Good Morning,


While it will take some adjustment – and apparently, miles and miles of video tape covering every inch Trump moves or syllable he speaks, business is getting better.  Now, let’s not assume that this means it works like a light bulb.


Indeed, after 8+ years of burdensome processes to make any movement forward, the leash is off.  The horses will not be locked in the corral anymore.


There will likely be an order which unfolds in the larger picture:  steadily increased investment, more buyouts, new lines of production, new plants, expanding job base – which would ultimately be followed by increased consumption.


Note – this may take awhile to unfold – but we suspect, the positive domino effects will be somewhat surprising to most.


We have spent so long worrying about everything under the sun, many investors will take years to become accustomed to the idea that things could be ok for awhile.


Heck, they could even be outright – gasp – positive.


Think I am joking?  Find me a positive headline about record highs in the markets – and then take a look again at the current sentiment stats, the charts of which I have kept in below at the end of your morning note.


Early Signs…


Guess what – we ain’t seen nothin’ yet.


The early signs are festering and it should be making the Apocalypse Now (Part LCXXII), Chapter 7, gang a bit nervous – but it isn’t, which is good.


Already home sales are suffering – not from lack of buyers – but a lack of homes available to buy.  Quite a shift yes?


The latest data on employment should make that even worse.  ADP numbers were a blowout – during a time of year which is usually pretty slow – seasonally speaking.


Expectations were for for a medium size increase of about 183K – after a solid number last month (also a surprise) of 246K.  This month?


A sizable beat:  298,000 jobs on the ADP number.  Expect those new jobs to lead to some new home buyers, car buyers, restaurant and movie attendees and grocery shoppers just to get started.


And then remember this:  nearly half of Gen Y is still under the age of 18.


I just have one thing to say:  pray for a correction (or at least a few weeks of chop and churn).


Ignore the Barbell Economy effect at your peril.  Nothing is perfect but the clear signs of growth – driven by the two largest generations of our time (The Boomers and Generation Y) – are evident for those who are tracking same.


The Better News?


The rest of the world is ending some of its collective shakiness as well.


I am not sure there are many people around who recall a time when things just grew – without an “end of the world scenario” unfolding twice a week and once every Saturday – for the Monday morning news flashes.


The Fed in Play Finally?


It was just a year ago right about now that we were fresh off the worst start in the markets in 80 years – and the best quarterly recovery in 83 years was unfolding.  The chatter then was cheap oil was the end of the world.  Further, cheap oil was the deflationary death knell.


The bears were having a heyday, tipping champagne glasses and counting cash.  Oops.


Instead we suggested one be on the lookout for coming demand which would flush into the system, stressing supplies and causing the new (next) fear:  inflation.


Today, as the chart below will show – inflationary thoughts have picked up nicely since then.  By the way – some inflation is a good thing.  I know that is easy to forget in all the hype about higher rates.


Higher rates will indeed come – hopefully – because higher growth will cause it.  The Fed needs to now make sure they do not get perceived as being “behind”.


**Advisors Only:  Don’t miss our upcoming events – check them here.


Let’s review:

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The chart from Calafia above shows the level of nominal and real 5-year Treasury yields and the difference between them.  That difference is usually seen as the market’s expectation for the average annual inflation rate over the next 5 years.


The green line shows the referenced pick-up in inflation expectations in recent quarters (since the cheap crude oil fears of a year ago).


Just keep this in mind for yourselves and your clients:  The economy is set to pick up steadily over time in the years ahead.  If so, then both real and nominal interest rates should also rise from current levels.


Plan accordingly.


The good news?  The $9+ Trillion in the bank, earning zilch, perceived as “safe from market risk”, may start earning a little interest again.


Think about it:  2%, say, on a $9 Trillion stash for a rainy day is not a small amount of added income.


“Yes, but Mike – about all the debt for buybacks?”


This gets mentioned a great deal – and it is reason for concern for companies who bought back shares with expensive debt – on a short leash.


But let’s play this out as to cycles and how things tend to work when watching a low rate cycle move to a higher rate cycle:


First – make sure to have this in stone:  it was normal throughout the 80’s and 90’s to have rates at 7-8%.  Shocking right?


Anyway, when rates are cheap, as a CFO you are paid to sell cheap debt for 10 years, buy back cheap equity shares and watch the productivity in earnings escalate.


In the reverse, 10 years out, one can assume two things:  rates are either still cheap – in which case – rinse and repeat is the answer, or – rates are higher.


They would be higher because growth had resumed as expected.  They would be higher because business, incomes, production, etc. would generally be better.


Then, when that 10-year debt becomes due, the table has shifted and that CFO is paid to do something else:


He or she offers new shares to pay down debt.  They are then praised for paying down debt “in a higher rate environment”.  However, all that really happened, is they bought their stock on the cheap 10 years earlier and sold it back out to the buyers more expensively 10 years later.


Think about it….not a bad deal at all.  Surely not something to fear.  Better yet, know the cycle over the long-term and see it as a positive.


Some Additional Thoughts


I hear this a lot:  “Yes Mike, but demographics take so long to unfold.”  To which I often say, “be thankful for that….”


As Warren taught us all long ago – the less you move things around over time, the less you react to “news”, the more you tend to end up owning.


Yes, some periods are always ugly no matter the thought process.


Heck, I even read that Betterment’s young CEO has now stated publicly, that “Warren Buffet’s thoughts on investing don’t really work anymore.”


Man, if I had a buck every time I heard that over the last 35 years.


Forgive me while I choke on my coffee from laughing.  I really do love it when I read things like that – it signals there is still great value in being a patient investor, willing to remain focused on the long-term goals at hand and run with the current over time.


I learned this when ocean racing in the middle of nowhere as a kid:


“Pay attention to the current underneath, not the waves on the surface…”


Speaking of Warren, as always, his annual letter are a must read.


Here is the latest for your viewing.


The Big Picture


Think people first – they drive markets.


Stand in the correct spots and let the waves roll in.  Be patient and disciplined.


No matter the theme, chop is normal, setbacks are healthy and risk is always present.


Your time horizon changes your perspective of risk, which is why your plan remains vital in keeping you on track.


The United States is sitting in a wonderful spot.  The fears of the past have all been birthed on the back of a market which has risen to new highs during all of the noted fear-mongering.


As the noise gets louder, the sentiment stalls – even as prices do not.


See through the fog:  This is a good thing for long-term investors.


Our demographics are the most powerful on Earth for a developed nation.  The game has just begun.


**Advisors Only:  Don’t miss our upcoming events – check them here.


Until we see you again, may your journey be grand and your legacy significant.


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P.S.   Those promised sentiment charts from the latest data: