Friday, July 29, 2022

Tax & Spend

Tax & Spend

If you really want to destroy a society, debase its money. With the M2 money supply currently at some $21T (that's correct, trillion) from a previous level of $14T, the country is flush with cash. This is causing lots of problems and weird things to happen. 

In terms of problems, too many people have too much money chasing too few goods. Hence, inflation is rampant. Of the two ways to combat this, either increasing supply of goods or killing demand, the Fed has chosen the latter. But even that action will be of little consequence if spending increases at a similar clip to the supply of money.

Money needs to come from somewhere, and the Treasury has been happy to keep the printing presses going night and day. This has led to an environment of stagflation and the government choosing winners and losers; the winners are the pork barrel recipients such as healthcare, (the) climate Solyndras, and "infrastructure." You can count on your taxes going on up, way up, especially if you're a small business owner. The pitch is always "pay your fair share" or "just a nibble" and when you take a look in the kitchen are your cookies are gone.

What is an investor to do? You need some good strategery. Assuming the omnipartisan "Inflation Reduction Act" agreed upon by Democrat members of the Senate gets approval in the House we can expect the "Tax & Spend" moniker to ring truer than ever. Investors need to adjust their portfolios accordingly.

Consider where and how the wealth redistribution is occurring, determine who the net losers and winners are, and allocate accordingly. Fighting the Fed is hard enough, fighting both the Fed and Congress is nearly impossible, especially when the IRS is being weaponized. Like the Indians of old, look for the gravy train and attack. Mark Twain put it best when he said "No man's liberty or property is safe while Congress is in session."

Saturday, July 23, 2022

ACA Gravy Train

ACA Gravy Train

In the annuals of history, there has naught been a bigger Gravy Train than the passing of the "Affordable Care Act" on March 23rd, 2010. It is a day that will live in infamy.  Imbued with the power of nation-states by the Sun King Barrack Hussein Obama, health insurers were granted pass-through monopolies.

Consider the charts above of the four largest remaining publicly traded health insurance companies. Almost to the day of ACA passage there has been a meteoric rise in their respective share prices. How is this possible? Amazing care? Deft management? Sweeping reform? Oh no dear readers, these companies have the implicit power to charge whatever the market will bear...and if you can't afford it, the government will pay your premium, but if you can afford it and DO NOT pay, then you can go to jail (the government of course determines "affordability.") Got that? 

So while Chicago burns this summer (both figuratively and literally), its most famous son, who vowed that "the South Side of Chicago is my Martha's Vineyard," is inking yet another lucrative media deal at his estate in...Martha's Vineyard.

The hypocrisy is as thick as our vast oil reserves that can't be pumped. In terms of corruption and maleficence perpetrated on the American people, the ACA ranks high. Consider the fallacy of mandating purchases, at any price, from private companies with geographic monopolies, of a product you may or may not use, but you are required to buy less face the loss of your freedom. Preposterous.

If there's one thing we've learned at ILAF though, crazy pays. Consider all the innovation in the tech space over the past decade. Or in EVs. Or in just about EVERY industry. The only thing healthcare seems to have innovated is consolidation, increased premiums, and higher share prices. Now that dear readers is true innovation! 

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Friday, July 22, 2022

Reverse Engineering

Reverse Engineering

Generally speaking, stock prices increase with increased earnings. When a company makes more money, in general, their shares are worth more because investors put value in growth and reward it by bidding up the share prices of companies that increase their earnings. Naturally, the opposite is also true. Granted, there are always exceptions to the rule, but for the most part earnings drive the market higher.

Along those lines, investors should be able to reverse engineer a portfolio based on their spend habits, or even consider the spend habits of a typical cohort. So for example, if you have a breakdown of your monthly expenses you can also typically trace that spending to broad sectors, and specially individual brands. This provided a good backdrop to the Chinatown adage of "follow the money."

A classic Maslow's hierarchy of needs also works well in this example. For the "average" American, the top three expenses on a recurring monthly basis are housing, medical, and food. Now for people who are NOT self-employed, that medical cost might not be too high because your employer is picking up the tab. Consider their cost in our example as yours.

So right from the start we can see from a percentage basis how much of our monthly income feeds the banks for mortgages or the landlord, the medical plan operator, and the food prodders. Depending on your situation, there most likely will be energy costs (fuel and/electric), clothing, entertainment, and many others. List them out and I suspect you'll start to see the brands behind the sectors popping up. Take note of the specific brands you utilize both as a function of your purchase, but also your time. You might only buy a smartphone once a every couple years, but you most likely are using it frequently. Same for a computer. TV. Internet.

All of these purchases and time uses trickle down to brand utilization. The brands with the most utilization should be ones you pay attention to from a portfolio perspective. You are probably not alone in your brand utility. And generally speaking, yet again, the fewer brands choices you have for a good or service or time usage the more of the total market that brand is capturing.

This reverse engineering exercise should reveal some very powerful, some would say monopolistic, brands in your life. Maybe you should consider owning them?

Tuesday, July 19, 2022

One-Two Punch

One-Two Punch

Americans have been economically knocked out by their elected leaders. The Wayfair decision and American Recovery Act language stipulating a Form 1099-K for transactions totaling $600 or more effectively acts as a one-two punch. When did we vote to join a Fight Club?

In the words of noted U.S. attorney Jackie Chiles, it is "outrageous, egregious, preposterous" to pay elected members of Congress to knock us to the mat. Enough is enough. This author believes Wayfair was the single most harmful Supreme Court decision in a generation. Consider the rationale.

When basic freedoms are destroyed or restricted, it leads to the rise of juggernauts that monopolize the respective industries; whether they are natural resources, air travel, or in this case internet commerce. And internet commerce is huge...literally hundreds of billions of dollars of goods and services flow through those fiber optic cables on a daily basis. Every. Single. Day.

They say people get the government they deserve, but we don't deserve this...the problem arises that there are two (possibly three) sets of standards; one is the citizen taxpayer who is treated like dirt. Then there is the elected officials. They treat themselves well. The third is the true constituency. Now a rationale person would ask "Isn't that the citizen taxpayer?" Theoretically, yes. In reality, the true constituency is corporate America (think S&P 500 constituents) and pandering to special interest voting blocks.

Sadly what arises is the decay of the foundational Constitutional values AND rights. Citizen taxpayers get a watered down Slushie while the political machine feasts. The solution? One is to vote them out. That is very, very difficult in states like California with a majority rule impervious to reason or accountability. Another idea is to vote with your feet. That option is not available to everyone, but most people who can, do. Finally there is the "moat" strategy. This idea involves creating an economic and social moat by capturing enough value in your life to protect your family from your very government.

Saturday, July 9, 2022

Ghosting Pareto

Ghosting Pareto

Ghosting Pareto is like avoiding gravity. Yet, this is exactly what investors should do. Why suffer the proverbial "slings and arrows of outrageous fortune" shot by Big Finance when alternative strategies exist

Vilfredo Pareto is best remembered as an economist of the namesake "Pareto Principle" which is a economic, social, and mathematical rule of thumb commonly referred to as the "80/20 Principle" or the "80/20 Rule." It is the recognition and codification of a naturally occurring phenomenon in life which he learned occurred in nearly every facet of life; whether it be income distribution, height, or even touchdowns thrown.

Investors should be concerned with Pareto because he helps us, indeed reveals, that the market for the most part is bullish over time. There are, however, vicious downturns that roll through the economy like sneaker waves every 4-5 years aptly termed Bear Markets.

Big Finance (kinda like Big Tobacco, but more dangerous) continually pitches "buy-and-hold," "weather it out,' and "dollar cost average." Are these bad strategies? Not necessarily, but investors rarely, if ever, hear about methods to avoid Pareto; ie selling covered calls, buying puts, or selling short when markets turn.

Nobel Laureate Paul A. Samuelson made a profound comment when he said: "The longer you own stocks, the greater risk of a devastating loss." Think about that for a moment. As investors gradually build a portfolio over time it generally goes up in total value. Meaning, just at the point of retirement a portfolio is the most susceptible to a sneaker wave. Take a look at the historical performance of the S&P 500:

For those visual learners out there like me, it is apparent that enough sneaker waves roll in often enough to really put the hurt on a long-term portillo and potentially destroy decades of wealth. How often are these sneaker waves rolling in? You guested it, about 20% of the time. Meaning you can be cruising along on your yacht 80% of the time with the wind at your back, sun shining, and boom! A sneaker wave strikes.

How do investors avoid Pareto? First, investors need to accept that sneaker waves exist. For some reason Big Finance is obsessed with telling investors that they should only buy, buy, buy. I wonder why that is? Hmmm. Second, investors should build an "all-weather" strategy. This might be as simple as selling when the tide turns. Or it might be an aggressive approach like riding the wave, see Absolute Alpha. Third, investors should codify their strategy and monitor it. 

Blindly dumping money into Index Funds and ETFs has been the hallmark pitch of Big Finance now for decades. Low cost! Low cost! chimes the jingle over and over like Chinese water torture. And as the billionaire heirs and executives of these juggernauts motor by in their cash-burning steamboats, who's advising investors to avoid Pareto? ILAF, that's who! 

Wednesday, July 6, 2022

The Bear Necessities

The Bear Necessities

If every policy maker is against you, who is for you? ILAF, that is who! As investors recover from a long weekend it is important to focus on The Bear Necessities to avoid indigestion. To date, this Bear Market (using the S&P 500 as our benchmark) is off approximately 20% from its highs. Crunching almost 100 years of data (because that's what we like to do at ILAF) the average Bear Market sells of approximately 36% from its high. Meaning? We are in the eye of the hurricane now, with plenty of pain left!

Another useful metric is the "time in a Bear Market" which averages 289 days or roughly 10 months from start to finish. We have been in the current Bear Market since highs were reached on January 3rd, so a little over 180 days. So that is the top-level data. Maybe more important, however, is economic policy. 

Current economic policy is focused on increased regulation, increased taxation, increased spending and the Federal Reserve poised to raise interested rates on guess what? Yes, increased inflation! Expect a 75- basis point hike again in 3 weeks to fight inflation. Sadly, consumers have largely burnt through their Covid savings and are now dipping into grubstakes squirreled away for retirement, house down payments, or starting families. Love hurts, and so does inflation.

What possible Bullish metric remains? Ahhh...the old "We have bottomed" theory. There has been a significant demand shock in oil over the past month as consumers have changed behavior. Most commodities are now significantly off their recent highs. Just about the time the full force of government intervention begins, consumers have already changed their spending habits. Combined with the Fed's sudden desire to "break the back" of inflation, this will almost certainly exacerbate the situation and result in a hard landing.

What is a hard landing? Imagine that the economy has self-corrected and oil prices have fallen 20% in 60 days while mortgage rates have nearly doubled. The supply/demand dynamic is already self-correcting. Yet, the most powerful unelected force in the world (sorry China), the Federal Reserve, now puts their heavy hand on the scales by raising rates. Ouch! Who's running this country?

The bottom line? Focus on the bare necessities; structure your portfolio and lifestyle accordingly. It is the belief of ILAF that the lows are not yet in, we are currently in a recession, and no meaningful economic recovery will happen until we get economic policy changes. As the Middle Class goes, so goes the country. Ben Franklin said it well: "If you want to double your money, fold it in half and put it back in your pocket."

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Monday, July 4, 2022

Happy 4th of July

Happy 4th of July

America is both an idea and a place; an idea of liberty and a place of boundless opportunity. America has a language. America has a culture. America has a soul. America has presence. America has borders. America has hope. America has truth. America has laws. America has consequences. On this 246th anniversary, I think JFK put it best when he said: "Ask not what your country can do for you, but rather what you can do for it." I encourage all Americans to embrace this philosophy of service before self.

Friday, July 1, 2022

Recession Game Plan

Recession Game Plan

Right on time for the long weekend's glorious 4th of July celebration is a self-inflicted recession. Here at ILAF we don't point fingers, we know who owns this debacle and our job is to help readers put together a game plan for this recession.

First, what is a recession? A recession is an economic contraction defined technically by a very specific course of events; two quarters of negative gross domestic product readings from the U.S. Bureau of Economic Analysis.

The Atlanta Fed's GDPNow gauge sees the second-quarter coming it at -1%. As a quick recap, the first-quarter was -1.6%. So we're there. The "official" number for Q2 will be released on July 28th. Expect it to trend worse right up until the release as the cart long-ago lost its wheels. Many a disgruntled farmer is careening down a pot-holed road without all his wheels, a tank full of $5 gas, and consumers cutting their spending. But I digress.

Game plan readers, a game plan! OK first let's get real. The "best" economists in the world didn't predict a recession, and IF we were to get one at all silly taxpayer, it wouldn't hit until AT LEAST 2023! there a way to revoke a PhD in economics? If the "best' economists got this obvious truth wrong, can we put much faith in their assurances that this will be a "short" recession? No, we can not.

Keep in mind, some 30-40% of the US population is pretty much immune to an economic downturn; meaning that they are on fixed incomes of one sort or another; Social Security, Pension, and/or Union jobs with fixed (but increasing) salaries. Why does this matter? The true effects of this recession will dissipate slowly and linger longer than predicted. I suspect 18 months of pain await us.

Typically, credit tightens during a recession as rates increase. Check that box. The Fed has been busy as a bee raising rates. Mortgage rates have nearly doubled in the course of a year. Remember, the Fed's mandate is to "ensure price stability and steady inflation of 2%." Meaning? There is more pain to come. With inflation at 8.6% "and rising" as Johnny Cash would sing, the Fed is hellbent on increasing rates. Expect another 75 basis points (0.75%) at the next meeting 26-27 July and then again on Sept 20-21. 

So for those who are cash flush, laddering CDs seems to make sense especially if you're keeping it short term. Who knows, given the desire to crush inflation we might see Fed Funds rates at 5% by the end of this year. That would imply mortgage rates over 8%.

The major takeaway from the Fed action is that they are directed (and determined) by the current Administration to break inflation. The optics are horrible with gas, food, and housing prices soaring. What this means for stock investors is that they are not particularly concerned with collateral damage (read your 401K, brokerage account, etc.)

This ties back into the Social Security, Pension, and Union paragraph above. Some 30-40% of Americans are completely immune to the effects of a crashing market. Consider, this year's start in the stock market (3 Jan - 30 June) was the worst since 1964. In the bond market it was the worst since 1842. You read that correctly. 180 years. So if you think we have a problem, you are correct.

In a recession, typically the non-union employees, jobs, and businesses will be shed first. So late hires, job hoppers, recent business startups, etc. are most vulnerable. A recession by definition means to "recede." Commercial sector spending will also be the first hit. Public sector is still flush with excess tax returns and largesse from Covid to the tune of billions.

So stock investors have a handful of viable choices; if the goal is to survive, then the companies with the strongest balance sheets, best brands, and inflation pricing power offer better chances than say a company with lots of debt or leverage, emerging branding, and cut-throat pricing.

Much of the economic pain we're experiencing is directly due to the price of oil and the corresponding cracking into gasoline. The insistence of pushing ahead with a green agenda without a transition bridge via fossil fuel has been a disaster, and the global economy will also get caught in this contagion. As with most supply-demand scenarios, oil demand, especially with $5 gas the norm across America now, should begin to wane. Consumers will aggressively change their spending habits when they run dry of excess Covid liquidity. 

As you read this blog right now, demand priorities are already shifting. Consumption choices are changing. The "trickle down" effects of a recession will hit the private sector, in particular small businesses which account for the majority of employment in this country, the hardest first. Next hit will be the larger private companies. Then public companies. In reality, a recession works more like a "trickle up" scenario, the only think I know that defies gravity. Middle Class taxpayers get hit worst and first.

Depending on where you are on the socioeconomic spectrum plan accordingly. If you're a small business owner or employee you are most vulnerable. Consider cash flow and liquidity as your most important priorities. Being dead is bad for business. Survival is paramount.

If you're a mid-size business owner or employee consider the durability of your brand and the value you offer as vital resources. Is what you offer elastic or inelastic? Are you customer obsessed? A merger or takeover of a smaller rival might make sense here.

If you're an employee of a larger corporation, ensure you aren't on the chopping block and maximize your utility. Are you taking advantage of all your employer benefits? Are you indispensable?

Local, State, and Federal employees should weather the storm well, in fact this is an opportune time for them to actually pick up distressed assets on the cheap. Blood in the streets has typically been a good time to buy. Get ready to pounce on distressed asset sales from your fellow citizens laid low by the recession.

Our government should be the least affected, at least initially, by its own policies. But by 2023 the effects will be apparent as withholdings in 2022 are already falling for almost everyone "on the economy" and capital "gains" will most likely non-existent for most filers.

Expect the full pain of the recession to kick in high gear later this year. Even though over the past 6 months we have witnessed the largest destruction of wealth in the course of human history, I believe we are only in the eye of the storm now. Think about that for a moment. "Paper Loss" or not, wealth destruction hurts for real with destabilizing "trickle" down effects. Bidenomics will have a lasting impact on the United States for generations to come.