Good Morning,


Here we are – that spot in each calendar when everything starts to slow down.  Volume slowly ebbs into the lows around mid to late August (the worst of the summer doldrums) and attention spans lag.  Price spreads increase – and with lower volumes, we can expect the high-speed traders will be able to temporarily push stocks around more when the algo’s gang up on a sector for example.  We have seen it before – we will see it again.


Lesson?  Try hard to ignore it.


Why?  Bigger events are unfolding.  The backdrop is shifting ever so slightly each month that passes by.  New things pop up to scare you into not recognizing the shift.  This is the age-old model of Wall Street.  Keep tensions high and money moving.  If we all invested like Warren, there would be a need for only one or two large banks or Wall Street houses.

More movement – more fees.  More things to worry about – more movement.  More things to worry about – creation of more “solutions” to help you – which steadily gets us right back to more movement.


Stand still…every step in your life investment and wealth management pathway is not designed (nor should it be) to “beat the market.”  The goal and effort should be focused on meeting your goals, calmly, logically and – with patience – over time.


The Bigger Picture?


While too many will fret over any fear painted across the headlines of the day, the summer will do as it almost always does – slow down.


As it does so, the lines will blur as normal and the call of the beach trip will be on everyone’s mind.  A break is what we all need.




…the shift is unfolding.  Step back and consider these elements:


We believe the US – and some parts of the global economy are setting up for a new golden age of synchronized growth.  The most recent data is often reported in such a manner as to hide this from most investors.  It takes time to dig through it and find the tidbits required to see past the overwhelming negative bent in the news.


Global Economy: Less Stagnation


Good news tends to follow bad.  We have spent years fretting over one global catastrophe after another.  It has been consistent.  One fear would be shot down and three more would take its place.  France and Italian elections (one still a year away) are only the latest.


But here is the thing:  It’s a big world out there, with lots of aspirational workers and materialistic consumers.


In some areas, demographic forces will continue to weigh on economic growth, because fertility rates are down while longevity is up.


The US has its Barbell Economy and that will be with us for many, many years to come.


However, around the world, including emerging market economies, there are still plenty of people who want a better standard of living.


Dr. Ed shared long ago that one very effective way to track global economic activity is with the yearly percent change in the sum of US exports and imports, both adjusted for inflation.  It is highly correlated with the yearly percent change in the volume of world exports.


The former was up 5.0% through March, holding near its best growth rate since December 2014.


The latter was up 6.1% over the same period, its best rate since April 2011.


The message?  After lots of mess, global economic activity is clearly improving.  With the dollar pricing in slow and steady growth – a sweet spot, and some surprising results, could be in the offing for many US household names.


No Rose-Colored Glasses


The financial world we live in today marks anyone with a positive outlook as someone who “clearly does not get it…” – which has happened before.


This thought we are embarking on a new age of surprising growth is no different from the early 80’s.  It is not some pie in the sky prediction.


It merely assumes a continuation of existing trends in demographics, technology, politics, and economics.  Further, it requires an understanding that the demographic part of this equation is already alive.  Short of a large asteroid striking the Earth, little can be done to stop the waves of people coming our way.


As Ken notes, those individuals who will change our lives and define our economy for the next 50 years – are already born.


Like it or not – the implications for the patient investor’s portfolio will be huge.


The main reason that we endured a “lost decade” of economic growth is that nearly 80 million baby boomers as the engine of our economy were followed by a much smaller batch of “Gen Xers” – who are now being followed by a new largest generation of all time – Generation Y.


Looking back, we can see the net result of the first “baton shift” was slower economic growth, higher budget deficits, a weak currency, and registered investment advisors who distilled their practices down to only municipal bond sales – based on an audience of terrified investors.


Fast forward in your mind for a second and we will quickly see that the economy and the markets are shifting again.


In baseball analogy – the first batter is just walking to the plate.  The pitcher is warmed up, the sky is blue, the wind is blowing out into right field and the game is very. very long.


The years between 2009 and 2015 were nearly identical to the years between 1975 and 1982 – both periods marked by a massive demographic footprint shift in the US.

They were recoveries from events – not new bull markets (yet) – which is why many missed them.


We are the only developed economy on earth with this benefit unfolding.


A Sampling


Note the latest data on homes – we are already running out of them:

Over the next 10 years, 60 Million kids+ will be looking to make their first home/residence investment – whether it be renting an apartment or buying a condo/home.


Sure, styles will change but the logic does not.  Prices are rising because we are already running out of inventory.  Talk to a broker – we are seeing levels of inventory not seen in decades.  And the good news?  This new game has just started.  Indeed, we are still a few years away from the really busy part – which itself is set to last for 15+ years.


By then we will not have built new homes in appreciable numbers for 20 years and a severe scarcity of housing is set to arrive.  Residential real estate prices will soar. Labor shortages will eventually force wage hikes even as we bring in the most deflationary force the world has ever known – the entire Generation Y!


In another few years, the “middle class” standard of living will soon begin to see a slow reverse from a perceived “decline.”  It was people – not politics.


Annual GDP growth is set to return from the current subdued 2% rate to near the torrid 4% seen during the 1990s.


In case we might wonder, we can safely assume the stock market will be set to surge in this scenario.


Share prices may rise very gradually for the rest of the teens as long as tepid 2% growth persists – but a 3 to 4 times multiple over the following decade is within reach – for the patient investor.


As much as we focus on people, this is not just a demographic story.  The next 20 years is set to bring a fundamental restructuring to many sectors of our economic infrastructure as well.


Start with Energy


The latest data show the US need only produce another 150,000 to 200,000 barrels a day to take the lead – over Saudi Arabia(!) – in global oil output.  Can you believe that?


The roughly 100-year supply of natural gas discovered through the newest “fracking” technologies will finally make it to end users, replacing coal and much of oil.


We already know that new (even cheaper) fracking technology applied to oilfields is unlocking vast new supplies.  Since 1995 alone, the US Geological Survey estimate of recoverable reserves has ballooned from 150 million barrels to 8 billion.


OPEC’s share of global reserves is collapsing.


Meanwhile, as noted here often before, Detroit is changing with Gen Y engineers flowing in – and automobile efficiencies are rapidly improving.  Mileage for the average US car has jumped from 23 to 24.7 miles per gallon in the last couple of years with targets or 45 – 50 mpg by 2028.


Total gasoline consumption is now at a five-year low.


Alternative energy technologies are building their contribution in important but overlooked ways in states like California, accounting for 30% of total electric power generation by 2020.


Before we know it, all of this will build into its final stage:  shifting the US from a net importer to an exporter of energy!


This will have significant and hugely positive implications for America’s balance of payments.  By eliminating our largest import and adding a vital export, we will all be surprised by how quickly some of the ghosts of debt concerns will collapse into the dust bin of time.


Accelerating Technology


Gen Y kids and engineers will bring new and expansive tools.


Feeling more and more like Star Trek as the years move ahead, new technologies at the enterprise level are already enabling speedy improvements in productivity that is filtering down to every business in the US, lowering costs everywhere.


As we have repeatedly stated, this is why corporate earnings have been outperforming the economy as a whole by a large margin – surprising many still unaware of these shifts – or unwilling to embrace them as real.


Profit margins are at all-time highs.


Even so, at lightening speed, thousands of new technologies and business models that we cannot comprehend are under development.  When the winners emerge they will have a big cross leveraged effect on economy.


New health care breakthroughs will make serious disease a thing of the past. Technology is leading the revolution of research.  In 20 years, it is likely that many types of cancer will a prescription at Walgreen’s.


Who is overwhelmingly in the driver’s seat on these innovations? The USA.


More Political Change Ahead Too….


Gridlock in Washington can’t last forever. Eventually, one side or another will prevail with a clear majority, allowing the government to push through needed long-term structural reforms – the solutions for which everyone agrees on now, but nobody wants to be blamed for in fear of votes.


The national debt then comes under control, and we don’t end up like Greece.


The long awaited Treasury bond crash never happens as the Fed becomes more aware of crowd fears.


In Summary


That is a good deal to take in for the start of the summer haze but it is well worth keeping yourself aware of.  Indeed, be certain it is very long-term, on the horizon stuff.  The good news?   Even though some of the main drivers of these events won’t kick in for another 5 to 7 to 10 years, the markets will begin to discount them well in advance.


The risk now is the same as the early 80’s.  If one waits until it is all crystal clear – the bulk of values will have already been built – only to then be on stage for the next major – excellent – piece of this puzzle:  a Generation Z which is currently birthing at the same pace as Generation Y.


If I told you what that implies – you’d really think I am a nut.


Perhaps this is what the essentially uninterrupted rally in stocks since 2009 has been trying to tell us?


Last item for the day…pray for a correction.


Steady as she goes friends.


Think demographics – not economics.


Just off the bow is the USS Summer Haze and often, hidden in the noise, opportunity arises.  We will be patiently looking for same.


The doldrums ahead may be sloppy – but they will cause too many to fear the wrong outcome – and that is good for the long-term investor.


Enjoy the beach plans ahead and time with loved ones and friends – be well and travel safe please.


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