Dear Family,
Welcome back! and “Thank you!” to all of you for your kind words about last month’s report. There has been no shortage of activity since I last wrote. So let’s get started…
The Big Question: “Why is this business cycle different from all other business cycles?”
Last month I had the good fortune of attending a conference where a panel spoke from the investment institute of a large well known investment firm. A common thread in the panelists comments was that our economy was not progressing as well as they or others would expect given the amount of time and the amount of stimulus the Federal Reserve has provided since “The Great Recession of 2009”.
Maybe the BIGGER Question is, Why do past business cycles even matter and how can they possibly correlate to the future given the seemingly endless supply of cheap labor and plant capacity in the Far East? https://www.theguardian.com/business/2016/jun/05/excess-capacity-in-chinese-economy-distorting-world-markets-steel
I posed this question to the panel. While all concurred that it was a valid issue none really had an answer. This seems critical if one were to continue to find relevance in the Ibbotson chart displaying benefits of diversification and how other markets are not correlated to each other. In a highly correlated world of central banks intervening in previously free markets, is diversifying in tightly correlated central bank dependent market diversifying or “di-worsifying”?
Back in 2008 there were very few asset classes that did not decline in value. http://3.bp.blogspot.com/_oak7mB5IUu0/TDxVjNM8OBI/AAAAAAAAAJQ/FlPzAMNA4mM/s1600/blackrock2.jpg
I believe cash, treasuries and gold were amongst the best places to retain value. Here’s an interesting article from 2015 by Morningstar discussing their findings on diversification. http://news.morningstar.com/articlenet/article.aspx?id=697751
It is my belief that many of the past theories on portfolio management no longer apply in our current Central Bank manipulated markets. Things like price discovery http://www.investinganswers.com/financial-dictionary/economics/price-discovery-3069 and efficient market theories http://www.investopedia.com/terms/e/efficientmarkethypothesis.asp are thrown under the bus by central banks intervening and participating in public markets. This can create distortions in short term market prices. Just yesterday Fed Chair Janet Yellen stated that The Fed would not rule out buying stocks or corporate debt. http://www.cnbc.com/2016/09/29/yellen-says-fed-purchases-of-stocks-corporate-bonds-could-help-in-a-downturn.html . These are hardly the words of a person interested in raising interest rates, in my opinion. Here’s a commentary with Rick Santelli of CNBC to which I say “Amen!”
http://video.cnbc.com/gallery/?video=3000555447
So now between companies issuing debt to buy in shares at or near 52 week highs (many who’s revenues and earnings continue to shrink) and the possibility of the Fed stepping in to buy stocks, it would seem many company share prices may be supported artificially. To quote Warren Buffet “Price is what you pay. Value is what you get.” In my opinion, the market is asking too high a price relative to the value of many underlying businesses. This may be what “bubbles” are made of…http://www.marketwatch.com/story/trumps-ugly-claim-about-stocks-is-backed-by-morgan-stanley-economist-2016-09-29
GDP
Years ago an investment strategist once said “If you want to know what the GDP is ask me in five years.” http://wallstreetexaminer.com/2015/07/those-new-revised-gdp-numbers-are-the-worst-indictment-of-u-s-trade-policy-yet/
With so many revisions it seems almost meaningless to report GDP let alone utilize it for forecasting or investment decisions. Perhaps the globalization of our economy will inspire students around the world or perhaps those at Indiana University’s Kelley School of Business (Let’s see if my son Ari really reads this.) to investigate better ways of measuring and predicting US GDP given the many global variables to consider. Good luck with that!
The Fed
Since the last issue the Fed meeting has come and gone and once again the Fed decided not to raise rates while guiding markets to expect a rate hike in December. http://www.usatoday.com/story/money/2016/09/21/fed-stands-pat-rates-signals-dec-hike/90776920/
Meanwhile back at the conference, interest rates and the Fed policies were of great concern and discussion. One fixed income analyst accurately predicted that the Fed would not raise interest rates as they would want to see more data.
Of course, having recently read my September issue of “The High Tech Strategist” by Fred Hickey (I suggest subscribing. He too has accurately predicted that the Fed would not raise rates.) mentioned the Congressional Budget Office recently was revising this year’s budget deficit from $500,000,000,000 to $564,000,000,000. This represents a greater than 12% increase in our country’s deficit or “check writing overdraft”. One has to wonder when the politicians in Washington, will be held to account for this reckless imbalanced spending?
This leads to my next Big Question: Why would the Fed raise rates while printing money to cover debt issued by the government to fund this deficit? It would seem counterproductive for the Fed to raise the cost of government borrowing as it would increase the deficit faster due to higher interest costs.
In conclusion: Don’t look for meaningful interest rate hikes in the near future. It seems to me that until our representatives in Washington can pass legislation to help lower the deficit through either spending cuts, revenue increases or a combination of the two, interest rates may remain lower longer.
“It’s All about those banks, about those banks..”
As that famous Meghan Trainor song goes, “It’s all about the banks, the banks no trouble…” (Just checking to see if my sons are still reading this…They can’t stop telling me how “cool” and “with it” I am. ☺ I think I just heard Ari groan all the way from Bloomington!)
Headlines this week are quite alarming as it pertains to European banks Deutsche Bank and Commerzbank. Seems like “Déjà vu all over again.”
Deutsche Bank under pressure as hedge funds cut exposure
http://www.telegraph.co.uk/business/2016/09/29/deutsche-bank-under-pressure-as-hedge-funds-cut-exposure/
Commerzbank Plans Job Cuts in Biggest Overhaul Since Bailout
http://www.bloomberg.com/news/articles/2016-09-29/commerzbank-shares-climb-on-report-of-10-000-job-cuts-pending
Meet the riskiest bank in the world
http://www.businessinsider.com/fdic-report-on-leverage-ratio-names-deutsche-bank-as-riskiest-2016-9
Going back to the Bear Stearns and Lehman days in 2008, hedge funds leaving seemed a prelude to these firms demise. The news flow in Europe today seems eerily similar and may be another reason the Fed has held back on raising rates.
Lessons From Lehman: Reasons To Flee A Failing Investment Bank
http://www.businessinsider.com/2008/10/lessons-from-lehman-reasons-to-flee-a-failing-investment-bank
Hedge funds fleeing Bear's prime broker business
http://www.reuters.com/article/us-bearstearns-hedgefunds-idUSN1440924420080315
As we have seen in the past, everything is fine until it isn’t. Where there’s smoke there may be fire…
“The Not So Great Debaters”
With the Fed out of the way most likely until after the election in November, all eyes are on the upcoming Presidential candidates. Having watched the debates I can only conclude in the words of my people “Oy vey!” Yiddish for “We are so screwed.” Maybe not the most accurate translation but works in this case. I had to turn the TV off as my kids were home and truthfully I was embarrassed to see two candidates for the highest position in our country, if not the most powerful position in the world, engage in the kind of shameful battle we witnessed.
Absent a constructive discussion of specific policies offered by either politician to move our country forward, Secretary Clinton seemed to gleefully take pride in inciting Mr. Trump’s continuous rants, while not being overly specific of her ideas. I understand Mr. Trump’s frustrations and even share some of his concerns, I just wish he or another candidate was running who could present his issues more calmly and mindfully. Only two more debates to go and from the sounds of it the mudslinging is about to get worse.
Trump says he may ‘hit her harder’ in next Clinton debate
http://www.pressherald.com/2016/09/27/trump-says-he-may-bring-up-bill-clintons-affairs-in-the-next-debate/
I, for one, will not be tuning in… Whatever happened to roller derby?
The Boys of Summer – The Cubs
Friday, October 7th The Chicago Cubs will begin their road to the World Series. As a lifelong Cub fan, I could not be more proud of the ownership, management and players of this Chicago Cub team. The Ricketts Family has shown their commitment to bringing a winning team to Wrigley Field and Chicago. Theo Epstein has shown us how possible it is to identify great talent and he and Joe Maddon have demonstrated exceptional skills in nurturing and bringing out the best in their players. Joe Maddon has surely secured his place in the Hall of Fame as one of the greatest managers of all time. As for the players, there are few professional sports teams today that play with the heart and passion that this Chicago Cub team demonstrates. So onward to the playoffs and let’s kill ourselves a few Billy Goats and bring home Chicago a Championship!!! (Sox fans it’s ok to root for the Cubs! The Sox will be back next year and quite frankly nothing would be more exciting than a cross-town World Series some day!)
In Closing…
It seems once again, the US banking system could be at risk by events in Europe and their banking system. Given the interconnected economic world we live in, it is hard for anyone to predict how Deutsche Bank and other banks in the European region will resolve their issues and how/if the US banks will be impacted. Caution is advised.
With appreciation and respect,
Newsletter Disclosure
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