January 2016

By Adams Financial Concepts | January 17, 2018 | 0 Comments

The outlook and predictions for 2016 are, frankly, awful. Between oil prices dropping, China’s repeated troubles, and the market opening only to drop 400 points, no one seems to have anything good to say about 2016. But how accurate is all the doom and gloom? Last December, Richard Bernstein published an article in Financial Advisor Magazine titled “Mute the TV,” in which he said “…2016 might be a difficult year for investors…not necessarily for investing.”[1] Again, it could be a hard year for investors, but not for investing. Why will it be so hard to be an investor, and why is the best advice you’ll get “mute the TV”? Because the Presidential and Congressional races are this November and everyone is campaigning hard. People are stirred up and there is a good change we’re going to be seeing negative ads, and their many gloomy predictions. Their goal to be elected, the candidates are all saying the same thing: “Be scared – things are very bad – but trust ME. I’ll fix it.” Fact checkers have already found, though, that every single one of the candidates has at least exaggerated the truth, if not outright lied, and we can expect that to continue. Mute your TV, because we need to focus on the facts, on what’s actually going on, and not that we’re being told is going on. The problems touted – the deficit, worker compensation, and commodity price drops – aren’t as tragic or dangerous as it is implied. During the Great Recession, the total deficit was at 10% of the US GDP; expenses were high, particularly the safety net, and revenues decreased with more people out of work and paying fewer taxes. Today our deficit is at only 2.5% of GDP, better than average in the long-term. The National Federation of Independent Business released the results of a survey to US small businesses that found hiring intentions for 2016 were higher than normal as well. To accompany this, hourly wages have increased 2.3% in the last 12 months. Lower oil prices (and other commodities), higher wages, and low unemployment (5.0%!) has meant that consumer purchasing power is increasing, and the value of the dollar continues to rise. These are all very good signs for the overall health of the country – and for the American consumer. It comes down to looking at the facts, and making your own decisions about the hard-and-fast numbers, not letting candidates or pundits talk you into “their” facts. My favorite saying is Daniel Patrick Moynihan’s “You are entitled to your own opinions, but not to your own facts.” Stay educated and focused on fact, and 2016 might have a lot of potential.   [1] Bernstein, Richard. “2016 – Mute the TV.” Financial Advisor Magazine. Dec. 17, 2015. retrieved from: http://www.fa-mag.com/news/2016-mute-the-tv-24293.html

Read More

Chinese Mercantilism and Yuan Devaluation

By Adams Financial Concepts | January 17, 2018 | 0 Comments

Only 40 years ago, China was an agricultural nation, and yet in what seems like no time at all they have become the world’s second largest economy – second only to the US. How is this possible? I have drawn the comparison both on About Money and on my blog about the methods China has used to burst into heavy industry and those Louis XIV and John Baptist-Colbert employed in 17th century France. In fact, there are many, many parallels that help us understand why China is where it is today. Like France in 1661, China’s economy was agricultural and found it difficult to compete on the world market. Both countries had the decision to change their economic focus by the government – for France, they focused on glass and textiles (both very lucrative industries at the time) and China’s Central Party focused in on  heavy industries such as aluminum, steel and copper production, as well as building airplanes and ships. France and China both introduced factories and built dormitories, or in some cases entire cities, up around the factories to house workers. These factories also saw the implementation of a minimum wage for the first time. They worked to create a trade surplus by using foreign policy to limit imports and because the government implemented the work, they largely ignored supply and demand. Perhaps most infamously, both poached from foreign industry – France by attracting artisans and China by proposing joint ventures, and both offered attractive incentives. This economic method, in which the central government drives economic growth, is called mercantilism. China’s central government controls foreign policy, land, military, and banks – and they decide which industry is of major importance. In China’s case, heavy industry. Yet the credit bubble bust and the commodities speculation may have hit China hardest of all. They invested billions into infrastructure and factories to meet the demands for copper, steel, and aluminum, but because only 50% of those contracts intended to collect on the product, they have found themselves up to their ears in overcapacity. To deal with the oversupply, there has been speculation that China is selling its steel at 10% under the cost to manufacture. To compensate, China has seen a devaluation of the yuan, but despite what we may be told by our presidential candidates, if allowed to float, China’s currency will decrease, not increase. In December of 2015, China spent $100 billion to support its currency, and spent another $3.4 trillion in foreign currency reserves – and yet history tells us that it is impossible to support a currency. I believe it will even take another devaluation. This is not a short-term problem, and we need only look across the Sea of Japan for an example. When Japan took an economic fall, they chose not to close banks and tried to work through the problem, but we find them 30 years later still struggling to recapture their former economic power. We can only watch and wait to see if China goes a similar way. In the meantime, China’s misfortune does spell potential growth for the American investor. We have the opportunity to purchase raw commodities at or even below the price to manufacture. As I have said before, although 2016 will be a hard year for investors, it will not be a hard year for investing. I believe that you simply need to keep your eyes open and be in the right place at the right time to take advantage of what is out there.

Read More

Conferences and Comparative Money Making

By Adams Financial Concepts | January 17, 2018 | 0 Comments

Every year, I go to several investor conferences with 2,000 to 3,000 of my closest friends. Each conference has companies who underwrite part of the cost by taking the opportunity to hawk their products at exhibitor booths. I am always attracted to the trading booths with their elaborate displays – multiple computer screens displaying the latest technical analysis of stocks and markets, the latest prices, and charts with all the most sophisticated analytical tools. There are the stochastic charts, the candlestick trend lines, the moving averages, and on and on. Surrounding the screens are the testimonials of who have made money using the tools and programs the vendors are showcasing. I should add that licensed financial advisors are not permitted to use any testimonials. Testimonials are a small part of an advisors’ book of clients. They may or may not be representative of the total performance of the advisor (and probably not – what advisor would use a testimonial of a client who lost money or who filed a complaint against the advisor?). Obviously these vendors are not licensed as financial advisors. They are not going to show the testimonials of their clients who lost money. I am pretty sure there are plenty of those who have lost money, but I have no way to know whether or not that is true. What is true is that some people, maybe all, have made money. That raises the question, “how much money?” Dalbar and Associates is a research firm that, among other things, studies how mutual fund investors do compared to the S&P500 or other benchmarks if they are in bonds, balanced, or asset allocation funds. The study looked at a 30 year period, ending on 12/31/2014, and found that the average mutual fund investor did make money. Had they started at the beginning of those 30 years with $100,000 their portfolio would have grown to $286,002. The average mutual fund investor made $186,002. Seems good. They nearly tripled the worth of their portfolio. However, if that $100,000 had been invested in the S&P 500, it would have grown to $2,122,469! The average mutual fund investor with $100,000 at the beginning of that 30 year time period would think they made money, but only a fraction of what that money could have made if invested otherwise. So, when I go to the conferences and see those testimonials of investors using the trading platforms and making money, I do not see how much they would have made over the longer-term had they just done as well as the S&P500. I do post how well my clients are doing compared to the S&P 500.

Read More

Robo-Advisors

By Adams Financial Concepts | January 17, 2018 | 0 Comments

On May 1st, 1975 the government deregulated fixed commissions in the brokerage industry. At the time, I don’t believe many in the industry would have said this would make any great impact on revenues, and history shows most chose to carry on with the status quo. Few stock brokers (that was the title financial advisers used back then) felt there would be much change in their business. One man did see an opportunity, though, and moved to found a firm that charged significantly less in transaction fees. That man, of course was Charles Schwab, who would build a significant and competitive that would capture one-third of portfolios by 1999. I think it isn’t unfair to say my industry is not good at seeing what innovations will reshape the industry. It is, after all, much easier to carry on with what you know. And yet investing is nothing if not the practice of trying to predict success and innovation. When I licensed in 1986, broker dealers (as financial advisors were called at the time) made up the largest percentage of the market, about 95%. To increase profitability those big companies began getting rid of any brokers who were not generating $75-100,000 in brokerage commissions. The average family income at the time was $43,000, but profitability was more important than loyalty to these big firms. Those dismissed brokers had licensed under the Securities and Exchanges Act of 1932, which made them registered representatives, and only required that they provide investment options “suitable” for each client. This meant that, if two investments fulfilled all the criteria for a suitable investment, the broker could suggest the one which gave her a greater kickback (if you’ve heard me go on about fiduciary responsibilities at all, you know my feelings regarding suitability). Many of the brokers the big firms dismissed became independent and licensed under the Investment Company Act of 1940, which required that they have fiduciary responsivity toward their clients, and had to make every decision in the clients’ best interests. They are held to stricter oversight, and can be sued if their decisions are viewed as being anything other than in the client’s best interest. By the 1990s and 2000s it was not just the dismissed brokers who became independent, but larger producers who wanted out from under the big firms were leaving and licensing as Investment Adviser Representatives and Registered Investment Advisers. This channel of Registered Investment Advisors have gained momentum, and recently Cerulli released a report which said that in 2016, RIAs grew by 6%, and the large brokerage firms were down 1.6%; they predict that by 2019, registered investment advisors will have more assets under management than the brokerage houses.[1] The big brokerage firms and their representatives (financial advisers) did not see the impact of the discount brokers. The big firms and financial advisers did not see the rise of RIA independent channel. As in the past, I believe that the financial industry will be disrupted again – this time by robo-advisors. When you look at most financial advisors’ performance, they put together portfolios which have generally underperformed. When I worked at those big firms we were told “to sell yourself and your personality, not your returns.” I began doing fee based accounts in 1991 when the general practice was to charge 3% on the first $500,000 or so of assets under management. Fees began to drop, in my opinion, because of poor performance. It is certainly hard to justify a 3% fee when the account is only growing at 5%. Many brokers have taken their fees down to 1% and below. Not only are fees under pressure because of poor performance, but today almost all the same services financial advisors offer can be provided by robo-advisors at a 90% discount. I was sitting on the plane next to a financial advisor from a large brokerage firm. I asked what their value proposition was. He claimed it was the personal connection, willingness to meet in person, and willingness to “hold hands” during tough times in the market. He said nothing about delivering great performance. It is true that human financial advisors will do the things he mentioned. Is that enough to justify charging ten times what a robo-advisor will charge? That advisor also commented the robo-advisor will be used by millennials but not their older clients (as millennials were the stated target). The fact is, we are seeing people across the spectrum (of age, income, and background) using robo-advisors. My Private Banking, an industry publication, produced a survey in 2016 which found that 40% of high-net-worth investors were considering using a robo-advisor.[2] Lower costs, convenience, and greater access to personalized options were all stated reasons for high-income interest in robo-advisors. One in five respondents were even concerned that their current financial advisor wasn’t making decisions in their best interest and thought they would see better advice from the robo-advisor. Now the question is, when set side-by-side, what does the broker, or financial advisor, bring that the robo-advisor doesn’t? Robots are much more adept at compiling and analyzing data than the human brain, or even the very basic computing software (or more complicated, even) we use to put together financial plans. Frankly, I think financial plans as a whole are flawed, as we saw them come apart in 2008/09 (you can read those options in greater depth in other blogs). I hear you cry – robots don’t have that personal touch! But how many people still want that? I have a number of clients overseas that I have never met in person, others who live out of state and I only speak to them over the phone. Personality and the “human touch” aren’t valuable enough to have clients prioritize them over efficiency and lower fees. Our value proposition at Adams Financial Concepts is to deliver over the longer-term superior performance. That is something the robo-advisors are not doing. That is something that the very large majority of financial advisors are not doing. Josh Brown in his book Backstage Wall Street said this: “Most of the brokers I know and have met over the years are phenomenal, world-class sales people…But a great many of these security selling savants don’t attain the knowledge necessary to actually accomplish anything for their clients… Selling one’s expertise is much easier than actually developing an expertise, especially as it pertains to investing.” If you look at other studies, Dalbar presented a report that said the average equity investor (including those who are clients of financial advisors) for the past 30 years has averaged a 3.69% return.[3] Compare this to the S&P 500, which is at 11.11%.The industry is going through a lot of changes, and I believe that the best selling point for a human advisor over a robot is the provide superior returns. That is what brings value to an advisor. Not human touch or better plans, but a tangible, superior return. The industry is changing again, and we, whether we are registered financial advisors, or brokers, or clients, must not imagine it will be slowed down. We must be prepared for what the future brings. [1] Cerulli Associates Global Analytics. The Cerulli Report: US RIA Marketplace 2016. 2017. [2] My Private Banking. Robo-Advisors 2015. [3] Dalbar’s 22nd Annual Quantitative Analysis of Investor Behavior. 2016. http://www.qidllc.com/wp-content/uploads/2016/02/2016-Dalbar-QAIB-Report.pdf

Read More

We’re Getting Old

By Adams Financial Concepts | January 17, 2018 | 0 Comments

In 1965, a Frenchman by the name of Andre-Francois Raffray thought he had made a very good deal; he had purchased an apartment from an elderly widow for about $500 a month. Up until 1975, France had no form of Social Security, and retired individuals had to rely on their savings and a process called En Viager. En Viager allowed a younger person to purchase a home in monthly increments paid until the death of the current resident. Mr. Raffray offered the 90-year-old Jeanne Louise Calment $500 each month in exchange for her apartment, which was worth about $90,000 in ’65. Unfortunately for Mr. Raffray, Ms. Calment lived to be 122 years old, the longest lifespan of any human. In fact Mr. Raffray died before Ms. Calment did. By the time of her death, he had paid about $184,000 for an apartment in which he never had a chance to live. This rather highlights the potential problems with a system like En Viager. In fact, it highlights many problems with the US perception of retirement as well. Every year, the expected lifespans of retirees is extended by three months. In 2016, it was theorized that the first baby who would live to be 150 years old was probably born. Modern medicine, healthy lifestyles, and access to amazing technologies have ensured that our lifespans are continuing to lengthen. That means that budgeting to die at 90 could mean you fall very, very short of your actual date of death (morbid as that thought may be). In the US, Social Security usually represents about 40% of your income; your savings have to make up the other 60%. For many of us, Social Security will be significantly less than 40% of what we will need in retirement.  Unfortunately, four of ten Americans reach retirement age without any savings whatsoever, and others are only able to provide themselves about 20% of their yearly income in retirement. It is no wonder that a Fidelity Study on Wellness found that 57% of the surveyed don’t “feel good” about money, and 42% would go so far as to say they are “anxious” about it; a horrifying 24% said that they avoided medical treatment because of money.[1] On that topic, the longer our lifespans, the more likely we are to face expensive medical treatment during our “golden years.” Even if (and this is a very timely conversation, so my apologies to those who look back with the benefit of hindsight) the Affordable Care Act continues to fund Medicare, a couple in 2016 would only receive approximately $260,000, and it is likely that President Trump will continue to propose legislature which will defund the Medicare Program. Yet on average, affluent individuals can pay over $1,000,000 in premiums during retirement. It isn’t a circumstance which inspires confidence. There is no easy or guaranteed solution to increasing retirement savings. If you’ve read my blog 10 Is the New 4, you know that I believe we are too focused on “safe” money with low risk and low returns. I believe that in order to get the retirement fund that our parents had by putting away 4% of their income, we now have to put away 10% because low-return investments are being pushed onto people who could benefit from greater potential risk for greater potential returns. Additionally, if the secular bull market ends as I feel is the highest probable end with high inflation, the purchasing power of that safe money will be significantly reduced. Think of the 1970s when inflation reduced purchasing power by 40% to 60%. That would mean instead on needing $1,000,000 for medical premiums a retiree will need 2 to 3 times that amount. Obviously everyone needs to weigh their own risk tolerance and needs, but I have found that too many investment advisors provide low benchmarks and low expectations when we should be providing higher returns to our clients – because that, I believe, is what is in their best interest in the face of possibly 30 years of retirement. If I were to tell you that you are saving for 30 to 50 years of unemployment, and would get an unemployment stipend equal to about 40% of your current income, would you look at those savings the same way? [1] “Measuring and Predicting Financial Wellness.” Fidelity Investments. July 2016. Accessed on 9/6/2017. https://sponsor.fidelity.com/bin-public/06_PSW_Website/documents/PDF-Measuring%20and%20predicting%20financial%20wellness.pdf

Read More

Climate Change and Energy Consumption

By Adams Financial Concepts | January 17, 2018 | 0 Comments

Watching the reports on Irma and Harvey, rubbing my eyes from the haze that covered much of Seattle, and having the wettest winter in Seattle’s recorded history to this summer’s longest period without rain all feels like climate change to me. Yet we seem to be plunging forward into a future which will require more natural resources and more energy than ever. I am an optimist, and am confident that we will solve the problem – we will find a way to produce more energy with less damage to the climate. There will be investment opportunities on both sides (energy needs and climate change), and that is what I wanted to discuss today. On the radio program, I have illustrated the impact of greenhouse gases by relating an analogy. Think about when the outside temperature is 75⁰ and you drive to the mall to do some shopping. You have the air conditioning on in the car set at 69⁰. You park the car and go shopping for an hour or two, and when you get back to your car and open the door. The temperature is not 69⁰ or even 75⁰; it is boiling in the 90s. What happened? The sun rays shined into the car turning to heat when it hit the seats and interior of the car. Some of the energy bounced back, but was blocked by the roof of the car. If you have a convertible with the top down, none of that happens. The heat from the sun escapes. That is similar to what happens with greenhouse gases. The sun rays hit the earth and without the greenhouse gas, would bounce back. But the greenhouse gas acts like the roof of your car, keeping the heat of the sun from escaping. I’ve written about the impact emerging markets are having on the market and the middle class before – that by 2030, 93% of the world’s middle class will be in countries like China, Brazil, and Russia. As affluence around the world increases, logically, energy use per capita grows. China alone, for example, is currently responsible for approximately 23% of global energy use compared to the US’s 17%.[1] By 2035, the world energy demand is estimated to increase by 30%.[2] That is the repercussion of “First World” technology and comforts becoming common worldwide. Our current response, burning coal, oil, and natural gas, will continue to wreak havoc on the planet; it is estimated by the International Energy Agency that by 2025 it will take $45 trillion invested in global energy to meet the necessary levels of greenhouse gas reduction.[3] In my opinion, $45 trillion may be too high and does not take into account the changes in technology we will see over the next ten years. In any case, there will be significant capital directed toward energy producers and that creates opportunities for investors if they choose the right opportunities. Although climate change has found its way into the realm of political controversy, the reality is that 99% of scientists who have spent time on the problem agree it exists. In the end, I believe that climate change is not about political stances, but about fact and scientific study. Climate change began with the Industrial Revolution, when humans began using coal, oil, and natural gases to power their innovative new technologies. The CO2 concentration at the beginning of the Industrial Revolution was 280 ppm – we know this because scientists are able to drill into ice caps and measure time and carbon content. In 2011, the CO2 in the atmosphere was measured at 402 ppm.[4] The CO2 traps the heat inside the atmosphere (hence the title “Greenhouse Gas”) and slowly heats the earth. We have seen that between 1880 and 1970 that the average temperature increase was only about 0.03⁰C each decade (which means about 1⁰F over 190 years). But since 1970, the average temperature has increased 0.13⁰C (meaning 1⁰F every 40 years)![5] The global temperature increase is responsible for dangerous storms like Hurricanes Harvey and Katrina, the wildfires, melting ice caps, and dozens of other symptoms. If we look at coal, which represented a full third of US electricity generation in 2016,[6] we find that our coal plants are only on average 37.4% efficient.[7] That means that our current technology is only able to capture and use a certain percentage of the kinetic energy available in the fuel source. We are outpaced by Japan, China, and the EU. To compare, the most efficient power station is the Nordjylland Power Station in Denmark, which clocks in at 47% efficiency.[8] I doubt that any other industry would boast about efficiency under 50%; all the more reason to rethink how we approach energy production, and perhaps there will be investment opportunities Oil and natural gas will have their place in energy production. But demand growth will probably slow down. Clean energy, for all the political babble surrounding its implementation, is well on its way to being the most practical means of production. You have likely already heard that in 2016, solar became “cheaper” than fossil fuels; the situation itself is not so simple that it can be calculated out “apples to apples” because government subsidies and location must be factored in as well.[9] Even without the subsidies, the payback for solar is equitable in 46 of the 50 US states. Estimates are that solar will grow at 30% annually. That said, that the debate even exists gives valuable insight into solar’s growing competitiveness. Likewise, wind and hydro energy have become more efficient. Even nuclear is becoming more and more viable. The area I find most exciting is bioengineering – companies which are altering bacteria to create the compounds found in fossil fuels in a fraction of the centuries it takes for them to be produced naturally. It is in these alternative energy producers that I believe the key to future investments lie. Many US Corporations committed to the Paris Accords even after the US officially pulled out, and will be investing heavily over the next decade in renewable energy. Ford has announced that they intend to up their production of electric cars to 50% by 2020. California hopes to be run by 60% renewable sources by 2030, and Hawaii, which is currently the most oil-dependent state in the US, wants to be 100% dependent on renewable energy by 2050. Remember, $7 trillion USD has been spent annually worldwide on energy. It is an industry that, by necessity, will see enormous growth, although with changes almost certain, previously unknown investment opportunities may present themselves.       [1] U.S. Energy Information Administration. Annual Energy Outlook 2016 with Projections to 2040. August 2016. https://www.eia.gov/outlooks/aeo/pdf/0383(2016).pdf [2] U.S. Energy Information Administration. [3] International Energy Agency. https://www.iea.org/. Accessed on 9/5/2017. [4] Global Climate Change: Evidence. (2008, June 15). Retrieved September 5, 2017, from http://climate.nasa.gov/evidence/ [5] Global Climate Change: Evidence. [6] “What is US electricity generation by energy source?” US Energy Information Administration. April 18.2017. Accessed on September 5, 2017. https://www.eia.gov/tools/faqs/faq.php?id=427&t=3 [7] “How Does US Coal Power Plan Efficiency Stack Up?” Process Barron. March 2, 2017. Accessed on September 5, 2017. http://processbarron.com/news/u-s-coal-power-plant-efficiency-stack/ [8] Process Barron. [9] Richardson, Luke. “Solar energy vs. fossil fules: how do they compare?” EnergySage. December 29, 2016. http://news.energysage.com/solar-energy-vs-fossil-fuels/

Read More

Impeachment

By Adams Financial Concepts | January 17, 2018 | 0 Comments

What happens to the markets if President Trump is impeached? It isn’t my intention to give a prediction on if he will or will not be impeached. I am writing this to analyze what would happen if he is impeached, so that you will be prepared in the event. My philosophy is to prepare for the worst and hope for the best. You can decide for yourself what the best- and worse-case scenarios are. That is not the purpose of this eletter; this is about the markets, not the merits (or lack-thereof) of impeachment. Prior to his election as Vice President, Andrew Johnson had been a Senator from Tennessee, and one of the few Southerners who had remained loyal to the Union during the Civil War. Six weeks after being sworn in as Vice President, Andrew Johnson was elevated to President when Abraham Lincoln was assassinated in 1865. Johnson took a moderate approach to the reconstruction of the South following the war. This did not sit well with radical Republicans, nor with Edwin McMasters Stanton, who had been serving as Secretary of War during and after the Civil War. Stanton was critical of Johnson, and in 1868, Johnson fired him. The House began impeachment proceedings three days later, on February 24, 1868 for “high crimes and misdemeanors,” and one week later, the House issued eleven articles of impeachment. Over the course of the next several months, impeachment votes failed repeatedly, falling just short of the two-thirds vote required for conviction. While there was no DOW in 1868, scholars have tracked the market. In the 3 months prior to the commencement of impeachment proceedings the market was up a little over 10%. During the months of impeachment, the market swooned and dipped. In the two months following the end of the impeachment proceedings, the markets climbed back up and was 6% higher than before the proceedings had begun. The second impeachment proceeding was that of Richard Nixon. During the 1972 election year there was a break-in at the Democratic National Headquarters in the Watergate Hotel complex. I remember reading the first article published by the Washington Post, written by Woodward and Bernstein, stating that the one of the burglars had an address book that listed E. Howard Hunt and possessed a check signed by Charles Colson. At the time, I did not understand the significance of those key elements. I was young and dumb. Nixon went on to be elected in a landslide. The investigation of the break-in continued, and began to narrow its focus onto John Dean. The Democratic Senate began its investigation in May 1973, and the Department of Justice appointed Archibald Cox as Special Prosecutor. In July 1973, Alexander Butterfield testified that President Nixon taped conversations in the White House. In October, as the heat was turning up, Nixon fired Cox. In November 1973, Nixon gave his famous “I am not a crook” speech. But it took until August 8, 1974 for Nixon to resign. During 1972 and 1973, the stock market was in a very strong downtrend. OPEC had cut oil supplies and the United States was seeing a significant shortage as prices rose. The market would tumble. In the 694 days from January 11, 1973 through December 6, 1974, the Dow Jones lost 45% of its value, making it the 7th worst bear market in the Dow Jones’ history. The economy had slowed from a gain of 7.2% in GDP to -2.1%. Inflation (CPI) jumped from 3.4% in 1972 to 12.3% in 1974. It was against that backdrop the investigation of Watergate took place. The Dow would climb roughly 70% from the Nixon’s resignation to the end of 1975. The third impeachment was Bill Clinton’s in the 1990s. Ken Starr had been appointed to investigate the failed land deal Whitewater. The allegation was that Bill Clinton had pressured David Hale into providing a $300,000 loan to Susan McDougal, a Clinton partner in the Whitewater Development Corporation. The investigation ranged from fired White House travel agents to a sexual harassment lawsuit filed by Paula Jones. In the course of the investigation, Linda Tripp provided Starr with a taped conversation of Monica Lewinsky. A Grand Jury was called and Clinton infamously defended himself by debating his use and definition of the word “is.” Six years after the initial investigation began, the House of Representatives, on December 19, 1998, initiated impeachment proceedings against the President.  After conviction, fifty senators would vote to remove Clinton from office, but it was once again short of the two-thirds majority required. Like Johnson in 1868, Clinton escaped removal from office. During the Clinton Presidency, the Dow had advanced from 3241 at the time of his inauguration to 9078 before impeachment proceedings began. The DOW would dip about 5% during the impeachment process and then continued up to over 11,000. In summary, we do not know whether there will be an impeachment or not. While I believe history does not repeat, I do believe it rhymes; there are lessons to be learned. The economy was strong during the Clinton years and during the Johnson years. In both cases the market was rising before impeachment, dipped during the impeachment, and then began to rise again. The economy struggled and the Dow dropped leading up to the Nixon resignation. But the market turned upward following his resignation. There is no guarantee that if there should be an impeachment, the market will follow the historical pattern, but my best guess has to be that it will. The stock markets have been in a secular bull since March 2009. The economy in 2017 has continued to be strong.  Bull markets do not die from old age; just because we are the 9th year of this bull does not mean it will end any time soon. Corrections and reversal will happen as they have in each of the previous secular bull markets. John Templeton said: “Bull markets are born on pessimism, grow on skepticism, mature on optimism, die on euphemism.”  We have not yet reached euphemism.

Read More

New Year, New Everything

By Adams Financial Concepts | January 17, 2018 | 0 Comments

The New Year is traditionally a time for self-reflection and New Year resolutions: You’re going go on more walks, lose some weight, cook more, and really buckle down on work – at least until March. It’s not all that different in the financial world. For the months on either side of January 1st, everyone from Barron’s to CNBC is releasing lists of stocks to own or avoid in the New Year. There’s a push to analyze your portfolio and make your predictions for the next twelve months. Honestly, I normally don’t put too much emphasis on the New Year – you shouldn’t be putting together a portfolio once a year and then tucking it away under the bed to collect dust the rest of the time. To invest means to be constantly evaluating and reevaluating your stocks. I don’t mean day-trading, mind, but researching and keeping up with your investments. So, usually, I don’t spend any more time making my guesses for the New Year than any other time – but this year is a big exception. The Trump Administration was sworn in on January 20th, and I’ve said it before, I’ll say it again, and I think I say it here too: no matter where you stand on the political spectrum, it’s time to start analyzing the possible results of Trump’s campaign promises. There have been a lot of doomsday predictions, so I’ll add quickly that I don’t believe that another Great Recession is coming, but I do see potential storm clouds on the horizon. There are three key things that I believe we should keep an eye on, and that we have not seen before this administration – a stimulus package without any sign of a recession, a heavy focus on repealing regulations (Trump has pledged to repeal two for every new regulation created), and the potential for a trade war as the new president favors Russia over China and Mexico, despite the latter two having a much larger impact on the US economy. Taken together, for 2017 it seems to be a positive initially for business, the economy. However, for the longer-term it’s a mixed bag, really, so let’s break it down and start from the beginning. Trump has promised a $1 trillion dollar stimulus package, with emphasis on rebuilding American infrastructure. Generally speaking, we don’t see stimulus packages without some real threat of a recession, which is definitely not present as we enter the second month of 2017. In fact, since 2009, a very strong economy has emerged – not just in the US, but worldwide. During the election, there was a great deal of fear-mongering, and we heard only about how terrible the economy was and would become, but the numbers refute this. Company profits are at a new high, and cash is at record levels. We’re also seeing that consumer debt levels are at a 40-50 year low, and wages are growing at about 3% each year. This, coupled with the low oil prices of 2016, acted like a stimulus to the economy all on its own! Even housing, after six years, is starting to take off again (because, we have to remember, that it takes time for builders to jump through the regulatory hoops, find funding, and begin the processes). I believe, based on historical trends and mathematical analysis, that this will be a great short-term stimulus, but have negative implications for the long-term. I’ve talked before about why I believe that there is inflation on the horizon, and I think that this stimulus could represent the first steps toward long-term inflation. The high inflation of the 1960s-70s was slow to build, and so you have to be looking for the signs early if you want to spot it. Repealing regulations was another pledge made during Trump’s campaign; he ran on the platform that they block small businesses from being able to compete, and large businesses are chased overseas, taking profits with them. When he arrived in office, Trump began filling his cabinet with leaders outspoken in their opposition to a number of regulations. Trump himself comes from a builder’s background, where regulations rule the day and changes in them can destroy years of work and preparation. Because I work in the financial industry, I’ve been absolutely swamped in news about the Fiduciary Rule for the last year (the focus of which is to ensure that a financial advisor working on a 401(k) or in any of the retirement spheres would have to fulfil a fiduciary obligation to “put the client first.” Insurance firms and big banks, who stood to lose up to $17 billion a year with implementation of the new regulations vehemently oppose the Rule). Many Trump supporters hoped that he would repeal the Fiduciary Rule when he came into the presidency, and on February 3rd he and his administration made their first public statement that they will be working against the Rule. Because of the way the Rule was developed, he cannot simply remove it with an executive order; he would have to go through the proper channels. This means he would either must have Congress repeal it, tell judicial not to enforce the Rule, or defund the program. These are not simple steps forward for the new president, and many other regulations are similarly protected. Like the stimulus, I believe that removing these regulations will be beneficial to the economy in the short-term, but questionable in the long-term. Finally, in my opinion the biggest potential negative impact would be a trade war with China, Mexico, or both that would have long-reaching negative effects for the US economy. Additionally, he has created friction with many of the US’s traditional partners like Japan, Germany, and Australia. He has been also been favoring Russia, who does only about 1/3 of the trade that China does with the US. This imbalance in foreign affairs means that there may truly be a trade war brewing, and increased tension with Mexico, as of this writing, only increases the likelihood. I’ve also heard it said by various pundits and commentators that we should just get the trade war “over with.” In my experience, that just isn’t going to happen. These are long, drawn-out disagreements that don’t end quickly or cleanly. There is no “getting it over with” when it comes to a trade war, especially with two of our largest trade partners. I am tentatively optimistic for 2017, but my outlook on the following years is, for now, undetermined. Presidents can achieve some good during their terms but can also do a lot of bad. I hope the moves by the new administration are mostly positive but it is something I will be tracking very closely.

Read More

Trump Trade War

By Adams Financial Concepts | January 17, 2018 | 0 Comments

These last few weeks have been a roller coaster, no matter who you voted for. You may be surprised to know that the DOW doesn’t reflect this. On Monday and Tuesday November 7 and 8, when polls were showing Clinton was going to be elected President, the DOW was up over 400 points. On Wednesday, once we knew it would be Trump who was going to be the next President, the DOW was still up over 400 points. The lesson, in my opinion, is that the economy has significant inertia and momentum. Whether the election of Trump will be positive or negative for the economy, we will only know months from now. I believe that Presidents try to fulfill the promises they made during their campaigns. Trump proposed a number of changes that raised considerable concern from friend and foe alike for their effect on the market. His promises to tear up NAFTA and impose tariffs of 35% to 44% on Mexico and China create concern that the world could find itself in a trade war. This would probably be negative for the stock market itself, but not for all stocks. President elect Trump has a reputation for being a “very good negotiator.” But I am not sure that being able to walk away from a bad deal on a real estate transaction is the same as doing so in country-to-country trade deals. It remains to see if this is going to be an issue. There is no doubt that companies have moved manufacturing facilities to China, Mexico, and other countries to benefit from lower labor costs. But that is not the only reason (and maybe not the biggest reason) that jobs have been lost in manufacturing. As a country, China has surpassed the United States as the top manufacturing country in the world, with $2.74 trillion in 2013, compared to $2.03 trillion in the United States. That $2.03 trillion is within 3% of record manufacturing output achieved by the US in 2007. Since 1984, manufacturing output has doubled, but with 1/3 fewer workers. Let me say that again. Since 1984, manufacturing output has doubled – but there are 1/3 fewer workers. The biggest factor in job losses has been productivity gains, not jobs shipped to other countries. Here is an analogy. In 1850 there were 23 million people in the United States; 11 million people worked in agriculture. Today the United States produces 600 times the agricultural output as we did in 1850, but by 2014 there were fewer than 762,000 people employed in agriculture. Since the 1850s, farming has become highly productive thanks in large part to trucks, tractors, combines, dairy parlors, etc. Think of it. Each farm labor hour produces over 8,600 times what an hour of farm labor produced in 1850! The same has occurred in manufacturing. Each hour of labor is now producing 6 times the output that it did in 1984. There are organizations like MEP Supply Chain which are forecasting that manufacturing output in the United States will overtake China and once again become the world leader in manufacturing. The reason? The United State is quickly becoming the most competitive country regarding investments in research, technology, and innovation. At the same time, the productivity gains will continue to reduce the number of jobs per unit of output. The issue with NAFTA and the TPP is, in my opinion, not about bringing jobs back to the United States. It is, instead, about exports. The campaign rhetoric was for the United States to begin to impose tariffs on goods imported from China, Mexico, and perhaps other countries. The expected response would be for those countries to impose tariffs on goods that we export. The United States exported $2.23 trillion in 2015, $267.2 billion to Mexico alone (at 11.9%, the second-largest export partner).[1] Our total exports are more than our total manufacturing output. Therefore, a trade war could have a significant impact on manufacturing. Total manufacturing employment in the United States is over 12.3 million jobs. The risk of a trade war for manufacturing alone would be significant. The Trump transition team announced that on Day One of the new administration that the President elect will ask the Commerce Department and International Trade Commission to study the impact of a complete withdrawal of NAFTA. That in itself will probably launch Mexico and Canada (the second and first largest US trade partners respectively) to begin evaluating on their side the impact. Will Mexico and Canada reach the same conclusions as the United States does? There have been reports that Mexico is already drawing up contingency plans if the United States withdraws from NAFTA. Donald Trump has the reputation of being very good at negotiating contracts. If he can get concessions from China and Mexico without launching a trade war, this has a lot of potential. For my clients, I am monitoring the situation closely. I already have a contingency plan in the event of a trade war.   [1] “US-Mexico Trade Facts.” Office of the United States Trade Representative. Found: https://ustr.gov/countries-regions/americas/mexico

Read More

Inflation to Escape Depression

By Adams Financial Concepts | January 17, 2018 | 0 Comments

Howard Marks, investor and writer, said “you can’t predict but you can prepare.” So, today I’m taking a mile-high view of the supercycle (what’s a supercycle? Read more about it in “The Third Supercycle Is Now”) and how I believe it will end, so that we can all be prepared. I believe that we will be able to speculate on how this supercycle will end by looking at previous cycles and the way they ended. By doing so, we’ll have the knowledge we need to prepare for whatever comes. Mind you – I believe that we still have a number of years left in this secular bull market, but it never hurts to start trying to educate yourself early. The first cycle lasted 43 years from 1870 to 1913; driven by the industrialization of the United States, it was a time that set the stage not only for the World Wars, but also for modern living. Model T Fords, railroads, telegraphs and telephones, electricity, and an abundance of clean water gave birth to the kind of technology we still make use of today. The loser was agriculture – in 1874, over 50% of the US population was employed on farms, but the 1874 Financial Crisis saw thirty painful years and the unemployed left for the cities, to find work there. A rapid movement into industrialization saw the US emerge as a world leader in time for WWII. And yet, the first super cycle collapsed into the Great Depression in 1929. The second supercycle, lasting from 1945 to 1970, was driven by the rebuilding of Europe after World War Two, the DOW grew from 150 to 1,000, for the first time reaching that threshold. With the housing and schooling offered by the GI Bill following the war, the Middle Class began to emerge, and with it a massive increase in disposable income that saw the popularization of 2-car families, fast food, and, of course, the television. Meanwhile, the intellectual battle between the USA and the USSR, known as the Cold War, saw the downfall of the Colonial System, which had been in place for centuries. African and Asian countries, like South Africa, India, and China were, for the first time, given control of their own fates. Those children who grew up knowing the Great Depression feared seeing it repeat itself and so, when recession times hit, not only did the second super cycle end after 35 years, those in power  took the risk of inflating themselves out of another depression. These emerging markets, which are only now gaining real economic ground, are what is driving today’s supercycle, which began following the Great Recession in 2008/2009, and could last through 2030. We should spend a moment looking at the Great Recession, and how those who lived through the 1970s inflation reacted the opposite of their ‘70s counterparts, and were willing to risk that recession in order to avoid potential inflation. I believe that today the supercycle is growing more rapid, and it will be a time both of rapid growth and rapid decay: companies that made up the S&P 500 in the 1990s have fallen by the wayside – companies like Kodak have made way for Apple and Netflix – and the lifespans of these companies could be as short as 15 years. So, if we are like our past counterparts, and react to the opposite of the Great Recession, I foresee this super cycle ending with inflation. The Millennials, who came to maturity during the recession will work desperately to avoid another Great Recession or Depression. When the economy begins to sink, remembering TARP and money printing by the Fed as “cures” for 2008-09, those in power will apply the same. They will choose to inflate their way out, as did the generation who grew up during the Great Depression. While we may not be able to predict exactly how this will happen, keeping our eyes open and preparing may give us the opportunity to avoid some of our predecessors’ mistakes. The chances are inflation will increase gradually as it did beginning in 1962 (see the graph below). Remember the classic story of the frog: if you put it straight into boiling water, it will jump out. But put the frog in water and slowly heat the water up, the frog will sit until the water boils. Inflation boils us like water does the frog. It was the early 1970s, when the oil embargo hit, that most people – and our nation’s leaders – recognized inflation, but by that time it had been increasing for a decade.  I believe that this supercycle will end similarly.

Read More