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!

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

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The History of Crowdfunding

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

In 1958, Harvard economist John Kenneth Galbraith published The Affluent Society, in which he outlined his belief that the US had reached the pinnacle of affluence – that American standards of living had risen as high as they ever would. Most families owned a car, their own 1,100 ft2 (on average) home, and even had refrigerators and telephones in those homes. This, Galbraith said, was as high as affluence in the US would rise. But we know that his assumption was wrong. Look at where we are today – smartphones and PCs and bigger houses and 3-car families, all concepts that Galbraith couldn’t predict. Society did not stagnate in the 1950s, it only continued to grow, and not just in the US, but around the globe. In 1946 George Doriot founded American Research and Development Corporation (ARDC), raising money from friends and associates. Prior to then start-up companies relied on angel investing or bootstrapping to get going. ARDC made a $70,000 investment in a small computer company, Digital Equipment Company (DEC). When DEC came public that investment was worth $35 million. Venture capital was born. The statistics of venture capitalism are staggering: in 2007 alone, US companies founded by entrepreneurs and backed by venture capitalism represented 10.4 million jobs, and those companies generated $2.3 trillion in revenues, 18% of US GDP. Silicon Valley alone is worth $3 trillion in 2016. And I believe it is these companies that are driving the current supercycle with their innovative and disruptive technology. Whether you like President Obama or not, I believe that in the longer-term what his administration will most be credited with will not be healthcare, but the JOBS Act passed in 2012. Jump Start Our Business Start-ups (JOBS) authorized Crowdfunding. Venture capital has grown to the point it funds the big start-ups but leaves behind many of the small ones. Crowdfunding allows companies to source funds from a large number of people. The source of funds can be worldwide and in smaller amounts. But through 2015 estimates are that $34 Billion was raised worldwide through crowdfunding. I believe we entered a supercycle (Wonder what a supercycle is? Check it out in this blog post.) The funding of the new companies that will drive growth for the next several decades will be the start-ups and many of those start-ups will be capitalized by crowdfunding. Just as venture capital furnished the start-up monies for the second supercycle, so will crowdfunding furnish the capital for the third supercycle we are in today.

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Brexit

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

The news that overhangs the markets is Brexit – the UK voted to leave the European Union. While I believe that this was a very short-sighted decision, I also believe that the Brexit decision has a historical impetus going back several centuries along with more recent history. During the late 1600s and early 1700s, France and England were in three major and several minor wars. Both England and France financed their wars with borrowings. Initially, they borrowed at 5%, but found it quickly grew to 10%, causing a Great Recession in both countries. France tackled the recession with stimulus and England with austerity. Here we see the first big rift between the British and EU mentalities. While the stimulus method caused a fairly fast recovery, British austerity took decades to recover. We jump now to the 2008/2009 Great Recession. Both the EU and the US responded with a 2009 stimulus package, but by 2010 the EU changed tracks and decided to enforce austerity measures to get their budgets in check. This, as we have seen, caused turmoil in the southern European countries, such as Greece. Yet with the stimulus, the UK GDP was growing faster than the US – yet they sided with the austerity measures, and in the summer of 2010 cut their budget by 25%, eliminating 40,000 government jobs. By the 4th quarter of 2010, they had slid back into a Recession. As the year turned, they continued to lose jobs. Brits who grew up between the 1940s and 1970s remember a time when “The sun never set on the British empire.” The British empire stretched from the British Isles to Canada, Australia, India, and much of eastern and western Africa. The UK GDP was second only to that of the United States.  As the UK continued their struggle in and out of recession, it was difficult not to become nostalgic for a time when the British Empire was one of the most powerful countries in the world. Today, they are only the 5th largest economy in the world, behind the US, China, Japan, and Germany. It was also easy to point fingers at who was “taking” jobs, but instead of fury at the austerity measures, they turned on immigrants. June’s Brexit vote was an accumulation of centuries of ingrained responses to recession. While it was the austerity measures that resulted in a tough economy for business and massive job loss, the blame was placed on the immigration granted by the EU over the last 30 years. What will be the impact? As of now, 44% of British exports are to EU countries; there is open trade between EU countries, but now tariffs will probably be imposed on those exports. Likely, there will be another Scottish and possibly even a Northern Irish move for independence. With the loss of Scotland, England will lose access to their oil revenues. Meanwhile, the leaders of France and Germany are positioned to take good advantage of Britain’s exit. In Britain, the austerity, initially a function of their own government and not the EU, will continue to wreak havoc. While Britain itself hopes that leaving will only affect their control of immigration and the single common market will be maintained, the countries still in the EU are not likely to agree to that. Particularly, it is France who is fighting against granting the UK any favors, while Germany is more willing to compromise. Both countries have said that there will be no free trade. In the long-term, austerity works. Britain will most likely come out of the recession, but it will probably get worse before it gets better. Perhaps the bigger problem is that Britain still insists in thinking with an Empire mindset. There is potential for more dramatic missteps for the world’s 5th largest economy if they continue in this mindset.

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What’s A Fiduciary?

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

Recently, British comedian John Oliver’s show Last Week Tonight put out a flooring (and very entertaining) look at the retirement industry. I spent Monday morning watching it after Sara shared it, and between nodding along with his points and laughing so hard I choked I decided that I needed to share it. You can watch the video included, and I encourage it, but I also wanted to highlight some of the most important points. First, Oliver asks what is a financial advisor? He answers actually, and technically – nothing. That title, along with financial analyst, financial consultant, investment consultant, or wealth manager does not actually indicate credentials. The only valid credential is whether your advisor is a fiduciary. I am. Two, as Billy Eichner asks, “[What]…is a fiduciary?” Well, it means that I (as a fiduciary) am required by law to put your well-being first. I cannot receive commissions from brokers. Every few years I can be, and often am, audited to make sure that there isn’t anything going on that shouldn’t be – as is every one of my employees. It is the highest standard of care in the industry. Finally, Oliver looks at fees. He compared fees to termites: they are tiny but they eat away at returns. In fact, a previous Department of Labor study found as many as 17 fees and costs being taken from 401Ks, and most of them were hidden so neither participant or sponsoring company realized they existed. Low returns could mean the employee participants may end with account balances at retirement that are up to half of what they might have been. A quality 401k does provide a lot of other benefits that aren’t usually associated with your retirement plan in addition to returns: retaining skilled employees and tax deferrals are just two. John Hancock responded saying that the plan Oliver was discussing was a start-up plan with $30,000 of assets. Read between the lines and it seems John Hancock is saying the plan is so small it loses money for John Hancock. While they claim there are no hidden fees, they did not say the costs were fully disclosed. Now that you know, what’s your next step? Watch the video: Then, I would start by contacting your advisor – or whoever works with you on your retirement plan – and asking two questions. First, if he or she is a fiduciary (now that you know what it is), and second, ask for their REAL returns, net of all fees. With these in hand, you can start to assess where your plan is at now, and make decisions about where you want it to be.

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The Market Is Flat

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

There has been no new market high since May 21st, 2015. That’s a reality that has some investors panicking; some are even dubbing this the “Twilight Zone” (do do do do). And yet – and yet, if we ignore the preemptive panic, we can see that for all the threat a flat market can present, there’s good news. If we look at global stocks, we find that as of the end of May they were off by 8%. Commodities have lost 22.8%. European bank stocks are back to 2008 Lehman Brothers lows; Japanese bank stocks are down 30% and Chinese bank stocks down 40%. Oil is down 60% and gold is down 35%. Hedge and mutual funds have lost and are continuing to lose money, as are junk bonds and emerging markets. Are you pushing the panic button yet? But the overall market is only down 2% overall. For all that we could interpret the state of the commodities and the banks as negative, the market itself is, from my perspective, actually encouraging. I believe that history doesn’t repeat; it rhymes. We saw a similar market back in 1995. The market had been flat for a year, and in January 1995 the New York Times posted an article titled “Prepare for a BIG, DEEP BEAR MARKET.”  People were genuinely preparing for a market downturn that we could compare to the Great Recession. Never happened. There are more parallels: talk of reforming the healthcare system (Hilary Clinton in the conversation, no less) had the pharmaceuticals up in arms, Orange County California filed for bankruptcy, Mexico had devalued the Peso, and the market was a very old secular bull. What happened instead of that deep bear market the New York Times article forecast was that the S&P rose from 487 to 1,366 in just five years – a 280% increase; ours would go from 2,090 to 5,890. If our DOW increased at the same rate, we would see it explode from 17,820 to 49,840. I’ve been predicting for several years now that we will see the DOW reach 100,000 in the coming years – could it be in the next five? It’s unlikely, but not out of the question if these numbers hold true. To quote another old adage, “the market climbs a wall of worry.” At the end of the day, I believe that, if we are holding onto the right stock, it is better to ride out the bad times.

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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 overproduction that stemmed from futures contracts made in the 1990s and 2000s, and the resulting credit bubble burst. Despite this, I still believe 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 an excess of supply compared to demand. Oil production in 2015 was at 96.3 million barrels per day but demand was just 94.5 million barrels per day, and the excess went into storage. Demand has not dropped off; it was a record high in 2015. During the 1990s and 2000s, it was believed that the price of oil would only continue to rise and so many futures contracts were taken. Airlines and other real consumers took out contracts with the intention of taking delivery but hedging against future price increases. Yet, as many as 50% of the contracts taken were speculative, and had no intention of ever taking possession. These were simply initiated as speculation on the price of oil increasing. Simultaneously, it became common for commodities to be treated as an asset class, and more investors joined the speculative boom through those means. Futures contracts make sense if the prices continues to climb, but if the price drops, not only do you lose your investment, but you can owe additional money as well (as these contracts are usually highly leveraged with borrowed money). In this way, I believe that the drop in oil prices was also the catalyst for other commodity prices to fall when the bubble popped. The speculation that prices were only going to increase also saw trillions invested into factories, plants, and drilling to keep up with the false demand. $2 trillion was invested into factories in India and China alone, and $6 trillion was invested into oil drilling in the Brazilian coast, Australia outback, and South Dakota. The additional investment helped create the oversupply. China’s steel production quadrupled between 2000 and 2015. At the end of 2015 there was 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 in the US 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. In 2015, 25 energy companies defaulted on their loans and I suspect there will be more than 150 additional bankruptcies to come. Despite the drop in oil, the oil companies the S&P book value have 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 write them down with a mark-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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What’s Food Got To Do With it?

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

TV and newspapers talk about the “consumer returning.” Where did the consumer go? Nowhere. They never left. In 2009, 70 percent of the Gross Domestic Product (GDP) was made up of personal expenditures. Which means, $7 out of every $10 spent in the United States went towards one of four different sectors: Domestically Produced Goods, such as groceries, internet, and washing machines; Imported Goods, meaning anything that read “Made in China,” “Made in Taiwan,” or “Made in wherever it might be;” Imputed Goods, a catch-all category consisting of rent and property purchases; and Healthcare. While the consumer hasn’t disappeared, they are making significant changes in their purchasing habits. Programmed purchasing, when a consumer visits a retail location having already decided what they are going to buy and how much they can afford to spend, is becoming the norm. Roger Stilson, President of Specialty Restaurant Group says: Roughly 85 percent of consumers who go to a sit down restaurant don’t judge the restaurant on the prices they see on the menu. They make a judgment value of the restaurant based on what on they can see on their credit card receipt during the drive home. Previously, the majority of restaurant patrons based their dinning experience on a number of factors other than price such as ambiance, service, and quality. Now that consumers are making a value shift, we can expect to see businesses follow. Products and services which meet the Baby Boomers and Millennials expectations for not only quality but end price will flourish in the market place.   For more information on all of these topics, I encourage you to listen to About Money, a weekly podcast and radio show. You can also follow us on Facebook and Twitter for blog updates, podcast news, and more! I want to hear your opinions; please leave a comment below and let me know your thoughts.  

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What Does Disruptive Technology Mean For an Investor?

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

Disruptive technology shakes up the norm. It unexpectedly displaces an established technology and forces the standard man outside of his comfort zone. Often arising during financial crises, disruptive technology sprouts new inventions and increases efficiency. Often in the midst of this chaos wild predictions are made about the future. On March 22, 1876, the New York Times made this prediction: “Thus the telephone, by bringing music and ministers into every home, will empty the concert-halls and the churches.” For an investor, disruptive technology has the following important implications – big opportunities and accompanied with the need for intelligent deduction. The catch is, traditional Blue Chip companies usually make incremental changes rather than disruptive ones. This causes them to risk loosing market share to upstart companies. They become what I call “Black and Blue Companies.”   For more information on all of these topics, I encourage you to listen to About Money, a weekly podcast and radio show. You can also follow us on Facebook and Twitter for blog updates, podcast news, and more! I want to hear your opinions; please leave a comment below and let me know your thoughts.  

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What Do You Control?

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

Negotiations on the debt ceiling have come to a close. The average guy or gal’s views of how each party handled their side vary wildly. However, regardless of your stance on how the debt ceiling should be handled, chances are you have no input. Most likely, the politicians in Washington aren’t calling you for advice. Does this mean you have no affect on today’s economy? No. By concentrating on what is in your control, you can affect change. You control your financial portfolio, advisors, and spending habits. When your choices reflect what you support, you utilize your influence on the economy. For instance, do you support an increase in local jobs? Small companies are making a significant difference in today’s economy by creating new jobs. Using their services helps these businesses grow and the local job market continue improving. In the Seattle area, there are numerous, thriving small companies created by innovative people. Many are in the technological field. One such company is Doxo, the every day mans digital filing cabinet. CEO and President of Doxo, Steve Shivers, returned to On The Money last Friday, August 5. He explained how their digital filing services for bills and bill payments allow consumers to store all of their financial documents on the web. Doxo not only helps you organize your bills and receipts, it gives you added payment flexibility and increases local jobs. Also, this tree friendly option is ideal for the environmentally conscious Seattleite.   For more information on all of these topics, I encourage you to listen to About Money, a weekly podcast and radio show. You can also follow us on Facebook and Twitter for blog updates, podcast news, and more! I want to hear your opinions; please leave a comment below and let me know your thoughts.  

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The New Currency

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

The U.S. dollar hasn’t always been the U.S dollar. For most of America’s toddler years, states, towns, and, sometimes, individual banks printed their own currency. Even with when the Coinage Act of 1792 was passed by Congress, it did not create a unified paper currency. However, a national currency was created when Lincoln’s Secretary of the Treasury, Salmon Chase, was asked to find finances for the Civil War. He established a national banking system and created the “greenbacks.” These greenbacks (first printed in 1861) formed the basis for today’s paper currency. In recent years we’ve experienced an economic downturn, causing businesses to find creative ways to cut costs and cover finances. From a “bartering goes modern” idea, a new currency has been born in the U.S. What is this new currency? It’s BizX Dollars. This unique bartering system, created by BizXchange, is a community of businesses which buy and sell among each other. Unlike a typical barter system where two parties have to accept each other’s services directly, this is a robust platform of over 200 businesses. Members earn currency by doing jobs for other members and then spend their currency for their own business needs. For example, you own a restaurant and you need to print $5K worth of menus. In most cases, you give a check to a printer and your bank account is depleted. As a member of BizXchange, you can now use BizX Dollars. These aren’t free dollars. They do cost you something in trade, such as $5K worth of BizX members eating at your restaurant. How does this save you money? Evaluate your real cost on $5K worth of dinners. If it’s 75 percent, you are now paying for your BizX Dollars at 75 cents on the dollar and getting new customers you wouldn’t have had otherwise.   For more information on all of these topics, I encourage you to listen to About Money, a weekly podcast and radio show. You can also follow us on Facebook and Twitter for blog updates, podcast news, and more! I want to hear your opinions; please leave a comment below and let me know your thoughts.  

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