It's hard not to imagine that the drama we hear about in the news won't affect our investments - but what's important and what's not when you invest in the long term? Mike offers some insight into what he thinks is important, what he takes into account when he puts together portfolios, and maybe just some information you'll find interesting!

Chinese Trade Talks

By Adams Financial Concepts | May 22, 2018 | 0 Comments

There is growing concern that the US will find its way into a trade war with China. The US government announced tariffs on steel, aluminum, and possibly on other products as well. China has announced their “Made in China 2025” a plan by which Chinese leaders intend China to be the leading nation in robotics, biotechnology, etc. China was an agricultural society less than 50 years ago. Today they are the second-largest economy, behind only the United States. They are on a path that could make them the largest economy in the world, and surpassing the United States. How did that happen in such a short time? If you have been reading my eletters or my blog or listening to me on the radio you know I believe history does not repeat but it rhymes. France had a similar path to China’s in the 17th Century. In 1661, Louis XIV acceded to the French throne. France was essentially bankrupt, having fought three major- and two minor wars. In those times there was no paper money; money was specie – gold and silver. Unfortunately, France had no gold or silver mines. So in 1665, Louis XIV picked Jean Baptiste Colbert as his Treasury Secretary and put him in charge of growing France’s economy. French industry consisted mainly of small craft shops, which were not internationally desirable and kept France poor and secluded. What Colbert realized was France needed industries, and he set about making that happen. First came “Royal Privilege,” wherein foreign businessmen could set up government-financed factories in France without being charged taxes. The Government also guaranteed that they would purchase the full output of the plants. Glass and textile factories were built – and some of those companies still exist today. They were to have the best quality in the world. The products were sold both in France and exported to bring in much-needed gold and silver. Competing products from other countries were not allowed into France, so French companies easily succeeded. Colbert sent spies to England and other countries to steal the secrets of behind their manufactured products and steal the technology. From other countries he recruited craftsmen and entrepreneurs, and once in France they were not allowed to leave. Over 15,000 craftsmen were executed when they tried to return to their home countries. Factories employed over 1,000 workers, something new in France. The workers were paid a minimum wage and worked 14-16 hours a day. The only days off were religious holidays and Colbert lobbied the Catholic Church to reduce the number of religious holidays, believing there were too many. Colbert encouraged women to marry before twenty so they would add to the workforce. Workers were housed in dormitories to be close to work. Colbert formed a corps of state-funded industrial inspectors who were charged with ensuring products were of the highest quality. Failure to meet these high standards was punished with a stint rowing the King’s galleon. The Dutch had dominated international trade when Colbert arrived. He constructed a commercial navy to compete. Ships from other countries calling at French ports paid excessively high duties on the goods they delivered. France became renowned for producing the highest quality products, especially luxury goods. Companies like St. Gobain and Gobelin Tapestries maintain that tradition today. Jean-Baptist Colbert? He was hated both by the French and by foreign governments, but he launched France into the path of large scale industrialization. He made them an economic power with a technique called Mercantilism. This is almost the same path China has followed. The Chinese government decided on industries they felt would be key to growth and poured their resources into them. The government owns the banks, and is thereby providing all the country’s financing. The government controls the building permits and determines what and where factories will be built. For example, TAECO is a joint venture between Chinese companies and some airplane manufacturers, including Boeing. TAECO was set up to convert Boeing 747s from a passenger configuration to freighter configuration. That is a common evolution for older aircraft. TAECO hangers and facilities were built on what was once a large duck preserve.  The government owned the property and there was no urban planning, just orders to build. The technology was furnished by Boeing. I believe at one point there were over 15,000 workers, and all were housed in dormitories. It all sounds like France under Colbert, doesn’t it? The government owns the land. The government controls the banks. The government decides on infrastructure. The government forces joint venture partners to share or give away their technology. The government limits competition and the government guarantees purchase on the products produced. They control building and prioritize what is built and where. 70% of Chinese exports are from factories that were relocated from overseas. For example, several years ago FOXXCOM, a Chinese company, employed 300,000 low-paid laborers housed in dormitories. 100,000 of those workers were dedicated to producing Apple products like the iPhone and iPad which would be exported back to the United States. The other 200,000 were working on Hewlett Packard and other high tech company products. That is why China has evolved from a backward agricultural country to the second largest economy in the world. What’s more, China has not played fair. In 2001, they joined the World Trade Organization (WTO) as a developing nation1 with many of the provisions designed to help developing nations grow. For example, tariffs on cars are 25% for cars shipped into China, compared to Chinese cars imported into the US at 2.5%. China is now the second largest economy in the world, but still has not changed their status with the WTO. However good that sounds, it also seems like the economy is built on sand foundations rather than concrete. From what I read, many of the big industries are not efficient. They are funded and supported by the government, and there is little incentive for them to be efficient. TAECO for example was operating at a significantly reduced rate a few years ago. How much of that was due to a slower economy and how much to inefficiency, I don’t know.  But I could say inefficiency certainly contributed. We know in this country there are certain functions the government should have, but when the government becomes involved in the private sector it seems to be inefficient and ineffective. I believe we are seeing that with China. This year at the five year summit, Xi Jinping, the supreme Chinese ruler, announced the “Made in China 2025” plan. The goal of the plan is to make China the leader in the industries of the future. The plan calls for Chinese companies to produce for Chinese consumption. The target is to produce 80% of electric cars, 70% of industrial robotics, 70% of medical devices, 60% of targeted tractors, and 10% of aircraft in China2. If they are successful, they could and would displace most of what the United States exports to China. Instead of reducing the trade balance it would reduce US exports to China by some 85% to 90% while maintaining or growing Chinese exports to the US. My guess is trade talks with China will not persuade them to back away from “Made in China 2025”. They feel they can outlast the United States in a trade war. I would also guess China will make great strides in those targeted industries. They will be strong competitors in the short-term with government financial support whether efficient or inefficient. The US will have no leverage since they will be producing for China. If and when they achieve “Made in China 2025,” they will be exporting their products in these categories to the rest of the world in direct competition to the US and remainder of the world. I believe we have little leverage in trade talks with China. Further to that I do not believe they will play fairly and honestly. Abraham Lincoln asked this question: “if you call a dog’s tail a ‘leg’ does the dog have 5 legs?” No, the dog has only 4 legs. Calling the tail a ‘leg” does not make it a leg. It will be important to follow and understand what is happening in China. There will be pundits who will bemoan their entry into those key industries and will shudder when they make some breakthroughs. But I believe just their entry and a few breakthroughs will not put them on a path to long-term dominance of those industries. Just because they say they are going to dominate does not mean they will, no more than calling the tail of a dog a “leg”. But it will impact some US companies and in my opinion it is prudent to be very cautious in investing in those companies. Notes: 1.    “Some Things Are True Even If Trump Believes Them” – column by Thomas Friedman, NY Times, March 13, 2018 2.     “The People’s Republic of Protectionism”, Barrons, May 4, 2018

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Bond Vigilantes

By Adams Financial Concepts | May 18, 2018 | 0 Comments

The Economist recently compared watching the market in 2018 to watching a horror movie. There is the character that walks out into the dark, the floor boards creaking and the swell of haunting music to build the tension. Is it Freddy Krueger or only the wind? In response to the drama of the market, the so-called “bond vigilantes” have reappeared. I have not heard mention of the bond vigilantes in over a decade, maybe two. My family sometimes questions my taste in novels, specifically when I started The History of Interest Rates by Sidney Homer. It goes back to 1988-89, when I was first in the business; I moved out of the bull pen where all rookie brokers began and into an office complex. The two brokers sitting on either side of me had been retail bond brokers for over 20 years and we were located close to the institutional bond trading desk and the municipal bond trading area. I was immersed in the bond side of the business, and discovered just how much there was to learn. I started by reading Eugene Fama’s Municipal Bond Handbook, a two volume set, which tops out at over 1,700 pages. (Fama, you might recall shared the Nobel Prize in Economics in 2013 for showing that only 7% of professional money mangers do well enough to earn their benchmark plus their fees.) When I had gone through training as a rookie I had learned about building bond ladders, a simple concept. What the Municipal Bond Handbook had to say went far beyond simplicity. Total yield in a bond portfolio has three components: (1) the coupon interest rates paid by the bonds in the portfolio, (2) the reinvestment of the interest payments, and (3) capital appreciation. Capital appreciation was capturing price movements, pricing disparities, and other characteristics of bonds that added to the total value. The value added by each component was roughly 1/3. Bond ladders capture the interest rate and reinvest the earnings in new bonds. That amounts to 2/3 of the return, but bond ladders capture little if any of the capital appreciation from the last third, which means the investor doesn’t capitalize on 1/3 of their potential earnings. Of the Municipal Bond Handbook about 1,600 of the 1,700 pages were devoted to that last 1/3. Sitting next to bond brokers, not only did I get to read about capital appreciation, but I also got to experience and learn it firsthand. For me it was the difference between average or mediocre and superior. I also learned about the “bond vigilantes”. There is no real group of vigilantes; they are simply bond traders – all those people I sat with as a fledgling broker. They focus on finding capital appreciation and understanding economic conditions that will impact bond prices so they can buy low and sell high. They watch economic conditions to find the anomalies that will add value to their portfolios. Long time stock market players listen to them because the same economic conditions they watch impact the stock market as well. Something happened last November that stirred the bond vigilantes. The yield curve began to flatten. Normally short-term rates on US Treasury bills run about the same rate as inflation. This is to be expected. Investing money short-term you would expect to stay up with inflation. But there is very little risk, so no real premium to the rate of inflation. Longer-term bonds like 10 to 30 year US Treasuries pay the buyer about 1 ½ to 2 ½ percent more for the additional risk of holding the bonds for a longer period of time with less certainty of what inflation and the economy will do. The Federal Reserve has considerable sway over short-term interest rates. They set a target “fed funds” rate and will buy and sell short-term bonds to hold that rate. However, the Federal Reserve does not have much control over longer-term rates. Those rates are set by what price market buyers and sellers are willing to pay. Since the Great Recession, short-term rates on US Treasuries were around 0.25% and 10 year bonds were 2 – 2.5%. In November the yield curve started to flatten. The Federal Reserve began pushing up short-term rates. Instead of following short-term rates up in lock step, longer-term rates moved up more slowly. Short-term rates today are 1.5% – 1.75% and 10 year bond rates are 2.8% to 3.0%. For the bond vigilantes a flat yield curve can imply that inflation is picking up because short-term rates are up. In fact, the CPI index has been increasing over the last 12 months. The bond vigilantes see the longer-term rates failing to keeping pace with short-term rates as an indication that the economy will be slowing down later this year or next. When the economy slows down longer-term prices on bonds increase and yields drop. If the bond vigilantes are correct and the economy is in fact going to slow down later in the next 12 months or so, that will also impact stock prices. This is what the fuss is about. That is why for the first time in over a decade we are hearing about the bond vigilantes. They could be right or they could be wrong. The Federal Reserve in this country and central banks around the world are raising short-term interest rates to return to normal levels. Longer-term rates at current levels may simply be a function of instability in the world and money seeking a safe harbor in the US. In summary, my guess is the economy is not going to slow later this year or next but instability in the world is going to keep foreigners buying our treasuries and holding the rates low. Like the bond vigilantes I have a spreadsheet I have been updating monthly since the late 1980s with the statistics and data pertinent to bond brokers. I have and will continue to monitor it to stay alert should the bond vigilantes be correct about the economy.

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Tulips, Bubbles, and Bitcoin

By Adams Financial Concepts | March 26, 2018 | 0 Comments

It is tulip season in Mt. Vernon, and for me that brings to mind a book. One of the classic investment books is Extraordinary Popular Delusions and Other Madness of the Crowd by Charles Mackay. Despite being first published in 1841, it is one of those books that I think has not only withstood the test of time, but is also, and unfortunately, relevant to modern investing every few years. The book begins in the 1600s and works its way through famous bubbles, such as the South Sea Bubble from 1719, John Law’s French Mississippi Scheme, and, perhaps most famously, Tulip Mania. Tulip Mania swept through Europe in the 1630s. Tulips were a highly-desired luxury item from the Ottoman Empire and with so few making their way into Europe, the prices began to rise to the point where in 1634, speculators were investing in them – a perishable good! By 1635, 40 tulip bulbs were worth 100,000 florins, while the average yearly wage was only 150 florins. In 1636, with a booming futures market, two tulip bulbs could have purchased 12 acres of land. Many investors made very rich. By February of 1637, the market dried up and prices crashed. It’s not hard for the modern investor to jump from Tulips to the Dot Com bubble of the late 1990s/early 2000s. Hindsight being 20/20, we like to think we wouldn’t fall into another bubble so quickly, but as Mackay’s book proves, we all love the idea of a get-rich-quick scheme, and it is difficult not to imagine that the next is somehow going to be different. I overheard a conversation in the grocery store back at the beginning of 1999; I overheard two twenty-something women talking and one said, “You’ve got to buy stocks! You know, you can borrow money on your Visa card, and you’ll only have to pay 18% interest!” To me, as an investor, that was another signal that the Dot Com bubble, that those good times, were coming to an end. Something similar occurred a couple of months ago; I had a former sales associate call, and after some brief small-talk, she asked me for a loan of $10,000 to purchase Bitcoin. She has no investing experience and I wasn’t swayed to invest, but I got the same feeling I had the grocery store almost 20 years ago. My concerns with Bitcoin stem from the same place as Tulip Mania. When I invest, my evaluations are based on measured value. I believe that if you cannot measure the value, it isn’t a good deal. I am also devoted to doing my own research because I know that TV personalities, the media, and so-called “experts” all have their own agendas. When I can’t rule out any of those concerns, there are too many red flags for me to invest in the product. I’ve heard some people discussing the idea that Bitcoin could become a world currency, and perhaps it’s on that basis that the virtual currency has skyrocketed 1600%. The problem with that idea is that there are some very strict requirements for a currency to become the primary exchange currency. The reason the US dollar is so far-reaching – is, in fact, used in 85% of all foreign currency transactions and greater than 60% of all foreign countries hold their reserves in the US dollar – is because it is uniquely stable, large, and backed unconditionally by the United States government. Prior to 1914, there were three primary currencies – the English Pound, French Franc, and the German Marc. Following WWII and the Great Depression, a number of countries met together and from that meeting came the rules that still define a world currency. At the time, the United States was the largest nation with both world-wide reach and the least damage following the war. The US had an enormous trade surplus, and other countries such as the UK found themselves deep in debt following the war. Any other currencies that were potentially stable enough were too small – specifically Switzerland’s Franc. In the end, the United States dominated and the dollar cemented its place as the world-wide industry. Bitcoin is neither large nor stable enough to take the place of the dollar as a world currency. In fact, the dollar was considered a safe-haven even during the Great Recession. In the end, much of the market is about perception – if the market believes 2+2=5, they’ll buy for 4 ¾ all day long. While the perception of Bitcoin is bringing speculators flocking, I don’t trust that the perception will hold, and like the Tulips, eventually someone will realize we’ve been paying more than they’re worth.

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2017 In Review

By Adams Financial Concepts | January 23, 2018 | 0 Comments

One of the things that I believe sets me apart from other talking heads commenting on the state of the markets is that I hold myself accountable for my predictions. 2017 is over now, and that means that most people are talking about 2018, and prepared to let bygones be bygones – whether they were right or wrong. I think it is important to take stock of what I said back in 2016 about the year just passed, and critique myself. I said at the end of 2016 that I believed 2017 would see the stock market continue to grow, not from any short-term political ramifications, but because we are in the middle of a secular bull market. These bulls do not die of old age; in fact the last began in 1982 and went on until 2000 – more than eighteen years! It’s said that bulls are born on pessimism, grow on skepticism, mature on optimism, and die on euphemism, and while many investors seem to worry that this bull is getting too old, I think we are still in the second stage. This is something I’ve been saying since 2009, and that was the basis for my 2016 predictions. Tied into my prediction regarding the Super Cycle, we saw almost all countries showing positive GDP growth in 2017. More specifically, I expressed weariness over the new Administration providing an economic stimulus, which has never been done while the country wasn’t in a recession, and I didn’t know what ramifications we could see. In the end, what was passed was Tax Reform, which I don’t believe will have anything near the effect a full stimulus would have. This tax cut, from most of the math-based research I’ve seen, will largely benefit the wealthy and corporations, whereas a stimulus package is generally beneficial for lower income levels. The impact of the tax reform will in my opinion be positive for corporate earnings and thereby for stock market, at least for 2018. I predicted that the economy would do well – not a 4% GDP rise, but no less than 3%. What we saw was that the economy did hit 3% in the last two quarters but did not hit 4%. I believe the Tax Cut was a gamble that the GDP would reach 5%, which I would like to believe will happen, but realistically doubt will happen. I also stated that I believed that we would see record profits, and in that I was correct. I believe that we’ll see even more in 2018, too. Profits drive the market, that’s the reality. It is numbers and not administrations that make the market move. I’ll talk more about that in the coming weeks as I give my 2018 predictions. We also saw record cash levels, consumer debt levels lower than the long-term average, and consumers benefiting from lower oil prices (and therefore having more money to spend driving up demand) – all things I predicted back in 2016. I predicted unemployment to be at 5% and was thrilled to see it even lower, at 4.1% as the low! I thought we would see housing not only recovering, but heating up as well. While the reality was regional and not country-wide, it is generally improving. I said that I believed that 2017 would be a good year for the S&P 500 and when the final results were in, they proved to be even better than I expected. Back to math for a moment, we know that tax cuts for corporations are, fundamentally, very good for company profitability. When tax rates are going to be cut by up to 14% (as they will be in this tax bill), we will see increased profitability which will, in my opinion, in turn increase stock prices and the S&P 500. Again, that’s just math. In the end, I believed – and continue to believe as I look forward into 2018 – that the economy would be good in 2017 and the years to come. I believe that the actions the government is taking will lead to a good today and good things in the next few years, but my concern is in the long-term.   Thanks, Mike

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Oil and Commodities Drop

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

2016 has been off to a rough start – in fact it is the worst start in history and for many, 2016 is stirring up memories of 2008. I believe that this fear is unfounded and stemming from misinterpreting the oil and commodities drop. They are symptoms, I believe, of the credit bubble bursting and the overproduction which stemmed from futures contracts in the 1990s and 2000s. Despite this, I still think that we are in a super cycle, and as with previous super cycles, there will be some winners and some losers. We wouldn’t be in a super cycle if everything was going smoothly. Where oil and other commodities are concerned, there is lots of supply and no demand. During the 1990s and 2000s, people believed that the price of oil would only continue to rise and so, many futures contracts were taken out. Airports and the like took them with the intention to collect on their contracts, but many – as much as 50% – were speculative, with no intention of ever taking possession. In addition, it became common for commodities to be treated as an asset class, and more investors joined the speculative boom that way. Futures contracts make sense if the prices continue to climb, but if the price drops, not only do you lose your investment, but you owe additional money as well. Often the money used to pay back the speculative contracts was pulled from other speculative contracts. In this way, I believe that the drop in oil prices was also the catalyst for other commodity prices to fall as well. The speculation which caused prices to increase also saw trillions invested into factories, plants, and drilling to keep up with the nonexistent demand. $2 trillion was invested into factories in India and China alone, and $6 trillion was invested into oil drilling in Brazilian coast, Australia outback, and South Dakota. The additional investment helped create the oversupply and among others, China’s steel production quadrupled between 2000 and 2015. That is an excess of 600,000,000 tons, and across the globe in Scotland, steel factories are closing – and we are likely to see them closing here as well. A lot of money went into factories, as during the housing market when a great deal of building resulted in many empty homes. We saw banks and businesses close in 2008, and likewise in 2015, 25 energy companies defaulted on their loans and I suspect there are more to come. Despite the drop in oil, though, the S&P book value has continued to grow. I think this is because oil companies saw the drop as very temporary and continue to carry reserves at full value ($100 to $110), and this spring auditors will force them to market value. I believe this will result in significant defaults and bankruptcies which will affect the market and earnings. There is good news for the American companies and consumers looking to purchase steel, oil, and other commodities. The price drop will make raw materials cheaper to purchase. I also believe that outside of energy and commodities there will be real growth coming in the market. But as I have said before, to quote Richard Bernstein, it will be a tough year for investors, but perhaps not for investing.

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Mute the T.V.

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

As of January 14, the stock market had its worst start in history. Are we headed to another 2008? NO! In fact, I believe we will probably see a decent to very good market in 2016. But is that what you will hear during the presidential and congressional campaigns? No, you will be hearing doom and gloom. 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 chance we’re going to be seeing many negative ads, and their gloomy assessments of the economy. 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 catastrophic 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 historical 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. One of my favorite sayings 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

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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

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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.

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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.

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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.

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