Friday, May 24, 2019

If You Want To Thank A Soldier, Be The Kind Of American Worth Fighting For. - Unknown

In observance of Memorial Day, Rollins Financial and Rollins & Van Lear will be closed on Monday, May 27th. Please note that all major U.S. stock exchanges and banks will also be closed in honor of those who died while serving our country.

Our office will reopen on Tuesday, May 28th at 8:30 a.m. If you need immediate assistance on Monday, please do not hesitate to contact our staff via email.

Take time to celebrate, honor, remember, and have a safe and wonderful weekend!

Best Regards,
Rollins Financial

Tuesday, May 7, 2019

Why do we fear prosperity? Understanding the wealth effect.

From the Desk of Joe Rollins

This has been a very unusual and exciting month in the financial markets. We have received unbelievably overwhelming positive economic news, yet for some reason we seem to be ashamed of our own prosperity. There are many things I want to talk about in this posting, but recently I have been scratching my head, trying to understand why the general consensus in the media is that we should be ashamed of this country’s success. The purpose of this post is to examine that concept and try to understand where it generates from. When we went through the fourth quarter of 2018, the same financial experts were predicting a recession in the U.S. in 2019. They also assumed that a political quagmire and overly aggressive Federal Reserve would destroy the U.S. economy in 2019. And surely the bull market that has been ongoing since 2008 would collapse and burn as the final coup de grace. Well, I guess I am here to tell you that those guys were wrong.

All over the news are so called self-styled socialists who believe that income equality should be the true goal of the American economy. Poor people should be compensated like rich people. The rich should share their wealth with the poor. The people who work hard or are better educated should share their wealth with the people that do not work as hard and who are not as well prepared. When you compare those two statements, I am a little bewildered how the logic fits from an economic standpoint. There is no question that everybody would like to stamp out poverty in America, but just exactly how do you do that? Do you do that by giving them money, retraining them for jobs or by just taking money from the rich and giving it to the poor for no good reason. I would like to review those subjects as we progress along.

Partners Robby Schultz and Danielle Van Lear's children, Caroline and Reid

As always, I would first like to cover the most recent month and the performance of the financial markets. The month of April was truly an extraordinarily good month from a financial standpoint. Even though the news was full of political gyrations related to the current President, the financial markets ignored all of that and turned in a sterling performance. The year-to-date performance of all of the major market indexes have been nothing short of breathtaking.

For the month of April, the Standard and Poor’s Index of 500 stocks was up very nicely at 4%. For the year 2019, that index was up 18.2% and over the last ten years that index has averaged an increase of 15.3%. The Dow Jones Industrial Average was up 2.7% in April, 14.8% for the year 2019 and over ten years it has averaged a gain of 15.4%. Once again, the one-year return was double digits for both indexes.

The NASDAQ Composite once again led the major market indexes as it was up 4.8% in April and for 2019 is up 22.4%. Over the past ten years, that index has averaged an annual return of 18.1%. In comparison, the Barclays Aggregate Bond Index was exactly flat in April and is up 2.9% for the year 2019, while only averaging 3.6% over the past ten years. I do not need to spend a lot of time emphasizing the glaring difference between the returns in the indexes and the bond index. All three of the major market indexes have averaged an annual return over the last ten-years of greater than 15%, while the bond index has averaged 3.6%. I continue to read the advice given to seniors just entering into retirement, stating that your portfolio should have a percentage equal to your age in bonds. In my honest and now well-documented professional career, that type of blanket advice borders on negligence. Such advice has led to overly conservative portfolios which almost assuredly will underperform the indexes in the next decade.

A client called me recently, frantic that the national debt would continue to grow at this seemingly accelerated rate and undoubtedly lead to financial chaos in the future. I responded that I was not terribly concerned about the growth in national debt as long as GDP continues to grow, and that the national debt is less than one times GDP in any given year. I pointed out that Japan’s national debt is roughly two times the GDP and has been that way for close to 35 years. There is no question that this level has slowed their economy, creating a subdued GDP in the intervening period, but it has never led to the complete destruction of the Japanese economy. Slowed down? Yes. Led to destruction? No.

I indicated to him that over the last decade GDP has basically doubled, and that as long as GDP was growing I did not share his concern. The President basically said the same recently, when he exclaimed that if we could continue to accelerate the growth in GDP, a lot of positive things would occur in the economy. By the very definition, income tax dollars paid to the Treasury would have to go up. With these extra dollars, the government could complete its long-awaited capital projects such as, roads, bridges and dams. Correspondingly, the money spent by the government on these projects would further increase GDP, coming full circle as these tax dollars go back to employees. He was exactly right on this subject.

Ava at her ballet recital

After we hung up, I went back to actually look at the numbers and make sure that I did not misquote and provide this client with inaccurate information. The GDP in 2009 was $14.418 trillion. In 2008 GDP was $20.495 trillion. GDP for 2019 is expected to come in somewhere in the neighborhood of $23 trillion. Okay, so perhaps I did misquote. From 2009 to 2019, GDP only went up from $14.418 trillion to roughly $23 trillion. So that is only a 60% increase, not 100%. But there is much more positive information in that analysis than meets the eye. In 2009, the unemployment in America was 9.3%. In 2019, unemployment in America is 3.6%. In 2009, even after one of the worst recessions in recent time inflation was at or near the same level it is today.

So basically, the country has increased its GDP by 60%, while its unemployment has dropped dramatically and the inflation rate continues to be at virtually the same level. I guess you would have to say that with that strong backing of economic performance over the last decade you certainly would have to be encouraged about the future, and you certainly should not be concerned that the growing national debt will endanger the economy.

I often mention in these postings that the most important component of a strong economy is the number of people working. It is believed that 70% of the current GDP is controlled by consumer spending. It should be self-evident, even to the uninformed, that if you have more people working, you have more people consuming. For every person that has a job, there is a downflow of money that creates GDP. They buy food at the local market, feed and clothe their children and spend money on consumer goods. The more people that are working, the better it is for the economy.

Last Friday we received the news that the unemployment for the month of April was 3.6%. It is hard to believe, but that is the lowest unemployment for our economy in almost 50 years. Clearly, more people are working now than ever over the last half of a century. How could you not be encouraged by this strong economic information?

So, you might assume that with the economy growing 3.2% in the first quarter and unemployment being 3.6%, that there would be, almost by definition, a shortage of labor to fill jobs. As a general consensus, it is always assumed when there is a shortage of labor employers bid up the cost of labor creating inflation, which would correspondingly mean a higher interest rate by the Federal Reserve, and almost assuredly a slowdown in the future. Once again, the people who wrote the textbook do not understand the economy in 2019.

For the first quarter of 2019, productivity actually increased at a rate of 3.6%; the highest increase in productivity since 2010. If you look at the time period from World War II to 2018, which included both expansions and recessions, productivity rose at an annual rate of 2.1%. Even in the previous economic cycle for 2000-2007, productivity rose at an annual rate of 2.7%. While we are seeing the computerization of many jobs in America, these computers are not replacing people. With computers, manufacturers are now able to increase productivity and therefore get more work out of the same number of employees.

The fact that productivity went up in the first quarter is particularly surprising given that first quarters are historically slow. Weather and other conditions typically slow down productivity, but this was basically a gangbuster quarter. This is a very important trend in the future of U.S. GDP. In order for GDP to grow, you must have productivity gains. The same people must produce more or the GDP will falter. This increase in productivity in the first quarter of 2019 should be very reassuring for those skeptics that believe the economy must fail just because it has had a 10-year positive run.

As we finished 2018, the forecasters were assuming that the economy would clearly be in a recession in 2019 and GDP would falter. I guess those forecasters were also wrong when the Federal Reserve reported an extremely robust 3.2% increase in first quarter GDP, which was up sharply from the 2.2% in the fourth quarter of 2018. How could so-called “expert” economists be so very wrong about the economy? Certainly, if you look at all of the geo-political events, you could see trouble for the economy ahead. However, the one statistic that you really need to evaluate is how many people are actually working, since that is where the GDP benefits the most. With the highest level of employees working during the last 50 years, it is unlikely that the GDP could fall into recession without a major reduction in those working Americans.

For reasons unclear to me, people seem to be ashamed of the prosperity that Americans have enjoyed over the last decade. In 2008, the average GDP per American was $48,302. By the end of 2018, that number had risen to $62,606 - a fairly substantial positive move given the number of people. I always question when the general public is addressed by the media with the misplaced notion that we should be ashamed of this prosperity. I guess I cannot clearly understand their skepticism. If you have worked hard and you do a good job, why should you not be well compensated? That is what is happening in America today. Due to the hard work, better education or just luck of the draw, employees are earning more than ever and are benefitting from their success.

There is this ongoing discussion that the wealthy should subsidize the poor for the betterment of America in general. I do not concur with those assessments. I could not help but be mindful of the quotes yesterday at Berkshire Hathaway’s annual meeting. When Warrant Buffett was asked if he was concerned that socialism would overtake America, he replied, “I don’t think the country will go into Socialism in 2020, or 2040, or 2060.” His vice chairman, Charlie Munger, added “I think we’re all in favor of some kind of government social safety net in a country as prosperous as ours. What a lot of us don’t like is the vast stupidity with which parts of that social safety net are managed by the government.” Truer words have rarely been spoken.

So basically, in an “income equality” society you would take the money from the rich in the form of higher taxes and turn it over to the government to reallocate based on their assessment of who should benefit. However, we have already seen, as mentioned by Munger, the vast stupidity of which the government allocates resources. Why anyone would actually propose or assert that the government will do a better job in the future than they do now is certainly na├»ve by any definition.

Caroline and Reid enjoying another beach day

A much better way to stimulate the economy is to do so without government intervention. The government has proven repeatedly its inability to administer social programs with any level of efficiency. However, a reallocation of wealth is actually occurring in the U.S. today. I have written on the subject of the wealth effect many times in these pages, but we see it virtually every day. We see clients that have enjoyed a run-up of 328% in the equity markets since the S&P 500 bottom in 2009. Every day, we see clients that are taking money out of their investments and using it to stimulate the economy. Maybe they buy a new car, fix their house, or educate their children…If the markets had not run-up so dramatically, then it is very likely that they would not have taken their money out of the markets and spent it in the economy.

You need to understand exactly what happens when the wealth effect is in operation. First, it is very likely that the investor creates income taxes by virtue of selling investments. These income taxes go into the government and help to fund future operations. The investor spends that money at the local car dealership creating sales for that dealership and correspondingly more employees are paid and those wages typically go up. So once again the wealth effect creates a tremendous positive attribute for the American economy. An investor takes a little profit off the table, creates income taxes and creates jobs. Does anyone really think that we could have realistically gotten the unemployment in the U.S. down to 3.6% if the wealth effect had not positively impacted the economy over the last decade?

And here we are now, being assaulted daily by the assumption that the bull market that started in 2009 must end for no particularly good reason other than “it always has.” As explained here before, bull markets do not just die of old age, there is always a reason. The reason more often than not is that the economy slips into a recession, and the stock market correspondingly goes down in sympathy to the recession. But also, the basis for which those forecasts are made should also be called into question. Forecasters were predicting a recession in 2019, which clearly looks like they were in error.

They also asserted that corporate earnings would be down in the first quarter at least 4%. As the vast majority of the companies making up the 500 indexes have now reported, those earnings appear to be fractionally higher than even last quarter’s robust earnings. I reflect back on the forecasters who said the S&P was very expensive at the end of 2016. The market could not go up in the intervening years because the indexes were overvalued. Just for the record, the S&P 500 index is up 36% since the end of 2016. So once again, do not believe everything that you read, unless it is contained herein.

One of the most respected corporate executives in all of America is Chairman and CEO of JPMorgan Chase, Jamie Dimon. He echoed my sentiments when he stated that just because things are good, doesn’t mean they have to go bad. Just recently while discussing if there has to be a recession , he said, “If you look at the American economy, the consumer is in good shape, the balance sheets are in good shape, people are going back to the workforce, companies have plenty of capital…business confidence and consumer confidence are both high… So it could easily go on for years. There’s no law that says it has to stop.”

I sure wish he would quit quoting me without due reference. He is so accurately correct though. There is absolutely no reason why economic expansion could not occur and there is clearly no reason why it must go down. As I pointed out in my last posting, I went through the volatile years of the Greenspan years at the Federal Reserve. By his own admission he would take the economy from boom to bust and vice versa for no good reason. Since 2006, the Federal Reserve has been controlled by much more educated and well-respected leadership. The best solution for everyone would be an economy that is not too strong and not too low, just right. The so-called “goldilocks” economy that we have today. If the Federal Reserve does its job, and it adheres to this double mandate of controlled inflation and full employment, this economy could continue to expand for many years to come. Today, it is hard to fathom that any type of recession could enter into the United States prior to the election in 2020.

Ava and her nameless bunny

I am often approached by potential investors for my opinion on Washington. Yes, I understand it is troublesome and that the nightly news is full of horror stories of political misdeeds, but you are missing the most important point to be learned from these political shenanigans. When Congress is completely concentrated on the irrelevant, as they are today, they are not passing laws that would be destructive to the economy. Since 2016, the current administration has rolled back regulations that were no longer needed in the economy. This has loosened up business expansion and improved the economy for everyone. If Congress remains as dysfunctional as it is today, they can never pass new laws that would add this form of legislative burden to society. I cheer them on in their incompetence.

Let them debate the irrelevant and totally worthless subjects that they appear to be focused on today until the cows come home. They can have all the hearings, meetings, subpoenas, and cross accusations they want, as long as they do not do what they are paid to do, which is to legislate. Some of the greatest stock markets of all time have been during a time of congressional incompetence. I think what we are seeing today is the government at its worst, but markets at their best.

As always, we encourage you to come in and visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email.

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins

Wednesday, April 17, 2019

What Do Accountants Suffer From That Ordinary People Don't? Depreciation.

Please note that the offices of Rollins & Van Lear and Rollins Financial will be closed on Friday, April 19th as a show of gratitude to our staff for working their assets off these past few months. And thank YOU for choosing us for your accounting and tax needs again this year; we appreciate your trust, patronage and support!

We will resume normal business hours on Monday, April 22nd at 8:30 a.m. However, if you have any pressing matters that require immediate attention on Friday, please do not hesitate to contact any of our staff.

Thank you again for allowing us the opportunity to serve you and have a wonderful weekend!

Wednesday, April 3, 2019

Best stock market quarter in over a decade, and reflections on our first 40 years investing.

From the Desk of Joe Rollins

As we end the first quarter of 2019 you cannot help but be impressed by the stock market’s performance in the first quarter after the carnage from the fourth quarter of 2018. The stock market made a stunning turnaround to recuperate nearly all of the losses it suffered during the fourth quarter of 2018. Virtually all segments of the market were up, including the beaten down oil sector along with a sterling performance by technology. There is a lot of positive things to say regarding the economy and the markets, although it is often minimized by the negative talk regarding a slowing economy. As I have pointed out in the past, a slowing economy is actually a virtue in that it keeps worldwide interest rates low as earnings continue to prosper, albeit at a slowing pace.

I have much to talk about in this posting regarding the economy as well as some reflections as we approach our 40th year in business. I wanted to reflect on some of the events that led to our current thinking and a successful investment criterion. If you wanted the stock market to perform well, this would be the economic environment for it to do so. We are currently in a “goldilocks economy” with interest rates low, earning high and inflation contained. That is the trifecta of positive investment returns as I will illustrate below.

Eddie, Jennifer, Lucy and Harper
skiing in Utah

I also want to describe the growth of this investment thought pattern over the last 4 decades that led to positive returns. However, before I do so as I must always reflect on the performance of the financial markets for the first quarter and for the month of March 2019.

As we reflect back on the best quarterly performance in a decade, virtually all financial assets were up in this quarter. The Standard & Poor’s Index of 500 stocks increased 1.9% in March and is up a sterling 13.6% for the year 2019. Also, the one-year performance is up 9.5%, which you have to remember includes the disastrous selloff in the fourth quarter of 2018. It is always interesting to note that the 10-year average in this index is up 15.9% per year for the last decade. The NASDAQ Composite was the best index of the quarter, up 2.7% in the month of March and up 16.8% for the year 2019. The one-year performance is also up at 10.6% and the 10-year average is 18.9% per year. The Dow Jones Industrial Average, mainly due to the downturn in Boeing stock, was only up 0.2% during March, up 11.8% for the year 2019 and up 10.1% for the one-year period then ended. The 10-year average on this index is also up double digits at 16.0% per year for the last decade.

Even the downtrodden fixed income index was up during this period. For the month of March, the Barclays Aggregate Bond Index was up 2 % and is up 2.9% for the year. The one-year performance on the bonds are 4.6% and for the 10-year period they average 3.7% per year. Once again, you can see the huge differential in returns between equities and bonds as the above numbers indicate. One of the most important things you have to consider with a fixed income investment is the direction of interest rates. Today, we have one of the lowest 10-year bond yields of all time and if you were a betting person, you would almost bet that index was going higher rather than lower. If, in fact, the interest rates do move up with the good economy, it is almost assured that your fixed income investments will operate at a loss. From a standpoint of potential investment returns, clearly equities favor higher returns than fixed income, which will likely operate at a loss or breakeven over the rest of 2019.

As we go into the second quarter of 2019 there is much to reflect upon. There is no question that the earnings for the first quarter are expected to be somewhat lower. It is currently anticipated that earnings would fall for the first quarter by 3.8%, however that must be taken in context with the fact that earnings are at historic highs and a small move down would not lower the anticipation of another strong earning cycle. Also, earnings expectations have historically been minimized by earnings that have exceeded expectations by an average of over 5% going back to 2010. If that is truly the case, we would anticipate an earnings growth this quarter that is basically even with the prior quarter. During the last quarter of 2018, with all of the financial forecasters believing that recession was inevitable, earnings growth actually increased by 3.5%, which quelled these fears and led to a large turnaround in the first quarter of 2019.

We are also seeing other positive attributes that are leading to market gains. For reasons that are hard to explain, the 10-year treasury rate has fallen dramatically this quarter. Back in October 2008, the 10-year treasury was currently trading at 3.25%, dropping all the way to the 2.4% range we enjoy today. This dramatic decrease in interest rates will most assuredly lead to a rush of refinancing and purchasing of homes, which has slowed due to the higher interest rates over the last 6 months. Lower interest rates have a very positive effect on the economy, creating new jobs in housing construction, suppliers and all the retail outlets that cater to home upgrades and improvements.

It is also clear that the current administration is campaigning for lower rates to keep the economy growing, but honestly the markets have provided the lower rates which should do the work for them. Surprisingly, the economy enjoys a continuous low inflation cycle. Last Friday, the Federal Reserve’s favored inflation gauge, core personal consumption expenditures, rose just 1.8%. This percentage is well below their optimal inflation rate of 2%. But more importantly than that, with inflation well contained, the Federal Reserve should have no reason to increase interest rates at this point, which is positive for the economy.

As you know, the Federal Reserve has basically two mandates to keep employment high while keeping inflation low. At the current time, employment operates at close to full employment and inflation is well contained. Given that double mandate, there is virtually no academic reason for increasing interest rates for the remainder of 2019, which should lead to a strong economy throughout the year and a recession is highly unlikely. While the equity markets will certainly be up and down over time, the positive trend is clearly intact and while swings in the market are almost inevitable, the trend up is clearly in tact and should be even higher at the end of the year, than they are today.

As we approach the start of our 40th year in business in year 2020, I could not help but reflect on what has led to the successful growth in our business and the beneficial events in history that helped us grow economically with our investment philosophy.

Over the last two years, we have enjoyed national recognition that may be unprecedented for a relatively small local investment company. Many of these awards were not campaigned by us, but yet came through national recognition and public filings. We are honored to have enjoyed the following recognition over the last two years.

1. In 2015, we were acknowledged as the 20th best nationwide investment advisors by CNBC. At that time, we managed roughly $274 million in assets and today we have doubled in size to roughly $560 million.

2. In 2018, we were awarded as One of the 300 Best Advisors in the United States by the Financial Times.

3. We were nominated by Accounting Today as one of the 150 largest CPA firms in assets under management.

4. Recently, we were awarded one of the 11th best financial advisors in Atlanta by Advisory HQ.

All of these awards were greatly appreciated, but I think they acknowledge 40 years of hard work spent understanding financial markets and reacting to those markets in a positive economic way. Not to say we have not made any mistakes over the past 40 years, but hopefully we have learned from those mistakes and improved along the way. The history of the firm is centered on the financial aspects that control the investment philosophy of today. When you evaluate financial firms, many of them were formed recently without this economic backdrop. How many investment advisors can boast that they have gone from a firm started with absolutely nothing, to an award-winning one from a small office in Atlanta?

Joe and his first computer

I would like to reflect on the history of the firm from when I started it in 1980. In the prior years leading up to 1980 we suffered through the disastrous inflation-prone years of President Jimmy Carter. One of his principal advisors was Dr. Alan Greenspan, which I will comment on extensively as follows. I vividly remember waiting in long lines to purchase gas due to our support of Israel during the war in the Middle East. Today, we are no longer economically dependent on the Middle East for oil and technology, and open markets have led to a boom in oil production in the United States. As I began the accounting firm in 1980, just as President Ronald Reagan was taking office, interest rates soared and the economy was clearly in recession. It was certainly not the optimal time to begin a small tax practice, but sometimes crisis leads to opportunity.

In those days, I would send my best clients to people that I believed could help them financially. Oftentimes, I would refer clients to the largest investment houses only to suffer disappointment. I soon found that these large brokerage houses had way too many conflicts and they would invest in financial products that met their own financial goals, not my clients. The final straw for me was when a client was led by a well-known broker in town to invest in a real estate partnership which carried huge fees and unrealistic appreciation of the assets. When the project had completely failed a couple years later and my client lost his entire investment, I complained to the broker who had advised my client to purchase into this without my knowledge. His response was that the client was “a big boy” and he could have read the financial document himself. Once I recognized these conflict-laden practices were not in the best interest of my clients, I formulated the plan to invest my clients’ money myself.

This process began in 1987. During the Reagan years, the stock market had performed extraordinarily well as interest rates fell from their highs in 1982. Unfortunately, President Ronald Reagan appointed Dr. Alan Greenspan on June 2nd, 1987 and he immediately announced his intentions to begin increasing interest rates to slow the accelerating economy. These increases in interest rates had a very negative effect on Wall Street, leading to the market crash in October 1987 (when the market fell from a high of roughly 2,100 to roughly 1,700 in one day). This 22% decline was the largest one-day stock market crash of all time. This was certainly not the optimal time to consider an investment company. However, I have to reflect on that market that closed that day in 1987 at roughly 1,700 but today is 25,928.

I wanted to build a new kind of investment company where there would never be any conflicts of interest. It would be a firm where the client’s interest was always held at the highest level of importance and we would not invest money where we would be paid to do so, rather we would only be paid by the client. We would sell no commission products and would take no money from any source other than the clients, period. Since this was such a radical change from the common way big brokers worked, I knew it would be controversial to them. In addition, there would be no surrender charges, a client could leave whenever they wanted to and the only way we could make money would be to grow their account.

We were the very first CPA firm in the area to seek to create an investment company. At that time, the AICPA, which was the governing party of CPA firms, would not allow CPA firms to have investment companies because of the perceived conflict of interest. We received permission, but were required to do so as a separate company. Thus Rollins Financial was founded on January 1, 1990, as we are competing our 29th year in business with the investment company.

As I began my investment company, I went through many boom and bust cycles. I vividly remember when President George Bush refused to cut taxes to stimulate the economy which led to a recession in 1990, leading to the election of President Bill Clinton in 1992. I also remember the 1990s as being extraordinarily good for the stock market, except for the wild fluctuations and interest rates as Greenspan pushed the economy in one direction or another. In his famous speech in December 1996, Dr. Greenspan expressed his concern of “irrational exuberance” that forced the market down dramatically for a year or so. I also remember Dr. Greenspan’s paranoia about Y2K and his fear that all computers would not reset as the century turned, which of course in retrospect was ridiculous. I spent the night in New York City on December 31st, 1999 and awoke the next day to computers working the same as they did the day before.

Harper and Lucy Wilcox in Utah

Dr. Greenspan’s wild expectations of negative financial news in 2000 led to him flooding the economy in 1998 and 1999 with liquidity of unprecedented levels. This in turn led to the huge run-up in the dot-com stocks and a market in 1999 that was too hot. As was typical during the Greenspan era, in early 2000 he reversed course and drained the economy of liquidity and increased interest rates. This led to the final coup de grace in March of 2000, when the dot-com bubble burst. At that time, the NASDAQ Composite reached over 6,000 before falling to close to 1,000 a few years later. Once again, reflecting back, that same index today is valued at 7,729, but it took almost 18 years to exceed that level of March 2000.

While 2000 was a down economic year, nothing could have affected the market more than the 9/11 attacks in 2001. Once again, the market suffered huge declines and Greenspan cut interest rates to compensate for that decline. If he had maintained a normalized interest cycle during this time frame, maybe this selloff and the economic downturn after 9/11 could have been minimized.

During this entire timeframe we learned that interest rate cycles are the most important aspect of equity investing. In anticipation of a bad economy after 9/11, Dr. Alan Greenspan decreased interest rates in 2002 to a then low of 1%. In fact, at the beginning of 2004, Dr. Greenspan advised that it would be better that all home owners adopt variable interest rates due to the extraordinarily low rates. Once again, only a few months later, he began increasing interest rates that over the next two years would move from 1% to 5.25%. He increased rates 17 consecutive months.

There are many that argue that Dr. Greenspan was the architect of the 2008 real estate disaster. He believed that low interest rates would accelerate the economy and would expand housing. However, he was a stanch opponent of federal intervention of derivatives, which led to the high risk mortgages which we all know so well today. In fact, the increase in short term interest rates from 2002-2004 in many ways led to the foreclosure disaster that occurred in 2007. People who could afford interest rates on a variable rate in 2002 could no longer afford them in 2007. As would be the case, bankers borrowing money basically for free from the Federal Reserve could loan it out for higher interest rates and make a large profit. What they did not count on, which was the single most important component of the 2008 disaster, was that the Federal Reserve would continually increase the interest rates to make the homes no longer affordable for the homeowner.

Dr. Greenspan remained Chairman of the Federal Reserve for 16 very volatile years. He often said that most of his economic analysis occurred when he sat in his bathtub with his yellow pad and thought deeply about the economy (it is best to avoid the visual aspects of that thought). What it actually led to was almost two decades of huge swings in the equity markets by an uneven Federal Reserve policy. During this time, we learned a lot about how the market moves based upon interest rates and the economy. I think this learning cycle has served us well in investing at the current time.

Fortunately for us, Dr. Greenspan retired in 2006. Since that time, we have seen a stabilization of interest rates and their movements to the market. Yes, we incurred the huge down move in 2008, but that was clearly at the hands of Dr. Greenspan and his prior administration. It appears to me that Federal Reserve Chairman, Jerome Powell, is of high credibility and knows exactly how to control the economy by gradual moves in interest rates to keep the economy at a high level.

The biggest benefit we have going forward is that the economy is strong and if the Federal Reserve stays out of the way, the economy should grow as we go forward. There is absolutely no reason why we should go from boom to bust as often as we did under Greenspan if the Federal Reserve does their job efficiently. At the current level of basic full employment, the economy should grow in the 2-3% range for years to come. However, any intervention to increase interest rates is likely to disrupt that normalized growth. Hopefully the current members of the Federal Reserve understand this and will leave the economy alone to grow its own foliage.

All of us should feel encouraged by the technology that is changing virtually every aspect of our lives. They did not find a better way to drill oil to turnaround the oil industry in America, they instead discovered that technology could allow them to find oil and allow them to drill it more efficiently than any other developed means of bringing oil to the surface. Technology led to oil wells that never before existed. Due to fracking and shale oil production, the U.S. is now the largest producer of oil in the world. In the 1980s and 1990s we begged the Middle East to sell us oil; we no longer need to do so.

There is also a technology that is changing the natural gas industry. Today we are able to liquefy natural gas and ship it around the world. Huge liquefied gas manufacturing plants are currently under construction near the Gulf Coast, which will take very cheap natural gas from the south, liquefy it and ship it to Europe and China to sell it cheaper than their current supplier.

President Trump was very critical of the fact that Europe acquires most of their natural gas from Russia. He understood the national security concerns that having natural gas being supplied by a potential enemy could have devastating effects on the European economy. But now, the U.S. can ship natural gas into Europe and sell it for cheaper than they are currently buying from Russia. There is a change occurring that is unprecedented in economic cycles.

I remember back only a few years when the so-called forecasters were predicting that robots would put many people out of work and take jobs from Americans and run them with machines. Today, in the automobile industry, robots manufacture the majority of a car, but yet employment remains full. Technology has changed the way that cars are produced and they are better than ever with fewer defects and higher reliability. I remember often times buying a new car and taking it to the dealership the day after purchase with a long list of defects. The car I currently drive has never been to the shop in over 2.5 years.

Now we are enjoying the electrification of cars and the potential it holds. Electric cars are common now, which get long range and do not use fossil fuels to drive. Clearly, they have their limitations, but it is my projection that within the next 10 years, every car manufactured will have electric features that will change gasoline consumption forever. Cars today have electronic features unthought-of only a few years ago. Electric censors in cars keep you from backing into your neighbors’ tree and stop you short from running over people. These features make the cars so much safer nowadays than they were only 5 years ago. It is quite unbelievable.

So, in closing, I reflect back on these 40 years and see all that has changed. Yes, there are problems in the world that will make us adapt our thinking. There is no question that the deficits will have to be addressed, but not immediately. The strength of the economy reduces billions in taxes, but we have to be able to afford the entitlements that we enjoy in America. Very small changes in the Social Security system could make Social Security solvent for 100 years. However, until we have a congress willing to support any changes in that law it is not likely to occur any time soon. But technology is changing everything we do and making our lives simpler and better. The reason I am optimistic for the economy and the stock market is that I see that huge companies generate a substantial portion of their revenue not with people or manufacturing, but through services. These services are extraordinarily profitable and their stock will be rewarded.

CiCi and Ava

The one negative aspect of stock market investing is that the only clear indicator of a down market is if there would be an oncoming recession. A recession will almost always reduce the value of the markets due to the lower earnings of the corporations. Fortunately, with lower interest rates in place, higher earnings and inflation intact, any recession is likely 2 years away and, if the Federal Reserve does its job, maybe even longer than that.

As always, we encourage you to come in and visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email.

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins

Tuesday, March 5, 2019

"Stocks off to best start in 28 years." - Barron's, March 4, 2019

From the Desk of Joe Rollins

It is really kind of hard to believe how well the stock market has done through the first 2 months of the year. We have had the best stock market since 1991 amid the most negative and derogatory news cycle in my professional career. How is it that stocks could perform so well during a new cycle that is so negative? Well, there is a simple answer to that question. Blame the “goldilocks” economy, not too hot and not too cold, just right.

I have a lot of things I would like to cover in this posting that I find of interest. First, I would like to go through some of the economic evidence and perhaps give you some ideas about why textbook economics does not work in this environment. Also, it seems that the current media darlings are the socialists that are hoping to see the U.S. economy convert into a socialistic one. I suspect that most readers of this posting really do not understand what a socialist economy is, so I would like to take the time to explain it. Also, I would like to give you examples of socialist economies and their ultimate failures.

It is very interesting to see potential presidential candidate, Bernie Sanders, and the star of the media, Alexandria Ocasio-Cortez, with their new proposals regarding the economy. Alexandria is too young to have a history of prior quotes, but Bernie Sanders is 77 years old and has many. I will give you some of his past quotes to demonstrate the absurdity of his current proclamations regarding the economy.

However, I must first start out with reporting the excellent month of February. The Standard & Poor’s Index of 500 stocks was up 3.2% during the month of February and is up 11.5% for the 2019 year. For the one-year period, it is up 4.7%, for the three-year period it is up 15.3% and the 10-year period it is up 16.7%. Quite excellent numbers across the board. The NASDAQ Composite was up 3.6% for the month of February, up 13.7% for the year 2019, also up 4.7% for the one-year period and up 13.1% for the 5-year period and up 19.9% for the 10-year period. The Dow Jones Industrial Average was up 4% for the month of February, up 11.6% for the year 2019 and up 6% for the one-year period ended February 28, 2019. For the 5-year period, that index is up 12.4% and for the 10-year period it is up 16.8% annually.

I always like to compare stocks with bonds so that you can get a feel for how different the indexes really are. For the Barclays Aggregate Bond Index, it was actually down -0.1% in February, although for the year 2019 it is up 0.9%, for the one-year period it is up 3.1% and the five-year period 2.3% annualized and 3.6% for the last 10 years. For those that thought bonds would have protected you in the selloff of the fourth quarter of 2018, you can see that stocks vastly outperformed bonds over any relative time frame.

The Rollins Group Partners -
Danielle Van Lear, Robby Schultz, Joe Rollins, Eddie Wilcox

It has actually been an amazing economy recently, even with the tremendous selloff in the fourth quarter of 2018; which, as I reported here, had absolutely nothing to do with the economy, earnings or interest rates. That selloff occurred because of the hysteria regarding the ill-placed and ill-advised concept that the Federal Reserve would continue to raise interest rates and throw the economy into a recession sooner rather than later. That concept was so ridiculous as to not be taken seriously, but yet the market sold off regardless.

It has been an impressive run by the economy and undoubtedly there are parts of the economy that are beginning to slow. We are seeing industrial production down and, of course, new home sales have tapered off. Not that this is a negative, in fact, it is very much so a positive. The economy reported a GDP recently in the fourth quarter and was up 2.6% for the quarter. Quite frankly, that is an impressive number. Plus, it is not so hot to force the Federal Reserve to increase interest rates, but also not so slow for them to cut rates.

The general consensus by those who forecasted the GDP for the first quarter of 2019 are currently forecasting it to be below 1% growth. While it is historically normal for the first quarter GDP to be slowed, this one was particularly affected by bad weather. Having the worst weather in decades in the North has slowed production and obviously brought construction to a halt. We should expect a significant rebound in the second quarter of 2019, as the weather improves and people are able to work outside.

The decline in the economy in the first quarter will have major positive impacts. With the Federal Reserve basically on hold, there is growing likelihood that their next rate change might be down rather than up. I cannot even explain to you how bullish a change down in interest rates would be for stock market performance.

Just the other day, President Trump tweeted that the only thing holding back the U.S. economy was the strength of the U.S. dollar and the Federal Reserve. The reason that the U.S. dollar is strong is that we have the highest relative interest rates in the world. Our ten-year Treasury bond yield is roughly 2.759% which is the highest rate among developed economies. In the United Kingdom the ten-year Treasury yield is 1.299%, in Germany an unbelievable 0.189% (basically 20% of 1%). Even better yet, in Japan the ten-year treasury rate is -.09%. As you can see, in Japan you have to pay the government to hold your money for 10 years. The economic effect of all these low interest rates is pretty simple. Money goes where it is best treated, which is currently the United States.

Money flows throughout the world, finding the U.S. as a safe haven with higher interest rates. This leads to countries selling their local currency and buying U.S. dollars. This effect strengthens the U.S. dollar against the rest of the world’s currencies, making U.S. exporters less competitive. What President Trump did not say in his tweet, but really meant, was that if the Federal Reserve would cut interest rates, making the U.S. dollar less attractive, the value of the U.S. dollar would be reduced, making U.S. manufacturers more competitive. While it is unlikely that the Federal Reserve would not react to anything resembling political pressure, it is probable that they have secretly considered that thought. If, in fact, the Federal Reserve would cut interest rates from the low level they already stand today, it would be an enormous boom to the stock market and it would move even higher than it is today.

Therefore, notwithstanding the negative news by the media, it is the best of time to invest in the stock market. We have an economy that is not too strong, but not too weak either. It is a time where earnings continue to be excellent, interest rates continue to be low and the economy is just right. We have now recovered virtually all of the down swing brought about by the stock market in the fourth quarter of 2018 and remain only a few percentage points from an all-time high. Fortunately, we have stayed invested during this entire cycle and it has been quite beneficial to our clients.

I am often asked why the younger generation supports a socialistic economy. The answer is pretty simple. If you think about it, socialism sounds very attractive to anyone. Just think of the concept of everyone being equal. There are no rich, there are no poor, no worries about incentives or greed - everyone is exactly the same. There are no hungry people, everyone has a job and everyone earns the same amount. Essentially, it is a concept of collective ownership. Everybody owns everything and of course this means that the government owns all businesses and there is not competition since everything is owned by the government. Also, you have maximum social welfare. All medical insurance is free.
CiCi and Ava on Valentine's Day

CiCi photobombing Ava and Carter

Basically, the government provides for your every need and it provides free education for all. If it was not for my 40 years of studying economics and economic trends, then I would have to say that sounds pretty good. No longer do you have to beat the guy next door, because he makes exactly what you make, and they make the same in Georgia as they do in New York. Equality abounds throughout the economy, and that is the way that socialism is taught in schools. In fact, that is exactly how it works. All for one, one for all and everyone has the same. Sounds pretty good to young minds that do not have the experience of reality.

When you hear Alexandria Ocasio-Cortez talk about her Green New Deal, you have to sit back and really understand exactly what she is talking about. She is talking about universal Medicare and social welfare for everyone. As you can imagine, this program would cost umpteen trillion dollars. Not billions, but trillions. Would everyone be better off because of this free concept? Let us evaluate what takes place in Cuba.

In 1959 Fidel Castro essentially took over the state of Cuba with the intention of building the perfect socialistic economy. Of course, his concept was built on the Communist concept of Socialism where there is not representative government, but rather a dictator that dictates the economy and controls all of the systems.

In Fidel Castro’s world everyone is paid basically the same. Yes, it is true that some citizens make more than others, such as doctors - rather than making $50 a month, doctors may make $70 a month. Education is fully provided for and healthcare is free to all. All businesses are owned by the government and free enterprise is essentially not allowed. It is the strictest definition of socialism in every regard. Now exactly how has that worked out?

The problem with socialism is that it does not provide any incentive for people to succeed. In fact, it provides a disincentive for people to succeed. If you make exactly the same amount of money working hard in the fields harvesting sugar cane as the guy sweeping the streets of Havana, would you choose the more difficult job or would you select the easier of the two. Private businesses are not allowed, the government owns all of the enterprises, the hotels are in disrepair and there is essentially no manufacturing on the island. What is the incentive for an entrepreneur to come up with an idea, if he makes the same amount of money as a street cleaner?

So, what has happened in Cuba is what has happened in every socialistic country from the beginning of time. Slowly the economy deteriorated and the majority of people with skill left. So, in Cuba, their citizens leave the country as soon as their education is completed, leaving a state of only young people and old people and no economy to generate the taxes needed to support the country. There is virtually no agriculture in Cuba, and roughly 80% of their food products are imported. The reason is that even though Cuba has abundant, fertile fields for growing food, no one has the desire to work hard in the sun when they could get the same benefits as those that do not.

This is the reason why socialism does not work, there is no incentive. The same thing happened in Russia. Even though it was a Socialist economy in 1989 with the Reagan buildup in military arms, it was essentially bankrupt. They converted to a somewhat representative government, but the economy has not expanded greatly. Unfortunately, the government sold off all businesses to political figures that became rich beyond anyone’s belief, but the average Russian has not benefited. Even today with the discovery of huge natural resources in Russia, their economy lags behind unproductive countries such as Italy and others.

What is even more amazing is that presidential candidate, Bernie Sanders, who is a self-described Socialist, is not even educated by history. He would love to convert the U.S. economy to a socialistic economy, not withstanding the fact that socialism has never really worked. He is also so blind to the obvious that he cannot dismiss his prior comments as being absurd. Bernie Sanders has been infatuated with the so-called socialist dream for nearly a decade, and potentially longer. He posted an article on his website entitled “Close the Gaps: Disparities That Threaten America” back in August of 2011, which contained a quote that reads, “These days, the American dream is more apt to be realized in South America, in places such as Ecuador, Venezuela, and Argentina, where incomes are actually more equal today than they are in the land of a Horatio Alger.” Sanders categorized this article as a “must read.”

This quote from the article that presidential candidate Bernie Sanders posted, can be reviewed by looking at current day’s activities. Venezuela, which was governed for many years by Hugo Chavez, has drifted into total chaos. Essentially, the economy is not working at all and they cannot even provide food to their citizens. Inflation is running at 1,000% annualized and even though the country has massive economic resources and vast supplies of oil, it does not have any economic resources or technology to abstract it from the land.

While Argentina is somewhat better, it too has fallen into a bad economy and a poor standard of living for its people. Ecuador may be even worse than the previous two. In retrospect, the American dream in Bernie Sanders' eyes is better realized in those countries that have virtually no economy, no technology to speak of and frankly limited future. Their governments are controlled by quasi dictators and they do not allow external capital to exploit their resources.

Bernie Sanders may think the United States economy would be better suited where everyone made the same as they did in these South American countries, but clearly it would not work. Take the classic Socialist example of Cuba and why such a vibrant country with such vast natural resources has fallen into essentially bankruptcy with no ability to feed its people or to provide a robust economy. As compared to the United States, where we have the strongest economy in the world, ample incentives for entrepreneurs, and the place where most everyone wants to work. As the old politician said, “United States is the country everyone hates, but the country where everyone would prefer to live.”

As you can tell, many of the current media stars today are born again socialists. I do not question the reasons why the media gives these socialist super stars such glowing praise except I blame the education they received. They do not have the experience of watching socialism fail in every country where it has been practiced.

I often have many people tell me that China is a Socialistic economy, but they are wrong. It is true that China has a Communist government, but its economy is extraordinarily capitalistic. Yes, government gets involved in businesses, but there is clear differentiation between the rich and the poor. Businesses are owned by Chinese nationals and the economy is controlled by their successes or failures. China is clearly not a socialistic economy, as is Cuba today and Russia before it failed.

Other countries like Sweden, Norway and Denmark practice a form of socialism and supposedly have the happiest citizens on earth. However, it is also true that these countries have the highest tax rates of any country in the world but it really does not make much of a difference considering nearly everyone there works for the government. It is a form of socialism, but not as extreme as practiced in Cuba and formerly in Russia. As mentioned above, socialism is rampant in South America today but is an outright undeniable failure. Is that really what Bernie Sanders and Alexandria Ocasio-Cortez want for America? You judge for yourself.

I try to stay away from political matters in this blog, but there is one that needs to be discussed so that you get a feel for the current political environment. Under general economic principles, it has often been said that huge government deficits are very much a negative for the U.S. economy. Under economic theory, if the government is issuing bonds to finance deficits then the government issuing these bonds would crowd out the private investor, creating inflation in a negative economy. The idea being that as more and more government bonds would be issued then they would have to pay more and more interest on those bonds and therefore the deficits would not be reduced, but rather increased. The huge ongoing governmental deficits would create an unconstrained inflation and essentially throw the country into insolvency. That is the theory, let us talk about the reality.

Often times in economic classes they would cite the economy in Germany during World War II. It is pretty simple to understand exactly what the theory was if you think about the German economy. Germany was essentially a very small country that elected to fight the entire world in World War II. Obviously, they did not have the financial resources to declare war across the world since their economy at that time was extraordinarily small. But they had one important attribute that made it possible. Germany had the ability to print Deutsche Marks with abandon. So, in order to finance their economy, they printed billions and billions of Deutsche Marks to buy military armaments and pay their soldiers. In essence, the war was fought with huge negative deficits backed up by the printing presses that printed money so that they could carry on with their military efforts.

To draw a parallel, the United States did the same thing during World War II. Many of you have probably seen the old war bond efforts where famous actors and actresses would promote war bonds during World War II so the government could finance the war effort. While the U.S. was also able to print money to support the war effort, it was obviously never on such a scale as Germany. In fact, even though FDR was given credit for turning the economy around from the Great Depression in the 1930s, it was not until the early 1940s that the economy turned around with the deficit spending for the war effort. Due to the huge deficit of spending during the war to build military armaments, the economy improved thus leading to a good economy for many years to come. Germany, on the other hand, did not experience the same outcome.

Josh and Charles Barkley

In Germany, they were printing so many Deutsche Marks, that inflation became rampant. No other country would accept this currency given the fragile nature of the German economy. It was led to believe that the German army was literally paid every single day because the currency was so worthless that by the second day it would already be devalued again. So as the war progressed, the German economy was run on deficits and the printing presses for the Deutsche mark. The economic failure of Germany can closely follow the decline in the military effort. Since the soldiers could not use the money that they were being paid, and Germany could not buy products from different countries because the currency was worthless the country fell into economic despair, which was certainly one of the contributing factors to its failure in the second World War.

So, what does all of this have to do with the U.S. at the current time? During the 8 years of the Obama administration, the United States ran up the largest deficits ever in history. During the Obama years, he accumulated more deficits than all of the previous presidents combined. President Trump has also not been exactly great with deficits and we are now approaching one trillion dollars annually in federal deficits, yet we are experiencing the exact opposite in the economy of what happened in Germany.

As compared to Germany, our interest rates have not accelerated and, in fact, stand at almost historic lows. We are now at a 10-year treasury rate that borders on the lowest rate ever in the history of American finance. How can you explain the fact that we are running huge federal deficits and issuing huge amounts of government bonds to pay for this deficit, but yet interest rates have not gone up?

Even more importantly, contrary to the predictions of so-called experts in the field, inflation has not gone up at all. Inflation is extraordinarily tame at this time, which is very important to the economy. In addition, unemployment today at around 4% is even lower than the 5% that so-called experts refer to as full employment. So, we are clearly in a conundrum. We have huge deficits, but yet we have low interest rates and virtually no inflation. I assume that someday someone will write a history book on why the U.S. did not realize the negative economic impacts of the currently huge deficits.

They may have their negative impacts in the future, but really not today. So once again, as illustrated above, the U.S. economy remains robust, interest rates are low and inflation is constrained. More importantly, corporate earnings are the highest ever in the history of American finance and while they may be slowing, they are still quite robust. It is the “goldilocks” of all economic factors that increase stock prices. Not too hot, not too cold, just right.

As always, we encourage you to come in and visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email.

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins

Tuesday, February 5, 2019

"The case for raising rates has weakened somewhat...We had the luxury of patience." Federal Reserve Chairman, Jerome Powell, explaining the decision to leave rates unchanged.

From the Desk of Joe Rollins

The month of January was quite extraordinary from a financial standpoint in virtually every respect. It is hard to imagine that as bad as December was, January almost made up the losses for all of 2018. While the S&P was down 4.4% for 2018 the Standard and Poor’s Index of 500 stocks was actually up 8% for the month of January. In fact, it was the best January for the S&P since 1987. Even more interesting, it was the best month for this index since October 2015. From the day after Christmas through January 31, 2019, stocks appreciated 15.9% and have already accrued $4 trillion in additional wealth for investors. What could possibly have created this huge reversal of fortune for the equity markets? I will try to explain that phenomenon later in this posting.

I have many things to cover that I found interesting this month. One of the beauties of writing about finances is that you get to criticize the politicians who should know better. Also, I need to explain why employment continues to get better and the effect it has on the U.S. economy. Despite all the negativity we have heard during the month of January, the market has continued to move higher and the world has gotten better economically. Throughout this blog, I will explain this phenomenon, as well as why you should not fear the machines, and why the world’s economies are slowing down (don’t worry, that’s a good thing).

Our client, Dr. Lloyd King, riding a camel! 

Before I cover all of the terribly interesting economic events of the month, I must report on how excellent January was. Although the one-year numbers continue to be negative, they are only slightly so. Even with the disappointing 2018 numbers, the ten-year numbers are all double digits and quite excellent. For the month of January 2019 Standard and Poor’s Index of 500 stocks was up a sterling 8%, while the one-year returns were - 2.3%, with the ten-year average return up 15%. NASDAQ Composite was up even better at 9.8% for the month of January and only a -0.7% return for the one-year period then ended. For the ten-year returns, the NASDAQ Composite was up 18.6% annually. The Dow Jones Industrial average was up 7.3% during January, down 2.2% for the one-year period and up 15% for the ten-year period. For comparison, the Barclay’s Aggregate Bond Index was up 1% for the month of January, up 2.3% for the one-year period and has ten-year average returns of 3.6%. The difference between the bond index and the equity index illustrates how extreme the differences are between the equity markets and the debt markets.

I would have to describe the 2018 4th quarter equity market action as total chaos. I am not sure that the information flowing from the financial journals and commentaries was “fake news” per se, but I would like to emphasize again, as I did during that quarter, that it was definitely exaggerated and unrealistic. For some reason financial commentators believed that the Chairman of the Federal Reserve, Jerome Powell, was on autopilot with every intention of increasing interest rates to the point of throwing the country into a recession. I never understood exactly why they came to that theory, given these are very learned professionals who understand economics and certainly have no intention of hurting the U.S. economy.

All of that changed once Jerome Powell indicated that no interest rate hikes were likely needed and that any future rate increases would be data dependent. The equity markets then settled down and moved higher. Rather than seeing at least two rate increases in 2019 as originally projected by the Federal Reserve Board, the futures now reflect no rate increases in 2019. In fact, those same futures indicate we are as likely to see a decrease in interest rates as we are to see an increase. The importance of this change in policy by the Federal Reserve cannot be underestimated. Those of us who have been around the financial markets for decades understand the importance of keeping the Federal Reserve on the sidelines.

I witnessed the ups and downs of the financial markets under Federal Reserve Chairman, Alan Greenspan, many times during my life. I vividly remember when he came into office originally in 1987 and his first act was to immediately increase interest rates, creating the largest selloff ever in the equity markets. I also remember in the mid-90s when he increased interest rates 17 times in a row for no apparent reason, which forced the markets into another downturn during the turn of the century. I would like to think that with the help of sophisticated computers, economic forecasters are more accurate than the days when Mr. Greenspan predicted trends on a yellow legal pad.

The best case for those investing in the equity markets would be for a non-existent Federal Reserve. It is sort of like a football official. If they haven’t been mentioned by the end of the game, they must have done a good job. There is no reason for the Federal Reserve to want to hurt the economy. Don’t forget that the mandate of the Federal Reserve is two-fold and neither one have anything to do directly with the economy. The role of the Federal Reserve is to control inflation and maintain full employment.

Today we have inflation well under control and the number of people employed in the United States is at a one- hundred-year high. Even during January, a period which is historically slow due to bad weather and the decline of the retail industry after the holidays, the economy added over 300,000 jobs. The fact that the unemployment percentage nudged up to 4% from 3.9% is of no concern given that the employment percentage was diminished by new employees entering the workforce. The participation rate for employment is improving, which indicates that more people have found work or are actively looking to enter the workforce, therefore helping the economy.

During the fourth quarter of 2018, there also was a huge level of concern from the financial markets regarding the slowing of the worldwide economy. While unquestionably it is true that the economy in China is slowing, it still has a reported GDP of 6% or greater. Also, we saw the economy in Germany slow and the European economies in general breakeven. While there has not been any noticeable decline in the U.S. economy, the rest of the world’s declining economies have raised concerns about the earnings of U.S. corporations.

Ava & CiCi

While it may be true that foreign countries would buy less from the U.S., it would also be true that the slowing would basically put the brakes on the Federal Reserve. The last thing that the Federal Reserve would want to do would be to further diminish the opportunity for the U.S. economy to expand when the rest of the world is slowing. The desired result of any Federal Reserve, and what is certainly best for investing in our equity market, is for the world to grow at a moderate pace; just like a Goldilocks economy, “not too hot, not too cold”. If it is true that Europe is slowing and Asia is slowing, this will have a natural moderating effect on the U.S. economy, which in turn will keep it from getting too hot and having to be slowed by monetary means. I think that is exactly what Jerome Powell was saying when he expressed the lack of need for interest rate increases going forward. All of that is absolutely good for investing.

With the beginning of 2019 we are witnessing a new Congress and a new group of politicians that often speak without really understanding economic theory. During the 2016 election, many of my son’s friends, who were in college at the time, were huge supporters of Bernie Sanders. Not that they really understood anything that Senator Sanders was saying, other than the concept of free higher education. While that certainly sounded really good to people currently in college, there was really no realistic proposal on how to finance such free education. It is certainly easy to spend money you do not have, but to impact the economy for generations certainly requires a better understanding of past economic events.

Who could not be impressed by Alexandra Ocasio-Cortez? It seems like she is on every news program we see and she is certainly the new superstar of this new congress. Not to mention, she is proposing a 70% marginal tax rate for certain high-income taxpayers. We also saw a new proposal for a 77% estate tax from Bernie Sanders this week, and, of course, the ever-present Medicare for all and increased Social Security payments for the masses; all very interesting proposals that will certainly garner votes in their next elections. However, the impact of income taxes on the economy is crystal clear.

Three times in my lifetime have sitting presidents actually decreased income taxes and dramatically improved the economy. John Kennedy did it in 1962, Ronald Reagan in 1980 and Donald Trump in 2017. Do these politicians now think that history does not mean anything? It is interesting that in each of these cases the politicians, while defining their position as progressive, realistically are moving to a more socialistic economy. As I mentioned to my son’s friends in 2016, “If you want to see how well socialism works, go visit Cuba, Venezuela, or Argentina.” People forget that Russia had a socialist economy and a communist government during many of the years of the Cold War. But those same people have forgotten that in 1989 the Berlin Wall fell and while communist Russia became very capitalistic, their importance in the world has since dwindled over the years with a GDP today not even as high as Italy. The truth of the matter is that socialism has never worked anywhere in the world and these politicians who think now it will, are clearly misinformed.

Last month I wrote a blog regarding the machines that were controlling the ridiculous buying and selling during December. After that post, I had many clients and others inquire how they could protect their retirement from these evil machines. I tried to explain that one of the positive aspects of the machines is that they cannot “short” the market forever. Even they have limited capital and they would eventually have to sell the shorts in order to buy. Don’t forget that the machines were an integral part of the market’s increase from 2009 through 2017. While it was clearly a case of the machines going crazy during the fourth quarter of 2018, this 2019 rally has proven they too had to cover their short positions.

My argument then continues to be that you cannot worry about machine trading – worry only about the economy, interest rates, and earnings. If you have a working knowledge of each of these components, the movements on the market should not concern you. Fundamentals outweigh every other factor in investing. So many times during the fourth quarter of 2018 we had clients question whether they were invested properly during this downturn. Yes, it was painful, and certainly we did not enjoy it any more than you did, however, given the higher fundamental belief that the economy was good, interest rates were low and the future was bright, we continued to be fully invested and were rewarded when the market moved higher in 2019.

It seemed like there was an avalanche of negative financial news during the last part of 2018 and also during January 2019. And every time I read all of those negative headlines, I would worry about the invested public being misinformed. The fact is, financially things are much better throughout the entire world today than only a few years ago, but if you only read the financial headlines you certainly would not believe so.

Just how cynical progressive financial news has become was apparent in this week’s Barron’s article regarding advice published in the New York Times. A college student wrote to the New York Times and asked what would be the best way for him to invest the nominal sum of $1,000 in order to begin growing his investments. As quoted by the New York Times, “Investing is flaying yourself to whims of Capitalism. You’re a chump to them.” Have we actually become so cynical as to recommend that investing is a fool’s game? It clearly appears that the progressive New York Times, or certainly this particular columnist, has lost his grip on reality to offer such poor advice to our youth.

I ran across a very interesting article recently that was posted in the Wall Street Journal. Basically, this article set out many of the facts that I reported when I did the book review on Factfulness. Basically, what that book said was regardless of the negative whims of financial reporting, the world was actually getting better everywhere. Not only in the United States, but all-around world. As reported by Greg Ip, “the world was getting quietly, relentlessly better” and as recently as 1980 half the world lived in “extreme poverty.” Basically, that means that based on 2011 dollar values, 50% of the world’s population in 1980 lived on less than $1.90 a day. Today, the proportion of people living in extreme poverty fell to an estimated 8.6% last year and in all likelihood has even improved since then.

As of September, more than half the world - 3.8 billion people - are middle-class or wealthier. Another very interesting reason for this increase in wealth in the world is that child mortality, illiteracy and deaths from violence have all plummeted, and life expectancy has gone up. One of the examples they gave was that Nathan Rothschild was the richest man in the world when he died in 1836. He died from a common infection, a condition that can now be treated by antibiotics for mere pennies a day. Even though he had the greatest wealth in the world, he did not have the medicine to prolong his life, which today even poor nations have.

Ava drinking from the dog's water (age 1)

The basic truth in why the world economy is better and everyone’s lives have improved is that when you create wealth there is the effect of a rising current that lifts all boats. As I have pointed out so often, having people work creates a trickle down affect to improve the lives of many people. In China, as an example, roughly 30% of the population has moved from severe poverty to middle class in the last decade. That is not because someone handed them wealth, it is because they moved from the fields to the manufacturing factories, increasing their standard of living.

All of this raises the concern of why the news and the financial reporting are so negative. It is quite clear that most of world has improved economically, yet the criticism is never-ending. As pointed out in this article, “for most Americans life is getting better, median incomes are rising, average health is improving and violent crime, divorce and teen pregnancy are all trending down.” I wish that more people really understood the positive economic effects of increasing people’s standard of living and the downflow of this wealth through many generations, improving conditions for all. We are right in the middle of the greatest spread of wealth ever in the history of the world and yet reading the financial news would indicate otherwise.

So where do we stand today and what are the economic forecasts for going forward? There is no question that the worlds economies are slowing, but that’s a good thing since it will slow increases to interest rates. It is also true that earnings will only rise moderately in 2019. But even a moderate increase in earnings already at historical levels is still a good thing. It is also a good thing that as employment continues to rise and the standard of living goes up, we are not seeing any increase in inflation. And it is a great thing that interest rates are remaining low as it appears that the Federal Reserve is on hold for an extended period.

As I have said so many times before, those forecasting recessions in 2019 did not have a full grasp on reality. Whether it was intentional remains unclear, but what is awfully clear is that they were wrong. While it is perfectly possible that we might enter into recession in the United States in the second half of 2020, it is also clear to me that the moves made by the Federal Reserve this month might postpone that recession into 2021. In any case, the economy is great, earnings are great and interest rates are low. That is the trifecta of positive news that almost always leads to higher stock prices in the future.

As always, we encourage you to come in and visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email.

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins