The Economy: The latest numbers appear to support an improving global economic picture. That certainly seems to be the case in the U.S. There are issues with Italian Banks but the ECB is determined to do whatever it takes to preserve the EU regardless of how they have to jigger the numbers. There’s more transparency in the U.S. but conflicting data or opposite interpretations of the same data creates confusion. These conflicting interpretations are not fake news. It appears to be how the data is parsed. We continue to urge that you evaluate your personal and professional situation to properly evaluate how events will impact you. With the flurry of activity from the Trump administration, it’s impossible to know how markets will ultimately react. Caution is advised.
Food for Thought: The Trump agenda continues to quickly unfold. Executive Orders have been announced almost daily. Cabinet officers continue to be approved. All branches of the Federal Government are on notice that budget cuts and profound change is coming. Global governments are struggling to make sense out of the new and developing U.S. foreign policy. The Main Stream Media (MSM) has been and continues to be demonized; officially branded as “The Opposition.” With less than 2-weeks in office, there is greater uncertainty than we’ve ever seen. Some say the deep state is immune to change. I think it’s premature to assume that the leviathan can’t be moved in a new direction. The challenge is to skate to where the puck will be.
Music of the Week: Huey Lewis and The News “Greatest Hits”
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: More Cowbell! The Bank of England (BOE) cut interest rates for the first time in 7-years. It also expanded their Quantitative Easing (QE) program to include buying corporate bonds. While these moves would suggest that Brexit has raised the risk of recession, global financial markets screamed higher with the joy of more global monetary stimulus. The further increase of global cheap money should foster expansion in share buyback programs. This will create higher per share profitability without the need for capital expenditures. Hence More Cowbell!
Food for Thought: Traditional polling may have seen its heyday. Pioneered by Gallup, polling techniques rely on two basic behaviors: First, a population willing to subject themselves to interrogation by strangers. Second, a population thrilled enough to participate and provide truthful answers. Neither of these behaviors appear to be a given these days. Witness the Brexit miss; witness misses in the U.S. presidential primaries. Except for those with a vested interest, polls are increasingly dismissed as misinformation by most.
Music of the Week: Gabriela Anders’ “Bossa Beleza”
The Economy: The Fed concluded its 2-day meeting today with its usual inaction. This time it was because “the labor market has slowed.” Next month it’ll be due to the shrinking icepack in Antarctica. TGISummerTime. The dull, monotone of the Fed press conference seemed to confirm that no-one expects anything from these Amos and Andy dissimulators. Financial markets rallied into the Fed’s press conference then reversed course and sold off at its conclusion. It was as if markets were rattling their sabers and shouting, “enough with the tofu, give us some real meat.” The message remains the same: The Fed doesn’t believe that the economy is strong enough to survive without continued support. If the Fed is right, then financial markets have no business being near all-time highs. If the Fed is wrong then markets should be much higher than they are. So who’s on first?
Food for Thought: BREXIT!!!!!!!!!!! British Exit. Next Thursday, June 23, our cousins across the pond will vote on whether to remain in the European Union (EU). Global markets will go haywire, regardless of the vote, before settling back into their somnambulant complacency. The EU was founded in 1951 and has never had a member state leave the club. Brexit will shatter the illusion of Union. It will also establish a guidebook for other nations itching to ditch Brussels. Great Britain has always had a love/hate relationship with its EU membership. Polls show about a 50-50 split on the issue with screamers on both sides saying it’ll be the end of the world. Britain has always been of Europe but not in Europe. So their disenchantment with EU monetary policy, immigration and unelected EU officials ruling by diktat has been brewing for a long time. Take note then retire to the beach to enjoy the summer.
Music of The Week: The Beatles “Rubber Soul”
The Economy: The Fed Beige Book was released today. It confirmed the “New Normal” of our slow growth economy. The Fed found the consumer healthy and spending. Ironically, the Commerce Department released the Retail Sales numbers today. Their numbers showed a decline in consumer spending with a sharp drop in automobile sales. Right Hand; Left Hand. Oil ministers meet this weekend in an attempt to prop-up the price of oil with a production cap. Iran is considered to be the linchpin in this effort but their oil minister will not be attending. Like a wedding with a runaway bride, the meeting is DOA without Iran. The Fed minutes and Yellen’s recent comments have been parsed for read-the-tea-leaves guidance to monetary policy. “Global” and “uncertain” were repeatedly used by Yellen to describe issues facing the Fed. One pundit noted that the Fed has never publically used the term “uncertain.” So again, the end of the world is nigh. We continue to temper our concerns for slow-growth megatrends. Demographics and student loans may be problematic but we don’t think entitlement laden Americans are anywhere near rioting in the streets as some talking heads have opined. After all, this Sunday is Opening Day at the San Diego Yacht Club.
Food for Thought: The Department of Labor (DOL) has released its proposed “fiduciary” rules. The proposed rules have significant impact on 401ks. Many 401ks and deferred compensation plans haven’t been reviewed since they were implemented. Now is a good time to get that review process going. Contact us if you would like help with this issue.
The Economy: Economic data released this week confirmed a growing U.S. economy: Pending home sales up; Personal income up; Consumer spending up; Home prices up; Consumer confidence up; ADP Employment report in line. But the headlines belonged to Fed Chair Yellen and her speech on Tuesday. Yellen assured markets that the Fed would go slowly on any future rate hikes … if in fact they occur in 2016 at all. The expanding U.S. economy is no longer reason to hike rates. Yellen cited global uncertainty and potential fallout from recent events as justifying a slower path of rate increases. She made it clear that the Fed still has room for additional stimulus but that it can hike if the economy grows faster than expected. Global financial markets were ecstatic over the prospect of continued easy money.
Food for Thought: In the 1970s we had “stagflation.” The economy was stagnating with little growth but inflation was a problem. Eventually inflation rocketed and it was the Volcker Fed that whipped inflation with 21% money markets and a 15% 30-year U.S. Treasury. Now we have a Fed beholden to zero interest rates (ZIRP), considering negative interest rates (NIRP) and thinking about helicopter money. Our concern is that the Fed induced financial engineering, which has driven stocks higher, will end with the gravy train going off a cliff. The first 10% correction in 4-years was met with panic by global central bankers intent on continuing to inflate asset bubbles. In this investing environment, know what you own and why you own it.
The Economy: Super Mario Draghi continues his legacy of Shock and Aw Shucks. We haven’t seen this kind of Italian Brass since Caesar crossed the Rubicon. Today Mario announced an aggressive expansion of ECB stimulus. Interest rates were cut further into deeper negative territory. Quantitative Easing was expanded by 30% from 60 Billion/month to 80 Billion/month. But the biggest change was adding corporate bonds to assets that the ECB can purchase. Global financial markets were not impressed. Moving into private sector debt is a Rubicon. What next? … Central Bank ownership of stocks, then real estate? Perhaps the ECB’s solution to slow growth is for the Central Bank to own all member assets and means of production. Nice way to come back to Marxism. Stalin and Mao must be gloating. Break out the Hammer and Sickle and fire up The Internationale.
Food for Thought: This week marks the 7th anniversary of the Bull Market. Stocks celebrated by trading down and breaking a 5-week rally. We continue to recommend that investors take profits and raise cash. The selloff that marked the first 6-weeks of the year has been arrested. But as we look out over the environment, we find it difficult find the drivers of growth that would power financial markets to meaningful new highs. Selling positions and moving into a money market fund is particularly prudent with retirement plan assets or annuities. In many cases investors can cherry-pick positions to sell within the same mutual fund. This is called a “Versus Purchase” transaction (VSP). We’re into tax season, now is a good time to review and protect your retirement assets. Buy and hold has worked for the past 7-years. Nothing lasts forever.
The Economy: Data released this week shows a US economy that is continuing to slowly expand. Consumption, GDP and employment appear to be growing. The Beige Book, which is the Fed’s summary and analysis of economic activity, confirmed a mixed picture of slow growth. Manufacturing is flat and productivity growth is questionable. Confusing? Yep. The question is: Can the US avoid the fallout from the confirmed slowdown in China, The EU, Russia, Brazil and Venezuela … to name a few. Think Global Act Local. It’s hard to feel your pain in San Diego, the land of eternal sunshine. Here we have booming tourism, real estate, biotech and massive defense spending as the US reorients its focus from NATO to our “Strategic Competitor” China. (Shoutout to Glenn for the PC euphemism. Back in the day when men were iron and ships were wood, they were called enemies).
Food for Thought: Annuities can be an effective part of your investment and retirement planning. Their features and benefits continue to evolve with the changing economic environment. Like any investment, they must be reviewed periodically to confirm they are still relevant to your goals. Contact us if you’d like help in evaluating these complex instruments.
The Economy: We’re the quintessential optimists so it’s with the risk of sounding like Chicken Little, that we again note the economic data is weak to mixed. The manufacturing sector is worrisome. Earnings season has ended with the note that corporate profits declined. Higher sales of cars and trucks are due in part to subprime auto loans. (Yep, subprime loans, the red-headed-bastard-sons of the Financial Crisis and subsequent Great Recession) Compounding this fog of uncertainty is the recent spate of terrorist activities. The Beirut bombing, the Russian airline bombing and the assault on Paris have heightened the sense of worry. The Fed released the minutes from their last meeting today. They were interpreted as being hawkish and in favor of interest rate Liftoff in December. Financial markets were ecstatic. But lost in the excitement is that fact that the minutes are pre-terrorist attacks. So we remain skeptical that we’ll see Liftoff in December. The much anticipated 25 basis point (1/4%) hike shouldn’t have much of an impact. It’s the unanticipated consequences that are causing the willies. After a decade of zero interest rates, no one knows what those consequences will be. Now that France has declared war on ISIS those consequences are more unknowable.
Food for Thought: The Russians have had boots on the ground in Syria for more than 40-years. To say that Putin and Company preempt the U.S. in Syria would be a gross understatement. In the aftermath of the Paris attack, the French are reaching out to Russia as an ally. With this diplomatic caress, Russia is on its way to being rehabilitated. Sanctions will quietly go away. Putin, bare-chested astride his white charger, crossbow in hand shooting whales, is the man of the hour.
The Economy: The jobs report last Friday came in better than expected Unemployment dropped to 5%; the lowest since 2008. The U.S. economic expansion appears to be on track Yet, there is little consensus on how well the economy is doing. For those saying that this is one of the longest economic expansions in history, an equally vocal group points out that it’s one of the weakest. For those saying that earnings season was strong, others point out that earnings growth is in decline. As we move into the holiday season, attention is beginning to focus on next year. 2016 is just 7-weeks away. Between now and then there’ll be a raft of statistics. But if a lid can be kept on Syria, the Spratly Islands and the European immigration scene, we expect an uneventful end of the year.
Food for Thought: The deep budget cuts known as Sequestration, have been kicked down the road to 2018. San Diego should benefit as increased defense spending flows into the economy. Looking further out into the future, Northrop Grumman has won the contract for the next generation of Air Force bombers. Word is that drone technology will eventually replace the pilots. San Diego is Northrop’s unmanned systems center. As the unmanned models become reality, this should become more of a growth business for San Diego.