Is the Market Defying Gravity?

“Is the Market Defying Gravity?”
Ty J. Young Editorial

Many analysts remain surprised at how well the market has continued to perform despite significantly negative market events. It is seemingly defying gravity! The Dow and S&P 500 have recovered from staggering blows and continued upward through events such as: The Flash Crash, the Greek debt crisis, the Chinese intervention that drove our markets down last fall, and the most recent terror attacks in Paris and Brussels. We are now back to November 2014 levels, and we continue to enjoy a 7-year strong market upswing.

But nothing lasts forever. Trying to time the market is usually a losing bet, and a dangerous game to play with your investment money. You have to ask yourself simple questions that may not have simple answers: Why has the market rebounded from the declines in late 2015 and January 2016? And, is this a time to be cautious with your money?

I. Why is the market defying gravity?

1. Money has nowhere else to go. Where can you invest? Terror-stricken Europe? Militant China, with economic numbers you cannot trust? Russia? Some foreign stock exchanges may have appealing investment options, but in general, and in the world we live in today, money is safest in U.S. traded companies.

2. Market players are no longer afraid of interest rate hikes. Yes, there was an interest rate hike in December, and yes the markets declined. However, investors seem to have lost the fear that there will be several interest rate hikes this year, or if we get them, they will be significant in size. In fact, many believe we could see what is being tried in Europe and Japan – negative interest rates.

3. Economic indicators are steady. Employment – at least the way we measure employment – has been steady. Job creation – at least the way we measure job creation – has been steady. The bottom line is some of our leading economic indicators have been steady as compared to other global markets. This has kept U.S. stocks attractive.
II. Why you should be cautious, despite gravity defying market?

1. Markets have not grown since the money printing stopped. The market has seen wild swings up and down over the last year and a half – yet it remains in the same position as in November 2014. This was just a few months after the Fed officially withdrew its Quantitative Easing program (the printing of money) from supporting the market. The signal is clear – without QE, the market cannot advance.

2. Profits down in 3rd and 4th quarters. As Larry Kudlow often says: “Profits are the mother’s milk for stocks.” They are also a primary indicator for economic growth. Profits were strong during significant periods over the last 7 years, especially for large cap stocks, driven primarily by overseas sales. Foreign sales driving profit margins should have been a cause for concern. Now profits are drying up – down 5.1% (year-over-year) in the 3rd quarter for 2015, and 9.5% in the 4th quarter. Those are the largest percentage drops since the last quarter of 2008 – the height of the last financial crisis.

3. Economic growth has been anemic. As stated many times, economic growth during the last 7 years has been somewhere between non-existent to anemic. Even with every fiscal and monetary policy tool being used to its fullest extent, we still have been limited to an average of less than 2% growth. The 1% growth in the 4th quarter of 2015 only reinforces the notion that Main Street has been decoupled from Wall Street. This is cause for concern – markets cannot remain elevated when there is little underlying economic activity to support an elevated stock market.

4. Many predicting return of “stagflation.” Stagflation, defined as stagnant growth rates with rising inflation, is one of the most dreaded words of the 1970’s – and represents the utter failure of the liberal Democratic economic policies of the Jimmy Carter Presidency and took the Reagan Revolution to correct. Stagflation is making a comeback among leading policy circles in Washington and Wall Street. Inflation topped 13.5% for the year in 1980, and required a strong hand under Reagan’s Fed Chief Paul Volcker to bring it down. Many analysts were concerned with deflation just a few months ago, but they have now made a 180 degree turn on the issue. This shows a couple of things: A) Do these guys really know what is going on? B) Anyone living paycheck to paycheck knows inflation has been present despite the drop in gas prices (which has been helpful but seem to be heading back up). If you have not received a pay raise in years, then you know your cost of living is squeezing that paycheck.

Most people do not know the impact of the economic wizardry happening behind the scenes. Your 401K has benefited, but watch your wallets. The unprecedented market run over the last 7 years has defied the odds and defied gravity. But it has been an artificial creation through market interventions, TARP (the Troubled Asset Relief Program), Stimulus, Quantitative Easing (Rounds 1, 2 and 3), mortgage-backed security purchases, artificially low interest rates, zero-interest rate policy. Since 2009, these government moves have kept money flowing into the stock market – and that has been the primary driver of market gains. You may or may not be familiar with these terms, but they all enjoy the same characteristics: they are government actions intervening into the free market, and the evidence shows they have not stimulated the economy. These tried and true methods of prosperity have not been prominent in our economic policies: New business formation, lower taxes, job creation, new inventions, business start-ups, and innovation in the business marketplace. Instead, the stock market has been propped up by the government.

Without natural stock price appreciation, driven by growth and innovation in a free market, you will only see stagnation, inflation, and debt. In other words, the chickens always come home to roost, it is just a matter of when.

Is your money protected from the potential storms on the horizon? Are you in a place where you can benefit from stock market gains, and none of the stock market loss? If not, and you would prefer to have your money in a place where it is protected against losses and earning a reasonable rate of return, call us at 877-912-1919 and we will explain exactly how it works!


Trump … Taking Back the Rules of Trade

“ Trump … Taking Back the Rules of Trade ”
Ty J. Young Editorial

Donald Trump’s constant verbal attacks on trade deals with countries such as China and Mexico have struck a nerve with a large segment of working class voters. The sense that trade deals have only “trickled up” to the top of the economy and not “trickled down” to the blue collar working class is evidenced in the lost manufacturing jobs and shuttered ghost towns throughout middle class America.

Historically, trade has been anything but free, and largely enforced by the brute force of a great power. It was only America that introduced a rules based and consistently applied system. At the end of World War II, the U.S. became one of the first global powers to institute a trading regime that was beneficial to everyone, and for the first time basically a “free” system of exchange. We paid for that system by maintaining open shipping, commercial lanes of transport, and global security – all bought and paid for by the taxpayer and the U.S. military.

That system broke down and failed. It was mostly given away by Washington policymakers. The anti-establishment anger against both parties has fueled the rise of Trump, who plans to make the rules of trade work for America again by pursuing “smart trade” deals.

I. The old rules of global trade.

1. American-led post World War II system. The 42 allies who were in the process of defeating Nazi Germany in World War II met several weeks after D-Day in Bretton Woods, New Hampshire, to design the post-war global economic order. The system, “The Bretton Woods System,” was an American enforced trading and currency regime, with all currencies pegged to the U.S. dollar. Trade, and the value of your currency – as they always have been – were linked … and the United States dollar made sure of it.

2. The dollar was backed by gold. From 1945 to 1971 dollars were “as good as gold.” This prevented widespread currency manipulation through monetary policy and limited the moves a Reserve Bank could make to lower or increase the value of their currency. Most importantly, it provided everyone with a stable currency and market environment.

II. What’s changed?

1. The dollar is no longer backed by gold. Large budget deficits and chronic unemployment, combined with foreign governments ramping up their redemption of dollars for gold, led President Nixon in 1971 to remove the U.S. dollar from the Gold Standard. In a series of economic moves made on August 15, 1971, this one was the most dramatic. Nixon believed gold redemption by foreign countries was driving down the value of the dollar, and draining U.S. gold reserves. His belief was why should foreigners manipulate the value of our currency through gold redemption, but we cannot? Nixon planned to return to the gold standard after the Bretton Woods system enacted reforms to protect the value of the dollar. Those reforms were never enacted.

2. There is no longer an American-led trade system. Currencies float … global economic factors, such as the World Bank and International Monetary Fund, are run by consensus and not American direction. Competitors have access to U.S. markets without equal access given to U.S. firms. Monetary policies and currency manipulation affect the price of goods, and therefore labor can be cheaper in countries such as China and Mexico. The rules of trade, like a lot of the world, seem anything but fair, certainly not free, and broken absent American leadership and direction.

3. We have given everything away. Many remember the Panama Canal – we built and paid for it with American lives and taxpayer money … and Jimmy Carter gave it away. Iraq – bought and paid for with U.S. blood and treasure – was given away by our current President. Our historic dominance in manufacturing – given away over several decades to foreign competition. The internet – invented by and under complete U.S. control for almost two decades* and handed over by our current President to a United Nations body, thus allowing countries such as Russia and China to dictate the freedom of the internet. Instead of pressing our position to our benefit – which usually benefits the other party as well – we have given away our leadership in almost every sphere of global politics and economics and with little, if anything, in return. No wonder the public is angry!

Trump wants to take back control of the rules of trade. His calls for better trade deals are an echo of the Reagan era, where the classic free-trader himself required Japan to allow for more U.S. auto imports and drove Japanese investment in U.S. jobs. We are in a different time and different circumstances, with many more problems affecting trade decisions. Nonetheless, even the Obama Treasury Department agrees with Trump, citing in its 2015 year-end report: “… no major trading partner of the United States met the standard of manipulating the rate of exchange between its currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.” Furthermore, other countries are not doing the right thing with their money, and that is hurting us! Again, no wonder the public is angry!

Moving forward, having leadership that is focused on a strong dollar policy and trade deals which benefit American workers should be the expectation of all Americans. Another expectation many Americans want for their retirement money is having a portfolio that is not exposed to the risks found in the marketplace. Sound attractive? Learn exactly how it works: 877-912-1919

*Some argue Tim Berners-Lee, a British scientist, invented the internet. He made major contributions to the final product we now call the World Wide Web. But internet was an American creation – invented, bought, and paid for by Americans.


Brokered Convention = Continued Economic Stagnation

“ Brokered Convention = Continued Economic Stagnation ”
Ty J. Young Editorial

The Republican Party establishment – loosely defined as the party apparatus, long-term donors, think tanks in and around Washington, and the party’s top leaders – all seem to be working toward a brokered convention this summer. The reason is to deny Donald Trump the nomination. But a brokered convention will most likely have one result – electing the Democratic nominee as president.

Republican Presidential candidate Ted Cruz and other candidates have described the potential for a contested convention in the media recently. The differences are slight: A contested convention is where several candidates have delegates pledged to them, but the leader does not have more than 50%. At the convention, the candidates have several votes among the delegates gathered to determine a winner. This is what the Republicans may have this summer.

A brokered convention can only occur after a contested convention occurs and no one can secure the more than 50% of the delegates needed. The party elites then choose who is going to represent the party. Such a circumstance – essentially undemocratic – would be a disaster for the Republicans. It would most likely lead to the election of a Democrat this November.

Electing a Democratic nominee would also result in the continued economic stagnation the country has endured over the last 8 years. While the Democrats can rightfully point toward 70+ months of growth since the recession ended and substantial job creation during that time, we still have not returned to the standard of living enjoyed before President Obama took office. Most of the economic success has been artificial.

I. What is a Brokered Convention?

1. One candidate does not have enough delegates to claim the nomination. On the Republican side, that is 1,237 delegates or one more than 50%. If someone has the lead once the convention begins, but not the majority of delegates, then votes are held at the convention as to who will be the nominee. After the first round of votes, delegates are free to vote for any candidate of their choosing. At this point, it is possible to shift from a contested convention to a brokered convention.

2. Party elites would be free to nominate their own candidate. If no one wins the majority of delegates after the voting, the establishment could then put its own candidate forward. That can be anyone, and does not have to be a person who has been campaigning for months or years leading up to the convention. Clearly, this could be a disaster. Voters would feel betrayed – even more so than they do now. The rumor is Mitt Romney would be a leading choice of the party establishment, and many concede this would be a sure-fire way to elect Democratic Presidential candidate Hillary Clinton (or Bernie Sanders). Some members of the Republican establishment have even stated in public they would prefer Hillary over some of the candidates who are the current options for the Republican nomination.

3. The decision on who to nominate would be in a smoke-filled back room and not by the voter. Although no one is typically allowed to smoke indoors anymore, the old way of selecting a nominee would surely cause chaos and voter revolt. The Republican voters would likely reject an elite nominee. Trump voters would bolt the party. Conservatives and Tea Party activists would sit out the election. It could lead to one of the largest electoral losses in American political history. The Republican Party would accomplish what seemed impossible 4 years ago – to lose two consecutive elections in which they should have won easily. Conservative voters would most likely be jaded and unlikely to vote again for decades, if ever, for the Republican Party.

II. Who Wins with a Republican Brokered Convention?

1. The Democrats win. It is hard to see a scenario where Trump voters come out and vote, where conservatives are engaged, and middle of the road voters like what they see in the Republicans brokered convention. That would allow the Democrats to roll to victory.

2. Hillary or Bernie benefit. Either Bernie, a self-proclaimed socialist, or Hillary, who is under investigation by the FBI and who is proclaiming she will continue with the policies of the current president, will most likely be the next President of the United States if the Republicans have a brokered convention.

3. Republicans lose. After months of voting, the candidate with the most delegates is denied the nomination, and a candidate no regular voter has voted for is chosen to be the nominee. What possibly could go wrong??? There is no fact pattern that would support Trump voters, conservatives, Tea Party activists, or mainstream voters getting behind a brokered convention nominee.

III. Why Would the Economy Remain Stagnant?

1. Hillary has promised our current economic policies will continue. The last 8 years have been brutal. Our debt has doubled. There have been massive declines in labor productivity (3.5% per worker year-over-year from 1995 through 2008, to 1.4% since 2008 despite job growth), anemic GDP growth, inefficient government, higher taxes, and stock market gains bought by money printing. While many supporters of the president point towards the 70+ months of economic expansion and job growth, it is hard to celebrate when those jobs were bought with $9 trillion in debt, are producing less than we ever have per worker, and GDP growth has averaged 1.78%, worse than ANY president since the end of World War II.

2. Bernie has promised not just more of the same, but WORSE, a complete shift to socialism! Large numbers of economically illiterate voters, combined with our college graduates being taught socialism is a good thing, leaves us with the potential of the American electorate actually choosing a socialist as president. While unlikely, the very fact Bernie is receiving votes would have been laughable not more than 10 years ago. Have any of these voters visited North Korea? Or the former Soviet Union? Venezuela? Cuba? Western European social democracies have been able to afford being socialist because their defense spending has been underwritten by America for 70 years and we invent almost everything. This leaves those countries to benefit from not having the expense of research and development, costs borne by American business. Socialism has failed everywhere and every time it has been tried. Most people in Europe with the means come to the U.S. for their medical care and their social welfare systems are bankrupt. Sweden most notably has enacted capitalist reforms to try and fix their budgetary deficits and increase incomes.

What happens next?
If your state has not voted, get out and vote! If we have a contested and then brokered convention this summer, buckle up and get ready for the fireworks. The last brokered convention we had was the 1952 Democratic convention. What we know from history is a badly split party rarely, if ever, wins the White House. And a brokered convention? The Democrats lost in 1952.

This is unchartered territory in most of our lifetimes, and a brokered convention certainly means continued economic stagnation and downward pressure on the stock market. Protecting your nest egg is becoming a priority for most investors. The smart money is using structured products to get a reasonable rate of return while at the same time achieving downside protection. Call now! 877-912-1919