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: 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: The economy continues on its path of slow expansion with regional pockets of weakness and strength. If you live in Detroit things are grim. Likewise for California’s Central Valley. If you live in San Diego, well, you’re living in Paradise and the Livin’ is Easy. San Diego’s economy rests on the 3-legs of military spending, tourism and hi-tech/med-tech. Add craft beer to that trifecta with Ballast Point Brewing having recently been sold in a billion dollar deal. Entrepreneurs and their young families are flocking to the county as the allure of sun, surf, schools and simoleons resonates across the rest of the country.
Food for Thought: Economic news has been brushed aside by the 3-Ring Circus known as the 2016 Presidential Election. Who woulda thunk it. The preeminent military and economic power in the history of the planet boogying like a banana republic on steroids. Plato’s Cave would tell us that this is the end of the world as savages leap and yelp around the bonfire. But as the rest of the world looks on in stunned disbelief, we Americans know that this is simply the best and most original entertainment that we’ve seen in decades. Thank the gods for the station-break provided by the Rio Olympics.
The Economy: Economic numbers have surprised to the downside this week. Oil is off 20% from its high of a few weeks ago. Home ownership is at its lowest since 1965. GDP came in 50% below expectations. Some are saying the U.S. economy is stalling. Central bank activity has likewise been muted. The Bank of England and the Bank of Japan were both supposed to initiate massive stimulus programs. It didn’t happen. The Fed met this week and did nothing. Ennui, exhaustion or summertime blues, no matter. Financial markets took the poor numbers as confirmation that slowing economies would keep interest rates lower for longer. Poor economic numbers should keep the monetary printing presses running full-out.
Food for Thought: Thank you Talking Heads, Supreme Court Justices, former Mayors and other professional blowhards. We get it. The Donald is dangerous and The Hillary is a criminal. The Donald is the most dangerous man in the history of the planet. Worse than Cain, worse than Attila, worse than Stalin. The Hillary is the worst criminal in the history of the planet. Worse than Jezebel, worse than Bloody Mary Queen of Scots, worse than Bonnie Parker. That’s why as Americans we’ve selected them to be our Champions. Because warts and all, they are Our Champions. Now, let’s get on with it.
Music of the Week: The Essential Etta James.
The Economy: The U.S. economy is continuing on its path of sluggish growth. Once you dial-out the incessant noise you find that there’s been little change in trajectory. The End-of-The-World spasm that we saw with Brexit has been replaced with the usual complacency that central banks will provide additional trillions in debt to keep the global economy moving forward. Yet the Central Bank Follies are dwarfed by the global political circus. It’s May Day in Great Britain as the first woman PM since The Iron Lady, takes the helm. The Chinese claim to the South China Sea was slapped down by The Hague; a first step to internationally sanctioned military action. Our apolitical Supreme Court has jumped into Presidential Politics with one Justice proclaiming that The Donald is unfit to be President. In short, it’s business as usual.
Food for Thought: We continue to advise you to trust your personal experience as a guide to the direction of the economy. From a top-down perspective, the global economy appears to be slowing. Global stock markets are rallying in anticipation of increased central bank stimulus. To us, this is akin to giving a heroin addict more heroin. Though some indices have rallied to new highs, we find it noteworthy that many individual stocks and mutual funds have not participated in the party. For example: Citigroup is down 28% from its 2015 high; Boeing down 18%; Walmart down 19%. We remain cautious and advise taking profits. Restructuring your portfolio may be a prudent move.
GO NAVY! BEAT ARMY!
The Economy: BREXIT!?! … or did it? Our poor Cousins across The Pond continue to spasm in the wake of last week’s vote. The end of the world scenario has been replaced by confusion, second guessing and dismissal by the Brits themselves. Talking heads are reveling in mindless chatter. The EU’s reaction has gone from “OMG No!!” to “Ok, if this is what you want, then get out now. We don’t want you hanging around.” Nature abhors a vacuum so the vacuous nonsense we’re hearing will eventually end. The consensus is that Brexit is an additional headwind for a global economy that’s already struggling with deflation. As with all things in life, there will be winners and losers. Because of this, we continue to emphasize that your personal experience is paramount. If Brexit is another headwind, then you must ask yourself which side of these headwinds am I on … With the Wind or Against the Wind?
Food for Thought: Preserving capital should now be your primary concern at this point in the economic cycle. Stock market indices are mixed as we end the first half of 2016; some up some down … and despite all the noise, multiple attempts to move to new highs have repeatedly failed. Investors should be leery of this repeated failure to move above year-old highs. Ask yourself, “What do I hope to achieve in a 7-year old, long-in-the-tooth, bull market. Clint Eastwood famously asked, “ … you’ve gotta ask yourself one question: “Do I feel lucky?”
God Bless America. Land of the Free; Home of the Brave! We have the best and brightest future at the dawn of the American Century. Have a Great 4th of July!
The Economy: Fed Chair Yellen appeared before Congress this week; Tuesday before the Senate, Wednesday before the House. Hostility towards Yellen was palpable with House members reducing her to confusion and gestures of helplessness. Global distain for authority in general and Central Bankers in particular was evident in spades. But the Mother of All Events was the Brexit vote on Thursday. Pollsters and pundits got it all wrong with their incessant predictions of a landslide win for “Remain.” Flashing the Longbowman’s “V” the Brits moved to reestablish their national sovereignty and leave the EU. Financial markets crashed in shock and awe on Friday. (Only fools are going to buy this dip.) The uncertainty of Brexit was quickly on display. Though the process is supposed to take 2-years, British politicians began to call to immediately disregard many EU laws; particularly those on immigration and banking. Political parties throughout Europe began to call for Exit Referendums in their own countries. This is the death knell for the EU. Great Britain is the second largest economy in the EU. Saying the EU will survive is akin to saying that a marriage is still intact after one of the spouses has left after leaving an “I’m thru with U” note nailed to the front door. It’s gonna get messy.
Food for Thought: For over 70-years global bureaucrats and central bankers have pushed the secular, one-world agenda characterized by multiculturalism, globalization and the tyranny of the minority. These mostly unelected officials, while deriding the Divine Right of Kings, have ruled with the arrogance of dictators. They have ignored the social contract based on the consent of the governed. Brexit signals the beginning of the end of their failed reign. Despite the near universal, and very vocal, support of “Remain” by global politicians and despite the total support by the mainstream media for “Remain” the Brits revolted against the overlords and their propagandists. Political ramifications were immediate with British Prime Minister Cameron resigning. The ripples are beginning to roil outwards from ground zero with economic changes in the wind. If a slowing global economy, negative interest rates and the failure of global monetary policy weren’t enough, Brexit adds to the uncertainty that has so paralyzed Janet nd the Seven Dwarfs. However, we see opportunity in chaos. Contact us for how to protect your assets in the coming roller coaster ride.
1. We overestimate our abilities, our uniqueness, and our objectivity, even more so when under emotional strain. We have all seen the studies: 90% of people say they are above average drivers. Rarely do people think those around them work harder or better than they do. And so on…
2. We systematically understate the role of ‘random’. We crave order, and we are willing to torture the facts to get there. But sometime things just happen, and sometimes problems don’t have solutions. No fundamental cause, no guilty party, no concrete answers. Moreover, on the up side, when random does break our way it’s appropriated as skill. The investment world is shockingly bad at separating outcome and process—yes, even those who drone on and on to prospects about their processes.
3. People will find a way to believe what they are incented to believe. As the saying goes, “The most dangerous place to stand is in between someone and what they want to believe”. In my experience, it’s hard to overestimate the power of this statement. Starting with the conclusion and reverse-engineering the supporting arguments is central to the human condition and, surprisingly, serves and important role in our evolution.
4. When presented with points 1, 2, and 3, almost everyone recognizes their validity, but believes at some level that he/she is exempt. The typical reaction is “Yeah, for sure, of course that’s how [other] people act”. It is always easier to see others’ mistakes than one’s own. And this is one of the reasons we have a very hard time changing our cognitive biases. All of us.
The Economy: The U.S. economy appeared to be motoring along in slow gear until last Friday. Then the abysmal jobs report was released and it cast uncertainty into the equation. Immediately, the odds of a Fed hike in June went to zero as investors recalibrated their tactics. Then on Monday of this week Fed Chair Yellen warned against putting too much emphasis on one report. She indicated that rate hikes were still in the cards for 2016. Yep … like a snow ball’s chance … . The bottom line is this: The Fed doesn’t believe that the U.S. economy is strong enough to allow for normalization of interest rates. We are stuck at the zero bound which is causing havoc for savers, banks and insurance companies. But the Fed lacks the confidence in the economy to end financial repression. How this plays out is anyone’s guess. The Battle of The Analysts is in full swing with some insisting that the end of the world is nigh. Others are equally vocal in calling for an end to cash so that governments can more accurately monitor the economy. The NSA must be salivating over the prospect of knowing where every nickel you spend is going. We’ve never been fond of Central Banks, run by academics, trying to impose economic theory on the real world. For a beautiful example of Central Banker Mindset, see Paxton Whitehead as economics Professor Philip Barbay, in Rodney Dangerfield’s 1986 comedy “Back to School.” He truly gets no respect.
Food for Thought: Global growth rates continue to be cut. This is occurring while global stock markets rebound from their first quarter swoon. Is this divergence evidence of The Greater Fool Theory or is it The Dawning of the Age of Aquarius? Your choice. We remain strapped to the rocket but have both hands on the ejection lever. The principals here at Higgins Capital have lived through several market crashes. The crashes follow the same script: Months of warnings culminate in a tipping point that seems to catch everyone by surprise. Far too many investors go from rompin’ stompin’ bulls to deer in the headlights unable to process the environment until they’re down 40%. Do not let this happen to you. Have an exit strategy. Know what you own and why you own it. Have real or mental stops on your portfolio. Trust your own personal experience over that of experts. Are things in your personal economic life or the economic life of your organization going so well as to justify new highs in a 7-year old bull market? Why do we continue to hear about new and more economic stimulus? Beware of Central Bankers bearing gifts.
The Economy: Hundreds of millions of dogs and burgers will be inhaled and millions of gallons of brewskies will be quaffed by Dudes and Dudettes in the Grand American Tradition this weekend. GDP will spike. Presidential candidates may go for a smile. We’ll doff our caps or curtsey for those that gave the ultimate sacrifice while continuing another Great American Tradition of thumbing our noses at authority. The weekend spike in GDP caused by the national hedonistic orgy will be offset on Tuesday by a GDP dip as productivity-crushing hangovers reduce economic activity to near-zero. The economy will gradually recover until the evening of Thursday June 2nd, when relief partying for the coming weekend will create an economic stall that will persist until the following Monday, June 6th. Have a Great Holiday. We’ll catch you on the rebound.
Food for Thought: On Memorial Day: Memorial Day is the holiday for remembering the people who died while serving in our armed forces. The holiday originated as Decoration Day after the American Civil War. The name of the holiday gradually morphed from Decoration Day to Memorial Day after World War II. In 1968 Congress passed legislation which moved four holidays, including Memorial Day, from their traditional dates to a specific Monday in order to create three-day weekends. The change moved Memorial Day to the last Monday in May. Memorial Day is not to be confused with Veterans Day which is celebrated November 11th; the anniversary of the end of World War I. Memorial Day is a day honoring the men and women who died while serving, whereas Veterans Day honors all U.S. military veterans. Memorial Day marks the unofficial beginning of summer. On Memorial Day, the flag of the United States is flown at half-mast (or half-staff for you Army and Air Farce types …Go Navy Beat Army!).