The Economy: After being dissed and dormant for a decade, inflation is front and center for financial markets. Concerns are being voiced by many. Fed members are among the loudest. Is inflation real or is the Fedspeak a stalking horse? Only your hairdresser knows for sure. While technology has driven labor and hardware costs down, a comparison of basic items in the grocery stores shows price increases of 40% or more over the past decade. The “Lies, Damned Lies and Statistics” crowd is complaining that economic numbers don’t measure the appropriate output. One recently asked how we could have tight labor markets with no wage growth. The cry is that the laws of supply and demand don’t seem to apply in the Goldilocks Economy. Meanwhile, stocks are off their January highs and moving sideways. This breather is either the calm before the storm or the pause that refreshes. Regardless of the metrics, the only thing that matters is whether you can sleep at night. Watch inflation; watch the Fed.
Food for Thought: China has a new Emperor. It took a few years after the death of Emperor Mao. But the song remains the same: a thousand years of dynasties with the occasional disruption. The Qing Dynasty ended in 1912. More than three decades of internal strife between warlords followed. Then the communist warlord Mao Zedong assumed The Mantle. A new Imperial Chinese dynasty was born: the Communist Dynasty. Now a successor to Mao has emerged: Emperor Xi. Likewise Russia. The Romanov Dynasty ended in 1917. Eventually the warlord Stalin emerged as the new Tsar. Then Brezhnev and now Tsar Putin. Triumvirate Great Power politics reignited. Will Turkey make it a fourplay? The investment opportunities are countless.
Music of The Week: Atlantic 5 Jazz Band’s “Bar Music Moods – The Piano Edition Vol. 1”
We Quarterback Money®
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”
We Quarterback Money®
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”
We Quarterback Money®
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”
We Quarterback Money®
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”
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: 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”
We Quarterback Money®
The Economy: Eight years into the current economic expansion there is nothing on the horizon likely to disrupt things for the next 6-12 months. Of course this could change at any moment. However we don’t see anything at present. The geopolitical situation could change at any moment. Some unforeseen event could trigger a meltdown in any number of national economies. But at present we see the immediate future as a continuation of the recent economic past. Central banks appear to be on a synchronized path of higher interest rates. Eventually this will impact global stock markets. But when that occurs is an unknown. For every economic number released there are pundits in support and opposed. Choose your poison. We continue to emphasize that you should keep an eye on the horizon while staying focused on your own specific situation.
Food for Thought: Stocks remain on a rocket ride with new records set almost every day. We’re 8-years into what is now the second longest bull market in history. It is crystal clear that regardless of age or valuations, this market will continue to go up until it doesn’t. Like the global economic expansion, there is nothing on the horizon that spells the end. We may see a correction that ushers in a final run to the top. … or there may be several corrections that eventually end the institutionalized Buy-The-Dip reaction to all pullbacks we’ve seen in the past 8-years. Of interest is that on separate occasions I was told by individual investors that the Dow will go to 30,000 before the ride is over; another stated that the Dow would be at 100,000 in 10-years. Reminds me of Ella Fitzgerald’s Blue Skies: “Never saw the sun shining so bright, Never saw things going so right …”
Music of The Week: Ken Navarro’s “Smooth Sensation”
We Quarterback Money®
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”
We Quarterback Money®
The Economy: “Synchronized Global Expansion” is the latest buzzword describing our global and national economy. While the Fed begins reducing their balance sheet this month, the rest of global central banks continue to print money with abandon; piling on more debt for future generations. How this house of cards ends is anyone’s guess. While we shake our heads in wonder, the flip side of the coin is that the Good Ole USA might actually pull it off. Natural and man-made disasters aside, Armageddon may not occur. Not to sound like a shill, but as a nation we have a history of coming back from the brink. While Americans appear to be more divided than ever before, the numbers show an optimism that can’t be denied. Consumer confidence is at all-time highs. Manufacturing indices are surging. Inflation remains historically low. Last but not least, the stock market continues to set new records. You can argue that the economic expansion is in the 7 or 8th inning. You can debate equity valuations or comparisons. You can read the tea leaves till you’re blue in the face. But one thing is clear; stocks are saying that the good times will continue.
Food for Thought: “Bless her heart” is Southern Belle code. Spoken in sympathetic tones, it translates into “That gal is out of control!” Such is the case of Senator Elizabeth Warren’s quixotic effort to put Wells Fargo out of business because of its ongoing regulatory problems. Bless her heart! Liz confuses herself with Moses and the Golden Calf. Bless her heart. First, there’s the matter of elevation: There is no Mount Sinai; she’s in The Swamp. Second, the Golden Calf is the Federal Reserve which is the Titanium Transformer; stronger than dirt and able to leap tall buildings in a single bound. Bless her heart. Third, hurling tablets don’t work no mo. The good Senator from Massachusetts would be more effective chasing Salem witches than tackling a TBTF bank.
Music of The Week: Tom Petty’s “Southern Accents.” Tom Petty passed away this week at 66.