| 4 person office! More in a shorter note to follow, but we now have 4 of us in office to help serve you—Martha joined us 10/18, be sure to say ‘hi’ when you talk to her!  Scary times Halloween is a scary time. On my trip to Scotland, my son and I went on several ghost tours late at night—including a trip to Greyfriar’s Kirkyard inside the crypt that is supposedly haunted by the McKenzie Apparition. Feel free to look online, pretty scary stuff. Matthew thought he heard something whisper… I didn’t really notice anything aside from it being cold, windy, and dark. We also visited numerous castles (Tantallon—on cliff overlooking a very angry North Sea and Stirling Castle, several dungeons, and an old village that is buried under the city-Mary King’s Close). We learned about the numerous ‘Game of Thrones’ murderous intrigues across the UK, the ways peasants lived, the reason Edinburgh was called Auld Reakey (their sanitation system was throwing sewage into sloped streets yelling “Guard D’Loo!” so pedestrians wouldn’t get soaked), the many ways they tortured and punished dissidents on the whim of royal leaders, and the ways they dealt with the plague which wiped out significant portions of the population several times. The natural beauty of mountains, lochs, and castles fit oddly with the dark history of Europe. If we think things are bad now, certainly things were far worse then.  Current Geopolitical Tensions-SCARY!! But that probably doesn’t make you feel any better as the many stories of horror in Israel, Gaza and Ukraine hold our attention. I wrote last February after the invasion: “I don’t want to downplay the historical enormity of Putin’s invasion of Ukraine. Many books will be written about the change in world order, which of course is unknowable at the moment. I have been (will continue) to send information as this unfolds. Hopefully not lost in leadership and the public’s eye will be the addition of another global humanitarian crisis, the added plight of the Ukrainian people.” Sad that we have yet another area of the world in humanitarian crisis with another event of likely historical enormity. And dysfunction in Washington with a looming election has everyone on edge. Ever since then in my newsletters I have advocated treating these events like a hurricane somewhere in the Atlantic: be prepared and follow the same checklists. Indeed, that hurricane feels closer to our shores, do not take it lightly. And, to the extent you can, helping charitable humanitarian efforts today will have tremendous impact. And yet—the equity markets are essentially flat from after the Putin invasion to where we are today. The bond markets, on the other hand, have seen amongst their worst routs in history as interest rates continue to climb. Many have asked, why is this market so resilient and what is likely to happen? I also wrote last February: “Putting on my investment hat, however, financial markets historically have had fairly minimal impact from armed conflicts aside from initial shock. Certainly, we saw that on Thursday with a negative open and subsequent rally (which could have been from “short covering”). Large corrections or bear markets are more commonly caused by disruptions within the financial system, not geopolitical conflict—see Gibbs’<raymondjames.bluematrix.com/sells…e=mail> piece this morning. For financial markets, the big question in my opinion is whether the oil shock adds to inflation pressures potentially placing the Fed in a position of choosing between fighting inflation or creating a recession.” Indeed, this is still true, though also certainly influenced by investor sentiment, which is short term and fickle. For an enlightening history lesson, look up market returns from 1941-1944 or during the cold war when we edged up to the brink of nuclear war numerous times (1950-1990)… you will be surprised at the resiliency of markets in these timeframes in spite of the volatility. It is counter-intuitive, but usually it is when sentiment is the worst that the markets are most likely to rally. Earlier in January this year that was certainly true with one of the worst investor sentiment readings since 2008 kicking off a nice first half of year rally. About a week ago, the WSJ warned there may be another major one-day correction in October. To me, that was a sign that we are not likely to see that bad of a day soon as major corrections usually happen in the face more bullish market sentiment—and indeed, last 2 days rally has erased some of October’s losses. For instance, “real estate cannot drop in value” was a common sentiment in 2000-2007—then 2008 happened. Either way, it is continued corporate profits and activity that has kept equities relatively strong even as October was still ‘scary’ with both stocks and bonds dropping over 3% and several equity indexes near or over 10% corrections since August. With the Fed likely on pause, now it is a matter of seeing if higher rates (which is the culprit of bond losses) will slow down economic activity enough to affect corporate profitability. And of course, the market wonders if the Fed would lower rates in the face of a downturn and a presidential election. They call this “the Fed put”, or the Fed putting a floor on asset prices. What have we been doing? We did raise some cash in June to our largest ever position. We continue to try and avoid heavily indebted companies and remaining focused on those with an innovative future. If AI takes over the world, we want to own it. Investing in inflation sensitive assets more important than ever, which is why we continue to hold positions such as gold and other commodities in nearly all portfolios. For our more conservative clients, the deliberate avoidance of longer-term debt in favor of short-term high yielding debts has probably been the second-best decision of our investing careers. The first was holding and buying assets through the depths of the financial crisis, some of you who have been with us remember those difficult times. But we recovered. Those who sold at the bottom and waited for ‘the right time’ to re-invest, likely did not. You may have heard that the traditional 60/40 portfolio has struggled mightily as bonds performed worse than equities, usually losing considerable amounts of money last few years. The strategies outlined and used in my 2017 paper (ladders, low duration, floating rate bonds, market linked CD’s—happy to send you a copy) have on balance made money through these markets. If interest rates continue to climb, they will continue to outperform the traditional portfolio. We hold money market funds currently yielding over 4% Fed tax free or 5%+ taxable—while being ready to change when we believe the market warrants. The best defense against selling into a down market is having adequate cash to make it through that down market. And for our more aggressive long-term investor clients, the short-term blips will matter little to you years down the road. Of course, what’s after Halloween scary season? The fun times of Thanksgiving, Christmas, Hanukkah, New Year… the Holidays. Hard to believe it’s almost here! I don’t know what it will take to reduce geopolitical tensions nor when it will happen. But I know it will eventually chill and expect that the cycle of history will continue as it has towards the progress of humanity. Fun picture: look closely behind us to left… Happy Halloween!!  |
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