March 25, 2018 Stormy

Risk/Reward Vol. 386

THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.

Last edition I predicted that the Federal Reserve's March meeting would dominate markets this week. I was wrong. Oh, the Fed's hawkish prediction of three rate hikes in 2019 and a year end 2020 Fed funds rate of a "modestly restrictive" 3.25 to 3.5% did cause the market to turn slightly negative on Wednesday. But that news was NOTHING compared to the bombshells that hit hourly on Thursday. First, Trump's lead counsel in the Mueller investigation resigned, then Trump announced a $60 billion tariff on Chinese imports, then China retaliated, then John Bolton was named the new National Security Advisor. The tumult continued on Friday as we waited out the Kabuki theater "government shutdown" threat for the umpteenth time. The result? A 1100+ point, two day drop in the Dow (which now is in correction territory), the S&P 500 going negative for the year and the NASDAQ dropping 6.5% in one week. Once again, politics Trumped everything (pun intended)

And let me correct myself. I don't mean politics. I mean Trump. I have followed the national news in general and politics in particular since the 1960 election when the youths of America (yes I was once young) were captivated by JFK and the whole Camelot thing. Unequivocally, I can state that never in that 58 year span have I seen anything like the phenomenon that is Donald Trump. Liked by some, hated by many, ignored by no one, his narcissism is something to behold. ( And believe me, I know something about narcissism). If he is not dominating the news for even a millisecond, he tweets something outrageous just to grab attention. Challenging Joe Biden to a fight, taunting Robert Mueller, belittling Jeff Sessions, humping Stormy Daniels, congratulating Vladimir Putin, reconciling with Kim Jong UN, beheading courtiers faster than the Red Queen and threatening a government shutdown are all in a day's work for him. His modus operandi is to keep everyone off guard and on edge, two positions Mr. Market detests. Consequently, one is left scratching one's head as to where to, or even whether to, invest.

I am exhausted. And the maelstrom has just begun. Can you imagine the campaign this fall and what is looking like the inevitable Democrat landslide? What will the "tweetstorm" look like then? How about next year when impeachment proceedings begin ? How do you think Mr. Market will react? As I have written many times, a profit is not a profit unless and until one sells. If the events of the past few weeks have not flashed some sell signs to you, I suggest the elections this fall will. If you manage your own money, what is your loss tolerance? Will you hold no matter what? If not, practice your exit strategy. Sell something, anything, for a profit---now. If you don't manage your own money, what will your investment professional do should a significant downturn occur? Sell at some point or hold indefinitely. Shouldn't you at least ask? The Dow has lost 3000 points (12%) in the past two months. We are still 5000 points ahead of election day 2016, but I don't like the direction. Indeed, I don't see anything on the horizon that is going to cause a market rebound. Do you? If so, please write me immediately. As longtime readers know, I am not a doomsayer. I am not predicting 2008 will be repeated. All I am saying is you don't have to be a Boy Scout to "Be Prepared."

Trump's dominance notwithstanding some interesting developments occurred this past week. First, despite "consensus" by Fed watchers that only three rate hikes will occur this year, a closer examination of the "dot plot" shows that 7 of 15 FOMC members favored four hikes. Watch this as 2018 progresses. Four hikes is certainly not out of the picture. Second, the projected year end 2020 Fed funds rate of 3.25-3.5% is above the "neutral interest rate" (the hypothetical rate of interest that neither promotes nor impedes GDP growth and/or employment). As such, the Fed is predicting that it will need to cool the economy in 2020 in order to curb inflation. This is startling considering the Fed has been highly accommodative to economic growth for a decade. Third, despite the two facts just cited, the rate on the all important 10 Year Treasury went down this week, at one time on Thursday dipping below 2.8%. (Remember: a dip in yield means an increase in price/demand.) Why? Clearly, Trump's unpredictability caused a temporary flight to safety and a bond buying spree. But I suspect something secular is afoot. I think the bond market questions the Fed's belief that the economy will grow as projected or that 2+% inflation as foreseen will ensue. As Karen Ward wrote in the Financial Times this week, economies don't prosper and inflation does not arise in countries facing demographic cliffs. With 27% of Japan's population now over the age of 65 (soon to be 40%) and with Europe and the US aging as well, spurring economic growth and a desired rate of inflation anywhere in the developed world will be a challenge.