Protection Against Prosperity

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Protectionism has been a rallying cry for many disaffected voters this year. Insurgent campaigns on both the right and the left have been calling for higher import duties and economic incentives for domestic industry. Meanwhile, across the Atlantic, protectionist sentiment was a key driver in the campaign for the United Kingdom to leave the European Union.

Protectionism–the idea that you can improve the economy by taxing foreign imports and subsidizing domestic industry–is a comforting notion. We all want a vibrant economy with thriving local industry. But as is often the case with economic policy, regulatory intervention in the form of tariffs and subsidies can be ineffective or even counterproductive.

Capitalism rests on a simple premise: mutually beneficial exchanges make us all richer. When foreign goods show up at our ports, they’re not accompanied by warships forcing us to take them at gunpoint. We buy imported goods because we perceive a benefit in doing so. If we can buy a $100 foreign-made widget instead of a $200 widget manufactured locally, that leaves us $100 richer.

Protectionists argue that buying these cheap imported goods is short-sighted and self-destructive because it harms domestic industries. To be sure there are winners and losers in this scenario, and cheap foreign competition will hurt domestic widget makers. If we take an even bigger view, though, it becomes difficult to see how it benefits us to prop up inefficient industries at the expense of everyone else. Raising the cost of importing widgets helps out widget manufacturers, but it hurts consumers who have to pay more to buy widgets. Worse, it hurts industries that use a lot of widgets. And worst of all, it actually hurts all U.S. export industries.

Tariffs hurt our exports in two ways: first, and most obviously, other countries are not going to be happy with us, and will eagerly retaliate by levying their own tariffs against us. But beyond that, money that gets sent overseas to pay for imports is not “lost”, as enriching other countries helps create markets for our own exports. We would not be able to sell as many exports to other countries if we weren’t buying their imports as well. Again, commerce makes us both richer.

More subtly, subsidizing industries creates economic inefficiencies through distortion. If the domestic widget industry is failing, ultimately the solution is not to pump money into widget manufacturers to sustain an unsuccessful industry, it’s to reinvest those resources into other industries (such as ones that benefit from having access to cheap foreign widgets.)

To be clear, we realize that there is a lot of real hardship involved in this process. This is true of any economic progress: the horse-drawn carriage industry was devastated by the invention of the automobile, for example, but the solution was not to tax automobiles to save carriage makers’ jobs. Adapting to economic changes may be painful, but the pain is eased by having a vibrant, efficient economy—which we believe is ultimately incompatible with protectionist trade policies.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

Deflated Inflation Expectations

© Can Stock Photo Inc. / NataliyaShirokova

We’ve written before about inflation and its corrosive effect over time. The topic has become much more timely because of two developments:

1. The prospects for inflation have gone up with the large increase in the price of oil and other forms of energy. We could potentially see annual inflation indicators top 3% within the next six months.

2. Money continues to flood into long-term low rate fixed income, as safety-seekers buy bonds yielding in the 1 and 2 percent range.

It appears these trends are in for quite a collision. Our first principle is ‘Avoid stampedes in the markets.’ So we suspect that the safety-seekers may not end up with what they were seeking. If today’s 2% bond is repriced in a 3% world, capital losses may result.

Human tendency is to expect current conditions and trends to continue. So the prospects for inflation are pretty much ‘out of sight, out of mind,’ since we have not had much inflation for quite a while. But the large increases in the price of oil and other raw materials could potentially generate annual inflation rates in excess of 3% over the next few months. Crude oil, for example, bottomed at $28 per barrel in February 2016. Current prices in the $40’s, if they persist until February 2017, will exert a lot of upward pressure on inflation.1

One would expect that investors locked in at 2% yields when inflation is running at 3% will not sit still for it. The mystery is, will the stampede of money into bonds come stampeding back out if safety-seekers find losses on their supposedly safe investments?

The potential for profit lives in the gap between expectations and unfolding reality. We believe inflation expectations and corresponding investment yields are off the mark. We have no guarantees, but our opinion is inflation will be up and bond prices will be down in the months and years ahead. If you would like to talk about the ramifications on our portfolios or yours, write or call.

1Oil prices retrieved via Federal Reserve Bank of St. Louis


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

Bond yields are subject to change. Certain call or special redemption features may exist which could impact yield.

The economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The Robots Are Coming!

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Some forecast that there will be no jobs in the future, as software and robots and other forms of mechanization take over more and more tasks now performed by actual people. To understand the issue, we need context and background.

Manufacturing output in the US is near record levels, up 30% from the recession levels of 2009. Yet manufacturing employment peaked in 1979 at 19 million workers. The total today is around 12 million workers1. One might say ‘The robots are already here.’

While seven million manufacturing jobs were lost, fifty million jobs were added to the total. Manufacturing jobs were not the only ones that disappeared, however. Millions of other jobs became obsolete. File clerks, telephone operators, laborers with shovels, elevator operators, secretaries, and farm workers were displaced by new machines and new methods.

In a dynamic economy, we perpetually do more with less. In the year 1900, 40% of Americans were engaged in producing our food2. When that declined to under 2%, we didn’t end up with 38% unemployment.

There is another way to look at it. Tens of millions of people are now engaged in occupations that did not exist forty years ago, near the peak in manufacturing employment. Similar change happened between 1900 and 1940, and 1940 to 1980. Why would we doubt that 2010 to 2050 would be any different?

A recent report in the European Parliament concluded that “Humankind stands on the threshold of an era when ever more sophisticated robots, bots, androids and other manifestations of artificial intelligence (‘AI’) seem poised to unleash a new industrial revolution, which is likely to leave no stratum of society untouched.” This presents more opportunity for society than danger, if history is any guide.

It’s going to be exciting. Please call us or write with questions or concerns.

1,2Federal Reserve Bank of St. Louis


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Traveling by Miracle

© Can Stock Photo Inc. / andyb1126

Next month I will be traveling again, to and from a conference. I’ll be going by miracle.

More specifically, air travel. I’ll fly on planes that cost about $80 million each. The planes are part of an airline company fleet that cost about $19 billion dollars. Of course, planes are useless without airports—and we spend another $19 billion per year on airport capital improvements in this country.

The planes and airports would not do us any good without the people who fly them, load them, change the sparkplugs, and do everything else it takes to run an airline. My airline spends $6 billion on the help each year. (OK, maybe planes do not have sparkplugs, but you get my drift.) Another $4 billion goes for fuel.

I’ll have breakfast in Nebraska and lunch in San Diego. A few days with colleagues and consultants, experts and peers, listening and presenting (a first for me, this year!): a priceless experience. Then back to Nebraska.

If I had to drive or take the train, the travel would take days and days. Instead, I get the use of these billions of invested capital and all those talented people to do the trip in hours instead of days.

All this for a few hundred dollars. It is traveling by miracle. The company that serves me lives in mortal fear that the next company will figure out a way to serve me better for less money, so it is on a perpetual quest to provide even better value for my buck. As a customer, I’m really doing well in this transaction.

If I choose, I can be more than a customer. I could also be a percentage owner of the aircraft maker, the energy company that provides the fuel, and the airline itself. I could lend these companies money by buying their bonds, and collect interest from them.

On my journey, I will probably meet at least one person who complains about the service, or a slight delay, or the crying baby, or the security procedures. But I’ll be counting my blessings that I was born to this place and age, and enjoying the miracles around me.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

Zen and the Art of Investing

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We’ve read that one of the central tenets of Buddhist philosophy is the idea of non-attachment. Attachment, according to the Buddhist worldview, is the root of all suffering. We want and expect certain things and become upset when we don’t get them. Freeing ourselves of our attachments to things alleviates our suffering and allows us to experience the world with a clear mind and a joyful heart.

I suspect I would make a pretty poor Buddhist in practice, but the concept resonates with some of what we do here.

Suppose, for example, that an investor watches their portfolio gain 5% in a single week. They will probably be overjoyed, but now they’re attached to the new value. If their portfolio retreats 3% the following week, many investors will be unhappy about its performance—even though they just made a very appreciable gain of 2% inside of 2 weeks.

It works both ways, too. If the market hits a bump and their portfolio goes down 5% they might be upset, even if they’ve watched their portfolio weather many such bumps and know it has a history of rebounding to their benefit. Even after they watch it rise back up, they may resent it for having dipped in the first place.

Now we’re not about to sit here and tell you that you should be happy when your portfolio underperforms—that’s not what we’re about. Non-attachment does not mean you stop caring about things, it simply means you put them in perspective. This frees you to make more effective decisions for the long haul instead of being swayed by emotions about the short term. An investor who trades in and out based on feelings about day to day performance is likely to do himself financial harm.

In the real world, of course, investing requires careful thought and analysis, not just philosophy. Thankfully, we are equipped to provide both. Give us a call or email us if you want to talk about your situation and how we can help.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

This is a hypothetical example and is not representative of any specific investment. Your results may vary.

Meet the “Junior Staff”

Do you know about our junior staff? These four appear in our real-time new media venues. They are tasked with producing a weekly comment, posted on Mondays. They also make other appearances from time to time.

portrait_grumpymcfussface

Grumpy McFussface was the first to join the team. He is definitely a ‘glass-half-empty’ type, serving as Junior Analyst. We value his input, a way to keep in touch with negative sentiment in the marketplace. We usually do the opposite of what he suggests, but please do not tell him. He might throw a tantrum.

portrait_brainyMcbaby

Then Brainy McBaby joined the team as Research Intern. He’s wiser than his years, a thoughtful one. He has an uncanny ability to take the long view, even though he isn’t quite two years old. A true prodigy.

portrait_happymctoddler

Happy McToddler is a good counterweight to Grumpy. She is almost always positive. Happy is our Trader Trainee, helping us implement our strategies. Of the whole junior staff, Happy does the most to help us keep your portfolios in shape. She loves to talk investment tactics and strategy.

portrait_youngwarren

We may have the only shop in the world with an investment philosopher on staff. Young Warren adds a lot, usually by posing questions of fundamental importance. He makes you think.

You can look in on the junior staff and see their work in any of three venues. You do not need to register or anything to see all of our daily comments, notes, links to articles, and other real time features if you go here: http://twitter.com/MarkLeibman. Of course, if you are a Twitter user, please click the ‘follow’ button.

Facebook users can ‘like’ our Facebook page to connect: http://facebook.com/LFnews. It is a two-step thing: click the link AND ‘Like’ the page. This won’t put your stuff out there to our other clients, it just shows you what we are talking about.

LinkedIn is another alternative. Click and connect, if you are registered: http://linkedin.com/in/lfnews.

For now, the junior staff appears only in these ‘real time’ media outlets. Hope you follow them.Twitter

The Beauty of Simplicity

© Can Stock Photo Inc. / renatas76

The high priests of investing preach in a strange language, filled with jargon and confusing acronyms. But some of the people who have actually made the most money investing speak in plain language. Nearly anyone can understand Warren Buffett and Charlie Munger, for instance.

In a recent Wall Street Journal interview, Munger said “There isn’t one novel thought in all of how Berkshire is run. It’s all about… exploiting unrecognized simplicities.” This elegant idea may be at the heart of the difference between effective investors and those who try to play one in real life, the high priests.

Simple ideas have been central to things that have been good for us. Before we cite examples with which you may be familiar, it is only fair to note that there is a yawning gap between “simple” and “easy.” What we do—what you put up with—is not easy.

Historically, the stock market has tended to gradually rise over time. Simple. But what would they talk about all day on CNBC if they didn’t act like the next sneeze or burp from the Federal Reserve (or whatever) would either doom us or make us rich?

Buy low, sell high. Simple. Many if not most investors end up doing the opposite, following trends, jumping on bandwagons, joining stampedes. We know how doing the opposite works out, buying at high prices and selling at low prices. Not pretty.

Own the orchard for the fruit crop. Simple. Yet only rarely does one hear this wisdom from the high priests. They talk about volatility as if it were risk, when the truth is, if the fruit crop is big enough for you to live on, you do not have to worry what your neighbor would pay for the orchard, or if his offer is higher or lower than the day before.

We’ve always believed that what we do is simple. Sure, there are a lot of fine points and nuances. We invest a lot of time and resources to find and learn the pertinent information. But in the end, we ought to be able to explain it to you. This is our goal. If we have missed, or you would like help interpreting something else you do not yet understand, call or write.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss.

The Risk You Don’t See

© Can Stock Photo Inc. / larryhw

United States Treasury Bonds have long been considered among the safest investments in the world. But bonds with extended maturities, twenty or thirty years, have a lot of risk. This risk seems invisible and under-appreciated in today’s environment.

How would you like a twenty year long term Treasury bond paying 7%? Would that be good for you? People thought so in 1977. But by 1982 when interest rates had risen to almost 15%1, those bonds were only worth fifty cents on the dollar. Worse yet, inflation ramped up and damaged the purchasing power of interest earnings. When rates rise, the value of existing bonds goes down.

Since the financial crisis of 2007-2009, hundreds of billions of dollars have gone into bonds—a record tidal wave of money. One might guess this represents a flight to safety amid the uncertainties of the world. Some people got hurt in real estate, some were hurt by selling stocks after a crash, and they just want to keep their money safe.

Behavioral economics has shown that we humans tend to believe that current conditions and current trends will continue into the future. So if we pose the question, “What will a 2% bond be worth in a 5% world?,” most people can’t even conceive of the possibility of 5% interest rates. While everybody seems to understand that the stock market goes up and down, few seem to remember that the bond market also goes up and down.

As inflation begins to pick up, investors may be leery of owning 2% bonds that are going backward in purchasing power. If the sellers come out, bond values may decline while interest rates go up. The more selling, the greater the losses, which produces even more selling.

We are not predicting this will happen. But we do know a similar situation happened in the past. Fortunately, we are working on ways to preserve capital without facing the large risk from rising interest rates. If you would like to know more, please call or email us.

1Data from St. Louis Federal Reserve


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Main Street Capitalism

© Can Stock Photo Inc. / MShake

Imagine what a world we would have, if the surest path to prosperity required each of us to be of service to the rest of us. But looking around, we may not even have to imagine it. I’m pretty sure Main Street already works on precisely that principle.

Jeff the grocer can only build sustainable increases in wealth and income by helping more people feed their families. He could try to raise prices or skimp on service or pass off inferior goods, but his trade would soon dry up and he would go broke. Customers would simply shop elsewhere. So instead he works to stock the foods that people want, at fair prices, as part of a pleasant shopping experience.

Likewise, Bob the car dealer can only prosper by helping more people get where they want to go, to and from work and shopping and entertainment and on vacation. He certainly could make more money in a short amount of time by tricking customers into bad deals, but most people can only be fooled once. The trickery would doom his business.

Kevin in the auto parts store is legendary for his ability to put the right parts and tools in the hands of his customers, so they can fix their troubles. He helps people take care of their vehicles and keep them on the road.

Leibman Financial Services is not immune. Competitors abound. We have to work hard to deliver more value per dollar of cost than anyone else can, to help people pursue their financial goals.

You see the pattern, right? We prosper by helping one another. If we aren’t of use to our customers, we don’t keep the customers. When we do it right, everybody benefits. Everyone is better off. When we don’t do it right, the discipline of the marketplace is harsh and swift. All the other businesses on Main Street, and the professionals offering medical and dental and pharmacy services, are in exactly the same circumstances. We prosper by helping one another.

This is the moral basis of capitalism.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

A Lesson From An Old Friend

© www.canstockphoto.com / 06photo

Surveys indicate that many Americans dislike their jobs. If you are among them, I hope you are not irritated by the enthusiasm I have for my work.

“Job” is the key distinction, however. One individual who had a formative influence on my life did not have a job—he had an enterprise. Dean Sack founded the York State Bank in the World War II years, among many other endeavors, and ran it to the age of 92. If you have ever wondered how I arrived at the goal of working to age 92, this is it. I met Dean when he was 76, eleven years after he retired—a retirement that only lasted six weeks!

Ironically, much of our work is devoted to helping people fund and find fulfilling retirement lifestyles. Most do not have control over their working conditions to the degree that I enjoy. So retirement is a worthwhile and laudable goal for most, if not for me.

When the Depression hit in 1929, Dean was an adult, at work. He fascinated me, a student of history—and face it, not many want to hear an old man’s stories. So we grew close. Among the qualities that Dean showed: a hunger for new ideas, and to learn; consistency and honesty and integrity, no pretense and no bull; a tight focus on the things he could control. He and others of his generation did much to build their communities and the world.

I was fortunate to observe so much wisdom at an early stage in my career. Thirty years ago, nobody talked about ‘work-life balance,’ but Dean was the model for an integrated life: being the same person at work and play, with friends and customers, day and night.

We stand on the shoulders of those who have gone before, as they say. Vast wisdom resides in those generations. The lessons we may learn cost nothing, but can be valuable beyond price. Here’s to our mentors and teachers and wise elders!