From the Desk of Joe Rollins
In the first part of August, I received many phone calls from clients who believed the world was surely coming to an end. I reassured them that the sell-off in early August was based on incomplete information and the work of professional traders. As I wrote in the last posting, I did not anticipate that there would be a major sell-off during August, and fortunately, I was correct. The month of August actually ended higher, despite all the concerns of investors.
I have found many topics I would like to discuss in this month’s posting. I think I will finally make reference to gold and Bitcoin and my thoughts on why we do not invest in them. Also, after two long years, the yield curve is no longer inverted. This is a major economic event, and I need to explain why this has suddenly become such a controversial topic.
It would not be a political season if I did not give you some insight into the politics of the tax proposals by the new candidates. Some of them are ridiculous, and some are beyond ridiculous, but I will explain. Interestingly, it seems that the U.S. is running out of energy. Nuclear energy may be the only solution for us in the future. It is amazing that the environmental lobby is so against nuclear, even though it may be our only alternative clean energy in the future.
I have always been interested in Cuba and became even more interested in their local economy and politics after I visited there a few years ago. It appears that anyone who can get a job elsewhere is now leaving the island and mainly heading to the U.S. It is especially important that we discuss the economy and why Cuba has failed and will likely not recover without additional help.
Over the last several years, job openings have doubled the number of unemployed people in the U.S. Finally, now, the number of job postings is almost equal to the number of people unemployed, and therefore, the economy sits poised to turn either higher or lower. I will explain.
Before I get into those exciting topics, I do need to report on August, which was an excellent month for the financial markets. Even though the anticipation was something extremely dreadful, the exact opposite actually occurred. Once again, the quick turnaround in the financial markets during the month of August emphasizes how important it is to be invested at all times. At the point where things look bleakest, that is the time when you need to be invested.
For the month of August, The Standard and Poor’s Index of 500 stocks was up a very satisfying 2.4%. For the year 2024, that Index is up 19.5%, and the one-year total return for that Index is 27.1%. The Dow Jones Industrial Average was up 2% for the month of August and is up 11.7% for the year 2024. The one-year return on that index is 22.1%. The NASDAQ Composite was up 0.7% for August, and for 2024, it was up 18.6%. The one-year return on that Index is 27.2%. As you can see, the three major indexes are all up in excess of 20% for the one-year period. Given the dour prospects for the economy from the so-called experts, the markets have returned excellent results for the last one year.
Just to give you some basis for comparison, the Bloomberg Barkley Aggregate Bond Index was up 1.4% for the month of August and is up 3.1% year-to-date. For the one-year period, that Index is up 7.2%. With interest rates most likely to fall in the next few months, it is possible that the bond index should show better results; however, as you compare it to the three major Indexes of stocks, it is a very dismal performance. Many people believe that you should have at least 40% of your assets in bonds. If you base that on returns, you can see that a 40% allocation to bonds would have been a serious mistake over the last 12 months.
At the beginning of 2022, all the so-called experts on Wall Street predicted that the U.S. would almost surely go into recession during that year. Even though they did not have a lot of evidence to support that theory, the one that they did roll out to explain a recession theory was that the bond market had an inverted bond yield. For those who are not familiar with bonds, what that meant was that the two-year treasury bond yielded a higher rate of return than a 10-year treasury bond.
The theory behind this logic was when interest rates are high for two years, that indicates a Federal Reserve that is restrictive and trying to control the economy by slowing it down, which would in turn throw it into recession. Also, the fact that the 10-year bond was yielding a lower percentage than the two-year bond would indicate that, more likely than not, the economy would be in recession due to the restrictive nature of the two-year since it clearly was not in sync with the yield 10-year bond. The so-called forecasters on Wall Street predicted that this inverted bond yield created recession 100% of the time; therefore, you should abandon stocks immediately. As would be the case, 2022 ended up being a bad year on the stock market, with the S&P 500 Index stock going down roughly 20% in 2022.
I predicted during that same period that the economy would not go into recession because the momentum was just too strong to allow it to go into any type of pullback. I was right, but the stock market proved me wrong. Notwithstanding my explanation of why the economy would not fail, the market went down anyway. But I have excellent news to report. After two years of the inverted bond yield, it has finally right sided itself. The current yield on the two-year treasury is 3.654%, while the current yield on the 10-year treasury is 3.716%. I recognize that the difference is small, but the fact that the two-year treasury is now below the 10-year treasury is quite a positive for the U.S. economy.
It is interesting to me that these so-called experts who predicted a recession in 2022 have not changed their opinion and still believe a recession is likely to occur. Those who quoted the inverted bond yield as evidence of the recession have not come out and changed their opinion because the inverted bond yield is no longer inverted. I recognize that these are extremely technical issues in investing, but you need to understand why the market goes down even without any rational reason. The markets went down in 2022 without any good reason, but the pain was felt in that year. However, it is encouraging that for 2023 and the current 2024 year, the same Index that lost 20% in 2022 is up 20% in each of those subsequent years.
Since it is a political year, I thought I would reflect on the proposed tax conversation with the current political candidates running for the Presidency. One candidate has proposed that they would be anti-price-gouging from big corporations and pharmaceutical houses. Literal price controls have never worked anywhere in the world, including the United States. Price controls did not work in Cuba (to be explained later), Argentina, Russia, Venezuela, and other third-world countries. If you think that the U.S. economy is more sophisticated than the others, remember Republican Richard Nixon imposed price controls in early 1971, and they were a dismal failure.
What true price controls do is lead to scarcity. This is not a difficult concept for anyone to understand, but if a producer cannot increase prices and therefore would produce at a loss, then they would not produce at all. Suddenly, while you have an oversupply of products, now you have scarcity. The question always centers around the fact of which is the worst situation. Controlling prices is a good thing for the consumer, but having no product to purchase, in my opinion, is a much worse situation. Look at the situation that they have in South American countries where they cannot produce the food necessary to feed their population because the farmers cannot make money on the sale of goods.
The obvious answer is, of course, to eliminate those price controls to increase the supply of products. Of course, when you do that, you get immediate inflation and a worse-case situation, such as currently being felt in the Argentina economy, where inflation is up 1000% over the last five years. The most uneducated economist would tell you that price controls are disastrous for the economy and cannot be enforced, and they would clearly be negative to consumers, not a positive, but it sounds good in commercials.
Another candidate running for office proposes that all the problems in the U.S. economy would be saved by putting tariffs on all products brought into the United States. The argument being that it would ensure that more manufacturing takes place in the U.S. since there would be tariffs to keep the prices high for goods produced outside the United States. Once again, the concept is a “populist” concept but is absolutely ridiculous from an economic standpoint. You cannot have tariffs without inflation. If, by definition, you would increase prices on all goods produced outside the United States, that would allow the U.S. manufacturers to exploit the market and increase prices, which would clearly create inflation and destroy consumer’s pocketbooks in the United States.
Goods produced outside of the United States have an incredibly positive benefit to the economy as has been clearly shown in the past. During the 1960’s and before, there were only three major car companies producing cars in the United States. The cars were expensive, and the quality was awful. I remember buying a brand-new car in the early 1970’s and taking that car back to the dealer the next day with a long list of things that were wrong. The quality was just not particularly good and since the car companies basically had a monopoly, they just did not care.
However, that philosophy changed when foreign car companies began manufacturing cars and shipping them to the United States. The cars coming out of Germany and Japan were of higher quality and of similar price than the cars produced in the United States. This increase in quality cars made the big car companies in the United States better. They had to improve their quality in order to compete. And they did. There are many examples where foreign manufactured goods have improved the quality of U.S. goods and competed on a level playing field with goods produced in the United States. There is no question that we all desire more goods to be manufactured in the United States to create more jobs and taxes, but the way to do that is not through higher tariffs but through a better working environment.
Another example that both candidates are against is the acquisition of U.S. Steel by Japanese steel companies. Both the current administration and candidates have come out against this acquisition. While you certainly think it would be a desirable interest to keep steel manufacturing in the United States, the way to do that is not as proposed by these candidates. If you were to turn over virtually all the steel manufactured in the United States to one manufacturer, that would obviously lead to issues where they could increase prices any time they wanted to.
The major difference would be that the Japanese manufacturers have agreed to spend $2.5 billion upgrading U.S. steel manufacturing and making it more efficient and cost-effective. This would be an enormous positive for the U.S. economy. First, the spending of this $2.5 billion would create vast amounts of jobs that would be high-paying and long-lasting. The innovation and production of cheaper steel would benefit many industries and construction in the U.S. In my opinion, the acquisition of U.S. Steel by foreign manufacturers would be incredibly positive for the U.S. consumer, yet from a “populist” standpoint, all the candidates are against it.
They argue that in the case of war, steel would be controlled by a foreign government, and therefore the U.S. would be deprived of the steel needed to produce military armaments. The ridiculous part of that statement is that in the case of war, any foreign manufacturers could easily be nationalized, and we would get back the industry for free that they have innovated and spent money to improve. The acquisition of U.S. Steel for many reasons should be approved, yet for political reasons, all candidates for the highest office in the country cannot see the benefits.
The most outrageous proposal is that one of the candidates would like to tax unrealized gains on stocks. You almost have to be amused by this proposal given the extreme complexity of doing so. Having completed tax returns for over 50 years, computing realized gains is hard enough, but to tax unrealized gains is virtually impossible.
I know it only affects taxpayers with over $100 million dollars in assets, and those are very few, but those people control a large portion of the population and employees in this country. But first, think of how you calculate the fair market value of your assets and how that has been done in this calculation. No one knows exactly what a business is worth if it is a private industry. As an example, we all know that the price of your house is subject to many fluctuations and changes year to year. How one with that amount of assets would calculate the fair market value of all their assets would be an exceedingly difficult situation.
Take as an example an entrepreneur who has only one privately held business and virtually no other assets and is stuck in this unrealized appreciation quagmire. Due to the success of that business, the value of that company goes from $100 million to $150 million in one year. Therefore, the $50 million increase would be taxed at 25%, and he would owe $12.5 million dollars in taxes under this proposal. Where does that money come from? It is clear that he would have to sell the stock of the company, which would endanger the company and employees and almost ensure the loss of jobs.
The interesting part of the proposal is that, let us say that the following year, the value of the company falls back to its $100 million level. Does he now receive a $12.5 million refund from the government? I doubt it, but who knows what is under this proposal? But the most important part of this proposal is that, almost assuredly, it is unconstitutional. While it is a “populist” idea to tax the rich, it is not realistic to tax gains that have not been realized. This proposal will not pass Congress, but it is interesting how it has been characterized by the media as being a positive thing when it would be an economic disaster.
I believe the one proposal that would create a better U.S. economy is the proposal to cut taxes on big corporations. One candidate wants to increase taxes on big corporations, and another wants to decrease them. It is hard to believe that the media just does not understand the difference. If you decrease the taxes of the corporation, you will get more companies that want to operate in this country. They would create new plants and equipment, hire employees, and pay local taxes. The higher the taxes are the more they will stay away and produce in other countries with lower tax rates.
I find it such a simple concept that it is hard to believe it is misunderstood. If you increase taxes on corporations, that is money that they could not use to hire people, expand plant equipment, and produce better goods. Obviously, there is a major difference between higher and lower taxes, but it solely depends on your view of what is better for the country. It is good to have wide-ranging opinions, but I only wish people understood the economic effect rather than the populist idea. It seems the better solution is to cut government expenses, not raise higher taxes.
I have always been interested in Cuba, and more so since I have visited the island. It is an example of why socialism just does not work and will never work in any economy. From an idealistic point of view, you would think that everyone would be better off with socialism than they are under capitalism. But that has never proven to be the case, yet people continue to believe that we are becoming more socialistic in our government in recent years.
Point to Cuba and you see exactly what the issues are. It recently came out that from the year beginning of 2022 to 2023, the island lost 1,011,269 residents (10% of their population). Over a million people left the island since there were no work opportunities, and they had a better chance of finding those work opportunities in other countries. What was the most distressing was that of this amount, over 800,000 of the people that left the island were between the ages of 15 and 59. This is also the age group that produces future generations. That means the most productive part of the population is abandoning the island in droves. Basically, what that means is that they are leaving the incredibly old and the noticeably young on the island, which is creating a financial disaster for the Cuban government. The care of the elderly is of serious concern, and the island has no way to raise revenue, since the majority of the tax paying populace has left to go to a different country.
The other interesting aspect is that the food production in Cuba has collapsed. Since people are not willing to work on the farms because the pay is equal to those sweeping the street, the production of food in the country has completely collapsed. To give you an example, the production of pork in Cuba fell to 3,800 tons in the first six months of this year, compared to 149,000 tons in all of 2018. The country is headed to a severe crisis since it cannot feed its population and will not accept help from other countries. Most of the people leaving Cuba are coming to the United States. It has now been reported that 645,122 Cubans have come to the United States over the last two years seeking asylum with hopes of residency.
I am asked every day about the potential for recession in the United States, and maybe I look at it differently than most people. And looking back over my financial career of over 50 years, it seems like that every recession in the United States was created with a spike of prices of oil and the effect it had on the consumer. I vividly remember the Jimmy Carter years, where the price of oil virtually doubled overnight. But worse than that, we had scarcity of oil, and therefore scarcity of gasoline. And every year since then, other than the COVID-19 year, a recession has created a spike in energy prices.
All that has changed. While the current administration has fought the production of oil and gas at every turn, the U.S. is now energy independent. We produce more oil and gas than we consume in the United States, and if the current administration would allow us, we would export to more countries. The exporting of natural gas to Europe creates many well-paying jobs and helps the U.S. economy. Therefore, I do not think recession is likely at the current time, because the price of oil has actually fallen over the last year or so or has remained basically stable.
People ask me all the time about why we do not invest in gold and Bitcoin. My answer to that is relatively simple. I do not have any way of evaluating what the value of gold or Bitcoin is or should be. It is impossible to evaluate whether those assets have the ability to go up or down, because they have no income stream and basically the only way they have any value is scarcity.
So therefore, they are like collectibles, which would be paintings or fine bottles of wine or autographs of professional athletes. The value has nothing to do with the ability for it to produce income, but more on the ability of scarcity. Since I find neither of these assets to be particularly scarce, I question whether over the long term, they can continue to go higher. I often cite the rednecks that promote gold on television on Friday night as a good example of why gold is not likely to continue to be scarce. If this hard-working group can produce gold, then more likely than not, more gold will be produced in the future. I understand the price of gold has gone up in recent years, but that is mainly due to inflation and not due to scarcity. If you compare those assets with U.S. stocks, you get a dividend flow and an increase in value in those assets that can be quantified. Currently, I see nothing in gold or Bitcoin that allows it to be evaluated on a total return basis, yet I do with stocks, which is why I went into stocks.
For the first time over the last several years, the number of unemployed is 7,115,000. It has approximated the number of job openings, which is 7,673,000. For the most part of the last several years, the number of jobs has doubled for the number of unemployed. As I have written and many times in this posting, we wanted the economy to slow so that the Federal Reserve would cut interest rates. We have now accomplished that goal without destroying the economy, and now we are almost assuredly looking at rate decreases.
I project over the next 90 days that we will see rate decreases of 0.75 which will dramatically improve the economy with lower interest rates and, importantly, lower mortgage rates. We could not have accomplished these rate decreases until the economy slowed, which we have now accomplished. You hear so much about the soft landing and the hard landing and the desire for one over the other. We have now clearly accomplished this soft landing, and that is almost a sure indication of higher stock prices in the future.
The U.S. is running seriously short on power. With the increase in electric vehicles and the use of electricity by technology, the U.S. is clearly running out and private industry is not responding. The answer to the energy problem is nuclear energy. I have never really understood why the environmentalists are so against nuclear energy. It is the only clean way to produce more energy and yet, for some reason, every time we begin a new facility, the environmentalists fight it.
The rest of the world has caught on and is building nuclear power at a rapid rate. In France virtually all their electricity is produced by nuclear energy. In China they are producing nuclear plants at an efficiency unseen in this country. They can build a nuclear reactor in seven years or less, at a fraction of the cost in the U.S. Over the last several years, it has taken over 20 years to build a nuclear reactor in this country, and everyone has been overdue and overbudget.
There are simple solutions to these issues, yet, due to the environmentalists fighting every nuclear plant, we cannot move forward. First off, the production of nuclear plants in the United States should be standardized, and rather than each being unique, they must all be built the same. This is not a novel concept. Also, the government must move in and provide protection to the producers of environmentalists’ legal challenges. Basically, the government would have to guarantee the uninter rupted production of a nuclear facility in the United States. It is amazing to me that politicians are so short sighted that they cannot see the obvious. The obvious is that we are running out of electricity and if we do not begin shortly, almost assuredly, there will be shortages in the future.
Almost everything I read; I see that America is becoming increasingly rich as we move forward. Over my last several postings, I indicated that the passing down of wealth by the current generation to the second generation is going to be historic in its high value. This passing down of wealth will materially alter the U.S. economy for decades to come. It will provide for a consumer; unlike anything this country has ever seen in the past. All these huge attributes can mainly be attributed to investing in the stock market. I have been saying this over the last decade, but the population just does not seem to understand or believe it. There are still too many people sitting on cash, earning virtually nothing as compared to the positive aspects of investing in stocks. I received a notification the other day that supported my assumption.
Fidelity Investments announced that there were 497,000 401(k) accounts in the U.S. with assets in excess of $1 million. That is 31% greater than from the previous year. This means that these 401(k) accounts have grown since they were invested principally in equities. This does not include the 401(k) accounts of all the other major brokerage houses such as Schwab, Merrill Lynch, etc. It also does not include the likely millions of investors that have $1 million or more in their IRA accounts, and not their 401(k) accounts. The evidence is clear that America is getting richer by the day, and they are getting richer by investing in stocks.
One of the reasons that short-term dips in the market do not concern me is because of the potential buying power of the money coming into the market daily. I always laugh when you see Apple stock go down after their earnings report. The principal buyer of Apple stock is Apple itself. They use their corporate profits to buy back their stocks, and every time it goes down, they benefit by buying more. The same is happening throughout the investing world. There are literally billions of dollars every day flowing into the stock market from 401(k) accounts. These 401(k) accounts tend to be more aggressive than ever, and therefore grow at a faster pace. Wealth is being created throughout the economy, and yet so many investors elect not to participate. We are moving into the best months of the year for the stock market, and there could not be a better time to invest for future profits.
We all know that the best months for investing are November through May. This time we have an even more powerful stimulus, which is the cutting of interest rates by the Federal Reserve. Once again, we have the trifecta of strong investing stimulus. We have a very sound if slowing economy, we have almost assuredly lower interest rates coming up and corporate earnings continue to expand and get better. We have the three most powerful positive attributes working in our favor at the current time. We do have many potential issues as well, such as the federal deficit, and a major U.S. discord with one-half of the population disliking the other half of the population.
However, I think the positive attributes of the economy clearly outweigh the negatives at the current time. If there has ever been a major opportunity to prove your potential to be wealthy, it is currently investing. I have never really understood why people like to invest in cash when they have the potential to earn many times that by investing in equities. All I can give you advice on at the current time is going into the best months of the year, it is now time to get fully invested.
We have had a fabulous year so far through August which followed another fabulous year in 2023. Over the last 20 months, the markets have been up substantially, and you have benefited from it enormously. It is a good time to reevaluate your investment philosophy and sit down and discuss with us issues that bother you regarding investing. There is no question that the markets will be higher 10 years from now than they are today. What happens over the next 90 days? No one has any idea, nor should you care.
When I first got into investing, the Dow was at 1,700. As of Friday, the Dow ended up 41,563. Stocks will be higher in the future because corporate profits continue to expand. That is not likely to change, and therefore the likelihood of recession is low. I think it would be a great time to sit down and review your investment philosophy and discuss with us how we can help you going forward.
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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| A big CONGRATULATIONS to Lily Holmes –
recent graduate of American University Washington College of Law! |
I have found many topics I would like to discuss in this month’s posting. I think I will finally make reference to gold and Bitcoin and my thoughts on why we do not invest in them. Also, after two long years, the yield curve is no longer inverted. This is a major economic event, and I need to explain why this has suddenly become such a controversial topic.
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| Eddie scoring major points with daughter Lucy at Olivia Rodrigo’s GUTS World Tour! |
I have always been interested in Cuba and became even more interested in their local economy and politics after I visited there a few years ago. It appears that anyone who can get a job elsewhere is now leaving the island and mainly heading to the U.S. It is especially important that we discuss the economy and why Cuba has failed and will likely not recover without additional help.
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| Yeehaw! Cameron ready for Western night at the high school football game! |
Before I get into those exciting topics, I do need to report on August, which was an excellent month for the financial markets. Even though the anticipation was something extremely dreadful, the exact opposite actually occurred. Once again, the quick turnaround in the financial markets during the month of August emphasizes how important it is to be invested at all times. At the point where things look bleakest, that is the time when you need to be invested.
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| Evan and Alexis cruising along’ in Nassau, Bahamas |
Just to give you some basis for comparison, the Bloomberg Barkley Aggregate Bond Index was up 1.4% for the month of August and is up 3.1% year-to-date. For the one-year period, that Index is up 7.2%. With interest rates most likely to fall in the next few months, it is possible that the bond index should show better results; however, as you compare it to the three major Indexes of stocks, it is a very dismal performance. Many people believe that you should have at least 40% of your assets in bonds. If you base that on returns, you can see that a 40% allocation to bonds would have been a serious mistake over the last 12 months.
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| Caroline and Reid (is that really you?) proudly displaying their new faces on Amelia Island! |
The theory behind this logic was when interest rates are high for two years, that indicates a Federal Reserve that is restrictive and trying to control the economy by slowing it down, which would in turn throw it into recession. Also, the fact that the 10-year bond was yielding a lower percentage than the two-year bond would indicate that, more likely than not, the economy would be in recession due to the restrictive nature of the two-year since it clearly was not in sync with the yield 10-year bond. The so-called forecasters on Wall Street predicted that this inverted bond yield created recession 100% of the time; therefore, you should abandon stocks immediately. As would be the case, 2022 ended up being a bad year on the stock market, with the S&P 500 Index stock going down roughly 20% in 2022.
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| Ava extending her love of all animals to the Charging Bull on Broadway! |
It is interesting to me that these so-called experts who predicted a recession in 2022 have not changed their opinion and still believe a recession is likely to occur. Those who quoted the inverted bond yield as evidence of the recession have not come out and changed their opinion because the inverted bond yield is no longer inverted. I recognize that these are extremely technical issues in investing, but you need to understand why the market goes down even without any rational reason. The markets went down in 2022 without any good reason, but the pain was felt in that year. However, it is encouraging that for 2023 and the current 2024 year, the same Index that lost 20% in 2022 is up 20% in each of those subsequent years.
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| Proud Papa Michael Holmes with daughter, Lily. Kudos to you both! |
What true price controls do is lead to scarcity. This is not a difficult concept for anyone to understand, but if a producer cannot increase prices and therefore would produce at a loss, then they would not produce at all. Suddenly, while you have an oversupply of products, now you have scarcity. The question always centers around the fact of which is the worst situation. Controlling prices is a good thing for the consumer, but having no product to purchase, in my opinion, is a much worse situation. Look at the situation that they have in South American countries where they cannot produce the food necessary to feed their population because the farmers cannot make money on the sale of goods.
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| Mia giving extra love to dad – Happy 97th, Muzzy! Cheers to you, and the fabulous journey that is your life! |
Another candidate running for office proposes that all the problems in the U.S. economy would be saved by putting tariffs on all products brought into the United States. The argument being that it would ensure that more manufacturing takes place in the U.S. since there would be tariffs to keep the prices high for goods produced outside the United States. Once again, the concept is a “populist” concept but is absolutely ridiculous from an economic standpoint. You cannot have tariffs without inflation. If, by definition, you would increase prices on all goods produced outside the United States, that would allow the U.S. manufacturers to exploit the market and increase prices, which would clearly create inflation and destroy consumer’s pocketbooks in the United States.
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| Alexis and Evan celebrating her 25th at a pasta making class with friends (not pictured)! Welcome to adulthood, Alexis! |
However, that philosophy changed when foreign car companies began manufacturing cars and shipping them to the United States. The cars coming out of Germany and Japan were of higher quality and of similar price than the cars produced in the United States. This increase in quality cars made the big car companies in the United States better. They had to improve their quality in order to compete. And they did. There are many examples where foreign manufactured goods have improved the quality of U.S. goods and competed on a level playing field with goods produced in the United States. There is no question that we all desire more goods to be manufactured in the United States to create more jobs and taxes, but the way to do that is not through higher tariffs but through a better working environment.
Another example that both candidates are against is the acquisition of U.S. Steel by Japanese steel companies. Both the current administration and candidates have come out against this acquisition. While you certainly think it would be a desirable interest to keep steel manufacturing in the United States, the way to do that is not as proposed by these candidates. If you were to turn over virtually all the steel manufactured in the United States to one manufacturer, that would obviously lead to issues where they could increase prices any time they wanted to.
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| Joe using props to explain bullish vs. bearish markets to Ava |
They argue that in the case of war, steel would be controlled by a foreign government, and therefore the U.S. would be deprived of the steel needed to produce military armaments. The ridiculous part of that statement is that in the case of war, any foreign manufacturers could easily be nationalized, and we would get back the industry for free that they have innovated and spent money to improve. The acquisition of U.S. Steel for many reasons should be approved, yet for political reasons, all candidates for the highest office in the country cannot see the benefits.
The most outrageous proposal is that one of the candidates would like to tax unrealized gains on stocks. You almost have to be amused by this proposal given the extreme complexity of doing so. Having completed tax returns for over 50 years, computing realized gains is hard enough, but to tax unrealized gains is virtually impossible.
I know it only affects taxpayers with over $100 million dollars in assets, and those are very few, but those people control a large portion of the population and employees in this country. But first, think of how you calculate the fair market value of your assets and how that has been done in this calculation. No one knows exactly what a business is worth if it is a private industry. As an example, we all know that the price of your house is subject to many fluctuations and changes year to year. How one with that amount of assets would calculate the fair market value of all their assets would be an exceedingly difficult situation.
Take as an example an entrepreneur who has only one privately held business and virtually no other assets and is stuck in this unrealized appreciation quagmire. Due to the success of that business, the value of that company goes from $100 million to $150 million in one year. Therefore, the $50 million increase would be taxed at 25%, and he would owe $12.5 million dollars in taxes under this proposal. Where does that money come from? It is clear that he would have to sell the stock of the company, which would endanger the company and employees and almost ensure the loss of jobs.
The interesting part of the proposal is that, let us say that the following year, the value of the company falls back to its $100 million level. Does he now receive a $12.5 million refund from the government? I doubt it, but who knows what is under this proposal? But the most important part of this proposal is that, almost assuredly, it is unconstitutional. While it is a “populist” idea to tax the rich, it is not realistic to tax gains that have not been realized. This proposal will not pass Congress, but it is interesting how it has been characterized by the media as being a positive thing when it would be an economic disaster.
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| DeNay and family enjoying some fresh air and beautiful views at Rocky Mountain Park |
I find it such a simple concept that it is hard to believe it is misunderstood. If you increase taxes on corporations, that is money that they could not use to hire people, expand plant equipment, and produce better goods. Obviously, there is a major difference between higher and lower taxes, but it solely depends on your view of what is better for the country. It is good to have wide-ranging opinions, but I only wish people understood the economic effect rather than the populist idea. It seems the better solution is to cut government expenses, not raise higher taxes.
I have always been interested in Cuba, and more so since I have visited the island. It is an example of why socialism just does not work and will never work in any economy. From an idealistic point of view, you would think that everyone would be better off with socialism than they are under capitalism. But that has never proven to be the case, yet people continue to believe that we are becoming more socialistic in our government in recent years.
Point to Cuba and you see exactly what the issues are. It recently came out that from the year beginning of 2022 to 2023, the island lost 1,011,269 residents (10% of their population). Over a million people left the island since there were no work opportunities, and they had a better chance of finding those work opportunities in other countries. What was the most distressing was that of this amount, over 800,000 of the people that left the island were between the ages of 15 and 59. This is also the age group that produces future generations. That means the most productive part of the population is abandoning the island in droves. Basically, what that means is that they are leaving the incredibly old and the noticeably young on the island, which is creating a financial disaster for the Cuban government. The care of the elderly is of serious concern, and the island has no way to raise revenue, since the majority of the tax paying populace has left to go to a different country.
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| Mitch, Marty, Barb and Mia trying out their sea legs in Tampa! |
I am asked every day about the potential for recession in the United States, and maybe I look at it differently than most people. And looking back over my financial career of over 50 years, it seems like that every recession in the United States was created with a spike of prices of oil and the effect it had on the consumer. I vividly remember the Jimmy Carter years, where the price of oil virtually doubled overnight. But worse than that, we had scarcity of oil, and therefore scarcity of gasoline. And every year since then, other than the COVID-19 year, a recession has created a spike in energy prices.
All that has changed. While the current administration has fought the production of oil and gas at every turn, the U.S. is now energy independent. We produce more oil and gas than we consume in the United States, and if the current administration would allow us, we would export to more countries. The exporting of natural gas to Europe creates many well-paying jobs and helps the U.S. economy. Therefore, I do not think recession is likely at the current time, because the price of oil has actually fallen over the last year or so or has remained basically stable.
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| Shelley and Cameron spent Labor Day rescuing 382.9 pounds of food for Second Helpings Atlanta! |
So therefore, they are like collectibles, which would be paintings or fine bottles of wine or autographs of professional athletes. The value has nothing to do with the ability for it to produce income, but more on the ability of scarcity. Since I find neither of these assets to be particularly scarce, I question whether over the long term, they can continue to go higher. I often cite the rednecks that promote gold on television on Friday night as a good example of why gold is not likely to continue to be scarce. If this hard-working group can produce gold, then more likely than not, more gold will be produced in the future. I understand the price of gold has gone up in recent years, but that is mainly due to inflation and not due to scarcity. If you compare those assets with U.S. stocks, you get a dividend flow and an increase in value in those assets that can be quantified. Currently, I see nothing in gold or Bitcoin that allows it to be evaluated on a total return basis, yet I do with stocks, which is why I went into stocks.
For the first time over the last several years, the number of unemployed is 7,115,000. It has approximated the number of job openings, which is 7,673,000. For the most part of the last several years, the number of jobs has doubled for the number of unemployed. As I have written and many times in this posting, we wanted the economy to slow so that the Federal Reserve would cut interest rates. We have now accomplished that goal without destroying the economy, and now we are almost assuredly looking at rate decreases.
I project over the next 90 days that we will see rate decreases of 0.75 which will dramatically improve the economy with lower interest rates and, importantly, lower mortgage rates. We could not have accomplished these rate decreases until the economy slowed, which we have now accomplished. You hear so much about the soft landing and the hard landing and the desire for one over the other. We have now clearly accomplished this soft landing, and that is almost a sure indication of higher stock prices in the future.
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| Following in her father’s footsteps? Ava in front of the New York Stock Exchange |
The rest of the world has caught on and is building nuclear power at a rapid rate. In France virtually all their electricity is produced by nuclear energy. In China they are producing nuclear plants at an efficiency unseen in this country. They can build a nuclear reactor in seven years or less, at a fraction of the cost in the U.S. Over the last several years, it has taken over 20 years to build a nuclear reactor in this country, and everyone has been overdue and overbudget.
There are simple solutions to these issues, yet, due to the environmentalists fighting every nuclear plant, we cannot move forward. First off, the production of nuclear plants in the United States should be standardized, and rather than each being unique, they must all be built the same. This is not a novel concept. Also, the government must move in and provide protection to the producers of environmentalists’ legal challenges. Basically, the government would have to guarantee the uninter rupted production of a nuclear facility in the United States. It is amazing to me that politicians are so short sighted that they cannot see the obvious. The obvious is that we are running out of electricity and if we do not begin shortly, almost assuredly, there will be shortages in the future.
Almost everything I read; I see that America is becoming increasingly rich as we move forward. Over my last several postings, I indicated that the passing down of wealth by the current generation to the second generation is going to be historic in its high value. This passing down of wealth will materially alter the U.S. economy for decades to come. It will provide for a consumer; unlike anything this country has ever seen in the past. All these huge attributes can mainly be attributed to investing in the stock market. I have been saying this over the last decade, but the population just does not seem to understand or believe it. There are still too many people sitting on cash, earning virtually nothing as compared to the positive aspects of investing in stocks. I received a notification the other day that supported my assumption.
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| “Brother and sister, together as friends, ready to face whatever life sends!” Caroline + Reid |
One of the reasons that short-term dips in the market do not concern me is because of the potential buying power of the money coming into the market daily. I always laugh when you see Apple stock go down after their earnings report. The principal buyer of Apple stock is Apple itself. They use their corporate profits to buy back their stocks, and every time it goes down, they benefit by buying more. The same is happening throughout the investing world. There are literally billions of dollars every day flowing into the stock market from 401(k) accounts. These 401(k) accounts tend to be more aggressive than ever, and therefore grow at a faster pace. Wealth is being created throughout the economy, and yet so many investors elect not to participate. We are moving into the best months of the year for the stock market, and there could not be a better time to invest for future profits.
We all know that the best months for investing are November through May. This time we have an even more powerful stimulus, which is the cutting of interest rates by the Federal Reserve. Once again, we have the trifecta of strong investing stimulus. We have a very sound if slowing economy, we have almost assuredly lower interest rates coming up and corporate earnings continue to expand and get better. We have the three most powerful positive attributes working in our favor at the current time. We do have many potential issues as well, such as the federal deficit, and a major U.S. discord with one-half of the population disliking the other half of the population.
However, I think the positive attributes of the economy clearly outweigh the negatives at the current time. If there has ever been a major opportunity to prove your potential to be wealthy, it is currently investing. I have never really understood why people like to invest in cash when they have the potential to earn many times that by investing in equities. All I can give you advice on at the current time is going into the best months of the year, it is now time to get fully invested.
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| Dream big! Train hard! Play volleyball! ✔✔✔ |
When I first got into investing, the Dow was at 1,700. As of Friday, the Dow ended up 41,563. Stocks will be higher in the future because corporate profits continue to expand. That is not likely to change, and therefore the likelihood of recession is low. I think it would be a great time to sit down and review your investment philosophy and discuss with us how we can help you going forward.
As always, the foregoing includes my opinions, assumptions, and forecasts. It is perfectly possible that I am wrong.
Best Regards,
Joe Rollins
All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.
This commentary contains forward-looking statements, which are provided to allow clients and potential clients the opportunity to understand our beliefs and opinions in respect of the future. These statements are not guarantees, and undue reliance should not be placed on them. Forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual results in future periods to differ materially from our expectations. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements.
