From the Desk of Joe Rollins
I know I have used this famous Groucho Marx quote in many of my postings, however, I find it particularly compelling at this particular time. It is hard for me to imagine that a great many Americans cannot see the explosion of the economy that is occurring around us. I guess it is influenced by the overwhelming negative attitude of Washington and the continuing flood of cash into the economy from our lawmakers. Of course, that will lead to short-term positive trends, however clearly long-term negatives.
Ava and Byrdie catching a
Braves game – Braves won in
12
In this posting I want to give you the facts and not the fiction. I recently had a client tell me that he did not like reading my newsletter since all I did was express positive thoughts. I guess I am guilty of the obvious. However, as I pointed out to him, the S&P Index of 500 stocks has had positive returns in 16 of the last 18 years. I also pointed out that when it was down 37% in 2008, it was followed by an increase of 26% in 2009 and 15% in 2010, making back most of the losses. In 2018 the market was down 4%, but up 31% in 2019 and 18% in 2020. If you had odds of 16 chances in 18 to double your money in Las Vegas, I rather suspect you would take those odds any day.
I want to cover so many things that indicate the strength of the economy. The evidence is all around us and if you do not grasp the facts, you may miss one of the greatest buying opportunities of all time. Before I can get into all those interesting items, I must report on the month of April which was quite an excellent month. For the month of April 2021, the Standard and Poor’s Index of 500 stocks was up 5.3% and up 11.8% for the year in 2021. The one-year performance on that index is a cool 46%. The Dow Jones Industrial Average was up 2.8% for the month of April and up 11.3% for the year 2021. The one-year return on that index is 42%. The NASDAQ Composite was up 5.5% during the month of April and is up 8.6% for the year 2021. The one-year return on that index is 58%. Just to give you a basis of comparison, the Bloomberg Barclays Aggregate Bond Index was up 0.8% for the month of April, yet it was down 2.7% for the year 2021. For the one-year period ended that index had a negative return of 0.5%.
As you can see from the above analysis, the lowest return for any of the major indexes for the one-year period was the Dow Jones Industrial Average which was up 42%. Compare that with the bond index, which was a negative for the one-year period then ended, and you will see the divergence that is occurring between stocks and bonds. Anyone not recognizing the underperformance of bonds will probably continue to lose money for the remainder of 2021, which is sad given the upward potential other asset classes hold.
Lucy and Eddie Wilcox after
the Girls on the Run 5k
As I predicted in the last several postings, the economic explosion in the United States is just beginning. What we are now seeing are the early stages of an economy unlike any we have seen since World War II. The GDP growth for the 1st quarter was a very high 6.4% and based upon the projections of the Federal Reserve, this year should generate a total GDP growth of 7.2%. Take into context that growth percentage would be the highest since 1984 when Ronald Reagan was President. Also remember that in 1984 we had basically come out of recession from the previous three years and that jump in GDP was somewhat prevailed by lower tax rates and reduced oil prices in the economy. The GDP growth in 2021 is not a reflection of a jump back from a recession, but clearly an explosion of printing money by the Federal Reserve and turning that money over to the average consumer.
The evidence as to this explosion is occurring everywhere around us. If you are unaware of the shortages in the economy, you really have not read current financial news. The automobile companies are reporting that they have cut back production because they do not have enough semiconductors to build a car. Take into context that virtually everything we buy nowadays has semiconductors and the production around the world is not adequate to keep up. That tells you the public is on an unprecedented buying spree. Currently, Home Depot has no dishwashers, refrigerators or washers and dryers available for delivery. Their latest indication is that it may be October before they are resupplied. Just when exactly have you ever known Home Depot to not have refrigerators available?
Even more distressing is that contractors are reporting that they have no 2x4’s of lumber. How can the housing boom continue without 2x4’s? Those contractors lucky enough to find 2x4’s are noting that the price is double what it was 6 months ago. I am also sure that you have read that home sales are beyond ridiculous at the current time. It is reported that homes selling in Atlanta oftentimes will get double digit offers to purchase above the asking price. The days of taking the asking price and discounting it 10% are long gone. In fact, for a decent house inside the perimeter of Atlanta, to stay on the market more than one day, there must be a serious problem with the house. Now how could any potential consumer not understand these shortages and not understand how good the economy will be if all these shortages occur?
The numbers for April were nothing short of spectacular. Consumer income during the month of April was up over 20%. Yes, I understand a great deal of this was due to the stimulus payments paid to most anybody who asked for them, but it also had a lot to do with more people going back to work. What was more interesting to me was that retail sales for the month of April were up 21.3% over a year ago at the same time period and the savings rate of consumers set an all-time high of 21%, as compared to a normalized savings rate of 7.5%. So, in summary, people were making more money, but were also saving more money and clearly this saving of money bodes well for future spending by consumers. All this explosion in the economy has to be taken in perspective of the actions of Congress where they have already distributed almost $4 trillion in stimulus money and are desiring to distribute another $4 trillion in the upcoming months.
Mitch Musciano-Howard accepting
his Varsity Letter for soccer
While certainly things on that list of Federal expenditures are needed, the vast majority of this amount will do nothing but create hyperinflation in the United States. If you take an economy that is already scalding hot and you flow an additional $4 trillion of liquidity into that economy, almost assuredly the economy will overheat leading to adverse economic effects of inflation in the coming months. Just exactly what they are looking at in Washington defies the ability of someone trained in economics to actually understand.
Make no secret about it, the way the Federal Reserve has created all this money to be distributed is by using their very efficient printing presses to produce more cash. While the flooding of the economy certainly has positive economic effects over the short-term, if you overheat the economy and if interest rates start to go up because of the overheated economy, the long-term trends on $8 trillion of manufactured money would be significantly bad. I do not want to imply that negative aspects will occur in the next day, week or month, but certainly 10 years from now we will all feel the burden of repaying debt that was created today.
I told you in prior postings that you should be extraordinarily positive with the progress that has been made on vaccinations in the U.S. I indicated that you were likely to see by the middle of the summer the ability to reopen the economy virtually everywhere. I was certainly wrong in that projection. That day is here today, and it is happening. I went to the Atlanta Braves game last night and the stadium was at full capacity. There was no social distancing occurring, but the numbers support that confidence by consumers. For all the people in the United States over the age of 18, 43% are now fully vaccinated and another 57% have already had their first vaccination. Everybody wonders why this percentage is not higher. Remember that there are no vaccinations given to anyone under the age of 18. However, beginning next week children between the ages of 12-17 will begin vaccinations, which should run the percentage up dramatically over the next few months.
Ava and her bunny sharing
a delicious snack
But even more encouraging are the U.S. citizens above the age of 65. A remarkable 83.5% of those U.S. citizens over age 65 have already had one vaccination. Also remarkable, is that 71% of U.S. citizens over the age of 65 are fully vaccinated at the current time. We are going to see an explosion of the economy as the U.S. citizens feel confident that the vaccinations will allow them to travel and spend money once again.
People think it is remarkable that the amount of increased savings during April was 21%, however, do not forget that people have not been allowed to travel and eat out for the last 14 months. If all those restrictions are lifted you will see an absolute explosion of spending throughout all levels of the economy and, in fact, we may be seeing it right now with all of the shortages that are occurring.
Almost every day I hear from an investor asking how the stock market can keep going up because stocks are clearly “overvalued.” I wonder exactly where those investors are getting their information. If we all agree that stock prices are based on earnings and earnings are going up, there is a high likelihood that stock prices will continue to follow earnings. But have you or has that investor looked at the current increase in income? For the first quarter of 2021, the high-tech companies such as Apple, Facebook, Google, and Microsoft reported income that was nothing short of breathtaking. The numbers were absolutely staggering in their magnitude and shattered all expectations as to future income.
DeNay visiting scenic Roswell, New Mexico
It is now anticipated that net income as we go forward for all S&P 500 companies will be 25% higher by the end of the year than they are today. That almost seems to me to be a conservative estimate given the avalanche of cash that is going to be spent by the consumers in the next nine months. Once these consumers feel comfortable that their job is protected and they do not fear from the COVID pandemic, they will once again travel, eat out in restaurants and spend money on consumer goods. We as investors do not really care what happened last year, that is in the past. What we want to know is what is going to happen in the next couple of years. It is fairly clear to everyone that is reviewing the information that the next couple of years should bring a substantial increase in profits due to this pent-up demand that is now going to be released on the American economy.
It almost seems comical to me that in the 1970s, ExxonMobil reported a quarterly profit of $10 billion and the congress of the United States was outraged. In fact, there were calls at that time by Congress to break up Exxon and to impose a windfall of profits tax on them due to their higher profits. This last quarter, the company Google reported net earnings that were double Exxon’s quarterly earnings and there was not a whimper out of Washington. In fact, when you think about it, Exxon spends substantial sums of money to extract oil from the ground, refine it and sell it to the public. Google sells no products to speak of and collects money at an invisible way by key stroke. Today the super large technology companies dwarf the oil companies and are likely to report substantial profits that will stagger the investing public and embarrass the older companies like Exxon and GE.
It must be spring – the roses are
blooming at my house
It has been reported by many that even though the banks received over $300 billion in Federal TARP subsidies they did not go out and lend to the consumer. In fact, they used that money to shore up their own balance sheets and to compensate their people. It is little known, but true, that virtually all the banks paid 100% of their money back to the Federal Reserve. In fact, now the reports indicate that TARP was a roaring success for the government. The Federal Reserve actually made more money on this plan than it cost them. However, it cost the American public quite a lot more. There was huge unemployment, many people lost their jobs, and it would take years to recover from that recession.
In comparison, what occurred in 2020 was the exact opposite. During March and April of 2020, the Federal Reserve did not bother with helping the banks, but went directly to compensate the individual citizens in the U.S. By virtue of throwing $4 trillion into the economy, they instantly turned it around. As I pointed out in those postings in 2020, if you do not realize what $4 trillion will do to the economy, you have not been around economics very long. By flooding the economy with money, the Federal Reserve created an economy supported by Federal money that only lapsed into a recession for a few months in 2020. Now, less than a year later, we are looking at an economy that is virtually exploding. The Federal Reserve Bank of Atlanta is now forecasting GDP growth in the second quarter at 11%. Short of wartime, this country has never had such high GDP growth.
What is bewildering about the reaction of Congress today is that they just cannot be satisfied with the good work that the Federal Reserve has already done. They are insisting that they need to throw another $4 trillion into the economy, which as pointed out above is likely detrimental. Almost daily we hear speeches of how many people are unemployed and the terrible economic circumstances of the unemployed. As we all now know, we could quickly solve the unemployment issue if we just reduced the subsidy by the U.S. government. We have paid unemployment greater than what was necessary during the crisis, which has continued almost beyond any time of realistic need for the money. Virtually every employer that I know cannot hire employees to work at their business. The golf course that I am a member of had to close two of its three restaurants because it does not have enough employees to work. Everywhere you go you see help wanted signs and employers with the inability to hire workers. That is not an economy that is represented by high unemployment.
DeNay hoping to spot some
UFOs in Roswell
Not only did the Federal government pay too much in the way of unemployment, most recently it has been determined that the first $10,000 of unemployment is tax-free for many recipients. It is estimated by the Bank of America economist that the unemployment today would be equivalent to a salary of $33,000 in the private sector. Most of the hospitality workers do not make that much money anyway and therefore it is better for them to not work than for them to give up the governmental subsidy. While it is true that there are still eight million U.S. workers not working today, you must wonder if they cut unemployment, a great number of those would return to work immediately. As of today, there are already two states that have totally rejected Federal unemployment subsidy not because they do not like receiving Federal money, but because there is such a shortage of labor in their state. They are hysterically trying to get people back to work by cutting the unemployment benefits. There are 8 million open jobs in the U.S.
A lot of ink has been wasted on the proposed tax increases proposed by the current administration. Quite frankly, I think there is a high likelihood that I have a better chance of playing shortstop for the Atlanta Braves today than all these tax proposals getting through Congress. I have no doubt that some will, but the majority will not, or they will certainly be modified. To give you an example of one that is an extreme, the President is proposing that for anyone making a $1 million, the capital gains rate would be equivalent to the ordinary income rate which is roughly 43%. If you add to that number state income tax, that means on a capital gain that size, you would be paying over 50% tax of that gain. In my opinion that will never happen.
People have lost sight of the real reason why taxation occurs. The reason you tax things is because you want people to buy less of them. Remember we have always overtaxed tobacco, alcohol, and gasoline, the theory being if we tax these items high enough, people will not spend money on them and therefore reduce consumption which will help the economy. For us to even consider taxing capital is a dangerous precedent. I thought I would never get to the point where the government is taking actions that are detrimental to the entrepreneurs of the U.S.
There is no question that capital is the secret to why America is the most inventive country in the world. Have you ever considered that virtually all the software and medical achievements occur in the United States and not in other countries? Japan and China have proven that they are very skilled workers that can copy U.S. products and produce them well. Neither Japan nor China have proven that they can develop these products as the U.S. has. The reason that companies can participate and create new products is because of capital. Sometimes it is private capital and sometimes it is government capital. In the most recent example, there is no way that these pharmaceutical companies could have developed a COVID-19 vaccine in less than12 months without the government’s involvement. By virtue of throwing billions of dollars into these pharmaceutical companies, vaccines were created within one year that are inexpensive and actually work. The last thing we would want to do is reduce the ability of entrepreneurship in America by taxing capital to such an extreme level. While capital gains taxes may go up to something like 28% which is the rate that it was during the Clinton Administration, certainly, to tax at that ordinary income level is not in the cards.
Marti Musciano-Howard celebrating
her Varsity Letter
and MVP
award for soccer
As we gear back up to full production in the U.S., it always concerns me when I hear Washington misstating the facts to prove a political theory. The most recent example of that is the State of the Nation Address by President Joe Biden. During the course of his speech he said, “Wall Street didn’t build this country. The middle class built this county, and unions built the middle class.” While not surprising, a similar opinion was represented by former President Barack Obama. Why is the government misstating facts that are clearly easily checked to be incorrect? I understand political payback and certainly the unions almost universally supported the President in the last election, and he would want to give them due respect - I understand that part of the program. However, the facts are indisputable.
Today less than 11% of the U.S. population is covered by union contracts. And the number of U.S. workers covered by unions previously is even less. The number of union workers during the 1920s was roughly 5 million. That number declined to three million in 1930 and almost none of these union jobs were in large U.S. industry such as steel or automobiles. In fact, most of the union jobs were all held in mostly craft skills that required specialized training to be a part of a union. Therefore, to assume that labor unions were instrumental in building America, is disingenuous and incorrect.
As we go into the summer, we have time to sit down with you and review your financial plan. I anticipate that this year is going to be bumpy with many ups and downs, but the trend is clearly up, and you need to participate. I believe bonds will not make any money in 2021 and that investment could potentially drag down your portfolio. However, the biggest obstacle to building wealth today is this over-mounting gush of money that is being held by the public in cash. I can almost assure you the vast majority of people reading this posting has more than one year of cash at their disposal, uninvested. If you are talking about a lost opportunity, there it is, just as crystal clear as it can be.
On that note, come 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
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