Everyone has bias. It is part of, in some ways, what makes us…unique. One of my, ha-hem, prognostications for 2017 was the increase proliferation of “fake news.” This has gone on for such a long time, it is kind of humorous to see media outlets fight back. It’s natural and to be expected. While it seems to be polarizing with regards to politics, I’m really speaking from a financial point of view. Most talking-heads on business-oriented TV shows are really clowns and unfortunately people listen to and act on such advice. While I’m certainly not out to right every financial wrong in the world, however much of what I write about in these missives is about putting the proper perspective on the financial landscape so that we can make money when it is time for making money and avoid losing as much as possible when that is the proper environment.
So, much of the long-term move in the capital markets is driven by simple demographics. While the graph above is a bit messy, I hope you can hang with me to understand the real story with interest rates moving forward. The blue line is the labor participation of folks between the ages of 25 and 54. While squiggly, this line generally rose throughout the 60’s and 70’s and then went into decline until recently. This is generally most of you reading this – the boomers. The recent spike in the blue line is the official passing of the baton from the boomers to those whacky kids, the millennials. The millennials, by the way, will have a bigger affect on trends than the boomers – sorry boomers. This is critical to understand as we think about investing over the next 20 years, but more on that at another time. So, just to sum-up, we are a couple years into a 20 year boom in U.S. labor.
The red line above is the rate of change in inflation as measured by the consumer price index (CPI) and the green line is a measure of interest rates. While not perfect, you can see that there is a strong correlation to all three over time. As participation in the labor force increases, wages increase, cost of stuff increases and ultimately interest rates rise. This may not be a perfect solution to a timing scheme from year to year or cycle to cycle, but if you don’t get the big stuff right it is impossible to consistently get anything else right. Without the proper framework, you’re simply relegated to listening “fake” explanations as to what is going on.
While I will admit, that government does have an impact (largely negative) on the economy and thus corporate profits, however it probably is not enough to really be overly optimistic or pessimistic depending on ones political bent. Changes in demographics have a much more direct impact on the long-term cycle. The road map ahead will most likely look a lot like investing in the 60’s and 70’s. My big concern is that so much of what is written about and viewed on TV is the proliferation of the indexing of investments and/or robo-advising. My fear is that these will actually turn out to be the true weapons of mass destruction (and not like the “fake” WMDs from a previous administration) 10 years from now. The investment industry is so backward looking. The future investment landscape will be one pave with a lot more cyclicality. The big un-known is to what extent the Fed’s QE scheme will add to this cyclicality. If I had to guess, I’d say a lot. The boom-bust cycles moving forward will most likely be more severe and occur with greater regularity. The tactics I employ to preserve capital during downturns, should be a big aide to results going forward.
Humbly,
P. Franklin Jr.
February 20th, 2017
All opinions and estimates included in this communication constitute the author’s judgment as of the date of this report and are subject to change without notice. This communication is for informational purposes only. It is not intended as an offer or solicitation with respect to the purchase or sale of any security. This information is subject to change at any time, based on market and other conditions. Any forward looking statements are just opinions – not a statement of fact.
Investing may involve risk including loss of principal. Investment returns, particularly over shorter time periods are highly dependent on trends in the various investment markets. Past performance does not guarantee future results.