presents America First Shock and Awe with his appearance and speech on Friday. The annual ego rush of whose private jet is bigger will be sadly missing Prince Alwaleed’s private 747 with the gold throne. The Prince is apparently still confined by his King who reportedly wants billions in return for a kiss-and-make-up return to business as usual.
Music of The Week: Chaka Khan “Chaka”
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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: Eight years into the current economic expansion there is nothing on the horizon likely to disrupt things for the next 6-12 months. Of course this could change at any moment. However we don’t see anything at present. The geopolitical situation could change at any moment. Some unforeseen event could trigger a meltdown in any number of national economies. But at present we see the immediate future as a continuation of the recent economic past. Central banks appear to be on a synchronized path of higher interest rates. Eventually this will impact global stock markets. But when that occurs is an unknown. For every economic number released there are pundits in support and opposed. Choose your poison. We continue to emphasize that you should keep an eye on the horizon while staying focused on your own specific situation.
Food for Thought: Stocks remain on a rocket ride with new records set almost every day. We’re 8-years into what is now the second longest bull market in history. It is crystal clear that regardless of age or valuations, this market will continue to go up until it doesn’t. Like the global economic expansion, there is nothing on the horizon that spells the end. We may see a correction that ushers in a final run to the top. … or there may be several corrections that eventually end the institutionalized Buy-The-Dip reaction to all pullbacks we’ve seen in the past 8-years. Of interest is that on separate occasions I was told by individual investors that the Dow will go to 30,000 before the ride is over; another stated that the Dow would be at 100,000 in 10-years. Reminds me of Ella Fitzgerald’s Blue Skies: “Never saw the sun shining so bright, Never saw things going so right …”
Music of The Week: Ken Navarro’s “Smooth Sensation”
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The Economy: “Synchronized Global Expansion” remains the bullish buzzword with 45 countries expanding in lock-step. This is a first in 50-years. Central bank liquidity programs and global debt are fueling the growth. The front cover of The Economist says it all, “The Bull Market in Everything.” Stocks, bonds, real estate, alternative investments, art, wine, automobiles, chopsticks. Everything and the kitchen sink has gone vertical and defies gravity. The relentless upward thrust makes the North Korean missile shoots look boring by comparison.
Food for Thought: Back in the day when there were economic cycles and price discovery, investors looked for nuggets in value or special situations. Today, the bull market steamroller has overruled causality and flattened every bear in sight. Thoughts of correction are dim; of a market crash, non-existent. Cowabunga!
Music of The Week: Shania Twain’s “Now”
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The Economy: Economic numbers have turned mixed as the hurricane effect kicks in. Whatever economic bump may occur as a result of the disasters will be temporary. The longer-term effect will be a headwind for the economy; though how much is an unknown. Last week the Fed continued tightening monetary policy. Fed Chair Yellen is sounding more hawkish as labor-market hiring is strong and global growth is recovering. As such, odds are for another quarter point rate hike come December. 8-years on, financial markets continue hitting new highs. Neither snow nor rain nor heat nor gloom of night stays these markets. Global Central Banks have bought up a majority of government debt. They have been buying and now own trillions in stocks. Now, on par with The Bilderberg Group and Nibiru, comes word of The Plunge Protection Team (PTT). Hear tell, the PTT is a shadowy coalition of officials and bankers. They rush to the rescue at the slightest sign of market weakness; pumping in billions of taxpayer dollars to keep markets from ever going down. Yep … and I have a bridge in Brooklyn that I’ll sell ya.
Food for Thought: Robotics and demographics are trends with lasting impact. The first generation of bots eliminated factory jobs. The latest generation is replacing CPAs, analysts, doctors and other professionals. Stepford husbands and wives may be next. The economy is increasingly becoming two-tiered: Do it your selfers (DIY) and those willing and able to pay for personal service. Boomers are out and millennials are inheriting the earth. Out with Tim Allen and in with Jenna Marbles.
Music of The Week: Craig Chaquico’s “Shadow and Light”
The Economy: The numbers were again mixed and eclipsed this week by politics. Housing starts and building permits were down. Jobless claims up, Industrial Production down. Fed minutes were, as usual, a sleeper … watching Yellen kick the can down the road is tedious at best. The excitement was reserved for the NOKO Doughboy, who blinked; for the rewriting of U.S. history that occurred in North Carolina and for the continuing Circus on the Potomac. With the exit of Steve Bannon from the White House, Chief of Staff John Kelly appears to have consolidated his control. If true, we may begin to see a unified message from the Trump Administration. Even if that message is via tweet, it may be an improvement over the noise that has become a distraction. With the uncertainty of the past few weeks, stocks have weakened while bonds have been in a holding pattern.
Food for Thought: Stocks are making some investors nervous. After relentlessly moving up this year, markets have stalled. Is it because August is usually a weak month, or is something else at play? U.S. markets have failed to hold their highs and the FANGs are down about 10%. Bulls see Dow 30,000 around the corner. Bears are salivating for a 20% correction. Central Banks continue to pump trillions into the global economy. As long as Fed Policy is “Free Money Forever” there will be an upward bias to stocks. Yet warnings abound. Fiscal policy along with Trump Initiatives are DOA. Political gridlock under Obama was astonishing; under The Donald it is simply unbelievable. Clearly stocks can’t go up forever. This begs the question for investors who are on the sidelines or short, “Do you want to be right or do you want to make money?” Which of course leads to the caveat, “Markets can remain irrational longer than you can remain solvent.”
Music of the Week: Shakira’s “Can’t Remember to Forget You”
The Economy: NOKO is the only news that’s fit to print this week. Who cares about GDP, IP or l,m,n,o,p when the fate of humanity may hang in the balance. As a Navy Junior, Veteran, investor, political hack and history buff, it’s fascinating to watch this “situation” unfold. For primers, go watch “Dr. Strangelove” and then “Wag The Dog”. The Chicken Hawks see Munich in every blip in the firmament. Snowflakes believe that the NOKO Doughboy can be cajoled into nice. We’ll list what we see as important considerations for investors: 1) We have a President committed to “America First.” This means geopolitically as well as economically. He has the earmarks of a War Leader … or Monger, depending on your leanings. He’s a Big-Picture guy who plays the long-game. 2) No one has ever crossed the U.S. with impunity: Saddam, dead; Gaddafi, dead; Noriega, dead. Escobar, dead; Mosaddegh, dead. Hitler, dead. Tojo, dead … Doughboy is on the wrong side of history. 3) Nukes are a part our warfighting history and doctrine. We’ve already used them. 4) A non-Nuke surgical strike is probably the opening gambit. With 2 Carrier Task Groups off the coast, there are about 1,000 cruise missiles available to neutralize command and control, air defense, naval and air force assets on short notice. 5) Depending on your persuasion, Just War Theory either does or doesn’t support a pre-emptive U.S. move. 6) The U.S. will be roundly condemned for taking any action before allowing NOKO to nuke American territory. 7) Trump, Cabinet Secretaries, The Joint Chiefs of Staff and the theater commanders will be called war criminals by many in the international community. … Whatever happened to those halcyon days when our only concerns were the central bankers?
Food for Thought: The Trump-Doughboy Cage Fight has put a cloud on the investment horizon. For the first time in months, if not years, “buy the dip” is not happening (though 2-days does not a trend make). Whether the bots are on hold, rewriting their own code before another endless round of buying, or whether living, breathing human beings are exercising prudence in the face of uncertainty, markets have stalled. We’ve counseled caution several times in the past, only to be proven wrong by a market that sees bad news as good news: financial engineering is terrific; financial repression is better; mortgaging your grandchildren’s futures with hundreds of trillions in debt is best. … but we’re George Reeves Superman fans and believe that Truth, Justice and the American Way will out. So we’re skeptical about markets that go up forever. Dow 30,000 … we’ll probably see 5,000 before that happens.
Music of the Week: Jesse Cook’s “Free Fall”
The Economy: Central Banks have again re-emerged as the biggest influence on financial markets. This follows a period, earlier this year, when global politics ruled. Since then, global and national politics have resumed their traditional role of all talk, no action; all hat, no cattle. Gridlock. Obstructionist, Stumblebum Democrats. Obstructionist, Stumblebum Republicans. “This time is different” turned on its head once again. So we’re back to relying on Fed Chair Yellen to provide us with our daily diet of comedic relief. This year the Fed has convinced markets that interest rates were going up to preserve the integrity of the financial system. In last week’s Congressional testimony, Yellen backtracked on that carefully crafted plan. Now markets are convinced that we’ll see lower for longer in interest rates. The Fed’s inability to adhere to any type of Monetary Policy other than whimsy, has again proven to be the case. Stocks and real estate continue their run to infinity and beyond.
Food for Thought: Free money continues to be the official policy of the Fed. Savers have gotten crushed for 8-years. Markets have levitated. According to some, the FANGs now account for 30% of stock market returns. We saw it in the 60s with the Nifty Fifty. Stocks and real estate have been immune to shocks of any kind. So there is now an entire generation of investors who are convinced that markets only go up. There are bold investors and there are old investors but there are no bold, old investors. We continue to see a disconnect between an expanding economy and the need for unceasing stimulus. More Cowbell! It is a no-win situation. With markets relentlessly rising you have to stay on the dance floor. Keep dancing but do it closer to the door.
Music of the Week: Steely Dan’s “Everything Must Go”
The Economy: Central Bankers dominated this week with the ECB’s Draghi reiterating that more stimulus is sure-fire Nirvana. Then Yellen and her crew called the stock market expensive while continuing to talk up higher interest rates. They ignore that higher interest rates have been the death knell of every bull market. Now that he’s in the Oval office and staring down the barrel of the Federal debt, The Donald has become an advocate of low interest rates. Higher interest rates jeopardize all of his campaign promises and programs. History teaches us that when the Fed begins to talk about stocks being expensive, the bull has further to run. Yet, we’re perplexed that the Fed would warn of an overpriced stock market. After all, they have finally achieved their objective of a runaway stock market that continues to race higher. Risk has been banished as investors have finally accepted that Central Bankers will always do whatever it takes to keep stocks going up forever. … to infinity and beyond!
Food for Thought: 4th of July! All Citizens are Patriots; regardless of which side of the aisle. Just ask us. So we can safely say, without being accused of hate speech, “My Country right or wrong, still My Country.” Have a great 4th of July!
Music of the Week: Rod Stewart’s “It Had to be You”