O Say Can You See, By the Dawn’s Early Light. Over the past two years U.S. Treasury bond yields have risen significantly. During this period, the Federal Reserve has been unloading bonds which were purchased in the Open programs affectionately referred to as Quantitative Easing which lasted several years as a result of the Great Recession that began sometime in 2009. During this period, the Fed’s balance sheet grew from $800 billion to $4.7 trillion in 2015.
What So Proudly We Hailed at the Twilight’s Last Gleaming. The massive monetary stimulus did not produce the desired results as GDP growth never exceeded 2% during this period. Since 2017, the reduction in income tax rates and lowering government rules which restricted economic activity has actually jump started an otherwise anemic U.S. economy. The second quarter 2018 GDP growth rose to 4.1% signaling the economy was strong enough to allow the Fed the wiggle room to raise rates to more normal levels.
Whose Broad Stripes and Bright Stars Through the Perilous Fight. Rumors of trade wars have circled the globe as U.S. trade tariffs have been implemented regarding European, Canadian, Mexican and Chinese trading partners. The U.S. Trade Deficit has been massive versus these countries for twenty years or so. Since 1990, estimates that over 10 million jobs were eliminated in American as these countries had significant labor cost advantages.
O’er the Ramparts We Watched. The tax cuts in 2017 have actually encouraged corporate America to commit to bringing some jobs back and raising wages for many Americans. The unemployment rate recently dropped below 4 %, if you want a job, you can find a job! The stock market is the leading indicator for continued good economic growth as the major stock indices have reached historic levels during the current quarter.
Were so Gallantly Streaming? In spite of higher Treasury yields, the current shape of the U.S. Treasury curve is forecasting economic growth. Borrowing costs for corporations remains historically low even as corporate borrowing has been at historic levels over the past five years. Record government spending is also contributing to improving economic activity. Projections for the U.S. budget are forecasting the deficits exceeding $1.0 trillion by 2020. The Consumer Sentiment Index is at a twenty year high as well. We believe the short-term (1-3 years) Treasury bonds to be the sweet spot in the bond market.
90 days 2.19%
180 days 2.29%
1 Year 2.57%
5 Years 2.95%
10 Years 3.06%
30 Years 3.19%
And the Rockets Red Glare. The current valuation the S&P 500 trades at 20.4 times 2018 earnings and yields 1.73%. Earnings for the S&P 500 are projected to rise from $132.25 to $161.10 next year or 21%, which is very optimistic. We still believe that economically sensitive industries should perform reasonably well andfavor industrials, energy, chemicals, materials, technology and consumer discretion stocks.
The Bombs Bursting in Air. As Apple Computer and Amazon’s respective market capitalizations surpassed $1 trillion during the quarter, we believe all kinds of market speculation abounds. Recent data from a leading krypto currency dealer indicates that Bitcoin’s current market valuation is approximately $115 billion. The size of the ten largest krypto currencies combined is approximately $166 billion. We believe this market is the most fictional Tulip bulb craze to ever occur. Mysteriously, one opens an account at one of the several dealers in these accounting entries ad ships money from the credit or debit card like a sports betting parlor. The “investor” has daily or minute by minute updates to the value of the currency. The smart investor gets in early and gets out early. We believe the krypto phenomenon is nothing more than a Grand Ponzi scheme…buyer beware!
Gave Proof through the Night that Our Flag was still there. As the price of gold sits at a 7 year low at $1200 an ounce, another anti-speculative indicator is there is no real inflation. Technological advancements have more to do with lower inflation than anything else. Yet, we believe a day will come when we experience higher inflation. In the Federal Reserve playbook, we know inflation comes when the market is not expecting it. During the last three years of the 1970’s, real assets experienced major appreciation. After living through the painful years of the Watergate era, Americans buried themselves in getting back to normal and never saw the inflation ahead.
O Say Does that Star-Spangled Banner Yet Wave. The Bretton Woods Agreement ended in 1974 allowing currencies to float in value. Gold had been fixed for 40 years at $32 an ounce. No one really knew what it was worth as it rose to $800 an ounce. We believe this sums it up for the current value of commodities. No one knows what they are worth. Should governments continue to issue more debt, finance the debt through Central Bank purchases, and get Venezuelan styled socialists in office, then our currency can collapse. Record levels of debt issuance by the U.S. government, state governments, corporations, and individuals will be the trigger for such a dollar devaluation leading to dramatic inflation.
O’er the Land of the Free and the Home of the Brave. How much is enough? We have lost several large accounts recently after we have compounded returns doubling, tripling and sometimes quadrupling their asset values. The quest for more is ever so great today. As we go into the cooler months in the fall, we believe that any further market appreciation is a good time to take profits off the table. We are more cautious about the next eighteen months as Fed policy is raising rates and reducing money supply growth. We look forward to conversation about your assets and believe that conservative strategies are advisable in the coming months.
We remain diligent to do the very best in making investments on your behalf. We strive to earn your trust and confidence in the investment management process.
Russell L. Robinson
Robinson Investment Group
5301 Virginia Way, Suite 150
Brentwood, Tennessee 37027
Titles from the 1st stanza of the Star Spangled Banner, Francis Scott Key, 1814