July 17, 2016 Henry Ford

Risk/Reward Vol. 314

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

Both the S&P 500 and the Dow Jones Industrial Average hit all time highs this week even as the bond market held strong. The conditions underlying this new, new normal of which I wrote last week are still in place. (
http://www.riskrewardblog.blogspot.com/ ) US investors keep pouring into equities as foreign buyers lap up US debt. What choice does either group have? Each is picking the tallest pygmy in a game of pygmy basketball. Take the bond market. In early 2008, the average yield on a 10 year government bond (US and foreign) was 4.3%. Today that average is 0.5%. No wonder the US Ten Year at 1.5 is so attractive to foreign buyers. Domestically, I pity the poor asset managers at pension funds, insurance companies and similar institutions. For years they have assumed that they will see, on average, a 7-8% return by mixing a healthy dose of conservative US Treasury securities with a sprinkling of more speculative, yield-boosting equities and alternative investments. But how can they possibly expect to approach that average when the yield on a 30 Year US Treasury Bond is a paltry 2.25%? The answer is that they cannot. Thus they are forced to invest far into the risk curve, doubling down on an unhealthy percentage of stocks. Consequently, stock prices continue to climb despite five straight quarters of declining profitability across the S&P 500, a factoid that is emblematic of the disconnect between the financial markets and the general economy. Like the witches in Macbeth, asset managers ply their trade while lamenting: "Double, double toil and trouble/ Fire burn, and caldron (read, equity markets ) bubble".

I caught some flack from readers last week for suggesting that secular stagnation will prevail unless and until wealth is redistributed. Believe me, I do not "Feel the Bern", but clearly a lot of folks do. That said, wealth redistribution does not have to be government mandated, and to my thinking is better when not done so. Back in 1914, Henry Ford came to realize that laborers in his employ could not afford a Ford, an automobile designed to be everyman's vehicle. Thus in the matter of 24 hours, he doubled the wages of his assembly workers to $5/day. Editorials across the land excoriated Ford for sewing the seeds of capitalist destruction. But destruction did not ensue and for the next several years America saw wages climb and the economy grow. Today's Henry Ford is Jamie Dimon, the CEO of JPMorganChase. He announced this week that over the next few years he will be raising the wages at the bottom of his workforce. Tellers, who make on average $10.15/hour, can expect to see wages of $12-16/hour. Hardly as dramatic as Henry Ford's move, but significant nevertheless Similar actions are under consideration at Starbucks. Apparently, Mssrs. Dimon and Schultz see things as I do. A consumer based society simply cannot grow when 42% of its workforce makes $15/hour or less.

I for one am enjoying the recent stock run up. Both the major indices are up over 5.5% since the results of the Brexit vote were announced on June 23rd. The S&P is up 18% since sliding into a trough in February. I have comfortably exceeded my annual goal of 6%, and am contemplating exiting the market for a while. That said, I do not see any serious threat to my portfolio in the near term. And, I like it's average dividend yield of 7+%. My big winner recently is GM which I ought on June 28. It's up over 11%. The big winner year to date is OKE. My recent re-entry is up 30% since April 28. Had I held it continuously since when I first bought on February 26th, I would have seen a 102% profit. I can't complain since I captured a majority of that gain during my two holding periods.

The Promenade des Anglais in Nice is one of our favorite places. We will return there one day.