Finally, The End of Zero Interest Rates!

image link

We previously wrote a short post asking "Does the Fed have the guts to do it?".

Well, today the Fed did raise rates, after keeping their target at essentially zero for seven years.

Economist Brian Wesbury, whose interpretation of economic events has been cited many times on the pages of this blog through the years, provides some worthwhile discussion of today's Fed decision here.

He notes that, although many commentators are describing the Fed statement that accompanied the decision as "dovish" in nature, the points made in the Fed statement are actually "mildly hawkish," including the comments regarding employment and "utilization" data, and the statement that -- even with this small rate hike -- monetary policy remains "accommodative."

Brian Wesbury concludes by saying that:

Today's rate hike isn't going to hurt the economy; it will help the economy by signaling the eventual end to a policy that has distorted economic decisions for the past several years.

We agree. 

Read the entire article by economist Brian Wesbury, as well as the entire statement from the Federal Open Market Committee, here.

Continue Reading

Hissy Fit, Part 2; Does The Fed Have The Guts To Do It?

image link

We wrote about the concept of the market throwing a "hissy fit" back in the summer over the prospects of the U.S. Federal Reserve Open Market Committee's (FOMC) decision to raise the target for the Fed Funds Rate.  

At the time it was expected that the Fed would hike the target rate in September but the weakness in the market (translated at the Fed to potential weakness in the economy) clearly spooked the Fed enough to keep them on hold.  As such, the expected September rate hike never happened.

Next week, December 15th and 16th, the FOMC will meet again to determine the Fed's target for short term interest rates.  It is now widely believed that they will vote to raise the target from 0% to .25%.  

Hardly a massive move up, but once again, the market seems to be throwing another hissy fit and, frankly, it is just not all that surprising.  There is a prevailing view in financial circles that the market has only been propped up in recent years by a very loose Fed policy on interest rates and that "taking the punch bowl away" will send the economy, and thereby the market, into a tailspin.  Clearly, market forces are testing the Fed in this moment of decision.  What will the Fed do?

Well, the Fed may have backed themselves into a corner by waiting so long to end the "zero interest rate policy" (ZIRP), and we have discussed this before.  But since looking backwards is never a fruitful endeavor, we certainly hope they will get on with the task of normalizing monetary policy and allow the world to move on from the "crisis" footing that it has been on for seven years now.  

Does the Fed have the guts to make this change in policy?  We shall see.  But we would not be surprised to see a rally in markets on the announcement of an increase in the rate target. How far and how fast the Fed ultimately goes will then become the point of focus for the markets, but getting on with the task is a major step, and one that is long overdue.

Continue Reading

Naysayers and Interest Rates

We've discussed our views on the economy and what effect we think higher interest rates will have on it many times over the last 6+ years since the bottom of the "crisis"-driven stock market in 2009.

It would appear that the Federal Reserve is finally ready to end the "zero interest rate policy" (ZIRP) that it has pursued for half a decade now.  This morning on CNBC pundit Jim Cramer stated that only people who are "too young or are foolish" think that higher interest rates are good for the stock market.  After over three decades in the professional investment management business, we are pretty sure we are not the former; and we think disagreeing with Mr. Cramer does not suggest one is foolish.

We've said for some time that the market may well throw another of its "hissy fits" when the Fed begins raising the target for short term interest rates; however, we believe that a return to normalcy (assuming 0% interest rates are not, nor ever have been, normal) will move the economy and, more importantly, the psyche of market participants in a more positive direction, thereby leading to stronger markets in the future.  And furthermore, maintaining ZIRP creates distortions in how capital is allocated and causes unintended economic consequences which are very hard to predict and create more uncertainty.

Just in case our readers should assume that we are "out on a limb" in our views on this topic, we would note such notable figures as Stanford Economics Professor John B. Taylor, former Western Asset Mangement Chief Economist, Scott Grannis, and Chief Economist at First Trust, Brian Wesbury, have all stated support for raising rates.

Stay tuned, as we still don't know for sure if the Fed will act to finally raise rates before the year is over, but we definitely believe such action is long overdue and will ultimately get us pointed in the direction of normalcy.

Continue Reading

Investment Climate: Get out of the "Market"??

The Fed didn’t raise rates and the market still had a fit.  Many continue to say the next crisis is upon us, as they have for years now.  Europe is a mess.  China is collapsing.  The Middle East is a bigger mess.  Politics is…well POLITICS!  And, about the market?  Get out!

Our longest term clients, those who have been with us since the beginning 30 years ago (we still have our first client), have just been floored by that statement!  They’ve never heard us utter such words.  They are thinking we’ve either lost our minds or spent too much time in the beautiful California Central Coast sun and it has baked our brains.  But we really think this call is long overdue.  If you have bought into the market, then we do feel it is high time you get out.  Instead, invest in businesses.

Okay, now our clients are starting to feel a little better.  It’s the old Taylor Frigon mantra about to hit you square in the eyes. 

But it is true that we believe it is time to get out of the market, if it’s the market in which you think you are “investing”.  We’ve all heard, ad nauseam, the line that most “active” managers don’t “outperform” the market.  This is the biggest lie ever perpetrated on the investing public in the history of investing!  Active managers ARE the market.  The “just buy the market” crowd has survived on what our good friend George Gilder describes as “parasites living off of the backs of active managers.”  Think about it, taken to its fullest extent, if everyone “indexed” (as the phenomenon is called) there would be no market.  Who would be responsible for price discovery, the government (scary thought)? Or the corporations themselves (talk about the fox guarding the henhouse)?  Along that line of thinking, the hysteria over indexing has reached such heights that there are those who have suggested that the very execution of “active management” is somehow promoting socialism.  Huh???!!!

It has grown in acceptance because Wall Street has abdicated responsibility for making investment decisions to the few, mass-managed money behemoths who dominate the so-called “active” investment management world.  Like in so many instances Wall Street, in general, is a victim of its own success.  It is simply too big to be able to adequately “manage” anymore so it has gone completely to financial engineering and trading on the institutional side of the business, and “wealth management” (financial planning) on the retail side of the business.  They simply aren’t training people to make real investment decisions.  By investment decisions, we mean, which companies deserve to have one’s capital.  We do not mean, which mutual fund or ETF should one buy, or to which active investment manager (like Taylor Frigon) should one outsource investment decisions.

Gone is the era of the “stockbroker”.  A much maligned figure that once stood tall in the world of managing money for people.  Yes they picked stocks, and yes they made their money on commissions for selling stock to their clients.  But, back in the day, good stockbrokers did research…real research.  They analyzed companies and made recommendations to their clients that they believed would make them money.  They followed the companies they had invested in (and the good ones invested their own money in the same companies as their clients).  And those that lasted in the business made their clients, and themselves, money.

While we subscribe to a different model of how we get paid today (an asset-based fee), which we feel more closely aligns with the client, we were fortunate to have learned our profession from one who was cut from a similar mold.  Richard Taylor was mentored by Thomas Rowe Price in the 1960s and learned how to buy businesses.  At that time, that is all you did if you were in the business of investing other peoples’ money.  The concept of buying the market was nascent, at best.  Thomas Rowe Price believed that the great fortunes that were made in this country were “made by men who retained ownership of great businesses, through market cycles”.  It is with this concept that we feel true investment strategies can be built.

Contrary to what many would like you to believe, this is not rocket science!  It is simply tedious, time-consuming and requires nerve, or a strong stomach, as the case may be.  Anybody can do it if they commit to a disciplined thought process.  Those who don’t can still hire people like us to do it for them.  While this may sound overly self-serving, it is meant to emphasize the point that part of the problem we believe exists in the financial world today is that most people have gotten too distanced from the investment decision-making process.  We believe this has ramifications for the general market and has held many companies back.  However, we think that it is changing and it will become more important than ever to be diligent about investing in businesses and not just blindly buying the market.  And this will not manifest itself in a massive crisis, but a slow burn that will cause one to wake up many years from now and either be bewildered by the lack of return in the “market”, or be comforted in the knowledge that you owned some great companies and built your own fortunes very nicely.

Continue Reading

Fed This, Fed That...

Once again the financial world, and in particular the financial media, are all in a tizzy over the statement that will be coming out from the Federal Reserve Open Market Committee (FOMC) later this morning, September 17, 2015, regarding the decision on whether to begin the long awaited end to the Zero Interest Rate Policy (ZIRP).  Anyone who has read our commentaries over the years knows that we think there is far too much emphasis on the actions of the Fed in determining the outcome of the economy.  We in no way suggest what the Fed does, or does not do, is immaterial to markets and the economy, but the idea that the Fed is the ultimate arbiter of economic growth, or lack thereof, is simply ridiculous!

As we have stated, it is our view that the Fed is long overdue in ending ZIRP.  In fact, we believe the economy could have withstood rate hikes as long as two years ago.  At the very least, during last years' surge of growth (Summer 2014), it would have been an excellent time to begin the process.  Now that they have waited so long, they have backed themselves into a corner and are headed towards raising rates at a time when global growth has slowed.  This is what we feared about waiting too long to get on with the process.  That said, regardless of the problems with economic growth in the emerging world, and in spite of what we admit is a subpar economic environment in the U.S.  and the rest of the developed world, we believe that further putting off the inevitable serves to retard growth even more.

There are many reasons for subpar economic growth.  We have pointed out in the past that the regulatory burden on business is far too high; that government intrusion in the private marketplace is onerous and government spending too large.  We have suggested that the tax code is far too complex and creates disincentives to economic activity.

All of these things are drains on growth and yet the amazing thing is that we are growing IN SPITE of all this nonsense.  It is the entrepreneurial economy that ultimately drives economic growth over time and at this point, the Fed raising rates .25% is absolutely irrelevant in that bigger picture.  In fact, they could raise rates to 1 or 2% and it would not stop the engine.  We think the signal it would send is that the constant vigilance over "looking for the next crisis" may be put to bed for a time, and that ultimately provides the backdrop to get on with fixing the things that are really holding us back from what should be an amazing era of growth, given the significant innovation that continues in the world of the entrepreneur.

Continue Reading