June 17 Flash:

Bernanke about to announce an end to extraordinary bond purchases? Fear not, the economy is gaining moment, it seems, see our comments from about ten days ago below: 

June 7, 2013

Things are so dull in this slowly expanding US economy that financial media have taken to treating the release of a monthly Labor Department jobs report as if it were a Hollywood premier.  The build-up, primarily a tool to get viewers to “be back, right after this…” has been ludicrous. The report came out this morning, new job growth at 175,000 was about where it was expected to be, and the markets did not react strongly one way of the other.

In brief, here are the beliefs and observations that have been driving our decision making these past few months:

The US economy is on the path to a sustained, long term expansion. The real driver for this is cheap energy, cheap American labor, cheap land and a stable rule of law that protects property rights, backed by an independent court system to enforce those rights.  This will attract foreign investment (the most recent prominent example: Smithfield Foods by Chinese interests), maintain the buying power of the dollar, and lead to a slowly declining rate of unemployment.

Corporations will continue to share their success with stakeholders in the form of stock buybacks and dividends, a mix that will shift as Washington continues to find ways to extract tax revenue from successful enterprises and individuals.

Home ownership will expand, but no boom – rather, people with good credit or the ability to purchase with a high down payment will create a new, more stable class of homeowners but a lower percentage of Americans will own than has been the case in past decades.

The gap between wealthy and poor will expand. Most of the wealthy will be elderly.

Speaking of elderly, this population, as long predicted, will dominate economic activity for the next twenty years, simply by their sheer size. Anything medical is a potential opportunity, as is travel, entertainment and housing enterprises that target the elderly. I believe some terrific technology driven opportunities to serve the needs of seniors will emerge as investment opportunities (self driving cars, domestic robots, medical diagnosis via smart phone to name a few) Importantly, seniors will dominate political decisions.  

To solve the need for revenue to support social welfare programs like Social Security and Medicare, the wealthy elderly will pay a greater share and be taxed more. Expect migration out of highly taxed states into those with friendlier income tax structure. But the larger solution will come by opening up the doors of America to immigration by people willing to work and pay taxes into the system.  Expect the complexion of the average “American” to continue to change.

With the sale of Vanguard GNMA fund for many client accounts, we’ve begun actively reducing client exposure to fixed income investments, for the first time in decades. I believe we are in the ending days of a secular bear market for interest rates (which equates to a bull market for bonds), a bear market that began in about 1981. The discussion above hints, an expanding but not booming economy is not likely to result in soaring interest rates, at least for some years.  So, we will not abandon high yielding bond holdings or avoid dividend paying stocks, both of which are bedrock support for our successful money management efforts. Rather, we’ll continue to raise cash as bonds are called or mature and likely deploy the newly available funds in opportunities for growth as well as income.

The future looks bright ahead, and I wake up every morning, motivated by the opportunity to find investment opportunities for our clients!