June 8, 2018

Anticipate The Ball

When you think about it, in almost any sport the most outstanding player seems to always be around the ball. They tend to make the big catch in a football game. They tend to have the most rebounds on a basketball court. They tend to be the ones that snag the “almost” home runs from going over the wall in baseball. Their anticipation of where the ball is going to be leads to tremendous success.

In any endeavor, sports, business, or politics, anticipation is the key to success. In the same way the world of investment management is an anticipation game. Anticipating economic trends, anticipating sector flows of capital, anticipating macroeconomic changes – like interest rate movements and currency fluctuations –  these factors when mostly correctly anticipated, lead to greater economic success. In the same way, when Spectrum Financial Alliance puts together and manages your investment portfolio, each individual portfolio element, each investment is an attempt to put your valuable capital in front of an anticipated investment event/result.

No one, including myself, can predict short-term market movements. Short-investments are normally, in my humble opinion, mostly irrational. Therefore, our task is to do what is possible – anticipate longer term events, based on past economic history and knowledge of how current macroeconomic factors tend to drive companies that we invest in.

In this first five months of the year, we’ve seen many significant challenges and the markets have produced a net return of almost nothing year to date. However, it is our firm conviction that, looking through the end of this year and into the years ahead, we will see a significant and upward movement that is predicated on an exceptional economic performance. Our nation’s growth is accelerating – even as we deal with the short-term pain of the economic and geopolitical issues that were wrongfully left unattended, by our nation’s leaders, for over thirty years.

 

Where Is The Ball Going To Be?

Let’s talk about some of these challenges and try to anticipate where this investment ball will land. First, the markets have been retesting of the February 8, 2018 low. We have retested that low (2,581 on the S&P 500 index) five separate times. We are now in the sixth retest of that low and we are confident that the market will hold, then advance again.  Each successive retest has held and then bounced higher than the previous test.

All that means is that our nation’s economy and our markets are successfully navigating the challenges that will spook the markets occasionally, and your account values are trending ever higher each time. The factors that are most important in the market’s short-term irrationality and fear of further potential problems include trade wars, geopolitical uncertainty, North Korea, Iran/the Mid-East, fears that inflation is going up, and fears of higher interest rates. I’d like to address each of these for you so that you will understand why we are highly confident that 2018 is positioned to be a well above average returning year for your portfolio.

 

Trade Wars

For many years our country’s leaders and Congress allowed our prosperity, and our nation’s wealth, to be undermined by less advanced and developed countries by exporting American workers’ jobs in the name of “fairness and equity” through our trade agreements. This happened under multiple administrations, both Republican and Democrat, and stemmed from a sense of (what I call) “affluence guilt” that was very well played by our economic competitors.

It was first advanced in the NAFTA treaty of 1994 under President Bill Clinton. NAFTA, or the North American Free Trade Agreement, looked great in principle as it expanded trade opportunities in North America, but for US jobs, the results were cataclysmic. We destroyed the textile and furniture industries on the East Coast and damaged many other industries through the elimination of equitable trade policies. Academically speaking, these types of trade agreements may work on paper, but practically, they have become miserable failures.

When American jobs are exported overseas, we are directly transferring the wealth, power, and prestige (that the blood of our forefathers paid for) to other nations who have normally sought unfair trade advantages to gain jobs. To assuage their “affluence guilt”, American politicians sacrificed economic opportunities, destroyed families (whose faded finances drug them down into the muck), and eliminated opportunity for income advancement in the U.S. That is directly the cause, in my view, for the widening income gap between higher income tax payers and lower income tax payers that has developed over these past 30 years.

Today, under an administration that truly cares about the middle class, we see frank talk, both with our allies and our adversaries, about putting our country on an equal footing and not deliberately and willfully hemorrhaging our country’s jobs and wealth. This is tough for other countries to accept, because they know the past trade game is over! They know new American leadership is going to advocate for Americans and not be guilted out of vitally needed American jobs. This should lead to a resurgence of our middle class – the backbone of America! A vibrant middle-class is a crucial element of capitalism, and upward economic mobility. It also fuels our economy and equity market.

I’m a great example of middle class mobility, as are many of Spectrum Financials’ clients. The American dream depends on that economic mobility. Therefore, President Trump’s policies, which no longer seek to appease Europeans, Asians, or Africans, are “must-do” items for the least among us and for the future prosperity of our democracy and freedom. These policies may be opposed by our friends, or foes, but, in my opinion, no trade war of any significant duration is likely to occur. Because our allies and enemies know these policies make sense for America and that our nation’s leadership is merely advocating for its citizens, they will protest initially but not create protracted international trade problems. Our trade partners may not like these changes, but they know they are long overdue. Instead, we are now on the cusp of major, generational changes that will likely create a highly prosperous resurgence in our middle class and our country as a whole.

 

Geopolitical Uncertainty/Iran/North Korea/Syria

There will always be, and always has been, geopolitical uncertainty. The Trump administration has not caused that geopolitical uncertainty, because producing uncertainty has typically been a tool of the enemies of freedom. Those enemies have no longer found an enabling American administration or Rules of Engagement that absolutely endanger the lives of our brave men and women serving overseas. It is my firm view that the 17 years of war and conflict America was engaged in with evil totalitarian Muslim radicals was caused by appeasement policies, whether with North Korea, Iran, the Taliban, ISIS, or other bad actors. These forces are literally the face of evil on our earth. They can’t be reasoned or negotiated with. That’s why instead of talking things out, they want to cut off our heads or cut out our hearts. They want to pump poison into our veins with imported meth, heroin, etc.

Now a new American administration has risen to their challenge. There is no military on the face of this earth that has the ability to humanely project power and influence like the American military. There is no foe (given proper rules of engagement) in armed conflict that can stand against our Armed Forces. Why do we allow fear of these evil creatures to cause us to bow to them, bribe them to act (as we did with North Korea and Iran) correctly, and quake when they test missiles or threaten our very existence? My experience has been that when bullies or despots are punched in the nose they back down. When they are appeased they grow, kill and murder, and become an even greater threat to liberty and our open society.  That’s how ISIS was allowed to flourish!

The Trump administration has done a great job of making these evil forces cower in their caves. Their little girls are no longer raped and denied an education, and they no longer steal from their neighbors and murder them when they don’t pay.  Having had an opportunity to go many places on this beautiful earth, I am shocked that so many of our citizens do not realize how things really work internationally and why liberty and freedom must be defended. This is because not defending them strongly leads to greater death, poverty, illness, turmoil, and could lead to the demise of liberty, and even our God given freedoms.

In summary, geopolitical uncertainty exists because of a lack of action not because of the current administration’s actions. Just as ISIS was destroyed in literally months (after our previous administration told us they would be around forever) other threats will now be reduced and eliminated. That means geopolitical uncertainty should be reduced resulting in higher valuations in your investments.

Based on our analysis we finally believe that there will be a highly successful resolution of the North Korea, Russia, and Syrian threats to world peace. As their threats recede, our markets are more likely going to enjoy a “peace dividend” with significant upside valuations and an increase in your account values!

 

Are Rising Interest Rates/Inflation a Problem? NO!

In every economic recovery, several things work to push up equity market values. In this current phase of growth in our country, many powerful factors are working synergistically to produce what we believe is likely to be the longest period of economic growth in our country’s history.  Those factors include the massive tax cut we received last year, the massive and ongoing deregulation efforts that are restoring reason to regulation and quit punishing our nations businesses for growing and providing jobs, the winding down of multiple threats overseas to our nation’s safety which will add a security premium to current market valuations, a restoration of fair and equitable trade policies that depend more on bilateral negotiations than our country being treated as an equal with every other country as we negotiate against multiple players, the pending infrastructure project which will add billions of dollars of net effects and spending to our economy, etc. As all of these great things happen, inevitably, we are going to see the labor market tighten somewhat and middle-class wages go up. That is great! The middle class has literally not had a pay increase in seventeen years. The policies currently being pursued by this presidential administration are going to end that and thereby stop the widening of the income and wealth gap between higher income tax payers and lower income tax payers. Everyone will benefit! While that’s occurring, interest rates and inflation will, normally and naturally in a period of robust growth, go up. On a short-term basis, you will see the normal occasional nervousness and even panic when interest rate hikes occur but remember interest rates and inflation go up in expanding and healthy economies. In an expanding and healthy economy, the valuation of stocks goes up. That’s what we own in your portfolios! At the same time, as interest rates and inflation go up the value of bond holdings decline. That’s mathematical and it’s a certainty. For that reason, our firm has little or no bond exposure in your precious assets. We will side step the debacle that we believe already began in bonds until yields have risen to a level where we think bond investment could become profitable for you, and all of our clients, again.

Without going into great detail, it is clear based on all available economic data that we are in the initial stages, in our view, of a tremendous upside movement. While the start to this year has been very slow, as our economy and our nation’s leaders have worked through many problems that were left on their table for decades, economic growth has continued to improve. Expect when the Federal Reserve meeting this month ends on June 13th, to see another Federal Reserve interest rate increase. I’d also expect at least one more increase prior to the end of this year. In our most heavily overweighed position, banks, every Federal Reserve interest rate increase will translate to higher bank stock prices. So, increases in interest rates and inflation, while on the short term somewhat unsettling to the market, in the intermediate and longer term are highly positive because they move that we are in a dynamic growing economy.  Your portfolios are allocated to actually appreciate in that economic scenario.

As a long-term student of our nation’s economy and markets I can truly say I have never been more confident about our future. Because of my background that confidence also extends to a wonderful anticipation of a much more peaceful world where American men and women are not, on a daily basis, in harm’s way because of threats we left unattended. Obviously, I am speaking for myself here, but this is best investment opportunity I have ever personally seen or studied. Therefore, be confident as we step into what always is an unknown future because our firm is anticipating where the economy is going, and we believe our allocations and choices will provide a much more secure future for our valued clients like you. Thank you for the opportunity to help you and yours and know we recognize that trust is a sacred responsibility that we will never forget.

 

Warmest Regards,

Kelly Buckley, MBA, CFP®

Managing Principal

Managing Director for Asset Management