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 Holidays are upon us and All is Beautiful. Synchronized global growth, led by the US is producing some of the best economic numbers since the Financial Crisis of 2008. Donald Trump’s foreign policy speech has outlined an America First approach that should produce economic benefits. Congress has passed the first rewrite of the Tax Code in 3-decades. Financial markets are comforted to have another unknown out of the way. Corporate profits that have been held overseas are expected to flow back to the US next year and used for dividends/share buy-backs. Share buy-backs along with the expanding economy should bode well for stock markets in 2018. San Diego continues on its growth trajectory with high/med-tech, military spending, services and tourism helping to keep the downtown skyline full of construction cranes. Pessimists still call for circling the wagons. Optimists see the Endless Summer of perfect barrels.
Food for Thought: Merry Christmas and Happy New Year! Happy Holidays! It’s been a pleasure writing for you this year. … and what a year it’s been! 2017 goes down as one of the most excitement filled years in memory. Good Excitement; Bad Excitement; Real Excitement; Fake Excitement; Lurid Excitement; Questionable Excitement. How’er ya gonna keep ’em down on the farm after all that jazz. With markets heading into the 10th year of their rocket run, US mid-term elections, Brexit moving forward, Japan re-arming, a new Federal Reserve, Draghi on his way out, more central bankers tightening the screws, 2018 will be every bit as exciting as 2017.
Music of The Week: Dean Martin’s “The Dean Martin Christmas Album”
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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: Good News/Bad News. The numbers continue to show an economy that is slowly expanding. On the whole, this has been the case for the past few years. You know you’re heading into a recession when the economic numbers are consistently negative. None of that for the U.S. The bad news, Hurricane Harvey will adversely affect the economy in a variety of ways. Rebuilding aside, natural disasters are never good for any economy. So Harvey is a negative and most likely more so than Katrina since Houston has a bigger economic/industrial footprint than New Orleans. Other bad news: The NOKO Doughboy continues to poke The Donald with a sharp stick. This time around, the POTUS reaction was more restrained than in previous instances. A focus on the domestic priority of Houston is one reason. Another possible reason is that WH Chief of Staff Kelly may have imposed some order on the spontaneity of WH communications. Regardless, financial markets have simply loved the Houston disaster and the increasing tensions with NOKO. Sensing that monetary policy will remain unchanged at the September FOMC meeting, stocks have rallied in anticipation of lower interest rates for longer … and more can kicking on shrinking the Fed balance sheet. To Infinity and Beyond!
Food for Thought: Life Insurance is probably only second to having your teeth pulled as a topic to avoid. It’s essential but infrequently attended to. September is National Life Insurance Awareness Month. So it’s a good time to evaluate your life insurance needs. If you have any questions or specific insurance needs, please contact us. The uses of life insurance have become more creative over time. Don’t leave home without it. Call us.
Music of the Week: Toni Braxton’s “Pulse”
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: The news has been all about the Fed. Trump made it clear during the election that he wanted to remake both the Supreme Court and the Federal Reserve. Word is that Randy Quarles will be Trump’s nominee as Vice Chair and the Fed’s Bank Supervisor. He comes from the private equity/private investment world. Quarles is considered to be a conservative counterweight to Yellen. Quarles would bring a fresh perspective to the Fed which has become dominated by academicians with little real world experience. Speculation has also focused on replacing Fed Chair Yellen in 2018. Trump’s Fed Chair nominee is expected to be National Economic Council Director Gary Cohn. Cohn comes from the investment banking world and would be the first Fed chair in 40-years who isn’t an economist. Within the Trump administration this is viewed as a plus since Trump wants practical experience over academic credentials. The downside is that Cohn is another Goldman Sachs alumnus; all of whom are detested by Trump’s core followers. Regardless of the accuracy of these reports, it’s obvious that Trump is determined to put a different Fed in place. A Fed that is more oriented towards pro-growth real world experience.
Food for Thought: Whenever we get out in the economy we’re impressed with how robust it looks. Restaurants are packed with diners day and night. Real estate continues to appreciate. New cars flood the streets. Everyone seems to be taking extended vacations. Yet in her Congressional testimony today, Fed Chair Yellen was surprisingly dovish. She expressed concern that inflation was below expectations and implied that the economy wasn’t performing as well as expected. Financial markets loved this narrative as it indicated that Yellen would keep her highly stimulative policies in place rather than continuing to turn off the spigots. But sooner or later the stimulus must end. It’s the human condition to project the recent past into the future; to assume that the future is going to unfold like the past. So it’s always interesting to hear a well-respected figure like Jamie Dimon, CEO JPMorgan speak candidly about the ongoing change in monetary policy. Commenting on the Feds move to end 8+ years of stimulus, he said, “We act like we know exactly how it’s going to happen and we don’t.”
Music of the Week: Josef Franz Wagner’s “Across the Pond”
The Economy: Steady as she goes with our heads firmly planted in the sand … or elsewhere that the sun doesn’t shine. Global economies continue to report they are expanding … with the ongoing Central Banks stimuli of hundreds of billions. So the logical question is, “How healthy is the patient in an induced coma with 9-IVs and a ventilator?” The answer is that it depends on who you’re talking with. A sunny, weekend walk around La Jolla shows streets paved with gold, crowded with exotic cars, full of laughing shoppers swilling $4,500 Haut Brion while lighting their smokes with $100 bills. The local lululemon says that business has never been better. But the company founder says the stock has crashed and wiped $10 billion in equity off the books. Chicanery or the drunken revelry of those untouched by hardship, convinced of their moral superiority? If a tree falls in the forest and no one hears it, did it make noise? The smart money didn’t pay attention to Vulcan at his anvil inside Vesuvius either.
Food for Thought: You can run but you can’t hide. The consensus is that financial markets are insane but still the only game in town. … game being the operative. Central Banks have manipulated markets beyond any point of recognition. So what happens next? Good question. Everyone agrees that when things end it will be the Mother of All Ugly (MOAU?!?). Everybody except you is going to be wiped out. You’re going to be in cash when the end comes and then jump into the greatest buying opportunity in history. Of course, everyone is planning to do this. So beware Bob Farrell’s Rule #9 “When all the experts and forecasts agree — something else is going to happen.”
Music of the Week: Steven Kummer’s “Nice ‘N Easy”
The Economy: Global economies appear to be improving with Germany and France leading the way in Europe. The U.S. continues to present a mixed picture. The Fed released its minutes on Wednesday. They looked through the data to indicate another interest rate increase in June. While some see the Fed as increasingly hawkish, actions speak louder than words and the Fed has been unwilling to inflict the pain that rising rates will bring. With the explosion of information provided by the internet, a solid case can be made for any position that suits your fancy. Believers who warn of bubbles are countered by equally sage adherents on the other side of the argument. While we’re awash in the rhetoric of change, it’s questionable how much will be legislated given all of the animosity. The Trump budget proposes the largest cuts in decades. But like the rest of the agenda it’s so steeped in emotion that its final form is impossible to discern. Add the Special Prosecutor to this witches brew and you can almost hear the wheels of government grinding to a halt.
Food for Thought: Financial markets are unfazed by this circus and continue their 8-year bull run. Interest rates remain at historic lows. Bond yields remain suppressed. Investors are convinced that Central Banks will continue to inflate asset bubbles into the foreseeable future. Terrorism remains a blight; though the vernacular has morphed from calling them Freedom Fighters to calling them Losers. That’s an accurate step in the right direction. Never give in; never give up; never stop dreaming; never stop believing. Enjoy your Memorial Day Holiday!
Music of the Week: Bob Mamet’s “Day Into Night”
The Economy: Holiday Cheer continues for the 6th week with global financial markets hitting levels of euphoria not seen in years. Donald Trump’s election was supposed to unleash Forces of Darkness that would obliterate life as we know it. Instead, optimism and euphoria have taken hold of financial markets around the world. Even oil markets are screaming higher on production agreements that ignore the OPEC’s history. The Fed ended its meeting and raised interest rates ¼% as expected. The call is that the Age of Central Bankers is drawing to a close with Trump’s fiscal spending to take the lead in pumping up the economy. Global markets have priced-in immediate results for the Trump agenda. As the post-election rally continues to hit new all-time highs, the Shiller cyclically adjusted P/E (CAPE) ratio now stands at 27. This reading is only exceeded by 1929 and 2000. Stocks are getting expensive.
Food for Thought: The Fed tightening unleashed a selloff in financial markets. Stocks tanked; Mortgage rates jumped to the highest in 2 ½ years. In her press conference Fed Chair Yellen indicated that 3 rate hikes were in store for 2017. Markets were expecting 2. Higher mortgage rates will eventually put a damper on real estate. Higher treasury yields will eventually begin to compete with stocks. But one day does not a market make. The Trump rally took taken a breather today but it may continue upwards till the inauguration on January 20, 2017.
Music of the Week: Elvis Presley “Elvis Christmas Album”
The Economy: The Holiday Cheer keeps coming. Last week it was Happy Holidays! It’s all good: Home prices up 5% year over year. The U.S. economy expanding at the fastest pace in 3-years. Consumer confidence far above expectations. This week it’s Happy Holidays Again!! It’s all good again: ISM non-manufacturing index rose to 57.2 in November; above consensus. October factory orders rose 2.7% also above expectations. Durable goods posted a 4.6% increase once again above expectations. JOLTS revised higher. The incoming administration has a Santa Bag full of action items to move the US in new directions: Obama Care, immigration, deregulation tax code, infrastructure, trade, education, defense, foreign policy. Financial markets have priced in immediate passage and implementation of every utterance. What comes out of the sausage making we call the legislative process, is anyone’s guess.
Food for Thought: Rock On! Markets have been on a roll since the Trump election. This has the feel of a Triple: Post election relief rally, Year-end performance chasing and the traditional Santa Clause rally. Trump supporters have the stage as they advocate a sea change. Hillary fans continue the fight with promises of disruptions in the Electoral College. I’m all for Dedication to The Cause but that’s why we call tilting at windmills Quixotic. After 2-years of flat returns, stocks have jumped to new highs in the past 4-weeks. The markets took 3-days to shake off-Brexit, 3-hours to shake-off the Trump election and 3-minutes to shake-off the Italian election. We’re on track for the next event to have 30-seconds of impact. Complacency Rules so remember Icarus and don’t fly to close to the sun. Have a Great Holiday!
Music of the Week: Dean Martin’s “A Winter Romance”