Gradually And Then Suddenly

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In the novel The Sun Also Rises, author Ernest Hemingway gives us an insight into an interesting mechanism. One character asks another how his bankruptcy happened. The reply? “Two ways. Gradually and then suddenly.”

It seems to us that many things in the economy and markets happen the same two ways. Prices rise slowly at first, then gain momentum. Or a market stalls and declines slowly for a time, then falls swiftly. Or business activity, at the bottom of a recession, begins to tick higher, almost imperceptibly, until it takes off.

And in our own affairs, we see the same situation. We talked recently with a client in her middle 70’s, who noted she now had higher income than at any point in her working years. Compounding builds wealth only gradually for a long time, then (it seems) suddenly.

(People who are liquidating investment balances with overly large withdrawals see the same thing, in reverse. Balances decline gradually, then suddenly.)

An important part of our work is helping people visualize those inflection points for trends that are nearly imperceptible at first. When we first begin to save a small amount each payday, it is hard to see the fortune that might emerge over time. And when markets seem to be just slogging through the mud month after month, positive changes are tough to imagine. Our role is to help people see how this works.

The same mechanism applies to our work in researching investments. For example, there are sectors that have done well in recent years, with abundant liquidity in a period with easy monetary policy. But we have seen this movie before: liquidity dries up gradually, then suddenly. This specific issue is on our radar.

The challenge is that investment prices and economic indicators have a lot of volatility in the normal course of events, most of it meaningless. Most years, the major stock market indices rise about half of all days and fall about half of all days. Not everything is a trend happening gradually at first, then suddenly. Some of it is just noise. We work hard to sort it out.

Clients, if you would like to talk about this or anything else, please email us or call.


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.

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

Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

Animal Spirits

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More than eighty years ago, economist and thinker John Maynard Keynes wrote that “most, probably, of our decisions to do something positive…can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction…”1

The term animal spirits dates back to the Middle Ages as a way to refer to the vagaries of human activity. Keynes used it to describe concepts such as consumer confidence and the willingness of businesses to invest capital.

In recessions, animal spirits are subdued; during economic expansions, they are said to be stirring. The idea of animal spirits helps explain the booms and busts of the markets and economy.

As contrarians, we seek to discern when the dominant trend has gone too far, either from excess optimism or an overabundance of pessimism. A simpler way to say this is that we seek to avoid stampedes. We believe these things run in cycles.

More recently, we found another use for the concept of animal spirits. History suggests that rising tariffs and trade barriers around the world are a detriment to economic growth and prosperity. These kinds of trade troubles could emerge from the current discourse among nations. And there are differences of opinion on the economic impact here in the U.S.

Some analysts have calculated that the actual amount of goods and services directly affected by proposed trade actions is some very tiny percentage of the overall economy. Their conclusion is that the potential for economic mischief from trade issues is small.

At the same time, business leaders are becoming concerned about the possibility of reduced export sales and lower incomes and sales in the U.S. due to these same trade issues2. These concerns could dampen the animal spirits. Facility expansions, hiring, orders for inventory or raw material…all these things could be affected.

If business activity declines, jobs and personal incomes will not be far behind. The economic impact would be negative. You see, the effect on animal spirits, a second-order effect of trade disputes, could have a much larger impact than the direct effects.

We do not change our principles or strategies based on headlines of the day. Of course, we are always looking for ways to improve our tactics. If you would like to talk about this or anything else, please email us or call.

Notes and references:
1John Maynard Keynes. The General Theory of Employment, Interest and Money, 1936.
2Business Roundtable, CEO Economic Outlook Survey Q2 2018. https://www.businessroundtable.org/resources/ceo-survey/2018-Q2


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.

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

The Antiques Roadshow

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Everyone knows what junk is: discarded items of little use or value. Yet from time to time some fabulous treasure gets pulled from a trash bin or purchased at a second-hand store for a few bucks. We see these items on the long running television series, the Antiques Roadshow.

This reminds us of our work with a different kind of junk. The polite euphemism for bonds issued by relatively weak companies is ‘high yield.’ Just between us, let’s call them by a more accurate term: junk bonds. From time to time, at rare intervals over the past seventeen years, we have found something we believed to be investable hiding in the junk pile.

A perfect storm may be brewing in the junk bond world. Federal Reserve Bank statistics indicate that the size of the junk bond market has doubled in the past decade, to nearly $2 trillion outstanding. Adding in another category, junk-rated floating rate bonds, puts another $1 trillion on the pile.

1. When financial conditions tighten and corporate results weaken (as they will sooner or later), higher quality bonds may also be marked down to the junk category.

2. The capacity of dealers and other market makers to deal with waves of selling has been dramatically reduced by financial regulations1. Large banks were once players, but trading for their own accounts has been curtailed. Formerly, they stepped in at market extremes to support prices. In the next crunch, they are not likely to be there.

3. We believe some fraction of junk may be held by people who may not realize they own it—hidden in other financial products sold to investors.

4. We have characterized the movement into the apparent safety of bonds over the past decade as a stampede, based on the size of cash flows and the ridiculously low interest rates. (That’s just our opinion.) If that money stampedes out…prices may plunge to lower levels.

Clients, we strive to deal with reality as we see it. The next downturn in the economy is out there somewhere. Our holdings will continue to fluctuate in value, and we will have a down year at some point. But we are excited about the opportunities that may arise in the years ahead.

Junk bonds may not be appropriate investments for all clients. If you would like to talk about this or have something else on your agenda, please email us or call.

Notes and References

1Regulatory Changes Impacting High Yield Liquidity, Pensions & Investments. http://www.pionline.com/article/20151228/PRINT/151229939/regulatory-changes-impacting-high-yield-liquidity. Accessed June 11, 2018.


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.

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

Floating rate bank loans are loans issues by below investment grade companies for short term funding purposes with higher yield than short term debt and involve risk.

High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Don’t Be a Pigeon

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We recently were approached by a supposed investment firm. A quick review of its website raised many questions.

It seems obvious to us that the whole outfit might be a scam. But we have studied the economy and markets for a lifetime. So we thought it might be useful to lay out for you the main clues that set us off.

The most notable thing is the use of jargon that sounds authoritative but is incomprehensible. We mean this kind of nonsense: “We create global allocation by opportunistically investing worldwide as an important element in the diversification of our portfolio.” “Generate and protect investor wealth through the long term differentiated returns offered by our unique investment management strategies.” Yeah, right.

The second clue is the lack of disclosures relating to FINRA or the SEC, the primary U.S. regulators of investment providers. These folks are neither registered to sell securities nor as investment advisors.

The third clue is the promise of high returns, which evidently are guaranteed. 12-20% annual returns sound pretty good, right? And different investment return options, guaranteed in writing? Be still, my beating heart!

The fourth clue is the promise that investments are liquid at all times.

We promise volatility, and make no guarantees. This is because we know that stability and investment returns are mutually exclusive—you must choose. Anything that is truly guaranteed carries a remarkably low yield, in our opinion. And anything that purports to offer the opportunity for high returns cannot be guaranteed.

The interesting thing is, that web site and those promises are up there for a reason—they work. People desire stability and high returns, and the knowledge they can get all their money back at any time.

Clients, if you ever have questions about something that seems too good to be true, PLEASE email us or call. You worked too hard for the money to let a scammer get it.


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

Little Is Big

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We were working recently with a client whose spouse passed away last year. Major life changes usually require a series of conversations to get everything settled and all the adjustments made.

This conversation showed us that “little is big.” The household cash flow was just a bit shy of covering the bills. Savings on hand were slowly being eaten up, month by month. If you have been in this position, you know it feels bad. It affects your attitude in a negative way.

A simple adjustment, slightly increasing the monthly withdrawal from invested balances, fixes it so there will be a little money left over every month instead of a constant shortage. The amount isn’t material to the sustainability of her finances. It was little, but changed everything. Little is big.

The same notion applies to other things in other ways, including investment analysis. Imagine the dynamics of an industry whose business is steadily shrinking by 1% per year, compared to one that is growing by that much. The shrinking industry would tend to have too much supply, poor margins, and dispirited employees. A slight difference—a little growth instead of a little shrinkage, would change everything. Little is big.

It matters in retirement planning, too. We did some arithmetic for a client age 40 with a $180,000 retirement account balance and $9,000 per year in deposits. A 1% difference in annual returns, the difference between 7% and 8%, makes a $400,000 difference in the amount accumulated at age 65. Little is big. (This is arithmetic, not a projection nor a prediction. No guarantees.)

This raises a question: if every little thing is potentially big, how do you keep track of it all?

For us, the answer is to keep the big idea in mind, and try to make sure everything we do advances the big idea. Our big idea is to grow your bucket, and strive to make it serve you as you need. Paying attention to the little things working to advance the big idea, that we can do.

Clients, if you would like to talk about this or anything else, please email us or call.


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

This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

 

Will Rising Rates Derail the Economy?

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At 228Main.com, we are voracious readers and consumers of information. Nothing happens in a vacuum. We therefore pay attention to the economy, the markets, and our holdings, as well as look for potential opportunities to invest. Recently it was time to sort out what it all might mean.

Rising interest rates, long expected here, have caught our attention. Home mortgage rates are at a seven year high1, and other consumer borrowing rates have increased as well. If we spend more on interest payments, we have less to spend on other goods and services.

We investigated, and learned that total household debt payments actually remain near the lowest point in many decades, although they are rising. But the total debt balances are at record highs, above the level reached before the 2008 credit crisis. What gives?

The answer is in the interest rates. Higher debt levels financed at lower rates have reduced our payments as a percent of income. If loan interest rates continue to rise, however, we will probably see more household income go to payments on debt.

There is another piece of income that doesn’t get spent: our savings rate. When we feel confident about the future and our 401(k)’s and other investments are growing, we tend to save less. When the outlook darkens, we tend to save more.

Our savings rate declined from 6% of disposable income at the end of the last recession to the 3% neighborhood now. Historically, it has been slightly lower at times—but we are probably close to the bottom.

The amount we spend is what is left after debt payments and savings—and one more thing: taxes. Taxes, like the other factors, seem to be at relatively low levels now—not likely to go lower. The 2017 tax reform cut levels sharply.

We believe it is likely that record amounts of debt face rising rates in the years ahead; our savings rate will rise sooner or later; and there is no more room to cut taxes. The net effect of these three things seems likely to eventually reduce consumer spending, which is an important driver of the overall economy.

We do not think we are on the verge of recession. Other indicators point to continued growth. But we are in the middle or later stages of the growth cycle—not the beginning. We are looking at opportunities that fit the times, as always.

Clients, if you would like to discuss this or anything else, please email us or call.

1All data from https://fred.stlouisfed.org/. Federal Reserve Economic Data, Federal Reserve Bank of St. Louis. Accessed May 22nd, 2018


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.

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

Only Thirty Years Left

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In the merry month of May a long time ago, I graduated from college in a new cheap suit and embarked on my career in financial services. The first entry on the resume was life insurance agent, the Prudential Insurance Company of America.

The insurance companies managed their affairs with vast armies of file clerks and secretaries and bookkeepers, filling towers of offices in major cities. There were no computers on desktops, long distance telephone calls cost a lot of money, and typing a letter was surprisingly time consuming.

Just a few years before, the New York Stock Exchange got so far behind in its record-keeping that it was forced to stay closed on Wednesdays for months in order to catch up the paperwork. This was due to the record trading volume of…wait for it…TWELVE MILLION SHARES A DAY.

Needless to say, times have changed a lot since I got in business.

I don’t understand how it happened, but I am turning age 62 this month. My plan to work to age 92 may be keeping me young. Between our digital communications, expansion of the team, reworking our systems and processes, keeping up with economic and market developments, and talking to you, there isn’t really time to feel old.

Thinking about the arc of this career so far, I began in the 20th century with a company founded in the 19th century. And now we are at the vanguard of the 21st century.

It feels like this unfolding age was made for us. We understand how to communicate with you in the new media. Being straightforward is a big edge when everything you say and do is visible. Word of mouth is a speed-of-light phenomena nowadays.

At this milestone, with so much left to do, we are grateful to be alive and part of it. With the best clients in the world and support by LPL Financial, we are very fortunate.

Clients, thank you all, again, for everything. If we can do anything for you, email us or call. Here’s to a great thirty years ahead, for you and for us.


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

Leibman Financial Services and LPL Financial are not affiliated.

No Free Lunch

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From time to time, we meet people who are devoted to avoiding the worst selloffs in the market. When there are so many simple statistical tools available to keep track of the trend, they say, it makes no sense to stay in the market when the trend is against you.

For example, by selling out when the major stock market indices dip below their 200 day moving averages, and buying back only when they climb back above, one could have avoided significant damage in the worst downturns.

The problem is, one could also have avoided some really sharp recoveries from low levels. And in any lengthy test of these mechanical rules, generally they would have cost money to implement.

The key question is, what fraction of your total returns would you be willing to give up in order to get a smoother ride along the way? Would it be OK to have 30% less money after twenty years? 20% less? 40% less?

Our point is, there is a cost to the human preference for stability. There is no free lunch. The trend-following systems that save you from damage also tend to water down your results over the long term.

We believe we get paid to endure volatility. Living with the ups and downs when so few are willing to do it…that’s what we do. We seek to understand what fraction of your money can be invested for the long term, without regard to volatility—and invest for you on that basis.

The markets have had volatile spells, but year by year results have been positive since 2009 in the major averages1. We know that sooner or later, unpleasant times are going to come around.

Our principles may hope to offer some cover from overvalued markets. Avoiding stampedes and seeking the best bargains may or may not limit the damage—we have a mixed record, and no guarantees. With the uncertainties of the markets, and the impossibility of knowing the future, it is comforting to have principles by which to operate.

Clients, if you would like to talk about this or anything else, please email us or call.

1Standard & Poor’s 500 Index, S&P Dow Jones Indices. Retrieved May 21st, 2018.


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. All indices are unmanaged and may not be invested into directly.

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

All investing involves risk including loss of principal.

Have You Heard About Unretirement?

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Retirement is a fascinating topic. New ideas about it seem to pop up regularly.

For nearly all of human history, we worked while we could and stopped only when we couldn’t. The average person had no reasonable chance to accumulate capital on which to live.

But by the middle of the 20th century, things began to change. With Social Security and greater amounts of private savings, most people retired from work at some point. A new lifestyle was born.

Now, anecdotal evidence suggests that some people plan to work as long as they are able—at one thing or another. One client tells us of her plans to do something she enjoys. Another likes working at the state park. Consulting offers some a way to stay engaged, but on a less-active basis, either part-time or seasonal.

We also know people who simply never left their primary occupation after they reached normal retirement age. They enjoy the work and their coworkers, and could not see the point in quitting.

Obviously, this form of “unretirement” is not for everyone. Some go back to school, pick up new or old hobbies, volunteer for causes in which they believe, or spend time helping with family. Travel, reading… the list of things one might do in retirement is limited only by one’s imagination.

Although we each have our own ideas about what retirement means, we all have one thing in common. Our choices will be richer, more varied, and better if we have money. The option to continue working is a better situation than not having a choice because of financial necessity.

Clients, if you want an assessment about the money end of your retirement, please email us or call.


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

Made It! Age 62, Eligible for Social Security

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Yes, at age 62 I could claim Social Security benefits. But I won’t.

After talking with you for decades about your Social Security benefits and the tactics you might use in claiming benefits, I’m looking at my own situation. There may be lessons in it for others, so we’ll talk about it here.

Suppose my benefit at age 62 would be $1,500. That’s $18,000 a year! Why wouldn’t I claim it?

1. If I wait until later, my benefit will be larger. That’s $2,128 monthly at full retirement age (66 and 4 months) or $2,856 at age 70.

2. If I claim now, since I want to keep on working, my benefits would be reduced by 50 cents for every dollar I earn over about $17,000.

3. My benefits would be partly taxable because I would have other income of over $23,000 for the year, basically. (It’s complicated—consult your own tax advisor.)

4. Flexibility: A decision to defer claiming Social Security can be changed at any time in the future, if circumstances change.

Since I want to work to age 92, my guess is that I won’t claim until age 70. But that’s just me. Under what circumstances would it make sense to claim at age 62?

A. If your spouse qualifies for benefits twice as large as yours, check into claiming on your record at age 62 and changing to a claim on your spouse’s record at full retirement age. This gives you some benefit from your earnings record, which might otherwise go unused.

B. If you have an impaired life expectancy, an earlier claim might make more sense. A person who plans to claim at age 70 but dies at 68 ends up collecting nothing.

Clients, this is intended to illustrate some of the basic considerations about Social Security strategy. You can learn more at www.SocialSecurity.gov, where you may sign up for a personal account and obtain personal benefit estimates at any time.

Please email us or call if you would like to discuss this at greater length.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

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