The Economy: The State of The Union clearly showed the sharp divide in the U.S. electorate. Pick your flavor. Markets have cheered Trump since the election. Given the ongoing economic expansion, expect the Fed to continue to tap-the-brakes with further interest rate hikes. Jay Powell replaces Yellen as Fed Chair at cob today. Yellen was the most dovish Fed Chair in history. Powell, by contrast is on record as saying, “… it is not the Fed’s job to stop people from losing money.” This in itself will be a sea-change, if there is follow through, since the Fed has been stock market driven since the Financial Crisis. Markets, the media and investors in particular have been enamored with synchronized global growth, tax cuts, profit repatriation, one-time bonuses and historically low unemployment. The Fed interest rate moves have created every expansion and every recession; every bull and every bear market. Party on Garth!
Food for Thought: What is your long-game? Gonzo Hunter Thompson spoke for some when he said, “Life should not be a journey to the grave with the intention of arriving safely in a pretty and well preserved body, but rather to skid in broadside in a cloud of smoke, thoroughly used up, totally worn out, and loudly proclaiming “Wow! What a Ride!” For most however, there are more prosaic goals such as planning for retirement, creating an estate or other bequeaths to family, friends and charitable organizations. Annuities may be the appropriate way to achieve funding needs. Contact us if you have questions about Annuities.
Music of The Week: Chaka Khan “Chaka”
We Quarterback Money®
The Economy: On the surface things appear to be moving along quite nicely with synchronized global growth still the order of the day. Beneath the surface, changes are coming. Trump has appointed Powell as the next Fed Chair. He’ll take the helm in February 2018 and may not be the same as the old boss. With his Wall Street background, he has a different perspective. Likewise Japan where the government pension system has been authorized to invest hundreds of billions in global stock markets. Saudi Arabia is undergoing change with historic upheaval in the royal family. While the House of Saud may reap a $800 billion windfall from wealth confiscations, the end result may be the unprecedented end of support for terrorism and a rapport with Israel. Brexit continues to muddle through with calls for the end of the world becoming more muted over time. Mankind is in holiday mode as year-end approaches.
Food for Thought: After a rip-snortin’ run, stocks have taken a breather lately. Anything less than daily triple-digit gains are seen by many investors as signs of doom. Whether recent market action is the pause that refreshes or something more significant is best addressed by Donald Rumsfeld’s famous quote: “There are known knowns. There are things we know that we know. There are known unknowns. That is to say, there are things that we now know we don’t know.” Markets will either go up, or they will go down, or they will go sideways. Have a great weekend.
Music of The Week: Tamba Trio “Pure Bossa Nova”
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: Politics continue to trump economics; though the numbers continue to show an economy expanding below expectations. August which is supposed to be the sleepy month of vacations has turned out to be action packed. The latest episode of House of Cards opened with the rush to World War 3; narrowly averted when the NOKO Doughboy blinked or The Donald turned a blind eye to further threats; your choice. Financial markets had a fit then recovered from the head-fake. Next up The Charlottesville Brawl and subsequent slugfest masquerading as a press conference. This was followed by the orchestrated exit of business leaders from the administration’s lineup. Two national business advisory councils were then dissolved and the rumor was that Trump’s chief economic advisor, Gary Cohn, was going to resign. Instead, Friday saw the White House departure of Steve Bannon who vied with Vladimir Putin for the administration’s title of “Master Puppeteer.” Again, markets spasmed into another head-fake. Stay on vacation; The Circus will still be in town when your return.
Food for Thought: Just when you hoped that your money would become more interesting, your dreams have been shattered by more fun and games. Except for checking your parachute there’s little to thrill with markets again near all-time highs and Kumbaya sung from every bank, brokerage firm and advisor. This week sees the Jackson Hole confab for the Master of The Universe Wannabes. Super Mario Draghi will croon “I’m Just a Gigolo.” Yellen will speak on “Financial Stability.” Interest rates will be lower for longer and come September there will be more kicking the can down the road because shrinking the Fed balance sheet will be cause for the Fed to sing A Cappella, AC/DCs “Highway to Hell.”
Music of the Week: Daft Punk’s “Random Access Memories”
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: Amidst weak economic numbers the DOW punched through 22,000 and is holding as we go to press. The Fed, which backed off their intent to normalize monetary policy, has provided another leg up to the markets. During the election Trump castigated Yellen for keeping interest rates abnormally low. Now he supports lower for longer. Likewise stock market valuations. During the election Trump called stocks, “a big fat ugly bubble.” Now he’s taken ownership and claims credit for the surge since the election. Yellen, who is decidedly anti-Trump has the power to crush this market. Yet she also has her legacy to think about. Trump has vowed to replace her in 2018. The question is, “Does she want her legacy to be that of the Fed Chair that crashed the market or is she going to manipulate things so that her successor has to face the music?”
Food for Thought: Shoot the Messenger! The MSM is aflutter about the blowout earnings season. But the Financial Times has this to say in the section titled, ’Reasons to be Skeptical About the Earnings Recovery,’ “These are far from reassuring numbers. The picture they reinforce is that US large companies have been able to grow earnings through financial engineering even though their cash flows are flat, or even declining. …the apparent earnings recovery of large US listed companies … may have been something of a mirage.” For example, the DOW is a price weighted average, so Boeing (BA), with its $235 price has been responsible for ¾ of the DOW’s recent 278 point increase. After eight years of the bull market, no one is thinking about risk anymore.
Music of the Week: Dean Martin’s “Italian Love Songs”
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: 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: 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”