Bears are sharpening their claws

Bears Are Sharpening Their Claws

Buy low, sell high. Are we at the peak, or will we climb over the wall of worry? The Stock Market’s “Trump Trade” has flourished, with record-setting market numbers since his election last November. We are certainly in a “new normal”. If the P/E (price-earning) ratios were a historical predictor, we are due for a stock sell-off. If “animal spirits” were an indicator, this market may remain bullish. If you are solely looking at data, retail sales are pointing directly up, as is the most recent CPI report. If long term cycles are a gauge, we are nearing the end of 16-18 year bull market.

But the data leaves out some broader intangibles that are impacting stock prices. The Obama-era stock market gains were artificial, based upon certain historical factors:

1. Price inflation due to the printing of money.
2. Federal Reserve zero interest rate policies.
3. Historic levels of debt creation and fiscal deficits beyond anything we have seen before, and therefore expansionary in its effect.
4. It started from the bottom, in March 2009 the floor was reached at Dow 6,547. This meant it had no other direction to go but up.

The market was not growing because of the traditional business cycle: a new Apple device was announced, a new life-saving drug was created, or infrastructure spending or construction. There was no underlying economic growth supporting a bull market. In fact, it can be said that Main Street essentially decoupled from Wall Street.

So, the constant drumbeat from perma-bears that there was no way the market could keep going up, and that we will see a correction, proved to be constantly wrong. But that doesn’t mean they will remain wrong on the issue for much longer…there are several policy issues that could serve as headwinds, or as the trigger for, a significant market correction.

They are:

1) Failure to repeal Obamacare.
2) Failure to reform the administrative state.
3) Failure to reform the tax code.
4) Federal Reserve Interest Rate hikes.

Enough has been written regarding each one, but they all warrant repeating. Much of the “Trump Effect” in stocks is based upon a belief that action will be taken on the policy front in D.C. First, failure to repeal Obamacare, an election year promise since 2010, could send markets in a tumble. While some insurance carriers benefit from the subsidies received, the broader market indices are negatively impacted by small and medium sized business health insurance costs, corporate and individual compliance costs, and the Obamacare tax increases.
Second, failure to repeal and reform the regulatory state – from the auto-pilot nature of some spending programs to EPA regulations to Dodd-Frank – it is clear the Trump Effect is also benefiting from a market-place expectation that truly cutting government is in the works.

Third, reforming the tax code would be necessary no matter whose party was in power in Washington. The highest corporate tax rates in the world….the byzantine, inefficient, burdensome tax rates on middle income earners…the double taxation which keeps corporate cash abroad…every aspect of U.S. tax policy is bad for business. While the Trump plan and the House plan have varying degrees of good and bad ideas, the bottom line is both flatten rates on both corporate and individual tax payers. This will spur economic growth and in turn drive up tax revenue for the government. For the economy, it is an absolute must, and the belief it is coming has helped drive the market surge since last November.

Lastly, and the most unpredictable, is the Fed. Three rate hikes and historically the market has reversed. If a third hike since December 2015 is in the offering, that could spell trouble for stocks. It doesn’t have to, it didn’t for Greenspan in 2004, and often the strong dollar combined with other economic factors could simply show a strengthening of the economy and an extension of the current cycle. But that’s a lot of history to overcome.

If Washington doesn’t go to work, and get major reform legislation passed, the fear of a correction and a bear market becomes more and more real. When that reality hits, be sure you have your money in a place where it is safe from market losses. Our advisors at Ty J. Young Inc. are experts in helping people like you protect their principal while earning a reasonable rate of return. You don’t have to lose money, call us today at 877-912-1919.

Rex Tillerson Confirmation

Secretary Tillerson Draws a Line with North Korea

Secretary Tillerson Draws a Line with North Korea
Ty J. Young Editorial

Secretary of State Rex Tillerson had an eventful week while traveling to Asia. His stop in Korea included a speech in Seoul where he stated “military options” were on the table in dealing with the North Korean nuclear threat.

The North Korean nuclear weapons programs have been rapidly advancing. Their missile program has now reached the testing stage for intercontinental capability – which means the ability to deliver its payload to the U.S. mainland. North Korea most recently fired 4 missiles into the Sea of Japan on March 4, 2017, landing within 190 miles of the Japanese coast line. This was the most provocative and dangerous act the communist regime had taken to date, and the action helped bring greater support for the U.S. missile defense system being deployed to South Korea, known as THAAD (Terminal High Altitude Area Defense).

Diplomatic statements then ramped up – the Chinese called for cessation of the North Korean missile testing in exchange for the U.S. to suspend wargame drills with the South Koreans. The Chinese explicitly stated they wanted THAAD removed from the Korean peninsula. Secretary Tillerson then responded with America’s most muscular statement to date. In a joint press conference with South Korean Foreign Minister Yun Byung-se, Tillerson stated that the era of Washington’s “strategic patience” was over, that military options were on the table, and any action that would endanger U.S. forces would be met with the “appropriate response.”

It was stunning language coming from America’s top diplomat, and drew a line in the sand regarding how long the U.S. would allow North Korea to continue advancing with nuclear weapons.

With battle lines drawn, what are the “5 Things You Need to Know” regarding the US-North Korean nuclear program stand-off:

5 Things You Need to Know Regarding the U.S.-North Korean Nuclear Program Stand-Off:

1. The North Korean Nuclear Program goes back decades. North Korea has maintained a clandestine, and now public, nuclear power program since 1962, and it is believed their efforts to develop nuclear power covered for a nuclear weapons program. Initially denied by both the Soviet Union and China nuclear weapons technology, the North Koreans developed their own and were preventing UN inspectors from visiting their sites in 1993. It is believed they saw what happened to Iraq in the Gulf War and assumed nuclear weapons would be the only deterrent to a U.S. invasion. In 1994, the first can was kicked down the road as the Clinton Administration agreed to build nuclear power reactors and provide food to the North Koreans, in exchange for suspending their weapons program. Predictably, the North Koreans signed the deal but then simply cheated. Thanks to help from the AQ Khan network and the Pakistanis, the North Koreans developed a break-out program with their first underground test in 2006. They have been advancing their program, and their missile delivery capabilities, since then.

2. The political environment in South Korea makes our maneuvering room very small. With the impeachment of their President only a week old, the opposition party known as the Democratic Party of Korea will most likely win the next election. They favor engagement with North Korea, and smoothing relations with China. While that would be welcome, it could also be viewed as appeasement. Some question if the U.S. missile defense system will be sent home by the new, left-leaning government. THADD is the current U.S. missile defense system that can be used to shoot down intermediate range nuclear-armed ballistic missiles.

3. The Chinese play both sides of the fence in this stand-off. The Chinese certainly have a more difficult tightrope to walk than the U.S. North Korea is financially supported by the Chinese, and therefore America believes the Chinese have all the leverage over the North Koreans. However, China does not want a collapse of the North Korean regime, because they would have refugees flooding across their border, and most likely a U.S. beach-head on a unified Korean peninsula. From their perspective, the worst of all worlds. However, they are also facing the reality that they do not want the U.S. missile defense system in South Korea, and have reacted angrily to its implementation. So, while they don’t want a unified Korea, they also prefer that the North Koreans don’t agitate the U.S. into a broader military deployment.

4. Conflict between the U.S. and North Korea would be an economic catastrophe. $5 trillion worth of good traverse through the region each year … half the world’s cargo tonnage … one-third of all global maritime traffic annually … 60% of South Korea’s energy needs … even a non-nuclear military exchange would devastate the South Korean capital of Seoul with upwards of 250,000 casualties expected in the first week alone. Global commerce, as we understand it, would most likely grind to a halt.

5. Tillerson’s veiled threat of military options was necessary – as long as it is not a bluff. As stated above, a non-nuclear exchange would devastate the capital of South Korea. Most Pentagon analysts project the U.S. would move forces into the region from Guam, Hawaii and Japan. Assuming it did not escalate into a thermo-nuclear conflict, U.S. force projections combined with South Korean forces would defeat the North within 60-90 days. BUT – that is not how it plays out. Most now project a North Korean nuclear strike on U.S. bases in Japan. The testing by North Korea of intercontinental ballistic missiles suggest the possibility of a strike on the U.S. West Coast. U.S. political necessities would require a nuclear response, and then enters China. A U.S. pre-emptive strike could not guarantee we would be able to get all their nukes, and again, U.S. bombers heading towards the Chinese border would most likely lead to a Chinese response. In the end, there is a lot the U.S. can do short of war, but unlike the Obama red-line in Syria, it does no good to bluff or not be serious and then not follow through. If Tillerson was not bluffing, we have entered a new and more dangerous phase than ever before.

The dangerous nature of this issue goes straight to the heart of market gains and the protection of your money. The U.S. remains a safe haven, but as the risk of global conflict has increased, the direction of the stock market has become more volatile with each passing year. It may be time to move some of the gains from the last several years into a protected principal product. If you want to learn more, call us at 877-912-1919.

Strong Dollar ... Has Never Been Weaker?

Strong Dollar… Has Never Been Weaker?

Strong Dollar… Has Never Been Weaker?
Ty J. Young Editorial

Stock market euphoria… glowing jobs report… apparent economic growth… and a strengthening dollar all provide evidence of the boom that has been launched with the advent of the Trump era.

Despite the relative dollar strength on the global currency markets, a less obvious conclusion may be that the U.S. dollar has never been weaker.

Dollar strength or weakness can be a good thing or bad thing based upon other fundamentals in the marketplace. The current strength of our currency is surprising, given recent comments from President Trump and Treasury Secretary, Steve Mnuchin

But strong it is. The dollar has seen almost a 10% rise in value over the last calendar year, with most of that spike occurring since the election of President Trump.

A strong dollar has been U.S. policy for decades, despite the fiscal and monetary policy to the contrary. And most countries view a strengthening currency as a hallmark of a growing and prosperous economy.

So why is our currency, supposedly stronger than we have seen in years, possibly weaker than we ever could have imagined?

The dollar has always been backed by gold and became the global reserve currency after World War II explicitly because of its convertibility into gold. President Nixon ended dollar convertibility in 1971, and since that time the dollar floated in value against other currencies.

What has maintained our reserve currency status is power. The U.S. backed the global order from Asia through Europe by force of arms. The U.S. was the primary supporter of emerging markets; the U.S. set policy on global economics; the U.S. underwrote the costs of the UN, World Bank, IMF and many other global institutions; and most importantly, the U.S. maintained the open shipping lanes and freedom of navigation necessary to keep the global supply chain moving.

That came to an end under President Obama – he withdrew our forward deployed leadership in the Middle East, allowed China to be more assertive in Asia, and signaled to the world our withdrawal from leadership and enforcement of the global order. To date, President Trump’s “America First” policies do not suggest an aggressive American role in settling global affairs.

The dollar was once backed by gold, and always backed by American power. In today’s world, how strong is the dollar in realistic terms? And does it matter?

I. Three Reasons the Dollar Could Drop in Value:
1. Trump agenda calls for massive stimulus – more dollars lower their value. A $1 trillion infrastructure project… increase in defense spending… massive tax cuts… all of this fiscal stimulus creates deficits. An increase in deficits means more borrowing, and more borrowing means a weaker dollar.

2. Currency wars mean a race to the bottom. In order for their exports to compete, foreign governments have been lowering the value of their currencies relative to the dollar for years. This “race to the bottom” has meant every currency, including the U.S., has gone down in value. As a foreign government manipulates it’s currency downward, the market adjusts the dollar’s value accordingly. If that off-sets the foreign government’s move, then they simply adjust downward again.
3. Global competitors decide to use other currencies. Why should other countries use the dollar? We are not backed by gold, no longer backed by power, no longer enforcing global order. This is a discussion happening daily amongst finance officials around the globe. The less the dollar is used in transactions, and the more in circulation through debt financing, the lower the value will be. Right now Russian troops are in Syria, Libya, Iraq and most recently Egypt. China is building islands in the South China Sea. Former colonies such as the Philippines publicly suggest leaving us and joining a Chinese alliance. Was ANY of this possible before 2008?

II. Three Reasons the Dollar Should Remain Strong:
1. Still today the dollar remains the best, most important currency. When you are used in at least one side of 80%+ of all transactions and trades globally, and for 65% of transactions and trades you are the currency used by both parties, it is hard to argue the dollar has lost its place as the global reserve currency. America retains the deepest capital markets, a vibrant and innovative private sector economy, the safest and largest repository of stored gold, and a functioning rule of law that protects your investments. Anyone who has just a couple of those advantages, much less all of them, will have a strong and attractive currency to do business with.
2. Trump may reverse the Obama era withdrawal. With Russians on the march in both the Middle East and Europe… the Chinese extending their defense perimeter into the Pacific… Iran emboldened, enriched and empowered by the Obama Administration’s nuclear deal… it is hard to see where the U.S. can contain the damage wrought by the last 8 years. BUT, despite these setbacks, Trump has promised to destroy ISIS. He is committed to a massive defense buildup. Despite warning NATO on defense spending, he seems committed to the alliance… There are signs that Trump intends on stopping our global withdrawal, and retaining our global alliance structure in its current form.
3. Nowhere else to go. If China and the U.S. can’t do business, Vietnam and Malaysia step up to the plate. When Europe is paralyzed by indecision, the British are always at our side. The very nature of U.S. account balance deficits allows for the dollar to remain supreme – we serve as the world’s banker because our politics can withstand the account deficits (for now). China does not enjoy our advantages and their currency is in free fall for the last 2 years… the Euro has been in permanent crisis since 2008… the Russian ruble???). There is only one global currency, despite malevolent interests who would prefer something else, and that currency is the U.S. dollar.

We can’t say the dollar’s global position has been challenged before because it hasn’t. Consider these post World War II events:

A) Defeat in Vietnam
B) Ending the Gold Standard in ‘71
C) Watergate
D) Carter malaise and oil shocks of the 1970’s
E) Russian advances during that same decade
F) The 1987 “Black Monday” stock market collapse
G) 2000 dot-com bubble
H) 2001 9/11 recession
I) 2008 banking collapse

All of these events and more did not lead to questioning the value and strength of the dollar. But these are different times. Global events and foreign interests are no longer following our lead, and they are questioning why the “weak horse” still calls the economic shots.

But if the dollar is no longer backed by gold, and if American power appears to be in decline, the dollar still can remain the global reserve currency thanks to the abiding belief in the greatness of the American economy. When disorder spreads around the globe, safety and security of American banks, the legal system, and the American marketplace will help the dollar maintain its preeminent status.

Despite global disorder and bad actors abroad, the dollar may go up and down in value, but you have still enjoyed the most recent gains in the stock market. Now may be time to take some of those gains and put it into a safer place. You can ensure your money is completely protected in the event of the next market downturn. Give us a call at 877-912-1919.