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 week’s economic highlight was Wednesday’s release of the Fed’s Beige Book. It showed moderate growth and little inflation. Lower demand in the economy is discussed as being the result of higher healthcare deductibles for consumers. More out of pocket for healthcare means less available for other spending. The Fed remains on track to again raise rates in December. The Beige Book was almost an afterthought to a week of upbeat economic news: Low inflation; retail sales up; manufacturing up; global stocks reaching record highs; investors pouring money into stocks; Industrial production up; housing up; Philly Fed Index up; Bloomberg Consumer Sentiment up. What’s not to like?
Food for Thought: My good friend Sam commented that my “More Money” email appears to be increasingly amazed at the non-stop rampaging bull market. He’s right. … You can slice and dice the metrics, the geopolitical environment and every conspiracy theory out there. Compelling arguments abound. To rest easier and become one with nature, simply accept that stocks will continue to go up until they don’t.
Music of The Week: Ziggy Marley’s “Conscious Party”
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The Economy: “Veni Vidi Vici” is the new Black and it couldn’t be more appropriate for the Ides of March. It rightfully belongs with Caesar but this week has seen a bevy of contenders who deserve participation trophies: Shia LaBeouf, Rachel Maddow, John McCain and Bruce Loveless were joined by Fed Chair Yellen. Uber Dove Yellen continued to lead from the rear with a ¼ point interest rate hike. Yellen’s comment to consumers was, “The simple message is the economy is doing well.” 3 or more rate hikes are expected in 2017; roughly one every other meeting till year end. Analysts were quick to call it a Goldilocks Rate Hike with a dovish statement. The Trump Animal Spirits provide the perfect cover for the Fed to reload monetary policy before the next recession hits. Having kept interest rates at zero for almost a decade, the Fed must now scramble to hike rates enough that they have room to ease when the economy eventually slows. Let’s keep those zombies and buglies dancing around the bonfire. Maybe no one will notice that credit is tightening. Bored? Try this Thought Experiment: Enter a Prime Rate of 7% into your operating calculations. What does that that do to your organization? … only a matter of time.
Food for Thought: Quantitative Easing (QE) is alive and well. While the Fed has cut back, nothing is being done to shrink its bloated balance sheet. Equally important, Central Banks continue to pump $200 billion per month into the global financial system. The EU alone pumps $80 billion per month and “We’ll Do Whatever It Takes” Draghi shows no sign of easing off. If global growth is accelerating, why is $2.5 trillion in stimulus still needed? … that is the fly in the Animal Spirits’ ointment. Next up, raising the U.S. Debt Ceiling from its 2008 limit. This used to be cause for government shutdowns and hand wringing. Maybe it’ll get some play when The Donald issues his budget.
Music of the Week: Jimi Hendrix “Axis: Bold As Love”
The Economy: 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. On the near horizon: Votes in Italy and Austria that may see more exits from the EU. Expectations that the Electoral College will confirm the U.S. Presidential Election. Anticipation of a ¼% Fed interest rate hike in mid-December. Prospects that we’re on the verge of another leg up in equities.
Food for Thought: Holiday joy is offset by the aftermath of the election. Partisans on both sides have sharpened their knives and created their lists. Though Republicans have The Hill and the White House, no one is calling it a mandate with the popular vote having eluded them. However, Trump is a man of a different color; arguably the first Man on Horseback since Teddy Roosevelt. Obama has established the precedent of rule by Executive Order; bypassing the Constitution, Congress and the Courts. Expect this to continue; first with the unwinding of the Obama agenda and then with its replacement. As The Circus leaves town, it looks to be replaced by The Wild West Show.
Music of the Week: Elwood Brothers “Jazz Tannenbaum”
The Economy: Call it The Pause that Might Refresh: Global economies appear to be coasting into the new year at a steady state. Neither expansion nor contraction is on the horizon. Some of the negative interest rates in Europe have returned to the positive side of the ledger. If the Chinese Communist Party organs are to be believed, growth there is powering along at 7%. Brexit is unfolding with the usual court challenges to the will of the people. The Fed meeting was a non-event and I’m beginning to think that an interest rate hike may not happen in December. Bookies have the probability at 70-80% but I don’t see a compelling reason. If the Presidential Candidate known as The FBI Suspect is elected interest rates may stay lower for 4 more years. If the Presidential Candidate known as The Russian Spy is elected, Janet and the 7 Dwarfs may push interest rates through the roof … in a hissy fit of spite before they are fired. Call it life in a 3rd world country.
Food for Thought:
1944: 18-year olds storm the beach of Normandy into almost certain death.
2016: 18-year olds need a safe place because words hurt their feelings.
Music of the Week: Roy Rogers’ “Happy Trails to You”
The Economy: At some point, news on the economy will focus on the fundamentals of data rather on the whims of Central Bankers. But we’re not there yet. So with the Fed meeting next week, life is on hold while we await more dissembling opacity. There is a growing sense that 7-years of monetary policy have failed and that continuing down the same path is a mistake. How this plays out is anyone’s guess. But one thing is certain, markets don’t like uncertainty. Talking heads and other blithering, blathering idiots are having a field day in front of the last Fed meeting prior to the election. Our call remains that the highly politicized Fed will do nothing to diminish the chances of a Clinton victory. So we say, “No Change; Lower for Longer” on interest rates. … continue to kick the can down the road and hope that somehow, the bubble of extreme asset inflation, can be pricked and deflated without an implosion. Tellingly, former Fed Chair Greenspan has said, that this, “… is the worst economic and political environment …” he’s ever seen.
Food for Thought: The equity markets have demonstrated how chaotic and fragile they truly are. Simply the whisper of a ¼ percent rate hike sent markets down over 2% on Friday. On Monday, the whisper that the ¼ percent hike was off the table sent markets up over 1%. On Tuesday, markets dropped again. We don’t think this is a healthy investing environment. We are focused on protecting assets. We continue to sell positions that are at a profit and put the proceeds into the money markets. You want to have funds available for investing when the opportunity presents itself. We’re not doom and gloomers. Rather we’re veterans of several market sell-offs, crashes and bear markets. At this type of inflection point, investments can often be reallocated to take advantage of opportunity or to make up significant losses.
Music of the Week: Big Mountain’s “Resistance”