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: All systems are go on a global economy that shows signs of continuing to expand. Easy money from central banks remains the order of the day. Trump tax cuts and deregulation have bolstered business confidence. The holidays showed Americans on a spending spree. Naysayers see the band on the Titanic bravely playing as she went down. Optimists see hundreds of billions in repatriated US corporate profits, tight labor markets, inflation and Trumponomics as the next leg up in the economy and the 9-year bull market in stocks. Ray Dalio of Bridgewater has called this a new bear market in bonds as Jerome Powell was confirmed by the Senate as the new Fed Chair. Powell is seen as dovish and a continuation of the Bernanke/Yellen school of gradualism in monetary policy. But it pays to remember that markets tend to drive the Fed and not the other way around. Interest rates are rising. Gold has broken through its $1,300 resistance and oil is at multi-year highs. With global expansion, investors are complacent that central banks will keep stock markets and real estate moving up forever.
Food for Thought: Davos, billed as the Global Economic Summit is in full swing. Over time it has morphed into another rich kid’s confab with the glamorous and notorious. It is known as the Bastion of The Globalists. This year Donald Trump will upset the apple cart as he presents America First Shock and Awe with his appearance and speech on Friday. The annual ego rush of whose private jet is bigger will be sadly missing Prince Alwaleed’s private 747 with the gold throne. The Prince is apparently still confined by his King who reportedly wants billions in return for a kiss-and-make-up return to business as usual.
Music of The Week: Chaka Khan “Chaka”
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The Economy: The new year is off to a roaring start with tax cut optimism leading the charge. Corporate profits held overseas, estimated in the hundreds of billions, are expected to be repatriated. Stock markets are salivating at the expected new surge in buybacks. Talk from Bulls is that the new round of buybacks will dwarf anything ever seen in history. Bulls anticipate that buybacks will dramatically reduce the number of shares outstanding. Their call is that this is only one of many events that will drive stock prices to dizzying new heights. Small business optimism is at a 32-year high; highest since 1985.
Food for Thought: San Diego feels like a boom-town. Free money, surging stock prices, the Pentagon’s “Pivot to the Pacific”, the hi-tech/med-tech sweep, construction buoyancy and the torrential real estate market have hundreds of thousands of San Diegans walking on air. We toured a new development of $2+ million tract homes that was sold out in record time. Yards small enough that some would call them garden homes and built so close together that you have to hold your breath in order to squeeze between them, real estate bulls are saying they’ll be worth $5 million in just a few years. Bitcoin up 300+% in a few weeks has taken a breather recently. Bitcoin Bulls tout a value of 50,000 to 100,000 in its next run. Jamie Dimon says he regrets calling Bitcoin a fraud. Investor euphoria appears to have arrived.
Music of The Week: Beegie Adair’s “Martini Lounge”
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The Economy: Happy New Year! … and a happy new year it is for global economic numbers with Germany growing at a blistering pace with the best employment numbers in years. The U.S. economy is likewise continuing to expand with no end in sight. Stocks are up, bonds are up, real estate is up, oil is up, manufacturing is up, optimism is up. Chicken Little is running in circles screaming about high asset valuations. But investors are looking at the Trump income tax trump and singing Happy Days Are Here Again. After all, in addition to the endless self-praise from The Swamp, Central Bankers have proven that at the slightest hiccup, inventive new types of monetary stimulus will rain down like Helicopter Money. Manna!
Food for Thought: Year end and into tax season. Financial planning rewrites. Annual portfolio reviews, document updating. What is the status of your wills, trusts, POAs, medical directives? Get them updated now! We do Monte Carlo Simulations for retirement planning. If we can help, please give us a call.
Music of The Week: Luna Blanca’s “Guitar Island”
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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: “Synchronized Global Expansion” remains the bullish buzzword with 45 countries expanding in lock-step. This is a first in 50-years. Central bank liquidity programs and global debt are fueling the growth. The front cover of The Economist says it all, “The Bull Market in Everything.” Stocks, bonds, real estate, alternative investments, art, wine, automobiles, chopsticks. Everything and the kitchen sink has gone vertical and defies gravity. The relentless upward thrust makes the North Korean missile shoots look boring by comparison.
Food for Thought: Back in the day when there were economic cycles and price discovery, investors looked for nuggets in value or special situations. Today, the bull market steamroller has overruled causality and flattened every bear in sight. Thoughts of correction are dim; of a market crash, non-existent. Cowabunga!
Music of The Week: Shania Twain’s “Now”
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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: Consumer confidence surged; Everything home-building looking positive. The US continues to post impressive economic numbers. Though nay-sayers shout “Fake News” with every number that’s posted. All news is good news with individual investors finally beginning to pour money into stocks. Brexit, Trump, the rise of populism, the assault on globalism, immigration and the environment are no reason to slow financial markets still feasting on $200 billion a month in central bank stimulus. Repealing and replacing Obamacare was to provide billions in tax savings. Those savings were to be factored into the overhaul of the tax code. The narrative was that passage was a slam dunk. The subsequent fail produced a new narrative that Tax Overhaul would sail through regardless. Markets were thrilled that billions in lost tax savings no longer mattered. True to form, a massive rally followed the fail.
Food for Thought: The Trump phenomenon continues to unfold in stark black and white. Love him or hate him he is a phenomenon. Polarizing in the extreme, he’s brought out the worst in many. The main stream media (MSM), Hollywood, the UN, NATO and foreign governments seem to be the most shocked. Sacred Cows everywhere are in retreat. All concerned are becoming aware that POTUS is a brawler who enjoys taking the fight to the street. As a businessman The Donald understands that the best way to gut a program or department is to decapitate administration and cut or curtail funding. No money, no staffing, no decisions, no activity, no continuation of programs outside the Trump Agenda. Brilliant or Brutal depending on your persuasion. How this ultimately plays out is anyone’s guess. How the financial markets respond is also anyone’s guess. With the stroke of a pen, Trump is undoing decades of U.S. policy and redirecting national priorities and resources. Markets continue to treat these unprecedented events as a win for all sectors of the economy. The prime example is Climate Change. The administration’s position is, “We’re not going to spend any more money on that.” Yet the response of financial markets is that the trillions invested in this sector are going to continue on the same growth trajectory as when they were darlings. Reminds us of PT Barnum’s “There’s a sucker born every minute.”
Music of the Week: Jack Johnson’s “Jack Johnson”
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”