Before I go into my weekly diatribe, I made a concerted effort to send the commentary out today so as to avoid sending it on Friday the 13th.
The economic news over the last few days has been a downer. Cisco, the maker of equipment that is the backbone for the internet reported earnings below analysts’ expectations. John Chambers, Cisco’s CEO, noted that “there are some challenges that are contributing to an unusual amount of conservatism and even caution.” Separately, the U.S. Labor Department reporting that the number of people filing for unemployment benefits for the first time rose last week to 484,000. Economists expected the number to drop.
The overriding opinion is that we have a slowing economy here in the U.S., and there are signs that this could be case the in China and other countries. Unfortunately, this is only one piece of the puzzle. The other pieces are the almost record high level of distrust and cynicism as it pertains to the stock market, government officials, business leaders, policy, etc. Which will we eventually become a victim of – inflation, deflation or stagflation?
Feelings of cynicism & distrust, whether warranted or not, are holding what I believe to be the majority of businesses and consumers from spending money. They either don’t trust the economic landscape going forward, or they are sitting tight until they see much clearer skies ahead. Unfortunately, this economic and monetary inertia either prevents or delays spending, building and eventually hiring. Being only 48 years old, I cannot comment firsthand about what it was like during the Great Depression, the go-go 60’s or depressed 70’s, since they are either before my time or I was not attune to what was occurring. However, I can honestly say that since entering the professional work force in January of 1985, I have never seen such a sullen, negative, distrustful and fearful overtone in the U.S.
Regarding inflation, deflation and stagflation, no one knows for sure what lies ahead. Personally, it is my and others opinion that we may see deflation (i.e., lower prices) in the near term and possibly stagflation longer term. Stagflation is a combination of a stagnant economy and inflation (i.e., higher prices). That being said, an opinion is only an opinion, and it would be utter madness to try and reallocate a portfolio weekly based upon what the prevailing opinion of the days is.
Unfortunately, it seems that daily there is another announcement of some crazy idea being touted. For example, adjusting the federal tax code so that individuals living in high cost of living areas, such as New York or San Francisco, pay a lower tax rates say than others living in Topeka, KS or Omaha, NE. You can say what you want, but individuals choose where they want to live, and I don’t believe those living in suburban or even rural (which many consider undesirable) areas should pay higher tax rates than those who choose to live in large cosmopolitan or coastal areas. Are we to assume that someone living in Aspen or Vail would need to be subsidized for choosing such a “harsh” cost of living locale?
Another absurdity is employers facing discrimination charges for declining to hire an applicant due to their criminal record and bad credit history. As a registered investment advisor responsible for the investment of other people’s money, I find it completely unthinkable that an applicant with a criminal record and poor credit history would even be considered. Bernie Madoff may have conned the SEC and other regulatory authorities, but I have enough common sense to not put myself, associates or clients’ livelihoods in jeopardy.
I am sorry if you find my comments offensive. However, I try to be pretty open-minded and if I am taken back by such ideas, then it affects my financial behavior and not for the positive. As a matter of fact, when I mentioned these “ideas” to Toan and Sally, they cringed. Take this effect and multiply it millions of times across the U.S. and you begin to create a cynical and distrustful mindset that results in reduced spending and a very short-term and non-committal investor attitude. I am looking forward to more consumer and investor optimism and commitment, which will result in spending, hiring and economic expansion and improvement for all, but it may be a while before this happens.
The Fed’s new normal
The following is a CNBC interview with Mohamed El-Erian, CEO and co-CIO of Pimco. Mr. El-Erian is CEO of one of the top fund companies and largest bond investors in the world and previously ran the Harvard Endowment Fund. Thus, he knows of what he speaks.
That being said, Mr. El-Erian makes a compelling case that there is little more that the Federal Reserve can do to juice the U.S. economy. In addition to his insightful comments, I have heard other investment professionals basically state that the Federal Reserve is ineffective at this point. Think about it, you can lower interest rates to practically zero, like they did in Japan, but if individuals are hesitant to spend, then it makes no difference. A zero percent loan will not lure me to buy a bigger house or new car if I am worried about my personal or firm’s economic future. What is needed is stability of policies and incentives. Fiscal stimulus as it pertains to tax rates will do much more to stimulate the economy, than the course the Fed has taken in lowering rates.
I strongly recommend you listen to this five minute segment.
http://finance.yahoo.com/video/companynews-18928726/el-erian-on-fed-s-quot-new-normal-quot-21329984
Quotes
“The mint makes it first, it is up to you to make it last.”
Evan Esar, humorist
“Diligence is the greatest of all teachers.”
Arabian proverb
“When one door closes another door opens; but we often look so long and so regretfully upon the closed door that we do not see the ones which open for us.”
Alexander Graham Bell, inventor
“An optimist sees an opportunity in every calamity; a pessimist sees a calamity in every opportunity.”
Winston Churchill, statesman
Tony Moeller, President
Integrity Investment Advisors
12721 Metcalf, #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074
The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.
If you enjoy the commentary and believe others may benefit or find it of interest, please feel free to forward it on. Also, interested individuals can contact us, and we will be happy to add them to our mailing list.
