Friday, February 18, 2022
The economy is grinding to a halt and on the cusp of a recession. As inflation ravages the economy, the Fed is well behind the interest rate curve now. Consumers are already pulling back demand via price-conscious shopping. Smaller cap stocks without tangible profits are being vaporized. Oh yeah, oil is taking a breather at around $100 on its way to $150 (or higher!) Can anyone say "Recession?"
Financial farmers need to be aware of what is happening in the global economy because macro events have salient and pertinent effects on their local sustainability. A confluence of events has put a once booming economy in the toilet. And if oil spikes further, the Fed raises aggressively, and/or consumer sentiment falls more, the economic gains of a decade will be flushed.
Considerable thought should be given in the coming days and weeks to the upcoming Fed meeting in mid-March where the Federal Reserve is now thinking of raising rates by 0.50%. Another eye should be on oil. High oil prices are yet another stealth tax on productivity (it costs significant energy to fed cattle, ship cattle, etc.) Almost every facet of the economy is greased by oil. Finally consumer sentiment might just be paramount, and it is falling like a rock. What should investors do?
Well anyone who has been in small cap stocks for the past 90 days has felt considerable pain. Like losses of 60%, 70%, 80% or more. This ties well into my previous post using Cathie Wood's ARKK ETF as a litmus test for innovation and risk appetite in small cap stocks. Let's just say the market is nauseous in regards to its appetite for this sector right now. "Bulletproof" tech hasn't done much better. Mid and Large tech have both been bushwhacked. The "survivors" so far have been pure commodity plays, ie banks, gold, and oil. People sitting on a pile of cash have also looked really, really smart.
If there is a gameplan to combat inflation, increase oil supply, or improve consumer sentiment nobody has seen it yet. Result? The pain will continue, and most likely get worse. We are the on the cusp of a recession; the economic gears are grinding to a halt. It will be extremely difficult to change poor economic policy, disastrous regulations, and incompetent leadership quickly. Financial farmers need to preserve capital here.
Thursday, February 17, 2022
The Freedom Index© is the inverse ratio of the percentage of GDP spent on government annually. Currently the reading is somewhere between 45-70% of your God-given freedoms, depending on where you live in the United States. No wonder Elon Musk is fighting the SEC.
It is a sad state of affairs when the Thomas Edison of our generation has to SUE his own government for chilling his basic civil rights. Instead of unleashing innovation, the Biden Administration has made a point of trying to crush it. How did we get here?
There has been a steady decline in basic civil rights for over a century, and it can be tied directly to the rise of the Income Tax and IRS. Once the government gained the power to tax it never stopped, because your tax dollars are its nutrients for growth. Hence we have witnessed a stunning growth in the size and scope of the government. Consider the historical chart below:
The Federal Government spend now is over 30% of our GDP. Combine that with State and Local spend and we're easily approaching 50%+. Why does that matter? Well as government grows, your freedoms erode. Sadly, the Founders knew this would happen. That is why they kept government small, knowing that it is inherently corrupt. Consider, since 1930 when Fed Spend was about 5%, you had essentially 95% of your freedom. Now it is less than half. And in many states like California it is worse. "The State" has become all.
Can this be fixed? That is a difficult question. President Reagan famously once said: "The closest thing to eternal life on earth is a Government Program." How true it is. Much of the problem lies with our elected representatives who do not represent us. They represent themselves and their lust for power. Change begins with voting them out, demanding term limits, and creating a task force to reduce regulations and simplify taxation. Yes, a task force to REDUCE government. We should not be the best country for political corruption and accountants, but rather for engineers, scientists, and poets.
Friday, February 11, 2022
House of Cards
Imagine you're an arch-criminal and you document every crime via photos, texts, and e-mails. Then you transfer that electronic record to your laptop, which you decide to leave at a computer repair shop and then never pick up. Well financial famers, that is the basis of Miranda Devine's superb, can't-put-it-down, dog-eared book "Laptop From Hell."
When did corruption become the standard of the Biden Administration? Well before Joe & Jill Biden took office. If we are to lend credibility to Hunter's laptop reveals, and we 100% should because everything in the book is cited, then it appears that the corruption began during Joe's first term as a Senator.
Without rehashing, and spoiling, the "origin story" of the Senator, Joe parlayed this position into one of Clintonesque peddling and power-brokering over the next 40 years. It ran the gamut of securing attendance at Yale Law School to overpaid plum positions to outright "quid pro quo" for influence.
Regardless of party affiliation, nobody wants this in our country. It makes the United States a laughing stock and on par with banana republics we so frequently chastise for corruption. When in fact it is OUR leaders with the tacit approval of legions of government minions looking the other way that facilitates the complete loss of confidence in the Republic. A groundswell of nausea has arisen across the country.
We need sweeping political changes. Establishing term limits, locking the public-private turnstile, and dissolving "non-profit" foundations are at the top of the list. As Americans we deserve better than this, the corruption needs to stop and those "public servants" need to be held accountable up and down the chain of command.
Oddly, the "Laptop From Hell" might just be the deliverance this country needs. In many ways Hunter's photos, texts, and e-mails seem to be a cry for help from the proverbial bagman to anyone with some backbone to help right the wrongs done by political corruption in this country. Indeed, I think Joe Biden said it best:
"Corruption is a cancer, a cancer that eats away at a citizen's faith in democracy...It saps the collective strength and resolve of a nation. Corruption is just another form of tyranny." - Joe Biden, Kiev, Ukraine, 2014
Wednesday, February 9, 2022
Vast amounts of money are often made by doing nothing. In fact, almost the entire economy is based on the principle of holding power while assets compound. The mechanism of compounding fuels asset growth by the function of incrementally adding more and more underlying wealth which germinates even further growth, ad infinitum. Simply put, compound interest is "interest on interest."
Financial farmers need to have holding power. You can own the best assets and have plenty of investable cash, but without holding power it is extremely difficult to get ahead because you are constantly fighting against the tides of doubt, anxiety, and speculation. These erode your ability to hold. Holding power provides the best opportunity to harness the magic of compounding.
There are also so fringe benefits to holding power. Typically the tax burdens are LESS, as patience is rewarded by the IRS. Your overhead in terms of logistics also tends to be lower as you have more capital in fewer positions and you can focus on those limited options rather than a spectrum of possible answers.
Ben Franklin put it well when he said about marriage "keep your eyes wide open before and half open afterwards." That statement can aptly be used in the stock market, real estate market, and commodity market as well. Will some crops (investments) fail? Yes. But having the holding power on others that systematically compound makes it all worthwhile, and then some.
Friday, February 4, 2022
Americans will be fighting inflation for the next 3 years as the Biden Administration is pursuing higher taxation, increased regulation, and significantly more spending without driving growth. These three elements will combine to cause lasting and harmful inflation that stifles the economy. What can you do?
Financial farmers and readers of this blog, like most fighters, don't want to ever get caught on their heels. Most studies indicate the vast majority of Americans are only one financial crisis away from bankruptcy, and typically this ruin is caused by not the loss of a job, loved one, or even the stock market. Rather this "risk of ruin" is directly related to a medical emergency. So rule one: To avoid the greatest risk of ruin, make sure you have medical insurance! If you're a worker, under Obamacare you're most likely paying for multiple people not in your immediate family too. That's just how criminal medical costs have become.
Next, inflation eats away at your earning power and cash value. So make sure your salary is keeping up or exceeding inflation; if the government is saying inflation is at 7% assume it is at least double. So you should be negotiating a 15% raise THIS YEAR to make up for lost buying power. Make sure you get you yours. Amazon is, they just jacked up Prime membership by 17% to $139/year!
Lots of cash sitting in a bank or checking account? Hmmm...well a certain degree of cash is good, no doubt. But are you really losing 1-2% of buying power PER MONTH by having a lot of cash in an inflationary environment? Also who can seize your cash on a whim? (Hint: They take some of your paycheck every month too.) Rule Two: Mind your cash. That might involve old school mattress stuffing or burying. I kid you not. Physical gold makes cents (see what I did there?) to me too.
Finally, what isn't affected by inflation? Nothing. That's right. So look for assets in terms of ownership percentages increasing, increasing cash flow, alternatives to actual cash (it still takes a LOT of effort to mine a troy ounce of gold), and companies buying back their shares all benefit you. Real estate becomes a double-edged sword in the sense that since rates will increase, demand drops for housing. So buyers MIGHT pay less, but their loans cost more. But does a 30-year mortgage @ 3% really matter when inflation is running 7-14%? Seems like a decent bet. Plus you get to homestead and live there. That's nice.
Until inflation is tamed, which I don't think happens in the next 3 years, investors need to be on their toes. Nothing kills work and productivity more than inflation. It is the "silent killer" which reduces the value you receive for labor, innovation, toil, everything. So increase YOUR price and look for assets that pay you to own them. Be wary of leverage. Embrace quality cash flow. Stay in the ring and land some punches!
Thursday, February 3, 2022
Menace to Society
At what point did the United States decide to stop following the Geneva Conventions? It seems like right around the time of the Afghanistan debacle the Joe Biden Administration no longer wanted to establish, follow, or track any sort of Rules of Engagement.
Last night a protracted firefight led to an explosion that waxed a reported dozen civilians (yet again)...but this time we allegedly also got an ISIS leader. So much for the "silent operators," I guess those guys are all working on their books, movies, and fitness programs since being discharged for not getting the vax.
But this brings up a larger question: When our own society is off the rails (see Southern Border or Urban Crime Rate or Inflation), why in the world is the United States doing proactive military ops in Syria on terrorists heavily shielded by civilians? This felt like yet another sad display of public relations in projecting a "tough guy" image that any meaningful action. This reckless attitude is having significant spillover effects.
If you think the Rule of Law is eroding faster than a California beach house's front yard you're right. Societal breakdown at scale is occurring before our eyes. The metrics don't lie, and even a lawn sign espousing that you "believe in science" won't help mitigate the effects of brazen violations of the law. Before we go gallivanting around the globe flexing our military muscle, this country needs to get its own House (yes the Capitol version) in order.
When freedoms are trampled and the Rule of Law becomes a joke, then hypocrisy rules. I predict an implosion, and right soon. The country's media is briskly changing the narrative to "living with Covid," lockdowns are now only for the "unhinged," and even mask mandates are being dropped. CNN cleaned house yesterday. And as the capitalist Bob Dylan so rightly remarked "the times, they are a changing."
Financial farmers should take careful note of the sea change occurring in front of them; as Covid fades another hydra will raise its head before the all-important November Election cycle. It could be Ukraine. It could be Urban Crime. It could be inflation. It could be all three and more. Stay on point and seek out quality assets at good prices. Protect your family from the erosion of freedom. Champion the Rule of Law. Be vocal about hypocrisy. This is YOUR country and politicians work for YOU. Make it so.
Wednesday, February 2, 2022
How do you run a global monopoly into the ground? You overleverage your balance sheet on bad M&A deals, overcompensate your executives, and finally make sure you have an inept board of directors. Long suffering shareholders of AT&T sadly have been left on hold.
Yesterday morning Ma Bell decided to exit one of its largest recent M&A failures by spinning off its Time Warner division into a new company with Discovery. It also cut its sacrosanct dividend in half. Here is the full report from MarketWatch (click to enlarge):
While widows and orphans will be looking for their next meal with the dividend cut, ATT CEO John Stankey and most of the Board of Directors will be wining and dining over the next couple weeks at the AT&T Pro-Am (Palmer's Club on the 18th for $1000 each, Clint's Saloon $350.) After that perhaps a corporate retreat at the Aspen Institute. Or a leadership conference in Davos. Too bad nobody is minding the telephone booth back in Dallas.