Out With the New, In With the Old?
With 2013 officially in the books, it is always helpful to look back at the year, consider what took place within the markets and how the landscape looks as we begin 2014.
The year began with all eyes on Congress as they worked through the tax reform bills. In the end, the wealthiest Americans (about 1%) are feeling and paying the lion share of increases. This relatively small group of individuals, accounts for approximately 19% of all taxable income and generates 35% of all taxes paid. In our view, this is not a sustainable model of revenue. This causes this group to aggressively seek methods and locations to reduce this imbalance. This final-hour bill passage was not the “Grand Bargain” we had hoped for. The economy side-stepped the fiscal cliff and a stiff-headwind for the market was removed (although temporarily). This was the “starting gun” that now in retrospect, released the market. No longer saddled with this uncertainty and with the fresh legs of loose monetary policy, the S&P 500 produced the best year of performance since 1997. It wasn’t just this index, with the exception of international emerging markets and commodities, every other area of the markets had a banner year.
We are regularly asked why the market did so well. The short answer is rather odd: 2013 was a year when bad news was good news. Our recollection of a period like this was 1998, when bad news meant interest rates would stop increasing because the Fed would quickly step in and offer liquidity to the market to stem a recession. The strange thing is, we are no longer in a recession. Economic growth is not robust, but it is not falling. Yet, low interest rate causing action by the Federal Reserve is the addictive solution the world investment markets have become dangerously accustomed to. Corporate profits are rising, but at the severe cost of employment. It is our belief that the overly aggressive effort by corporations to show quarterly profits and their unwillingness to increase capital spending will have a long term negative effect on corporate profits to continue increasing and very likely, inhibit growth.
We have stated many times the overwhelming benefit of a decreasing interest rate environment is not fully understood by most. The relative comparison of absolute interest rates is fruitless. In our view,
comparing today’s rates with 10 years ago fails to account for the individual’s reliance on debt to sustain our macro-economy. Small changes in consumer debt rates (e.g., credit cards, car loans, etc.) can bring a halt to spending very quickly.
These thoughts are why we are allocating portfolios along the following ideas.
1. Rising/Falling Interest Rates:
The 10-year US Treasury bond hit 3% in the fourth quarter only to meander back down to the 2.8% range. This movement will mark most of the year. We seek to take advantage of the high and low marks when possible. We anticipate holding our current bond positions to maturity.
2. Rebalancing:
We do not defend this as a performance enhancing strategy; rather a prudent decision to maintain risk control.
3. Fear Opportunities:
This is a way of buying value. Where there are herds moving or limited access to capital, our nimble approach and strategic relationships can reap terrific benefits. Some examples of these opportunities are closed-end funds, middle-market lending and niche managers.
As always, there is opportunity that can be found with patience and work. We treat each client’s dollar as if it were our own.
The year began with all eyes on Congress as they worked through the tax reform bills. In the end, the wealthiest Americans (about 1%) are feeling and paying the lion share of increases. This relatively small group of individuals, accounts for approximately 19% of all taxable income and generates 35% of all taxes paid. In our view, this is not a sustainable model of revenue. This causes this group to aggressively seek methods and locations to reduce this imbalance. This final-hour bill passage was not the “Grand Bargain” we had hoped for. The economy side-stepped the fiscal cliff and a stiff-headwind for the market was removed (although temporarily). This was the “starting gun” that now in retrospect, released the market. No longer saddled with this uncertainty and with the fresh legs of loose monetary policy, the S&P 500 produced the best year of performance since 1997. It wasn’t just this index, with the exception of international emerging markets and commodities, every other area of the markets had a banner year.
We are regularly asked why the market did so well. The short answer is rather odd: 2013 was a year when bad news was good news. Our recollection of a period like this was 1998, when bad news meant interest rates would stop increasing because the Fed would quickly step in and offer liquidity to the market to stem a recession. The strange thing is, we are no longer in a recession. Economic growth is not robust, but it is not falling. Yet, low interest rate causing action by the Federal Reserve is the addictive solution the world investment markets have become dangerously accustomed to. Corporate profits are rising, but at the severe cost of employment. It is our belief that the overly aggressive effort by corporations to show quarterly profits and their unwillingness to increase capital spending will have a long term negative effect on corporate profits to continue increasing and very likely, inhibit growth.
We have stated many times the overwhelming benefit of a decreasing interest rate environment is not fully understood by most. The relative comparison of absolute interest rates is fruitless. In our view,
comparing today’s rates with 10 years ago fails to account for the individual’s reliance on debt to sustain our macro-economy. Small changes in consumer debt rates (e.g., credit cards, car loans, etc.) can bring a halt to spending very quickly.
These thoughts are why we are allocating portfolios along the following ideas.
1. Rising/Falling Interest Rates:
The 10-year US Treasury bond hit 3% in the fourth quarter only to meander back down to the 2.8% range. This movement will mark most of the year. We seek to take advantage of the high and low marks when possible. We anticipate holding our current bond positions to maturity.
2. Rebalancing:
We do not defend this as a performance enhancing strategy; rather a prudent decision to maintain risk control.
3. Fear Opportunities:
This is a way of buying value. Where there are herds moving or limited access to capital, our nimble approach and strategic relationships can reap terrific benefits. Some examples of these opportunities are closed-end funds, middle-market lending and niche managers.
As always, there is opportunity that can be found with patience and work. We treat each client’s dollar as if it were our own.
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