The Independent Investor: Time to Hedge Your Bets?
Over the last few weeks, the threat of rising inflation has triggered a great deal of concern among investors. Given that inflation has been at a low level for a number of years, their concern may be justified.
Many market pundits were surprised by the wage data in the non-farm payroll report for December, which was released two weeks ago, Friday. In that report, wages jumped far more than most expected coming in at a 2.9 percent annualized growth rate.
Given that our central bank monitors wages as one of their key indicators to gauge future inflation, that number sent the bond and stock markets into a tizzy. Again this week, investors received another inflationary surprise when the most recent Consumer Price Index (CPI) jumped 0.5 percent in January. The gains were broad-based in everything from energy to apparel.
This news was not taken too well in the bond market where the U.S. 10-year Treasury bond rose to above 2.9 percent, the highest level it has been in several years. Many economists believe that a further rise to 3 percent is inevitable. Yet, none of these numbers spell doom for the economy or even the stock market. From a historical perspective, both inflation and interest rates are still at incredibly low levels. But the markets tend to look ahead.
What, they ask, will the rate of inflation be by the end of this year or next year? Here, things get a bit dicey. You see these recent inflation numbers do not reflect the impact of the $1.5 trillion tax cut, nor the increase in the nation's deficit. Neither do they include this week's presidential announcement that an infrastructure package worth another $1 trillion is in the works.
If you add all of this spending up, in addition to an economy that is already growing at 3 percent while unemployment is at rock bottom levels, there is a danger that the economy might overheat. If this were to occur, the Fed would be forced to raise interest rates sharply. That would be bad news for stock and bond holders.
However, in a scenario where inflation expectations are rising, commodities do quite well, at least for a year or so before the Fed takes away the punch bowl by raising rates. When most investors fear inflation, they buy gold as a hedge. It has worked well through past cycles.
Looking at the price of gold over the past decade or so, gold's up cycle began back in 2002. It peaked in 2011 when the price per ounce touched $2,000. Since then, it has fallen by almost half, finally bottoming out in 2013 at around $1,200 an ounce. It has gradually creeped higher (by about $200 per ounce) in fits and starts until now. For the last year or so it has been in a trading range of $1,310-$1,370.
While we won't know whether those predicting higher inflation will prove to be correct, it might be a good idea to at least hedge your portfolio. A little gold exposure, via a precious metal fund, commodity fund, or a combination of the two, might not be a bad idea. Since
commodities are speculative, provide no interest or dividends, and are much more volatile than either stocks or bonds, buyers should beware. If you decide to hedge against inflation, I would limit exposure to no more than 2-5 percent of any portfolio.
The Independent Investor: How to Handle a Pullback
The stock market is in turmoil. Several hundred point swings in the Dow and other averages has investors on edge. The indexes are suffering 1-2 percent point swings per day. How are you dealing with it?
Over the last several months, I have written several columns preparing you for this day. I thought it might be useful to give readers a refresher course on coping. Here are some useful tips on avoiding that worst of all reactions—selling on the lows.
Number one: do not check your portfolio. The more often you do, the greater the probability that you will panic and sell. Every time you check your investments in a freefall decline like this one, you will feel terrible. The only way you can stop the pain (you will say to yourself) is to sell. Don't do it.
You see, we humans are really not built for investing. Our primal instinct when we face danger is to run. That fear and flee response has been saving our butts ever since the first sabre-tooth tiger chased us out of our caves. But putting some distance between you and that predator doesn't work very well when it comes to investing.
We are more comfortable thinking in the short term. No never mind that stocks may come back next month or next quarter, most of us can't take our eyes or our minds off what happened today and what may happen tomorrow. How many of you remember the back-to-back declines we had in the first quarter of 2016? Not many, I would wager.
For some, this is an opportunity. Given that many of us receive bonuses in the first quarter of the year, we may have some cash sitting on the sidelines. This is the kind of opportunity that most investors hope for. Baron Rothschild once said "buy when the blood is running in the streets." Now is your chance to put that money to work. Buy a little on every down draft and be patient.
But doing that takes courage and willpower. You have to fight that instinct to simply husband that cash and "wait until the market recovers," but by then it will be too late. Do it now when panicky traders are giving away stocks at great prices. There is nothing fundamentally wrong with the markets or the economy. We are simply experiencing a long-overdue correction in stock prices.
But the markets have never experienced these kinds of declines, you might say. The headlines may scream "1,000 point drop on the Dow" but they fail to remind us that the Dow has gained much more than that over the last year. By the time the dust clears, we will have discovered that the total percentage loss of the main equity indexes will be no more or less than what we normally see in corrections.
As I have written many, many times before: this too shall pass. You trusted me then, so I am asking you to trust me now. You won't be sorry you did.
The Independent Investor: Health Care and the 3 Musketeers
Earlier this week, three of the country's most influential corporate titans sounded a call to battle. Given the inaction of our government, these modern-day musketeers are preparing to storm the battlements of sky-rocketing health care costs.
Jeff Bezos of Amazon may not have the swash-buckling prowess of Athos, nor does JPMorgan Chase's Jamie Dimon compare in physical strength to Porthos. And granted, Warren Buffet of Berkshire Hathaway would be a stretch in playing Aramis, but make no mistake, they do bring a combination of strengths that could revolutionize what I believe is the single greatest threat to our nation's economy.
Back in May of last year, I wrote a column bemoaning the fact that while our politicians continue to bicker over the symptoms — health care insurance — they lack the courage and expertise to address the cause —rising health care costs.
Back when I wrote that "Mr. Buffet, a Democrat, in his recent shareholder meeting, took time to address what he called the real problem for American business, and it wasn't taxes. The cost of health care, he maintained, now represents about 17 percent of this country's Gross Domestic Product (GDP). That's up from just 5 percent of GDP fifty years ago."
I also pointed out that other corporate giants, such as Bill Gates, founder of Microsoft, had echoed Buffet's warnings in a TED Talk presentation as well. At the time, I believed my column had fallen on deaf ears, but lo and behold, here are these three champions announcing (in a deliberately vague press release) a partnership to address that very issue.
The companies said they will develop ways to improve the health of their employees, with the goal of improving customer satisfaction and reducing costs. The statement said that "they were going to bring their expertise to bear in a long-term effort through an independent company that is free from profit-making incentives and constraints."
While Warren Buffet is revered for his investment prowess, he also knows quite a bit about insurance, since his Berkshire Hathaway owns Geico Insurance among other financial subsidiaries. Clearly managing health insurance is a large part of the cost of health care. Then there is Jamie Dimon, the chairman of one of the largest banking goliaths in the world. He has a legendary knowledge of the financial and payment systems. He understands the role of middle-men (of which the health care system abounds). He is also an advocate of more, not less, competition. Jeff Bezos of Amazon provides a proven ability to bring health care into the age of the internet and beyond.
Other business owners have tried in the past to tackle this problem, or have beseeched government to solve the problem. But this is the first time that three modern-day, Queen's Guards have drawn swords. They will be personally ramrodding this effort.
Some discount the effort as mere publicity or simply unimportant since the three will be focusing on building a better system for their own employees and not the nation. Altogether, the three companies have one million workers, a good sample to work with. However, in my opinion, if they are successful, the business community would jump at the chance to mimic a system that lowered costs and improved benefits.
How serious is this effort? If the stock market is any indication, readers should pay attention. The entire health care sector in the stock market swooned on this announcement. The sector lost $74.5 billion in value in one day simply at the thought that there could be a better way to tackle this problem.
The Independent Investor: There's Nothing Sheepish About the Price of Wool
We humans have been using wool for thousands of years. It was the primary clothing material of the middle ages. But even today, new uses for wool are cropping up, driving prices to record highs.
The primary use for wool continues to be in clothing production. The newest demand for this natural material is coming from sport's companies such Nike, Puma and Adidas that are weaving it into sneakers. It appears that a new generation of consumers prefer natural over synthetic fibers. They want to know where their products come from and where they are going.
Even old codgers like me are not immune to this trend. Six months ago, I purchased my first pair of wool shoes. Not only are they the most comfortable shoes I have ever worn, but the wool is both warm in the winter and cool in the summer. A client reminded me that weavers are also using increasing amounts of wool in their products as well.
Actually, there are plenty of other uses for wool. Wool is the top choice for high-quality carpets, for example. You'll also likely find it in the padding underneath that rug as well. Furniture, such as seat upholstery, as well as stuffing and covers are also made from wool. Blinds, curtains, cushions, even wallpapers, are often made of wool, as are blankets and wool-filled duvets.
Wool is also coming into vogue in places like China. The growing affluence of its people and its manufacturing prowess make China an increasingly important market for wool. Australia is the world's largest supplier of apparel wool (90 percent market share). China consumes about 78 percent of their exports, but there are about 100 countries worldwide with at least some wool production.
New Zealand, Uruguay, the U.S. and China all contributed to the 1,161 million kilograms of wool produced in 2017, according to the International Wool Textile organization. That is a 70-year low.
The bad news is that wool is expensive to use and that situation won't be changing anytime soon. In Australia, wool production has been stable since 2010 and is forecasted to grow by a mere 4 percent this year to about 446,000 metric tons. Why?
Well, lamb chops explain part of the reason. Sheep production has been increasingly focused on meat production, rather than wool. Refocusing production to produce more wool and less meat is a multiyear process and cannot be accomplished over the short-term. The decision to switch may have more to do with demand here in the U.S. than anywhere else. Increased demand for wool in the United States represents the largest growth opportunity for Australia's wool products. An estimated 70 million sheep were shorn in the Down Under last year.
For that to increase, the Aussies want to see our consumption of wool on a per capita basis increase. Today we consume a mere 300 grams (11 ounces) per year. That compares with about one kilogram of consumption in China, Europe and Canada. I'm betting consumption will increase, but as it does, so will the price of wool, at least for the next year or two. So my advice is to buy those sneakers or that sweater now, because it is just going to get more expensive in the future.
The Independent Investor: Is Bitcoin Broken?
Bitcoin, Ethreum, Ripple and a number of other crypto currencies have had a terrible week. Some of these digital dollars have lost 25 percent overnight, if not more. Today Bitcoin, itself, is down almost 50 percent from that level. Those who warned that this mania would come to a tragic end are crowing now. Are they right?
Last July, I wrote my first column on the phenomena of crypto currencies. Since then, Bitcoin vaulted to historic highs, briefly touching $20,000 on Dec. 17. Since then clients, friends, relatives and yes, even my mother-in-law, have asked me if I thought crypto currencies were a good investment.
The answer will always depend on the price I'm willing to pay for something. Until now, I have simply sat back and watched as the mania unfolded. Today Bitcoin is down almost 50 percent from the highs. Many financial historians have compared the run-up (and decline) in crypto currencies to the great Tulip Bulb Mania of the 17th century. Back then, one tulip bulb in Holland was said to be worth 10 times the annual income of a skilled craftsman. The craze ended in disaster for one and all.
Since even I am not old enough to remember the Tulip Bulb craze, let's look instead at the Dot-Com boom and bust. I do see a lot of similarities between the insatiable demand for anything with Bitcoin, crypto or Block chain in the name today, and companies in the early 2000s that doubled and tripled simply by changing their name to something "techy."
The question to ask is whether or not crypto currencies represent anything more than "animal spirits." In a global market where just about every other investment vehicle is gaining ground, why not Bitcoin? In other words is it simply part of the "greater fool theory" where you're buying Bitcoin simply to sell it at a higher price to someone else?
The crypto cheerleaders will tell you that investments like Bitcoin are real. The currency can be used to purchase things, products, etc. Another argument-the scarcity of crypto currencies compared to the world's traditional currencies. Others say the block chain technology that drives Bitcoin and other crypto currencies is "secure" because the underlying technology records and verifies every transaction using exact copies of a database spread on computers all over the world.
Some of those arguments may hold water, but not all of them. The fact is that it is notoriously difficult to buy anything with this stuff. The currency network is slow and buying anything small takes a lot of effort and time. Besides, who would want to spend this electronic money on a television or cup of coffee when next week the price might be 20 percent higher than it is now?
The fact that more and more crypto currencies are popping up kind of flies in the face of the "scarcity" argument. There is nothing to prevent an inexhaustible amount of these currencies to flood the world over time. And just because no one has figured out how to hack the block chain technology doesn't mean that they won't.
There have been several cases already where millions in crypto currencies have been stolen or hacked throughout the world. Finally, various governments are bound and determined to either regulate this free-wheeling market, or shut it down completely. In this example, China and South Korea come to mind.
While the controversy rages, crypto currencies will continue to trade and plenty of money will be made on both sides of this market. It appears that as time goes by, technical analysis is beginning to work in assisting traders in determining which way these currencies are going, at least in the short term. Right now, the betting is that Bitcoin will bottom out around here, only a little below the price where it traded overnight ($9,969).