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: The U.S. economic numbers continue to indicate that things are picking up bigly. Housing starts are up. The Philly Fed Manufacturing Index is up. Jobless claims are near their lows. Earnings season is in full swing but the economic data this week is overshadowed by the inauguration. Davos, the annual financial confab was held this week. The group, which is noted for its strong support of globalization, is trying to adjust to the new reality in Washington. Team Trump was notably absent. The message is consistent whether it be to the Davos Elite, the State Department, the Intelligence Community, the Press or any of the other sacred cows of the past 100-years: “Your days of self-aggrandizement are over.”
Food for Thought: On the eve of the inauguration, it feels like Y2K on New Year’s Eve 1999. Even the weather is the same with drenching rains that flooded parties. Half the U.S. is apparently convinced that this is the second coming. Half that it’s Armageddon. It’ll be something in between. One thing is for sure, for the first time in decades, hard-nosed business men and women will be running the U.S. government with military men in charge at the Department of Defense. We expect change to come hard and fast.
Music of the Week: Sade “Promise”
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: 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.
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: Another quiet week highlighted by the release of the Fed Minutes. As usual, the Minutes caused a hissy fit in global financial markets. Why? Well, why not? It was more of the same Elmer Fudd stuttering opacity that financial markets have become addicted to. For the rest of the world it’s much ado about nothing. The Fed emphasized that their decision on interest rates was data dependent. … as it has been since the Fed was founded in 1913. Duh! Economic numbers may move one tenth or one hundredth of a percent. In response, financial markets go haywire. Out of a US population of 320 million, a reported employment change of 15,000 will create massive gyrations in financial markets; over a .0047% change. When was the last time you based a decision on a .0047% change in anything? Recently? Ok you must be a quant or an engineer. For the rest of the planet, it’s statistically insignificant; not even a rounding error. As a result of this, we see the financial markets as being disconnected from the economy. Massive and misguided Central Bank manipulation, global fiscal irresponsibility, political gridlock by elected and appointed Peter Principled Lilliputians has failed to halt US economic growth. It’s a testament to the resilience of the American people. Every day is a holiday; every meal is a banquet.
Food for Thought: We are always conducting informal surveys to keep the mainstream media noise and click-bait in perspective. We continue to find the average Joe (or Josephine) well grounded. The basic American character of “Question Authority” remains intact. The prevailing outlook is local optimism tempered with frustration with the national and international scenes. America remains the clear choice to pursue personal and professional dreams. No other country or culture comes close. So spare us the incessant jabbering about the imminent demise of the American Goliath or the American way of life. The isolationist/interventionist dichotomy of the American political will has been a constant since George Washington warned of the “peril of foreign entanglements” in 1796. Rather than seeing the 20th century as the American Century, we see the 21st century as the true American Century. The 19th was only the prelude. We see the US increasing its global dominance. American innovation technological prowess will continue to reign supreme. In the global community, the US remains the headstrong, determined adolescent that will muscle its way to the head of the line. For Joe and Josephine American, “My Country right or wrong; still My Country” still rings true.
The Economy: Economic numbers have disappointed this week. Housing disappointed. Manufacturing disappointed. The Fed met and as expected, maintained the status quo; no change to interest rates for the foreseeable future. Lower for longer or never forever. With respect to oil, for decades the mantra was that low oil prices were good for the USA. In the past 6-months policy wonks have championed the idea that low oil prices are bad for the ol’ USA. Oil prices are up almost 50% in the past few weeks. That must be a good thing as we spend more on everything petroleum. So who’s on First? Oil is up 50% and that’s now a good thing. So, oil moving back up to $140 must be a great thing. Confused? You should be. The mindless noise is deafening. Here’s a sample of recent headlines from the chattering media class courtesy of the “Daily Reckoning” website:
4/5: Dollar Rises as Investors Anticipate U.S. Data
4/6: Dollar Falls on Fed Minutes
4/13: Dollar Climbs Before Data Forecast
4/15: Dollar Falls on Lackluster U.S. Data
4/21: Dollar Rises After Solid U.S. Data
4/25: Dollar Sinks After Q1 Growth Takes Another Hit
You got that?
Food for Thought: We’re midway through the first quarter earnings reporting season. Stock buybacks and dumbed-down earnings expectations have given us earnings that again are beating those reduced expectations. Lower the bar enough and any caveman can stumble over it. Financial markets are lovin’ it. But for many investors this seems to be the stock market rally to hate. Beware. We believe that the US economy is fundamentally sound but until the Fed decides to stop supporting asset bubbles, we’re leery. Protecting your assets should be at the forefront of your decision making.
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.