The Economy: Data continues to confirm that the global economy in general and the US economy in particular are accelerating. Industrial production is the latest metric to blow through expectations. The Fed’s Beige Book also confirms expansion and modest inflation. Euphoria continues to build support for increased consumer/business spending as the US tax cuts bring the bacon home. Not surprisingly, members of the Fed are beginning to voice caution about the economy overheating. The Fed has also expressed concern that markets are ignoring the interest rate tightening cycle which has already increased the Fed Funds rate by 125 basis points. When the Fed raises rates, its intention is to tighten financial conditions. Borrowing gets harder and more costly at all levels. Investors and banks become less willing to lend and borrowers become less reckless. Credit cools off and the economy slows. … not that we’ve seen any of this yet. By contrast we seem to be at the beginning of a new phase of “Damn the torpedoes; full steam ahead” in business.
Food for Thought: Retirement. One of life’s major events. Some start thinking retirement in high school. Others not until AARP comes calling. Most retirees are shocked at how inflexible their overhead is when they retire. The solution for many boomers is to try to make up for lost time by being aggressively invested in this stock market. George Santayana famously said, “Those who cannot remember the past are condemned to repeat it.” Bitcoin is the latest example of how quickly things can change. Bitcoin has lost 50% of its value since reaching a high in December. A 50% loss in less than one month. US stock markets have been on a rocket ride since Trump was elected. Those approaching retirement and those who are retired should be especially cautious of this market. Structuring an income producing portfolio should be your priority.
Music of The Week: Elvis “Elvis Forever”
We Quarterback Money®
The Economy: “Summertime and the livin’ is easy.” Economic data has been scarce. The Fed continues to indicate that they are now in a tightening cycle. We’ll believe it when the stock market has a correction and the Fed actually continues to raise rates; rather than follow their usual action of doing everything possible to support the asset bubble. The Fed has also indicated that they will be shrinking their bloated balance sheet. This will also have a tightening effect. Again, we’ll believe it when we see it. In the meantime, stocks continue to move higher led by the FANGs. Stocks remain a pure-play in central bank manipulation with the Bank of Japan now buying stocks like never before. Oil, on the other hand, entered bear market territory this week; crashing to $42/barrel WTI. The ripple effect has yet to be felt in the economy. A few short weeks ago oil was the biggest bull story around. … goes to show how quickly the story can change.
Food for Thought: We’re officially into summer. Time to find a good read and relax. “The Fourth Turning: An American Prophecy …” by Strauss & Howe frames today’s world in a way that you might find thought provoking. Are we in an era of increasing instability or is it simply a matter of the ever-present media. Most of the time, things tend to change only at the periphery. Occasionally events are life altering: wars, economic collapse, revolution are three macro events that come to mind. It’s all happened before … on numerous occasions … and the world is still turning. We’re cockeyed optimists and far beyond the sky-is-falling. Having said that, we continue to encourage you to have an exit strategy for these financial markets.
Music of the Week: Michael Allen Harrison” “Horray for Hollywood”
The Economy: Economic data is weak as we go into the Fed’s expected interest rate increase later today. Inflation remains below expectations. Retail sales x-autos is down. Auto sales have begun to disappoint. Bond yields remain stubbornly low as foreign money pours into U.S. Treasuries. Treasuries are a global safe haven with attractive yields. Regardless of what the Fed does to raise interest rates, market forces continue to suppress those levels. The Lesson: “The Market is Always Right.” Even central bankers must bow to Market Gods. They just haven’t figured this out yet … and are too arrogant to learn from history. Stocks?!? … clearly they are going to go up forever with absolutely no risk.
Food for Thought: Global central banks continue to pump $30-billion/month into the global economy; $1.5-trillion so far this year. As a result, there are reports of global recovery. A recovery based on massive debt … and we are assured that debt is irrelevant. Venezuela is bankrupt, Puerto Rico is bankrupt, Illinois is bankrupt, Stockton is bankrupt … because of debt. But central bankers continue to spout that debt is irrelevant at the global level. Good luck with that myopic nonsense. The debt of Louis XIV bankrupted France and Louis XVI got the French Revolution. The Debt of WWI bankrupted Germany and Weimar got the hyper inflation where 1 million Marks bought a loaf of bread. The Debt of WWII bankrupted Great Britain and the U.S. muscled past the Brits and into the position as the pre-eminent super power. Bread and circuses for the masses. Contact us for innovative help with your money.
Music of the Week: Heart’s “Tell it Like It Is”
The Economy: Caution over mixed economic numbers continued this week with Housing Starts unexpectedly weak and Industrial Production unexpectedly strong. Looking ahead, one has to ask if U.S. political turmoil will be reflected in the economy. Today, Texas Representative Al Green, speaking from the floor of The House, called for Trump’s impeachment. So it’s official; the knife fight is on. Consequences be damned. Ideology Rules Supreme. The drama weighed on stock markets as a minor pull-back took hold. Indices were down 1 1/2 to 3% on the day. The VIX (S&P500 Fear Index) was up 46%. But this is not a Black Swan; nothing unexpected here. If the past 8-years are any indication, We can expect today’s losses to be erased before the week is out. Failing Buy-The-Dip, we can expect the Fed to announce another round of stimulus programs to save stock markets. If not a stimulus fix like a QE-4, perhaps a suspension of any further interest rate increases for 2017. After all, Nixon’s Watergate only shaved 45% from stock market valuations. So the Fed has its work cut out for it.
Food for Thought: “If The Glove don’t fit, Impeach!”
Music of the Week: Frank Black’s “Frank Black”
The Economy: Caution best describes the economy. Mixed economic data is being released into the most toxic political environment in decades. Global central bankers continue to add liquidity at unprecedented rates. $1 trillion in liquidity was injected into the global system in the first quarter 2017. Central bankers are committed to supporting real estate and stock markets at all costs. Tens of billions of dollars have flowed into U.S. stock markets from European Central bankers. As with the binary political landscape, economists and investors are split on how the economic landscape will play out. Will there be a day of reckoning based on historic metrics or have interconnected global markets evolved to a new and unknown model. The result of this is that each data release creates more questions than it answers. Banks are easing lending standards but loan demand is down. Why? The Fed is tightening into the weakest recovery in history. Why? Automakers are coming off a huge selling cycle; but incentives and liar loans have fueled sales. Why? The EU is reporting record growth in many areas yet the ECB keeps interest rates at historic lows while continuing to pump record stimulus. Why? Consumer confidence is up but retailers are closing stores at a record pace. Why? These macro questions eventually filter down to local decision making. Hence our emphasis on how your organization views the horizon.
Food for Thought: The S&P 500 Volatility Index (VIX) is known as The Fear Index. It’s used as an indication of investor complacency. The VIX is now at multi-decade lows; recently touching lows not seen since 1993. In the course of the past 8-years Central Bankers have rescued stock markets with such frequency that “Buy The Dip” has become a sound strategy for many investors. After a 3% pullback stock markets have regularly rebounded to new highs. Black Swans have ceased to be meaningful as investors have accepted that Central Bankers will always, successfully come to the rescue. Investors have the constitutional right to make money by investing in stocks and real estate. The Four Horsemen of the Apocalypse have been replaced by The Four Horsemen of Guaranteed Investment Profits. Risk is Dead and markets will go up forever. Yet, as Bob Farrell famously noted, “When all the experts and forecasts agree – something else is going to happen.”
Music of the Week: Dire Straits’ “Dire Straits”
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: As has been the case for a while, economic data has been mixed. Examining the data results in the Rabbit Hole story getting curiouser and curiouser. For example, blow-out automobile sales were recently reported. But then you find that sub-prime auto loans are at all-time highs. So auto makers are moving product in the same risky way that the housing market was propped-up with sub-prime loans before the financial crisis. The economy continues to expand at a historically slow pace. But after 7-years of zero interest rates you’d expect something more. Central bankers have embraced negative interest rates without consideration to the damage being done to savers or financial institutions. Now the vaunted US consumer may be voting with his/her feet. The retail sector has been reporting first quarter earnings this week. Most have been dismal. Nordstrom missed earnings with the stock getting crushed in the after market; down 17%. Pundits are beginning to wonder if the consumer is pulling in its horns. While there are sectors that are doing well, it’s very much a case by case basis. With the current economic environment look to your specific organization and region.
Food for Thought: The Artist Formerly Known As Prince recently died without a will. He left a $250 million estate that will now be fought over for years. Absurd. Get your will done or updated. Create or update your trust while you’re at it. The Grim Reaper doesn’t respect the loose ends in your estate planning. The larger your estate the more it will draw bums and gold diggers out of the woodwork. Spare your family and your estate.
Music of The Week: Strunz & Farah’s Album “Primal Magic”