Imagine having your beliefs and safe comforts destroyed. You relied on truth and security, and you put your full faith into a system that was supposed to compensate you for your commitment and hard work. You believed in something with your full heart. You made yourself vulnerable and weak, but with a strong foundation backing you, you didn’t really care, and you didn’t have a reason to care. And then it tricked you and made your life almost impossible to live. You had to adapt. To make the bare minimum just to survive. Taking up odd jobs that humiliated you, but you didn’t have a choice. It was either that or work for free. Starvation, homelessness, and poverty might be incomparable to this, but who knows. Maybe these are the unknown byproducts of this shutdown. Day 35… the end is here.
“I am very proud to announce today that we have reached a deal to end the shutdown and reopen the federal government.” President Trump finally agreed to reopen the government for about three weeks until February 15th after a crazy day of airport closures due to a shortage of air traffic controllers. For the past 35 days, 800,000 government employees had their paychecks halted. These furloughed workers and their families would line up in lines as long as a couple city blocks just to collect donated groceries. This president-engineered shutdown ended today when President Trump and Congress reached an agreement.
The Market. Was the US stock market a bubble in 2018? Should you own as little US equity as possible? Speculators dominated the market in 2018. They chased fads and fashion, and they tended to follow the herd. Cannabis and cryptocurrency. The top feared global risks for 2019 are extreme weather events and natural disasters, cyber-attacks, data fraud and theft, weapons of mass destruction and a water crisis. China reported its slowest growth rate (6.6%) in nearly 30 years. Venezuela cut diplomatic relations with the US after President Trump recognized the interim president Juan Guaido as the official president. Without more babies and immigrants, the US won’t be able to support its aging population. Two new economic theories: the longer the expansion, the larger the pool of “at-risk” relationships and the size of the downturn predicts the size of the subsequent expansion, but the size of the expansion does not necessarily predict the subsequent recession.
China’s slowdown. China released its GDP numbers this week, and it’s a little concerning. China recognized the economic growth of 6.6% in 2018. For most countries, this would be a great growth figure to hit. For China, however, it represents its slowest growth in almost 30 years. A few possible reasons exist. Obviously, there is the other side of the trade war that we've been witnessing for the past year. However, while the impact was felt, Chinese officials said it was "manageable". Perhaps the slowing of economic growth is due to the Chinese government trying to manage debt-levels. Less reliance on debt, in the long run, is healthy for the economy. Right now, however, it would mean that the chances of China sustaining superb growth is slim. Interestingly enough, at the World Economic Forum in Davos, China has told the world that its growth is healthy and focused on the long run. If China, one of the world's largest economies, were to significantly slow down, it could trigger global ramifications on the scale of 2008.
The Innovator’s Dilemma. There are two types of technologies, “sustaining” and “disrupting”. The way a company handles these technologies is what sets companies such as Apple apart from companies like Xerox. Clayton Christensen writes in The Innovators Dilemma that the best way to handle disruptive technologies is to, “find or acquire a subsidiary company with the right values and processes, equip it with the necessary resources, and let it do its thing.” During the 1980s, Xerox was well on its way in establishing itself as the world leader in printing solutions, and one of the most valuable companies in the world. Xerox was known to have the strongest sales force in the world, and near full market domination to the point where people even today still refer to printing as “Xeroxing”.
So, what happened? During this same time period, some of the world’s leading computer scientists and engineers were working at Xerox PARC on a few groundbreaking technologies. Just one of the many innovations they came across was a GUI (Graphical User Interface), which is what every personal computer in the world uses today! Before the GUI, computers had that bland green text with the black background you see in old movies. So why do Apple and Microsoft have market caps approaching $1 Trillion dollars while Xerox barely maintains a market cap of $5 billion? Back in the 80s, the brass at Xerox headquarters didn’t see a market for the disruptive technology and instead allowed Apple, and later Microsoft, to have some rights to the disruptive technology that would go on to revolutionize the home computer. In the following years, Xerox would try to release their own personal computer, but would ultimately fail miserably. Xerox had a chance to be what Apple or Microsoft are today, but instead, they focused on their sustaining tech and gave away their edge on one of the most disruptive technologies in history. Xerox is not alone; Kodak, IBM, Yahoo!, Sears, Polaroid, AOL, are just a few examples of companies that held a vast market share, developed innovative technologies first, and still failed to innovate. These companies failed because they chose to focus on their sustaining technologies that offered higher profit margins and satisfied current consumers while leaving disruptive technologies with little or no developmental or marketing resources. Make sure to keep an eye out for companies developing disruptive start-ups, because that is how you beat The Innovator’s Dilemma.
The Alchanati Campbell and Associates Team
Beauty and destruction. There is beauty in people, in nature, in food, in conversation, in the formation of family, in the words of books, in the scripts of songs, but, there is also destruction. We destroy and sometimes we cannot rebuild. How did this happen? When did we become so carried away with profit, growth, and innovation? Forget the shareholders; nature should have majority vote.
Global warming is what we caused. Human activities are estimated to have caused approximately 1 degree Celsius of global warming above pre-industrial levels (1 Celsius = 33.8 Fahrenheit). What would happen if the earth’s temperature rose 1.5 degrees Celsius above pre-industrial levels? Increased levels of drought in some areas, heavy precipitation in other areas, and extreme temperatures in many other regions. Sea level rise will have a more visible impact on islands and deltas flooding towns and cities like Miami. Species loss and extinction would increase. The average person generates 4.5 pounds of trash per day equaling to 1.5 tons of solid waste per year. All of this waste ends up in landfills, the ocean or at incinerators; being burned and breaking down and producing methane gas and CO2. Heatwaves in the artic, drought in agriculture-dependent countries, sea level rises causing towns to sink below sea level, a continuance in the extinction of species, the air becoming unbreathable, waterways polluted unable to drink… what good is paper money when we can no longer breathe from the trees that it was created from.
The Market. 36% of household heads between ages 24 and 32 owned a home in 2014. In 2005, the share was 45%. 20% of that decline can be directly attributed to an increase in student loan debt. California housing inventory increased 18% year over year (buyer’s market). The government shutdown is affecting 25% of the government (800,000 employees working without pay). A national emergency is most likely to happen. The shutdown is estimated to decrease GDP of the first quarter of 2019 by 0.3-0.4%. US politics are still very much uncertain. Fewer than 1 in 5 workers report they’re “very confident” their retirement income will enable them to actually live comfortably. Consumers (us, we, me and you) are feeling incredibly good about the economy but very nervous about where things are headed.
“The stock market is a giant distraction to the business of investing,” (John C. Bogle).John believed that mutual funds make no claim to superiority over the market averages. Nobody can consistently beat the averages over longer time periods. He believed in passive investing, and low fees and expenses. His biggest belief was that the customers’ interest always comes first. If you want to be heard, learn how to communicate effectively. Simple beats complex. Perfect is the enemy of the good. “To repeat, while such an index-driven strategy may not be the best investment strategy ever devised, the number of investment strategies that are worse is infinite,” (Bogle). If you want a successful business, you need to understand your customers. Thinking long-term can lead to extraordinary results. Saving is one of the most important investments you can make. Money isn’t everything. Rest in peace, John C. Bogle.
What life should mean to you. We experience reality always through the meaning we give it. Individual psychology has found no problems in life which cannot be grouped under these three main problems- occupational, social and sexual. Life means- to contribute to the whole. The meaning of life is to be interested in the whole of mankind and try to develop social interest and love. Only the individual who understands that life means contribution will be able to meet his difficulties with courage and with a good chance of success. The only individuals who can really meet and master the problems of life are those who show in their tendency to enrich all others. A full solution of the cooperation of two, each partner must be more interested in the other than in himself. This is the only basis on which love and marriage can be successful.
Brexit, in its simplest sense, is the UK’s efforts to leave the EU. It got its name from Britain and exit, making Brexit. In the most recent news regarding Brexit, we saw the British sterling lose 2.3% of its value against the USD on January 15th, leading up to the Brexit vote, before recovering its losses, and creating a new monthly high after the plan was turned down. The current state of matters in Britain is worrisome, with little to no resolution occurring between differing parties. Theresa May, Britain's prime minister, seems to be unwilling in changing demands, with her main points being on creating a border between Northern and Southern Ireland, a right for the UK to withdraw unilaterally, and a trade deal. After this deal failed to pass, they will have to go back to the drawing board and hopefully reach a consensus before the UK officials leave the EU on March 29, 2019, at 11 pm.
The shutdown. Despite concerns that the longest government shutdown in US history would delay the producer price index this month, the Bureau of Labor Statistics published the numbers on time. January’s numbers are currently set to be published February 14th. The producer price index or PPI measures the selling prices that producers receive for goods at all levels of output. While the PPI doesn’t cover all industries, it is the most accurate indicator of future CPI, has a long history of data, offers good breakdowns of commodities for investors and shows inflation which in turn can move the markets. The PPI for December showed the largest decline in prices in five months, likely a sign that the 13% price drop in gas has lessened the inflationary pressures on the economy. The largest gain in prices was seen in wholesale food which rose 2.6% while the overall cost of goods decreased 0.4%. Some economists argue that the PPI is too easily skewed by energy and trade margins and believe that the core rate is a far more accurate measure of inflation. For December, the core rate was flat, again showing that for the time being inflation has slowed down. Either way, the Feds are taking a "wait and see" approach before increasing rates again.
The Alchanati Campbell and Associates Team
The economy should expect a slowdown in 2019. Interest rates are high, real estate prices are slowly declining, inflation is rising and the 10-year T-bond and 90-day T-bond are getting closer to an inversion. Based on history and fundamentals, we are in the last stage of the economic cycle: the tightening stage. But why does the economy look so strong? The market moves on information. With the current political climate and transformation in information technology, tweets and informal speeches have been moving the market in swings. It wouldn’t be improbable that market manipulation is occurring, but that just makes finance more interesting.
The Market. Rising interest rates have caused listings to sit longer on the market. The average 30-year fixed rate mortgage rate was 4.74% in November 2018 (November 2017 rate equaling 3.82%). With higher interest rates, people have to lower their home price target to be able to afford a new home. The bond market offers predictive information about future economic growth and inflation. The Treasury Bond rate has stayed low at around 2.69% while the Fed has been raising the Fed Funds rate. The bond market’s fundamentals are indicating that the nominal growth in the US economy (GDP) will drop from its 2018 levels. Home sales are expected to continue on a downward trend in the next 12-months with the increase in mortgage interest rates.
Why do we care so much about having the “best”? Some people are after the best, and some are satisfied with good enough. But looking for the best can be extremely counterproductive. Choices are about making us feel good, about getting us to some other thing that we want, or it’s to help us make statements to the world about who we are. What you choose is saying something about who you are. Large choice sets induce people to regard the choices they make as statements about the self. People who are out to get the best do much more social comparison than other people. The solution: sometimes ‘good enough’ is indeed good enough.
What I’ve learned from attending one of the best Yeshivas in Israel. One of the greatest challenges of this world is to appreciate and enjoy what we ourselves have- even though there are others who have more. It is not so much death that is good, but our awareness of death’s certainty that is good. Not knowing when we’ll die creates, if we allow it to, a very real and healthy sense of urgency to get on with life. The purpose of this world is choice- to give us the incredible opportunity to be independent things, to live our own lives, to be ourselves. What truly has the potential to shape us is our free will, who we decide we want to be. Relationships are built upon commonality. We do best when we see beyond our own pain to something more. All pain passes. While the experience itself was not in your hands, your response to it was. According to the difficulty is the reward. Greatness is much more often found among those who face adversity head on and overcome it. Everything has the potential to be good and everything has the potential to be bad. Our reaction to what happens is the deciding factor. There is nothing that happens to us in this world that is good or bad. All is completely neutral.
Quantitative easing. After the 2008 crisis, the Federal Reserve engaged in quantitative easing. What exactly is quantitative easing? Basically, the central banks purchase bonds and securities. This increases the money supply in the economy, lowering the cost of money and the cost of borrowing as well. A lower cost of borrowing, or a lower interest rate… increases economic stimulation. Now, Jerome Powell, Chairman of the Federal Reserve, said that the Fed's balance sheet will be "substantially smaller" going forward. This "quantitative tightening" began in 2017 and has now reached $50 billion per month and has reduced the balance sheet by $400 billion. Many analysts on Wall Street believe the Fed should not seek to reduce the balance sheet and hike the interest rates, as doing so could lead to increased volatility.
ETFs vs Mutual Funds vs Index Funds.One of the many trends that changed over the year was the large investments that were made in ETFs. For investors looking to invest in dozens of stocks or even industries, mutual funds, index funds and exchange-traded funds have been the way to do that. Mutual funds allow you to invest into a basket of assets like stocks and bonds that are professionally managed while charging the investor a fee that usually makes it the most expensive of the three options. An index fund is a fund that will track many of the stocks that make up a certain category, like the S&P 500. Index funds generally charge the lowest fees since they are not actively managed and simply track a benchmark. The newest platform to the mix is the exchange-traded fund or ETF, which due to its convenience is becoming more popular. Unlike other funds, an ETF can be traded as easily as the average stock.
There are currently 9,356 mutual funds registered in the US that manage nearly $19 trillion. Over the course of 2018, billions of dollars were transferred from actively managed mutual funds into passively managed mutual funds and ETFs. Currently, index funds account for 29% of the U.S stock market, but based on the current trend, Moody’s estimates that by 2024 passive funds will surpass actively traded funds. By the end of 2018, ETFs held nearly $4 trillion and continue to grow as they become increasingly popular. ETFs that tracked the market as a whole performed the least poorly while ETFs that tracked the oil industry lost as much as 75% of their value. Overall, I believe the best approach for the average investor is to invest in low-cost passive mutual funds or ETFs that index the market, but don’t take my word for it back in 2013 Warren Buffet offered this advice, “Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.”
What you should know about the Fed’s last speech.
The Alchanati Campbell and Associates Team
WHAT'S UP FRIDAY? is a weekly newsletter that will give you a summary of "What's up?" on Wall Street, in the US and around the World written by The Alchanati Campbell and Associates Team. What makes us unique is we focus on long-term knowledge; knowledge that will still be useful to you 10 years from now.