I trust this letter finds you well, and that you are enjoying another fantastic holiday season. Despite the general mood of the population, with regards to how ‘crazy and concerning’ things are in our society today, I’m often reminded of just how good we have it. Sometime in November, I was struggling with a cough that just wouldn’t quit. When I began having breathing troubles, I decided that enough was enough. On a Sunday afternoon, I hopped in my car and drove approximately 3.5 miles to our local grocery store, where I entered a clinic and was promptly seen by a registered medical professional. Approximately 15 minutes later, I was filling a prescription and, within 10 minutes after that, I was back on the couch, barely missing a full half of the football game. While it is easy to complain about how horrible our healthcare system is, I have visited several countries where folks walk days to see the only doctor available, and the idea of access to real medicine is not even a possibility.
On another note, I had the great privilege of touring Gettysburg for the first time this year and highly recommend a visit. In addition to the amazing history, I was reminded just what a divided country looks like. I think so many of us forget that, within days of President Lincoln’s election, a state, South Carolina, wasn’t just unhappy with the decision but literally left the Union. This action was quickly followed by 5 more states seceding and sparking a war that left over 620,000 Americans dead. While there is no doubt we’re at a crossroads in our country and division is on the rise, I refuse to embrace the hopelessness I hear from so many; knowing that at one point in our history so much blood was shed and lives lost. Regardless of the current noise, I remain hopeful for America with our spirit and our drive. I refuse to give up on prospects of a better life for my children and my children’s children.
Shifting our focus to the markets, it has been a heck of a year. Rewind just 12 months ago and the stock market was in the midst of a 20% gut-wrenching decline. I can say, without a shadow of a doubt, not many, including me, believed we could be where we are today. Despite writing and publishing Much Better Prices at what ended up being a prescient time, I never imagined markets would advance like they have in the face of such uncertainty. Needless to say, it is once again a reminder of just how important it is to remain open-minded and, above all else, flexible and opportunistic.
Despite stock market and portfolio gains, I would be remiss not to mention just how important it is to keep emotions in check and allocations appropriate. As we’ve discussed throughout the year, rather than becoming overly confident with portfolio returns, one should always pursue an appropriate allocation, which will remain the first line of defense to any prolonged pullback. Let us know should you have any questions about your allocation, and we’ll be glad to schedule a meeting to review your accounts and financial plan. If it slips your mind, Linda will be reaching out.
Liquidity & the Fed
Many may wonder what has happened since my last post, Something Smells, regarding the Federal Reserve and liquidity concerns within the repo market. Well, let’s take a moment to rehash what transpired. In mid-September, with no explanation whatsoever, the overnight lending market among banks began to freeze and rates surged upwards of 10%. This had not happened since 2008 and sparked incredible concern almost immediately. Figureheads rationalized this as a ‘one-time event’ due to a confluence of variables that just happened to occur simultaneously. This ‘one-time event’ turned into a daily concern, whereby the Federal Reserve had to continue stepping into the repo market and provide needed liquidity. At first it was just for a few days, which turned into a few weeks and now has resulted in an infinite lending practice which by many is being dubbed QE4. While the Fed is adamant this is not in fact Quantitative Easing, its balance sheet tells another story.
This should, however, be no surprise to us. In April of this year, I wrote a piece A Bigger Can, A Longer Road discussing how we were now in a new world where the Fed would pursue a unique and untested model with monetary policy. My argument was simple. Since we’ve now begun to use the Fed balance sheet as a monetary policy tool, we would, in fact, never see it be significantly reduced again and, in turn, slowly increase over time.
…what has just transpired is an entirely new and additional method by which the Fed will control monetary policy; and, it is my opinion, that never again will we see the Fed balance sheet be reduced; but rather, over time, it will be further expanded to correlate with our national debt. Basically, what is getting no headlines at all is how the Fed not only kicked the can down the road, but found an entirely new road and a much bigger can!
A Bigger Can, A Longer Road – Quint Tatro
I believe this has been one of the most significant, untold stories of 2019 and is what prompted me to quickly move from a net seller, during September, to a net buyer of equities once again. You see, if recent history tells us anything, it is to not underestimate the Federal Reserve’s ability to provide the necessary liquidity to spur on stocks for the next move higher. Many call this Fed activity Market Manipulation, while I have learned to call it just another piece of the puzzle.
China & Emerging Markets
I’m often asked my thoughts on the trade war and the future of our global relationships. It is in my nature to ponder this from an opportunistic standpoint and to conclude that the real benefactor for this will be the countries currently accepting the manufacturing, which is rapidly diversifying away from China.
Let’s look at it another way. A few years ago, if you were the head of an organization with a majority of your manufacturing located in China, i.e. almost every single publicly traded company making and selling goods in the US, the moment the trade war was announced, you began to do two things and the first was to immediately gain an understanding of how this impacted the bottom line. You reviewed cost cutting, price increases, margin compression and anything else which would impact your business due to this overnight increase in your expenses. The second thing you did was to immediately dispatch people to find new suppliers in new countries. You see, there was no way you could afford to wait around for this trade war to be settled; you had to take matters into your own hands and ensure you were in control of future pricing. More than likely, you explored and began a transition to one of the many countries willing and able to take on the job including Taiwan, Vietnam, Cambodia or India.
While this sounds simple, the truth of the matter is that these countries, while willing to take on this work, are simply not yet in the same place China is with regards to their labor force, infrastructure, logistics or ports. So, does this stop them? Absolutely not. Consider, for a moment, a country with the opportunity to imagine an absolute boom in manufacturing, a rapid rise in employment, a flush middle class, improved trade relations and on and on and on. You see, while these countries are working hard to secure their place in the manufacturing land grab that is taking place from China’s stubbornness, they are being forced to make significant investments within their own country to support the growth. Many of these countries are now seeing the equivalent of an industrial revolution and their markets are following suit. From my vantage point, it simply makes sense as one of the best potential investments over the next several years regardless of what happens with China and trade relations.
I would like to conclude my market discussion with Gold, as it has been one of the best performing asset classes of 2019 and, in my opinion, it is just beginning. You don’t have to be an economic savant to understand why this makes sense. Allow me to examine a simple economic principal about the laws of supply and demand. While an economic boom is not new, with regards to American or global history, the variable which has never been in play during such an economic cycle has been the profound levels of debt being held by sovereign nations. Post financial crisis, global quantitative easing has resulted in debt to GDP at extraordinary levels. This has been one of the results of the zero to negative interest rate policies throughout the world, which was an attempt to stimulate us out of the great financial crisis. Unfortunately, we have now become dependent upon these low interest rates to the point where any hint of anything else (Q4 2018) will be met with an immediate halt in productivity and stock market declines. In summary, we’ve reached the point of no return when it comes to easy money and zero interest. While this has resulted in strong stock market gains, thus far, inflation has been kept at bay due to advances in technology and a desire to keep profit margins at highs. Employment levels have reached 50 year lows; and, with a global economic resurgence on the horizon, we are beginning to see an increase in demand for general raw materials. As material costs begin to escalate, building costs will also rise and therefore everything from construction to rents must also follow suit. Combined with an extremely tight labor force, there is no doubt in my mind, we are on the verge of seeing an uptick in inflation – the general cost of our goods and services. What has traditionally been the best method by which to hedge against an erosion of purchasing power or an uptick in consumer pricing? Gold. It is for this reason we will continue to have a portion of our accounts allocated to the shiny metal, and we hope to see more of what we’ve seen throughout this year.
This year Tatro Capital, now known as Joule Financial, hit a few milestones. We successfully relocated into our new building on Broadway, in Lexington, and absolutely love the new location. The increased space will allow us to expand our staff which we’re excited to be doing in the first part of the year to better serve our growing clientele.
We are extremely proud to be serving over 500 families all throughout the US. Finally, a piece of news I’m super excited about is the fact that starting in January, in partnership with Vanguard, we are proud to be launching a 401k for two of our local Chick-Fil-A’s which will help over 200 part and full-time employees begin saving for a better financial future. To say we have been blessed is an understatement. So, I genuinely want to thank you for your continued support and trust in us as a business and your adviser.
In conclusion, I want to send out a special thank you to both Daniel and Linda. Without their help, there is no way Joule Financial would be where it is today. In March of 2019 Daniel celebrated 10 years with us and this Spring will mark Linda’s 8th. We’re super excited to announce our next full-time hire, but we will save that for our next mailing.
Until then, ~ Quint
Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance of future performance. Joule Financial is a fee-only registered investment adviser. For more information please review a copy of our firm’s ADV brochure: HERE