The Economy: The economy appears to be expanding quite nicely and business optimism continues to rise as it approaches new records. The Left Coast, with its gateway to Asian trade, technology and Pentagon spending continues to boom along. Construction cranes fill the skies. New homes are stuffed into every nook and cranny. Roadwork and infrastructure projects are everywhere. New cars abound. Recently launched multi-million dollar yachts overwhelm the docks. Planes are jammed. Restaurants are packed. Exotic vacations are booked years ahead. The stock market confirms this rock ‘n roll fantasy narrative with many indices at or near their highs. Understand that only 3 tech stocks account for 70% of index gains this year. So the question is, “Can you be a cockeyed optimist and a contrarian at the same time?” The answer is yes. Now we’re entering earnings season with projections for year-over-year increases of 20%, Is this the beginning, the end of the beginning or the beginning of the end. Only Elon Musk knows for sure. China, Russia, North Korea, Syria, Turkey, UN, NATO, Trade Wars, Immigration Wars, SCOTUS Wars, Mid-Term Election Wars, Culture Wars, Religious Wars … and rising interest rates. Not to worry.
Food for Thought: Youth is wasted on the young and the wisdom of the ages is simply wasted. We will continue to emphasize the importance of interest rates and what the yield curve is telling us. While there will always be a bull market somewhere, most investors have a significant portion of their financial assets in fixed income. The old saw, “Stocks, bonds and cash.” The beginning point for most portfolio allocations is about 40% in fixed income; e.g. the bond market. So when I emphasize having an exit strategy, I’m particularly talking about having an exit strategy for fixed income. Contact me if you have questions on how to risk proof your portfolio.
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: Economic numbers come in two broad categories: 1) Hard data such as trade balances or housing starts and 2) Soft data such as sentiment or confidence surveys. Hard data is based on numbers. Soft data is based on how the respondent is feeling at that moment in time. You can dispute the numbers but the argument will remain grounded in statistics. Surveys based on feelings are completely subjective and should be taken with a dose of skepticism. Numbers this week neatly fell into these two categories. Hard data was mixed with initial jobless claims up, existing home sales and durable goods down. Soft data and surveys were positive with optimism and odds of a December rate hike falling below 50%. Geopolitical concerns have continued to weigh on markets as NOKO, Iran and trade wars remain unresolved. Stocks swooned over the Italians … But it’s officially summertime so don’t worry be happy. Grab the beach toys and head for the water.
Food for Thought: In keeping with the never-ending 73-year old Italian Opera Buffa, check out the Video of the Week link below. Few know that Christopher Walken is an accomplished hoofer. Lighten your day and watch him here or there. Courage! The latest Sign of the Apocalypse is another Italian Meltdown. Financial markets are having a hissy fit. It’s almost as if traders are trying to stay relevant in a world where the only thing that matters is what the Central Banks are doing. … and that remains unchanged . The 2012 ECB vow that they will do “whatever it takes” to keep the punchbowl full of moonshine remains in force. With the exception of the Fed, global central banks remain committed to free-money, for all, forever. How this ultimately plays out is anybody’s guess. Many investors see asset bubbles in both stocks and real estate. Others see compelling bargains. Both have seen years of gains. But while we know that all trends reverse, we don’t see anything to indicate an inflection point. Pick your poison. … onward into the Summer Doldrums.
Music of The Week: Beegie Adair’s “Dancing in the Dark”
Video of The Week: Christopher Walken Dances
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The Economy: The U.S. economy appears to be accelerating from its modest expansion over the past several years. While purists may argue the validity of the numbers that are released, they are the numbers that move markets and investors. After years of insisting that inflation is too low, we may be seeing that monster rearing its ugly head. The Fed’s Beige Book shows inflation increasing across a broad range. Consistent with increasing inflation, the Fed is now warning that higher interest rates are on the way. They have 4 hikes planned for 2018 and are leaving the door open for more. In the meantime, information overload is the order of the day. The actionable news is further confirmation that the Fed is in a tightening cycle. Loans of all types will continue to become more expensive. Those economic sectors that benefited from a decade of low rates may see increasing headwinds as rates continue to ratchet up.
Food for Thought: Stock markets are suddenly a hot topic of conversation. After years of the lockstep rise in global asset values, stocks have shown that they can go down as well as up. But let’s face it, making changes to an investment portfolio is like watching paint dry when compared to wine tasting or hiking Nepal. Sailors know that a rising tide floats all boats … and the reverse is true. The last bear market showed that diversification is no protection when all asset classes are getting crushed. But that message will have to be relearned. The FANGs may be particularly vulnerable. Regulatory issues could loom as Americans are waking up to the privacy/government surveillance/freedom of speech issues posed by big tech and social media. Anti-trust happened to the railroads, big oil, autos and airlines.
Music of The Week: Govi’s “Andalusian Nights”
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The Economy: The CPI and PPI prints were hotter than expected and have helped to juice the stock market indices to a 50% rebound. The feel good mood has been further enhanced by the Olympics. Winners all. Inflation indicators watched by the Fed are are heating up. … and bond vigilantes seem to be on the loose with interest rates accelerating higher. As has always been the case, the Fed will follow the markets. There are few consumers who remember interest rate hikes that crimp economic activity. Fewer still who remember being priced out of a home or auto loan because interest rates moved against them. … remember when an 8% home mortgage was to die for? How many real estate players could handle those metrics today. How about those halcyon days of 16% home mortgages? Fun!
Food for Thought: Annuities and life insurance have evolved in ways that work well with investors seeking income or the possibility of establishing an estate. In specific situations they may be a prudent investment for retirees. Contact us if you have questions about creating or supplementing your retirement income.
Music of The Week: Sade’s “Lovers Rock”
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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: 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”
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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 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 Fed finished its two day meeting today with historic action: They announced a specific plan for shrinking their bloated balance sheet. This is a tightening of monetary policy. The plan goes into effect next month; October. The details are straight forward and, in an economist’s perfect world, would result in interest rates moving up. However, the economist’s model doesn’t account for market forces. One reason that U.S. interest rates have remained stubbornly low is because of those very market forces. U.S. Treasuries are treated as a safe-haven in an increasingly volatile world dominated by the lowest interest rates in history. Global demand for Treasuries drives prices up and yields down.
Food for Thought: Bitcoin has been in the spotlight as the best-known of the cryptocurrencies. But rather than focus on which cryptocurrency will eventually emerge as the benchmark, focus on the underlying technology which is Blockchain. Blockchain is the next example of technology’s creative destruction. When you hear Blockchain think “Trust.” Blockchain technology will dramatically reduce or eliminate the plague of knockoffs and false or hard to verify information that has corrupted our everyday lives. Blockchain technology users will have access to an independently verifiable trail that allow anyone to validate the subject at hand. Examples are consumer products, food, shipping data, news, trade data, financial information, personal information … the list is endless. All verifiable to whatever granularity you desire. Blockchain technology is trust. Cryptocurrencies will validate Blockchain just as email validated the internet. Bitcoin may prove to be like the Netscape Navigator. Focus on Blockchain.
Music of the Week: Elton John’s “Rocket Man” from the album “Honky Chateau”