Week in Review

Great things are not done by impulse, but by a series of small things brought together. – Vincent Van Gogh

Be not afraid of growing slowly, be afraid of standing still. – Chinese Proverb

Society is demanding that companies, both public and private, serve a social purpose. – Larry Fink

I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years. – Warren Buffett

What matters most is not what you invest in, but when and at what price. – Howard Marks

Big Concerns…

The Wall St. Journal had an interesting article out this week titled, The Global Economy Is Great; Be Afraid.

Here are some soundbites from the WSJ…

Billionaire chief of Blackstone Group, Stephen Schwarzman said, “he’s bullish on the economy but like many others isn’t going all-in; the risks are just too great with asset prices already so high.”

“The complacency is what’s really alarming,” said Martin Gilbert, co-CEO of Aberdeen Standard Asset Management. “Everyone’s worried about not being worried.”

Scott Minerd, chief investment officer at Guggenheim Partners said, equity markets have “all the trappings of a mania that could take the S&P 500 to 3600 this year, up 27% from 2839.25 on Thursday.”

On the Dollar…

There’s been a lot of news this week on the dollar.

First, Treasury Secretary Steve Mnuchin announced the U.S. wants a weak dollar.

Enter President Trump. The WSJ reports…

“The dollar is going to get stronger and stronger, and ultimately I want to see a strong dollar,” Mr. Trump said during a CNBC interview at the World Economic Forum in Davos, Switzerland.

Mr. Trump added that he thought remarks by Treasury Secretary Steven Mnuchin, who said on Wednesday at Davos that a “weaker dollar is good for trade,” had been taken out of context by investors who fled the dollar.

Their remarks represented a break from past administrations, which have worried that any comments about the value of the world’s reserve currency risked disrupting global investment flows or influencing interest rate movements.

Of course, the mixed messages don’t make it easy for investors. That’s why it’s more important to follow the big money.

I mentioned a few weeks ago that the big money had taken an extreme position betting against the dollar. It’s one reason the price of oil has soared over the past few months.

Big money has also taken an extreme bullish position on oil.

Given the extreme sentiment on both trades, I expect them to reverse. Meaning the dollar will strengthen and oil will go down over the next few months.

More on Market Risk…

I was reading through Platinum Asset Management’s Macro Overview.

Here are some key risks across global markets to think about…

What are the key risks to this buoyant global outlook?

The obvious risk, and one that the markets are focused on, is a return of inflation. In particular, labour markets are tight in the major economies, with the exception of Western Europe, so higher wage inflation is certainly possible if growth remains strong.

Couple this with higher commodity prices (and the anecdotal evidence of shortages in a range of industrial and electronic components), a scenario of rising inflationary pressures cannot be dismissed.

If central banks were to raise rates in a sustained and steady fashion in response to inflation, given the level of debt carried in all the major economies, it would certainly pose a threat to current rates of growth.

The other great unknown is the longer-term ramifications of the money printing exercises by the US Federal Reserve, the European Central Bank and the BOJ. While the US, on face value, has extricated itself successfully from its quantitative easing (QE) program (i.e. it has stopped “printing money” via bond and other asset purchases), it is yet to attempt to unwind this policy in any meaningful way. For the moment, QE continues in both Europe and Japan.

Characteristics of HNW’s (High Net Worth Individuals)

In 2016, U.S. Trust published a survey on HNW’s.

To qualify for the survey, the individual had to have at least $3 million in investable assets. Four things stood out to me…

That it takes a long time to build wealth, they take a long-term investment approach, they see family values as an advantage, and they see marriage as a life-long commitment.

(Editor’s note: There were ten but I took out one commenting on 2016 economic expectations.)

  1. They built wealth over time: 77 percent of those surveyed came from middle class or lower backgrounds, including 19 percent who grew up poor. They earned wealth over time, most of it through income from work and investing.
  2. Basic, long-term approach to investing: 86 percent of HNW investors made their biggest investment gains through long-term buy and hold strategies, traditional stocks and bonds (89 percent) and a series of small wins (83 percent) versus taking big investment risks. Their use of more sophisticated investments grows as their wealth increases.
  3. Use credit strategically: Nearly two-thirds consider credit as a means to strategically build their wealth. Four in five say they know when and how to use credit as financial advantage.
  4. Make tax-conscious investment decisions: HNW investors know that real investment returns are really negative returns if they are gobbled up by taxes. Fifty-five percent agree investment decisions that factor in potential tax implications are better than pursuing higher returns, regardless of the tax implications.
  5. Invest in valuable tangible assets: 48 percent of HNW investors invest in tangible assets, such as farmland, investment real estate and timber properties that can produce income and grow over time with legacy value. One in five collects fine art, including one in three ultra-high net worth art collectors who are now using art as an alternative asset class and a core part of their wealth structuring and philanthropic giving strategies.
  6. Disciplined savers, opportunistic buyers: 81 percent of HNW investors say that investing to reach long-term goals is more important than funding current wants and needs. This disciplined approach to saving and investing was instilled at an early age and becomes easier with the financial freedom that wealth affords.
  7. Advantage in life based on family values and upbringing: Four in five wealthy people came from families where their parents encouraged them to pursue their own talents and interests, but set firm disciplinary boundaries and, for the most part, were tolerant of failures and mistakes along the way. The five family values most strongly stressed during their formative years were: academic achievement, financial discipline, work participation, family loyalty and civic duty.
  8. Strong family tradition of philanthropy: 65 percent say there is a strong tradition of philanthropy and giving back to society within their family.
  9. Marriage is a lifelong partnership: 86 percent of the wealthy surveyed are married or are in a long-term relationship. Most stayed married to the same person, avoiding the financial setback that divorce often creates. They tend to divide, rather than share, roles and responsibilities at home, including financial and non-financial contributions to family wealth, such as caretaking for children. Almost all discuss important goals and values about the use of money.

Political Discourse: From Good Old-Fashioned Fist Fights to Twitter

I was reading an article from the January 26, 1929 New York Times.

Here was the headline… Peacemakers Halt Fight in the House Lobby; Elliott Hurls Copy of Record at Blanton.

From the NYT,

What promised to develop into a good old-fashioned fist fight between Representatives Thomas L. Blanton Texas and Richard N. Elliott of Indiana was stopped today by Representatives Edward E. Denison and Thomas S. Williams of Illinois…

Things were progressing at a rapid pace, with the combatants about to come to grips… when Denison and Williams intervened…

Representative Blanton was the first to strike a fistic pose, and at this point the Illinois members rushed in…

There is at least one fight, or near fight, in the House in nearly every session.

Call it… Progress?