ROSS RANT

12/18/2019

I am now happily in my Florida home for the winter. Sunny and in the seventies every day. Lots of good warm days for tennis and fishing.

So now we have impeached Trump. What a truly sad day for democracy. This action by the Dems is exactly what the founders warned against and tried to prevent by defining what conditions must prevail to use impeachment. The Dems have set a horrible precedent we hope will end with this fiasco. If it happens again we have no democracy. We have partisan anarchy where the popular vote is meaningless. What is occurring today is a real threat to the cohesion of the country and irresponsible to the ultimate. The behavior of the press through all of this over three years is equally dangerous as a free and at least nominally objective press is critical. The mainstream media have abandoned all pretense of professional journalism, and have become a megaphone for the Dems. We are in a very bad and dangerous place right now.

As the year comes to a close, it has been a great one for the economy and especially for the stock market. I have stated for a long time, the place to be is in equities, especially in US stocks, and that being in fixed income or worst of all, annuities, was a huge lost opportunity cost. My portfolio is up over 32% on the year, and if you did nothing other than buy the S&P index you would be up 27% without having to do anything. Bonds had a good year due to the Fed dropping rates, but nowhere near as good as equities. And from here on it is likely that bonds will be losers as the economy continues to stay good and rates slowly rise. An average long term bond fund returned 19.25% and a government bond fund 17.25% YTD. Corporates returned 12.77% and the highest risk, high yield bonds retuned only 11.05%. Target dated bonds returned only 8.17% making the whole target dated strategy really dumb. The only thing worse is probably annuities. Munis returned around 8.2%. These are Morningstar data. With all of these data, they are averages, and specific funds had different performances. As I have said several times, I rarely trade. I just own very good US companies, and only trade out when I think the stock is in for along term decline. Otherwise, I go play tennis, and let my money do its job. Bottom line is as always, a portfolio of great US corporations is a long term winner, and while that may suffer ups and downs, over time it wins by a good margin. The average returns over the past 6-7 years for the stock indexes has been around 13%. Historically, whenever there has been a severe decline in stocks, there has been a strong bull market to follow, even in the thirties. The S&P at the start of 2009 was 865. It is now around 3200. That is a 268% increase in 10 years. It is up around 41%, and the Dow up 43%, 10,000 points, since Trump was elected. So long as rates remain low, the stock market will remain strong. 2020 should see good, but much lower returns than 2019. Equities is still where I plan to be.

There was a recent article entitled basically that almost nobody saw the upturn in the stock market in 2009. That is like Greenspan saying only 5 people saw the crash coming. Both are ridiculous. How you could not see the upturn coming in 2009, is beyond me. Once we had TARP, TALF, and other Treasury support for the banks and AIG, plus QE, it was clear the upturn was starting and would be strong. While I admit I had some basic inside information on what Treasury was doing, that input was not needed to see the turn coming. Every time there is a major downturn in the S&P, there is a following strong recovery in stock prices. If you look at the thirties and every other deep dive in stocks, you see the pattern. Once Trump was elected with his plan to materially reduce taxes and regulation, and to have a pro-business policy agenda, there was no question what was coming. To me, 2020 should be good, but not as good as 2019 simply because 2019 was so great, it is too much to expect a repeat. However, I do not rule it out if China really abides by the deal, Brexit happens as Johnson has planned within one year, there is a new deal with the EU, and factory production picks up as it appears is starting to happen, not just in the US, but also in China and the EU.

The world economy seems to be bottoming according to PMI data. Johnson will now cut a strong deal with the EU, and he will make a good deal with the US. The whole world trade system is dramatically changed permanently. The China deal and USMCA have left the US in the best trade position ever. We now have deals with Japan and S Korea, and next year we will force the EU into a new deal that will benefit the US. Without the UK, the EU is in a very weak situation. Trump will jam them once Johnson gets done doing the same. 2020 should be a very good year for the US as to world trade. Trump and Johnson working together will dominate.

China is now in a much weakened position. China is the real risk the world faces now. The whole country, but especially the private companies, are grossly over levered. The trade war has caused a substantial rise in defaults, and many more are in poor shape regarding meeting debt service. This is not going to change with the trade deal. Business will never be the same for China as many companies are continuing to move out, and supply chains are shifting as fast as new ones can be established. Watch Chinese debt situation. It is the next world financial crisis. We just do not know when. Chinese agriculture is in bad shape, especially pigs. That alone on top of Hong Kong and over leverage, have put them into a situation where they had to give important concessions. When this is combined with the financial problems, China is in for some tough years even with a deal with Trump.

On the same vein, the US has a similar, but nowhere as serious debt problem. The continuing massive government deficits are a huge issue for the Fed to manage around. We saw a brief example when the repo market, a $2.2 trillion market, went off the tracks in September. Repos are essential to the smooth functioning of the financial markets. It is how banks, brokerages and traders fund very short term cash needs with very low cost loans using Treasuries as collateral. The Fed has taken steps to fix this problem, but it is a canary in the coal mine. Treasury has to issue hundreds of billions of new bonds to meet the deficit. There is a group of primary dealers who have to buy these bonds. As the government floods the market with more bonds to fund the deficit, there is also a reducing amount of cash available. Nobody is clear where the cash has gone around the world, but it is being hoarded or just socked away. When there is a shortage of cash, repo rates rise, and that screws up the whole financial market. That is a huge problem for the Fed trying to manage the financial markets and interest rates. The Fed is now probably locked into holding $4 trillion of bonds on its balance sheet since liquidating a small part of that helped create the September problem. As the federal deficits grow, the pressure on the Fed is increasing. This is a fundamental problem that is not going to get better. One day deficits will be totally out of control. In the meantime this fiscal stimulus will prime the economy pump along with ultra-low interest rates, and a liquidity push by the Fed with its mini-QE that is underway now. It is hard to see a recession in 2020 with all of this and the trade deals now going into place. GDP could grow at 2.5% or better with all this stimulus. That is why I am staying in equities, and why Trump will win.

Last Saturday, the WSJ had an extraordinary 2 page detailed article describing how We Work got started, and how it crashed. It was a perfect story of how the geniuses of Silicon Valley and Wall St banks may be smart at finance, but they know little to nothing about how to assess a business, and its founder, nor what makes a business successful—cash flow. They made all the rookie mistakes one can make. I have been involved in either listening to pitches for start-ups, and being part of several, for many years. I learned a lot of lessons from being part of the operation side. It is very different than the finance side which I am also deeply experienced in. The first clue should have been the crazy personality of Neuman. He was the ultimate snake oil salesman with no experience running a real business. Second, the whole business strategy made no sense to anyone who understands real estate and office leasing. Third, you never give a guy like this voting control of the company unless it is already very successful, which We Works was not. How they let that happen is inexcusable. However, after Facebook and Google, the trend was to let that happen. They bought into the BS that this was like Amazon, and growth at any price was what the strategy needed to be. Office leasing is not selling retail goods, nor digital messaging, and Neumann is not Bezos. Nobody was controlling the clash outflow, which is critical in a startup. Mr. Son, the largest investor, even encouraged more growth. Neumann had the most expensive private jet when the company was hemorrhaging cash. Expenses were beyond out of control, but the board went along. The board of investors became enamored with Neumann and his BS, and what they believed was the huge payoff in an IPO. This is pretty typical of financial executives. They focus on the future payday more than how to get there in one piece. This was Dotcom II to the ultimate. What made it even worse, was the CEO of Softbank, Mr. Son, the $100 billion venture fund, seemed to make some lucky decisions early on in its fund life, mainly Alibaba, and so he made a decision to invest billions into We Works in literally twenty minutes. The company was leasing space for its offices around the world at a pace that was impossible to control. Then they spent enormous sums to finish the spaces in high style. They would change out furniture at a whim, and throw away whole floors of almost new furniture so they could replace it with what was suddenly deemed more cool. Neumann was smoking pot in the office, and taking time off to go surfing. The company was losing more than its revenue. Yet the geniuses kept investing more billions. I saw this sort of insanity in the late eighties, and at other times in my career, and it is the same every time. You have a group of fund managers and bankers who get bamboozled by some fast talking guy who has some business idea the bankers really do not understand, but it sounds like a great way to make a big hit when they can do the IPO-millions in fees and cap gains. Business schools should make this their prime case study and drill it into their students as lessons of everything not to do. If you can get a copy of the Dec 14 WSJ, it is in the first section and well worth reading.

Florida is about to pass a bill that requires all high school students to pass a civics course to graduate. A big step in the right direction. Now if we could get all high schools and freshman college kids to be required to do the same, plus a real objective history class, not a left wing version of what they view as white male oppression, we would really start a return to some level of education and reality.
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31% of people polled think socialism is good. All one can say is, that demonstrates how uneducated kids are coming out of college now. They obviously learned nothing about economic systems, nor the history of socialism in a variety of countries that tried it. It is fed by Pocahontas and Bernie, and the far left Dems promising government controls and free everything for what is now known as the “victims”. They are really victims of a prosperity never seen before. Of inclusivity never experienced before anywhere in the world. That anyone would even promote socialism today, given its history of failure, is a real condemnation of the education system in the US. It continues to astonish me that less than a huge majority think Trump is doing a great job with the economy. I blame the mainstream media for pressing recession scenarios, and not giving Trump any credit for delivering the best economy and stock market we have had in over 50 years. You can hate Trump, but you cannot refute the data.

A team of scientists at Google reported that they had achieved quantum supremacy. A term of art in science. Sure enough, soon came the attack from 13 academics claiming that the word supremacy is racist, violence prone and neocolonialist, and other things these nincompoops rage about these days. What any of that has to do with quantum mechanics is a real mystery. As the WSJ pointed out, Diana Ross needs to rename the Supremes now, and I guess we need to rename the Supreme Court, Then there is always the Supremacy clause in the constitution. Do these so called academics realize what idiots they are saying this utter nonsense. This is another example of what is happening on campuses across America today. And your kids and grand kids are being indoctrinated with this crap instead of being educated. This is why I keep asking that you stop donating and demand a stop to this left wing crap.

kommonsentsjane