economics

Fast Times, Slow Times

photo shows a throttle with an image of a tortoise and an image of a hare

Great thinker Burt White recently put the last two years in context: “The fastest bear market ever then became the fastest recession ever that then became the fastest recovery ever.” In fact, the S&P 500 stock index doubled from the low point faster than ever. At the start of the pandemic, with so much fear and uncertainty, the five-week drop was sharp but short.

Then things turned around.

All we had to do as investors was sit tight, rearrange things a little where we saw a chance at a bargain, and wait a short while.

Long-time clients will remember the slow times of the past, when bad weeks in the middle of bad quarters in the middle of bad years seemed to go on forever.

When account balances were lower than the year before.

When it seemed like the economy would never recover.

The human tendency is to believe that current trends or conditions will continue: it makes it difficult to keep the faith in the slow, bad times. But we know how this works, so we keep the faith despite it all. Spring comes after winter. Recovery and growth follow recessions.

The fast times we’ve had recently will inevitably slow down. The next recession, the next bad year is out there. No one knows when. Those who claim to know are so often wrong they can’t be relied upon. We find solace in knowing the tough times may bring us the bargains that make the good times good.

Clients, we will continue to rely on the principles that have served us well over the many years we’ve been at it. Looking for bargains, avoiding stampedes, seeking to own the orchard for the fruit crop. Whether trends are moving fast or slow, up or down, we seek to understand the seasons and the cycles of the market.

We cannot guarantee results, but we’ll still be here doing what we do when times change. Clients, if you would like to reminisce about the olden days or talk about the future, please email us or call.


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Two Economists

© Can Stock Photo / skaron

The story goes like this. Two economists are walking down the street. One says, “Look! A $20 bill, just lying there!” and reaches to pick it up. The other says, “You fool! If that was really a $20 bill, somebody would have picked it up already.”

The underpinnings of this joke might be what is called the Efficient Markets Hypothesis, or EMH. It holds that all available information is already in the price of every security, so it is not possible to ‘beat the market.’ Related notions include the idea that investment selection does not matter, only the asset class or investment allocation.

Of course, our experience tells us that at times, certain investments do get mispriced. Condos in Las Vegas in 2007, tech stocks during the dot-com era, oil at $140 per barrel in 2008: all of these things seem to be examples of when the market was not efficient at all.

At these times, consensus expectations drifted far from the unfolding reality. “You can’t lose money in real estate” and “We’re in a new era, tech stock valuations don’t matter” and “Oil will never trade below $100 again” were the refrains of those faulty expectations. You may remember them.

Of course, we believe that the crowd can be wrong. That space between consensus expectations and the unfolding reality is where profit potential lives. One of our jobs is to try to find those exploitable anomalies and invest in them. Another is to go against the crowd when we believe it is wrong.

The simple rule, ‘never join a stampede in the markets,’ is one way we express this.

As a consequence, looking at the world with our own eyes, doing our own research, finding our own conclusions, this is what we do at 228 Main. It takes some courage to go against the crowd, to take unpopular actions, to stick with our strategies even when they require more patience than we had planned on. You and we are in this together: without your persistence, we could not do what we do over the long haul.

Hopefully from time to time we will find those $20 bills that others do not believe in.

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


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

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Free Wins

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People or companies may confer benefits on third parties without cost, as a side effect or byproduct of their actions. Planting a tree improves the neighborhood and provides shade to a neighbor. Keeping bees results in the pollination of nearby crops. Providing first-aid training to workers may save lives outside of work. A video or blog post created for clients might contain an idea that helps people who are not clients.

These are examples of what economists call positive externalities. These things are all good. They make the world a better place.

I believe the concept applies in our interactions with others, as well. Have you ever had your day brightened by the laughter of a group of passersby? Watched someone hold a door for someone with an armload of packages? Overheard a “thank you” being given for an otherwise thankless task?

All of these things are benefits that they produced for free and you enjoyed at no extra cost. They are positive externalities, on the small scale of daily life.

Having a tree planted improves our home as well as the neighborhood, but generating positive externalities can also help us beyond business transactions. Friends and family members respond to the empathy, kindness, and thoughtfulness embedded in any of those little actions we can take. If employed, those in our network are likely to sense the intangibles we add to the workplace environment. Our teammates across the community likely enjoy our interactions more.

Generating positive externalities is not charity. There are no costs involved, only benefits for giver, recipient, and neighbors and passersby. Win-win-win.

The general concept has been around for a long time, and is often expressed more simply. Be kind. Fill up the buckets of others. Do unto others.

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

Review and Outlook: Perception and Reality

© Can Stock Photo / sborisov

The gap between perception and reality is a key concept for us, as contrarian investors.

Year-end is a logical time to stand back and assess the year just ending, our current situation, and prospects for the next year. Many others ably describe the facts and statistics and the major themes. We will look at a pair of critically important things that may have fallen into the gap.

We believe the president has a flawed understanding of global trade. He recently spoke again of disastrous trade deals, massive profits to other nations, and millions of American jobs lost. The reality is, trade lets us get more for everything we produce, and pay less for everything we consume. It enriches America and the world.

We aren’t here to argue politics. But we are here to understand economics and markets as best we can, for your benefit and ours. The markets may be underestimating the potential for damage to the economy, corporate profits, employment, and stock prices if the president’s rhetoric ever translates into actual policy.

The second concern is about Congress, and a problem to which both parties have contributed (in my opinion.) The American system of governance historically produced major legislation through a bipartisan process. The Civil Rights Act, Social Security, Medicare, and the Tax Reform Act of 1986 were all products of give and take between members of both parties. All of these endured.

Without debating the merits of either, the Affordable Care Act and the recent tax legislation are the products of a partisan process. Both featured closed-door negotiations by small groups, deal-making that benefitted narrow groups to win votes, and straight party-line votes that produced less-than-perfect outcomes.

The ACA has been under attack since it was passed, and is now being unraveled by the opposition. The same thing could happen in the years ahead to the tax legislation. Uncertainty about tax policy may create problems for companies and the economy.

The short version of all this is that we are optimistic—as always. But our eyes are wide open. We will continue to diversify into sectors that may be less affected (or unaffected) by these issues. This is consistent with our core principles of seeking the best bargains and avoiding stampedes.

Clients, if you would like to discuss these issues further, or have anything else on your agenda, please write or call. In the meantime, we are enjoying the results of 2017 and hopeful about what will happen in 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.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

The Melting Pot Matures

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A few weeks ago the Nobel Prize Committee announced the latest round of Nobel laureates for 2016. Seven Americans were named to this high honor—and six of the seven were immigrants, born outside of this country.

Immigration is frequently a hot topic during an election year, this one perhaps more than most. On the one side, we are told that immigration is costing us jobs, lowering our wages, and causing more crime. On the other side we are given a moral argument, that we are a nation of immigrants who should welcome others into our melting-pot culture as we have welcomed those who came before.

We set aside the moral side of this debate; while we occasionally dip into moral philosophy, this blog concerns itself chiefly with practical matters of economics. And as a practical matter, there are very good reasons why we should appreciate the value that immigrants bring to our country, above and beyond whatever Nobel prizes they may win.

As a country we are facing a demographic crisis. Since the 1970s, we have been having noticeably fewer children per family than we did previously. As our generation reaches retirement age, record numbers of Americans are leaving the workforce. I still plan on working until I’m 92—but many of my contemporaries have other plans. As we leave, there are more openings left behind than we have children and grandchildren to fill.

This demographic wall creates a major drag on the economy: we want to grow our economy faster, but we simply don’t have enough workers to do it. For the past year we’ve seen the unemployment rate hovering at 5% and below. Even as the economy recovers and we start to add jobs, there’s going to be a very real question as to who will be filling them. The workers simply aren’t there. To some extent this is a regional issue—some of our employment woes could be fixed by having job-seekers move from economically depressed areas to thriving areas where jobs are being created too quickly to fill. But not everyone can uproot their lives for work, and where people cannot or will not relocate, the only alternative is to import workers from elsewhere.

Ours is not the only country facing this demographic crisis. We need only look at Japan, Europe, and other parts of the developed world to see what happens when an aging population is not replaced. Many first world countries have a lower birth rate and lower immigration rate—and, not coincidentally, lower GDP growth. We would do well to learn from their example what not to do.

This is not to say that we endorse open borders or encourage illegal immigration. We are a nation of law. We should have sensible laws that are enforced in a fair and even-handed manner. But to suggest that we should slam the door shut on immigrants is to ignore the economic reality we face. One of the best and surest ways to expand our economy is to add new people to it—and we will need to, if we wish to continue growing at a reasonable rate.


The opinions voiced in this material are for general information only.

Are You Getting Your Piece of the Pie?

© Can Stock Photo Inc. / Elenathewise

The Federal Reserve provides us with a quarterly report of household net worth. The latest number is $89 trillion, up 59% from the financial crisis year of 2008. I don’t care who you are, that’s a lot of wealth—and a nice increase.

The distribution of our wealth from person to person is the subject of some political debate, which we will leave to the politicians. It always has made sense to us to focus on the things within our control; let’s see what we can learn from the numbers.

Our $111 trillion of assets includes homes, pensions, stock, money in the bank, mutual funds, small business ownership, and bonds.

We owe $22 trillion, most in the form of mortgage debt but also including consumer debt like auto loans and credit cards.

Net worth is simply the value of our assets minus our liabilities, or what we own minus what we owe. $111 trillion minus $22 trillion is our $89 trillion in net worth.

Here are the pertinent points, as we see them:

1. Having wealth in different forms is a good thing, a form of diversification. We the people have money in the bank, different kinds of investments, homes and businesses.

2. Debt can make sense when it helps us own assets of enduring value that we can afford to pay for over time. $22 trillion is a lot of debt, but it helps us to own $111 trillion worth of homes and businesses and other assets.

3. Since debt or liabilities are subtracted from assets to determine our net worth, it makes sense to minimize debt over time. One who pays off a car loan and then keeps putting the payment amount in savings each month might get by with a smaller loan the next time a vehicle is purchased.

4. Because assets are the starting point for determining net worth, one should seek to invest effectively for growth and income over time. Money does not grow on trees, but it may grow over time.

Our $89 trillion net worth is a very large amount of wealth for us as a society. The decisions we make play a big role in determining whether or not we each get our piece of the pie. We have written about Four Habits for Financial Success which might help, and we encourage you to call or email if we can be of service.


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

The Medicine is Worse than the Disease

© Can Stock Photo Inc. / nebari

Monetary authorities took extreme measures during and after the financial crisis. These policies failed in their stated goal. More importantly, they have the potential for much mischief in the portfolios of the unwary in the months and years ahead.

Fed Chairman Ben Bernanke made it clear that the role of zero interest rates and Quantitative Easing was to push money into productive investments (or “risk assets”) that would help the economy grow. Instead, the biggest tidal wave of money ever flooded into supposedly safe assets, like Treasury bonds. Money flows into US stocks disappeared in the crisis, and basically have never come back. Zero interest worked exactly opposite the way it was supposed to. This obvious reality is totally ignored by the central bankers.

Current Federal Reserve Chair Janet Yellen continues to parrot the party line. Progress toward undoing the mistaken crisis policies has been excruciatingly slow. And the potential for damage to safety-seeking investors continues to mount. Similar policies, or worse, are in effect around the world.

Standard & Poor’s recently issued a report stating that corporate debt would grow from a little over $50 trillion now to $75 trillion by 2021, globally. Bonds are the largest single form of corporate debt, which is how investors are affected. This isn’t happening because corporations are investing so much money in new plants and equipment and research. It is merely meeting the demand of safety-seeking investors for places to put money. We think of this as “the safety bubble.” It appears to be the biggest bubble in history.

Standard & Poor’s is warning of future defaults from companies that borrowed too much money at these artificially low interest rates. Our concern is that when interest rates inevitably rise, people locked into low interest investments will see large market value losses even if their bonds are ultimately repaid.

We’ve written about the impact of higher inflation on today’s supposedly safe investments. Now the warning from S&P highlights another risk. The distortions created by counter-productive monetary policy are growing.

Of course, we believe our portfolios are constructed to defend against these risks, and to profit from the artificially low interest rates. We will continue to monitor these and other developments. If you have questions or comments, please email or call 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. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

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.

Renting the Oil Company

© Can Stock Photo Inc. / fredgoldstein

We all seem to know intuitively that rent on a residence covers all the expenses of ownership, plus a profit for the landlord. Hence most people prefer to own their homes rather than pad the landlord’s wealth.

And yet when we buy a gallon of gasoline, we are paying all of the oil company’s expenses plus a profit for their owners. We pay the cost of refining crude oil into gasoline, transporting it to retail locations, or running the store at which we purchase the gasoline. Not to mention the cost of exploring for and pumping the crude oil and shipping it to refineries.

But if we own a piece of the action (in the form of shares of common stock) in an oil company, we indirectly own a share in the oil wells and refineries and transportation and everything else needed to put a gallon of gasoline within our reach. Own or rent? We prefer to own—and by the way, if you prefer to rent, thank you for doing business with our oil company!

We and our clients own phone companies and clothing manufacturers and car makers and raw material producers and major retailers and airlines and nearly every other segment of the economy. From the time we wake up and brush our teeth, put on clothes, go to factories and shops and offices, use energy through the day… we are doing business with ourselves. We are owners, not renters.

It is our opinion that a person who owns no common stock or other business rents everything: the refineries, auto manufacturers, food distributors, trains and planes, communications networks. They are paying rent for everything that goes into their life, without receiving any benefits of ownership.

Rent or Own? You might want to own shares of companies for the very same reason you prefer to own your home. We are available to discuss whether this philosophy fits into your plans and planning—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.

Stock investing involves risk including loss of principal.

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