Author: Tom Yorke, Oceanic Capital
Covestor models: Global Diversified Conservative, Global Diversified Moderate, Global Diversified Aggressive
It has been quite a mind-bending couple of weeks, what with the Chinese dissident drama, the $120 million sale of for Edvard Munch’s “The Scream” and political developments in France, Russia and Greece.
Stateside we have less than stellar employment numbers, we think, because – as The Gartman Letter pointed out earlier last week – the official “90% confidence rate” is plus or minus 100,000 workers, so our actual 115,000 new jobs reported last month could have been either 15,000 or 215,000, take your pick; we just hope you don’t need a 100% confidence level.
Then we throw in the fact the labor participation rate fell to the lowest rate in 30 years, at 63.6%. Then consider the fiscal pressures from government transfer payments for Medicare, food stamps, and the newest one, disability payments, and we have a real disaster brewing here.
Some workers are extracting so much from the system that it builds in a structural disincentive to look for real work. Hey, when doing nothing pays so well, sleep in! Throw in the rapidly aging Baby Boomers, at the margin and pretty soon you have a regular political party of slackers. Anyway it’s clear we are just barely moving forward, but forward it is, not backward, so that’s something to hang our hats on.
What keeps us awake at night still is the drama that could unfold in Europe this summer. We are dubious that 17 countries that for centuries were on their own (and frequently went to war to stay that way) are going to behave like one big happy family when it all hits the fan.
The hot summer night nights are rapidly coming and the youth unemployment rates are between 25% and 50 %, not a recipe for smooth summer sailing. Why do I feel like I am watching a repeat movie of a slow train wreck? Haven’t we seen this before?
Let me guess: market volatility will pick up, politicians will scurry about spouting the latest catch phrase to try and calm the fervor, but nobody’s ox will get gored, meaning that no truly hard steps will be taken to right matters.
Donald L. Luskin, of Trend Macrolytics, recently wrote an interesting Op-Ed piece in the weekend Wall Street Journal. Luskin sees a confluence of challenges coming together at exactly the wrong moment here in the U.S. over the next six months: a testy presidential race, the end of the Bush tax cuts (hint: no more 15% tax rate on dividends), in all likelihood another round of debt ceiling negotiations.
Remember the last one, and the resulting downgrade of the US credit? It was the Stupid on one side versus the Arrogant on the other and guess who lost? The taxpayer! Well, introduce a lame duck Congress (a phrase that barely has meaning any more) and we have ourselves a very real chance of the tax law expiring, and then being goosed up another 3.8% by the Obama-care surtax on investment income.
This could equate, according to Mr. Luskin, in the single biggest tax hike on dividends in history! Ouch, that will clearly leave a mark.
We think with all the chaotic (and often times neurotic) events taking place, trying to decide when it’s the right time to move in or out of some investment is just a waste of time and most likely money. If you can’t be satisfied knowing you have thought through your allocations well, and avoid tinkering with them on a regular basis, you are more likely risking missing out on major market moves.
History has shown this time and again. Relying on your sense of market timing reminds us of long drives without directions, perhaps you will get there but perhaps not, and did it happen as quickly as you thought….not likely. The vast majority of talking heads and the constant chatter about the various markets is basically just random noise and should be treated as such.
Consider them (the talking heads) barking dogs, meant to be ignored instead of a call action like “risk on” or “risk off.” Your hard earned investment funds should be considered long term in nature, meant for things like retirement, weddings, college tuitions, endowing a gift, or (OMG!) leaving a little for your grandchildren to cover their share of the astronomical debt burden we are leaving them.
We expect the trip to be a long one; we will not make any drastic changes until our regular rebalancing this summer. May we substitute one thing for another inside of our allocations or buckets? Perhaps. Will we sell everything, and go to cash with our head in the sand? Of course not.
The best trade is the hard trade, it’s been said many times in different ways … “buy when blood is running in the street” is a famous version. We are watching and will be guided largely by how our investment percentages look relative to our targeted allocations come summer’s end. If we are higher than planned in some assets, we will sell and if we are lower we expect to buy.
Structured, disciplined and confident despite all the noise; that is why we – at Oceanic Capital Management – focus on allocations and on correlations. It maximizes both our returns and our sleep.
