Commentary
Happy New Year !!!
A most sincere 2015 welcome and ‘All My Best’ to clients. You have made NEAM and my life’s work in the world of personal finance extraordinarily gratifying and fulfilling. For all of that, I cannot ‘Thank You’ enough!! Another nod goes out to prospective clients, mostly from client referrals; welcome to a plain English summation of what I see happening in the midpoint of this decade. As always, let’s examine flashpoints, positive and negative…
Let’s start with the glass half full: Same as 2014, the US economy continue to lead the world. Our economic performance is the envy of the world, bar none. Add in a desirable dollar, attractive Treasury yields vs. other major developed economies and you have a powerful tailwind for investment purposes. Allow me to borrow a paragraph from last year’s opening GAZBIT:
“The US economy continues to grind ahead, Europe will grapple with deflation and Japan, is well, Japan. What do all three have in common? Anemic growth, loose monetary policy and rising debt. That’s positive? Well, not really, but the US will power ahead, as the least bad, while the systemic combo platter of structural unemployment and debt, limit any advances in other developed economies. As a result, the US will continue to benefit as the investing haven, by default, for both stocks and bonds.”
No need to rewrite. All is coming true, due to fruitless “economic engineering” by world central banks and the primary axiom ‘You cannot create demand’. Individual and companies must have confidence to borrow money AND pay it back, no matter what interest rates are. Simply put, this is lacking. Without these animal spirits, we will plod along, until that confidence becomes not only relevant, but crystal clear.
So what to invest in? Tried and true, large cap domestic blue chips, which churn out profits and thus dividends, my career long favorite, preferred stocks and dare I say, bonds, in the form of Certificates of Deposit. I will get taken to the woodshed for this, again, but given a 10 year German Bund yielding 60 basis points of 6/10 of a percent (Europe’s best economy) vs. a US 10 year at 2.15% with huge liquidity and our bond prices will go up because of worldwide demand for “safe” assets, but more importantly, a high investment return. Dig deeper and you know what really appeals, municipal bonds. Taxes continue to go up so why not earn a tax-free yield, which in many cases is better than a taxable investment.
Below is another plagiarized paragraph from last year’s initial 2014 GAZBIT:
First, as you all know, I primarily purchase individual bonds for your investment portfolios, as opposed to bond funds (exception: High Yield) because I like maturity dates. It helps to manage duration or length of time, before a bond matures and thus manages volatility. I buy bonds to hold until maturity, thereby locking in a definitive ‘Yield to Maturity’ that helps me plan your future income streams. It has been this way for over two decades and will continue since you want dependable cash flows. Period. Now, other people are waking up to this realization and they want the same thing. Stocks can give you cash flow via dividends, but volatility is an added, most often, unwanted side effect. Bonds, however, give you predictability, save for credit risk, (homework must be done) and if your time horizon does not allow for 30-40 years or if capital preservation is your primary investment objective, I rest my case. Bottom line, as statistics have told us, time and again, 10,000 people turn 65 every day. Do you think they can afford a three-peat (if burned by 2000-2002 & 2007-2009) with retirement hurtling towards them, vis-à-vis great stock exposure? Ah, no way. Thus, the hunt for income and even more important; Retirement Income, continues and will do so unabated for as long as the eye can see, in my opinion. Staying flexible is key to maximum investment return on a risk-adjusted basis.
Now let’s look at the glass half empty: Where do I even begin?!? Hmmm, Debt, Terrorism, Russia, North Korea, ISIS, any Emerging Economy, Central Banks, and last but not least, China.
European Politics – Central Banks have had the money spigot wide open since 2008, partly to stimulate demand, but also to allow governments’ of all stripes to launch systemic and cultural reforms. What did they do? Nothing! Well the band aid has been ripped off (Thank You, Greece) and now is the crucible for the European Union and as a result, the Euro. Monetary union was the easy part, but the Europeans never really got around to Fiscal union and it has laid bare the Achilles Heel (Greek pun intended) of the whole Maastricht Treaty. Nobody wants to guarantee someone else’s debts, social reforms have not taken place…You get the picture. Socialism is great, until you run out of other people’s money and that is where we are present day. I’m not saying to fire up the printing presses for Deutsche Marks or Drachmas, but someone will leave the EU. Question is who?
Next up, China. The People’s Republic is waking up with a massive debt hangover from overbuilding and that is filtering it’s way into lower natural resource demand, which equals lower economic growth. Everywhere. Granted, China is still expanding their economy, but the annual rate is down from double digits to just over seven percent, yet global growth is being constantly revised lower, as noted by the IMF, who lowered their global GDP forecast less than 10 days into 2015. Another reason to look with jaded eye toward any economist who thinks they can predict what is going on in the world, when we are living in experimental times by the world’s central banks.
Nice segue into my next hot button, Central Banks. At what point in the charter of the Federal Reserve was it mandated to keep annual inflation to at least 2%, while maintaining an unemployment rate of 6.5% or less?!? Hmmm, I seemed to have missed that one. Central bank manipulation continues in unprecedented fashion with the Swiss lifting their currency peg, India reducing their lending rates, the Bundesbank offering a 5-year Bund auction at the staggering interest rate of Zero and not to be outdone, the Danes charging member banks to keep their money in their repository. I refuse to list them all in the name of brevity, but you have academics and economists (what a combination, Yikes) trying to micro-manage (think Soviet-style, 5 year plans) an interconnected global marketplace by tinkering with money supply. Good luck with that.
In my opinion, we need a global debt diet. Central banks should see their folly of keeping interest rates low (for a considerable period of time) as a mistake and actually raise rates, which would then force the hard decisions to be made that all politicians, domestic and international, need to make, but are avoiding. Spending cannot exceed revenues; It is actually ok to say ‘No’ to spending largesse, once in a while, and my favorite, every solution to any problem is not to automatically say: ‘Raise taxes’. The world needs accountability in the worst way, not another debt restructuring or ‘kick the can down the road’ mentality. Man up and face the fact debt will continue to be wealth’s destroyer, both on a country and individual basis. Those who ignore, do so at their own peril or demise.
So where to invest in 2015? Great question, considering the domestic stock markets are priced to perfection, again in my honest opinion. Thanks to central banks easy money, investing in dividend-bearing stocks is a no-brainer, but it comes at an amped up risk profile, since fundamental valuations are distorted. What you have left is momentum investing in an ever-growing smaller universe of large cap, blue chip names like: AAPL, MMM, MO, UNH and others. Add to this mix my annual Preferred Stock asset class, selected Certificates of Deposit in the 7-9 year range (close to 3%) and selected growth ETF’s, primarily health care, technology and a contrarian play, utilities. Last, but not least, state-specific municipal bonds, which offer a compelling after-tax return vs. taxable investments. Every asset class or investment selected is viewed from a total return perspective and while stodgy, offers some modicum of downside protection. Eventually, there will be a correction and the idea is to preserve capital, just like 2008-2009 and live to fight/invest another day. Let me copy one last paragraph from 2014 as I really think it fits:
For now, keeping investing simple and straightforward, with excellent flexibility to get in or out of a market is crucial in this era of uncertainty. Having a quality investment allocation of selective blue chip stocks, mixed with prudent fixed income securities will ride through most financial storms. Let’s see how it goes…
All The Best…
