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Water Cooler Wisdom: Second Quarter 2016

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By Mack Bekeza

Is the U.S the only place for long term returns?

Although the United States has experienced one of the best bull markets in terms of duration and returns, investors have been wondering what is next. This past year has not been as invigorating as the prior few years and, on top of that, economists are predicting U.S GDP growth to be at around 1.5% for the next few years. You may have also been hearing from either presidential debates or that “one guy” at the bar that everything is going down the tubes and that we have seen our best days. Are they right? The answer is, we do not know.

What we do know is this, even though the U.S is still considered the safest place for investors, that doesn’t necessarily mean we should only be invested in American securities. Did you know that the rest of world accounts for 95.5% of the human population, nearly 75% of the global GDP, and nearly 60% of the total stock market? On top of that, international securities are not perfectly correlated with the U.S markets so they can be used as a very effective diversification tool for people of all age groups and time horizons. So why don’t people invest outside of the U.S?

There a couple of reasons:

  1. Many people have a bias towards their home country
  2. Many people fear that investing internationally is unbearably risky

To respond to those two reasons, there is nothing necessarily bad about being biased toward your home team but there is also nothing wrong with tapping into other developed countries and even emerging markets such as China and India to name a couple. And for people fearing that going international is overly risky, that is not necessarily true. Although volatility is more prevalent, that does not mean that international securities are a sure way to lose money. In fact, it is the volatility that will allow more buying opportunities which in turn can boost returns for people like you and I.

So despite what happened this past quarter (Brexit, continued negative interest rates in Europe, along with current slow global growth), we should still expand our horizons into the international markets and tap into the opportunities they present.

Attached are a few slides about global markets for the past quarter.

©2016 Castle Rock Investment Company. All rights reserved. Please share your insights and comments with us at Mack@CastleRockInvesting.com.

Water Cooler Wisdom: Fourth Quarter 2015

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“What, if anything, can the rest of the world do to mitigate the volatile China impact?” – Anonymous client

Great question…and unfortunately, I don’t know the answer. Free trade is a basic American principle than underpins our capitalist system (my editor removed “mostly capitalist”). Of course, we all know that free trade isn’t truly “free” and America still operates from an unfair position with China. This is not new in 2015 but what’s changed over time is how quickly information is disseminated to “investors,” (human or not) and the speed at which our intermediaries can transfer funds.

Watching China move from a manufacturing to a service economy is like watching an awkward teen move into adulthood. You can’t hasten the pace, or make them mature overnight, since some things just take time. China implemented market circuit breakers on the first day of trading in 2016 that were tested that same day. Trading was suspended for 15 minutes when the market (CSI300 Index) dropped 5% and halted the rest of the day after the market dropped 7%. The circuit breaker was deactivated later that week after halting trading twice and exacerbating the market sell-offs it was designed to limit.

Back at home, the U.S. economic numbers generally look sound but there’s nothing to get excited about. We are missing that one glaring opportunity to spur inflation and, in turn, wage growth. Long-term GDP growth of 1.5% is a yawner, labor force participation is down to 62.5%, and we know the graduating class of 2015 is the most indebted class ever.  In other words, they’ve already consumed a larger part of their future income than previous graduates. Talk about a drag…on the economy.

It is ironic but a drop in the value of the U.S. dollar, an increase in interest rates, and a drop in the supply of oil actually sounds good right now (see “Oil Markets”). It makes me long for the days of 13% interest rates and long lines at the gas pump when you could only fill up on odd or even days (depending on the last number on your license plate).

But then again…stagflation is depressing. I’d take today’s economy over the 1970’s any day. Economists disagree on whether there will be three or four Federal Reserve rate hikes in 2016 (see “The Fed and Interest Rates”) and in spite of a 0% return in money markets, we have almost $12 Trillion in cash (notice the capital “T,” see “Cash Accounts”).

Conclusion
As usual, we recommend a balanced portfolio with a risk profile suitable for each investor’s tolerance and goals. 2015 seemed to play out the new normal of volatility, but we should continue to invest wisely, steadily and with discipline. Volatility is here to stay.

Water Cooler Wisdom: Third Quarter 2015

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During last quarter’s review meeting, I promised a snarky review this quarter, but “good grief” as Charlie Brown would say. The “Grexit” story from July feels insignificant at this point. Greece is now negotiating the “transfer” of over 50,000 migrants and refugees. In fact, the International Organization for Migration reported that more than 35,000 migrants and refugees arrived in Greece during the first week of October alone for a total of almost 435,000 since January.

Perspective: It’s hard to get upset about a reduction in your pension check when you are surrounded by refugees who were forced to flee their homes by armed conflict. A tough year is all relative.

The vast majority of Syrian refugees have fled to neighboring countries, including Turkey (about 1.9 million), Lebanon (about 1.1 million), and Jordan (about 630 thousand). The impact of the global migrant crisis and the response by government leaders is a bigger issue than can be addressed here. Germany is expecting more than 800,000 people to claim asylum this year, which may provide a little relief with their aging demographic issues. Perhaps a silver lining?

But let’s move on to the stories that impacted the bottom line.

China Slowdown

At the beginning of August, we became aware of the ongoing slowdown in China when July’s Purchasing Managers’ Index (“PMI”) fell to 47.8. Just eight days later, the Chinese government unexpectedly devalued the Yuan by 2.0%, surprising markets and sending stock prices tumbling around the world and making us all believers that something was awry in China. When the August PMI came in at 47.3, it reinforced concerns of a global slowdown. That weighed even further on global commodities and markets prompting the Fed to leave rates unchanged yet again. It appears that China is struggling to transition from an investment-driven economy to a consumer one and they may have mistakenly used one of their tools as a sledgehammer.

Commodities

Remember the days when it seemed as if China was going to either consume or contractually gobble up most of the world’s natural resources? It reminded me of when my father would complain over dinner about the Japanese buying up Manhattan real estate in the 1980s. The purchase of Rockefeller Center really lit him up. In the slides that follow, you’ll see China’s immense consumption of industrial metals in 2014, a dramatic drop in its GDP contribution from investment in 2015, and the current level of commodity prices.

Conclusion

As usual, we recommend a balanced portfolio with a risk profile suitable for each investor’s tolerance. Participants will not be pleased when they receive their third quarter statements but, hopefully, we have all learned to invest wisely, steadily and with discipline. Good grief.

Full Report with Slides