Perspectives

As the Coronavirus continues to stalk the land, killing at last count over 260,000 Americans, word of at least three vaccines have been delivered for FDA approval.  Distribution in some capacity is to hopefully commence by December 18.  Mass inoculation is expected to take place soon after approval, and most of the world should be vaccinated by the fall of 2021.All of this is wonderful and a testament to modern bio pharmacology.  Still, even with this advance, the Center for Disease Control and Prevention (CDC) forecasts 440,00 Americans dying from the virus by the time it has run its course.  This figure assumes people will be receptive to being inoculated with the vaccine as it becomes available, a big assumption at this point.  Even with the delivery of the vaccine, the number expected to die exceeds the death toll from all Americans in World War II.  There is no data yet of those who will live but have lingering aftereffects, from mental impairments to compromised respiratory and motor skills.  In many respects, the Covid-19 virus has damaged the country in ways the Great Recession never did. Many investors are expecting a return to pre-Covid-19 prosperity with the vaccine in 2021.  That is not likely to happen.  While Americans will return to some routines enjoyed before the pandemic hit, it is not likely that life will revert to status quo ante.  One reason will be that many of the things enjoyed prior to the virus may not be available.  Already over ten percent of restaurants have closed their doors, and the estimate is for 30 percent to shut down if the holidays do not provide a pickup.  The same is true of many other forms of retail and entertainment such as apparel, department stores, theatres, nightclubs, and the like.One less obvious victim of the pandemic may be the era of easy money.  While the Federal Reserve will do what it can to keep interest rates low, foreign investors who buy the debt that finances the government’s deficits are showing signs of nervousness.  One reason for the concern is the tug of war over the transition of power, an event that is making the US look like a country whose institutions are no longer respected by its own people.  Why should foreign bond buyers trust in the value of the dollar when the country backing the same cannot conduct an election that both sides will respect?A falling dollar is supposed to be good for an economy.  It makes imported goods more expensive and thus less competitive.  At the same time, domestic exports become more competitive due to being lower in price in foreign currency.  But if interest rates need to be raised to prevent the decline from becoming a rout, then a key element of control of the country’s finances will effectively pass to foreign interests. While control of the Senate will not be resolved until January 5 or so, Republicans have already indicated that they are not interested in continuing government spending going forward to match the amounts appropriated earlier in the year when the virus first hit the country.Republican fiscal rectitude seems to be a function of who controls the White House, witness the approximate $6.7 Trillion in red ink the last four years that added an equal amount to the country’s indebtedness.  In terms of deficits, this may be the time when the music stops.The reality is that there are over 20 million Americans out of work due to the Coronavirus.  Almost all programs put in place to address their plight will terminate on December 31.  With another round of lockdowns beginning, more will join this number.  For many, it will be a cold winter, no matter what the weather forecast says. The EconomySince part of the emergency spending to address the pandemic ended September 1, the economy has been showing signs of deceleration.  The deceleration was offset somewhat by the high savings rates of earlier this year. The remaining programs are set to expire on December 31, and lockdowns are again becoming more prevalent in response to higher infections and mortality rates.The economy is set to slow down even further.  Economists at JP Morgan Chase bank are expecting the economy to decline 1 percent in the first quarter of 2021, after growing 2.8 percent in the fourth quarter of 2020.  JP Morgan expects the economy to return to growth in the remainder of 2021, but only after a $1 Trillion stimulus package is passed into law sometime in the first quarter.  In terms of sectors, farmers are perplexed that there is a shortage of containers to ship grain to foreign buyers.  It turns out that foreign sellers can use the containers to ship more expensive goods to the US, send them back empty, and still make more than shipping grain.  Other goods pay up to eight times more than farm output for shipment in containers.  If the containers are used to ship bulk items like farm output, the containers need to be cleaned out after use, which makes grain shipments even less attractive to the shippers. Interest RatesInterest rates will remain low for the foreseeable future if the Federal Reserve has its way.  The question is: will they be in control in an environment that has always depended on foreign investors financing our government deficits, but seldom to the extent that is true now.  Expect interest rates to begin to climb upwards. InflationAs mentioned previously, cheap money has found an outlet in financial markets.  Instead of consumer price inflation, we have witnessed record-high stock prices and lows in interest rates.  Any number of business startups have been funded that never would have seen the light of day were interest rates higher. If interest rates do go up, expect to see inflation rates to follow.  Also, it seems that there is more talk of a $15/hour minimum wage indexed to inflation.  While such a wage will make more Americans who work for the minimum wage ineligible for government assistance, it will be inflationary.  How much so depends on the time frame for implementation.  Florida passed a $15/hour minimum wage law for their own state during the election.  The Stock MarketBy most valuation metrics, the stock market is overdue for a correction.  An accommodating Federal Reserve has held a correction at bay.  Yields on non-investment grade bonds are down to 4.8 percent, a record low. The issue is how much more will the rest of the world back the US, given its perceived political instability.  Sectors that should do well in 2021 are commodities, companies that should spring back from 2020 like transportation, and industrial firms that can profit from a falling dollar. Warren M. Barnett, CFANovember 25, 2020

Many investors have decided to wait until the election is decided before investing in the stock market. Based on history, there is a two-to-one chance; this is a bad idea. What an election does is eliminate the uncertainty over who will win. This uncertainty holds stock prices back more than the programs of the candidates themselves. A recent story in the Wall Street Journal bears this out.  It is fashionable to believe that if one party or another wins the White House, there will be some stock market crisis.  In reality, even if there are enough electoral votes (270) to name a winner the day after, the next government is not installed until January 20 of next year.  This delay leads to all kinds of punditry as to who will be impacted.  At the same time, programs that may be affected have time to lobby to minimize, if not eliminate, the adverse impact.  For example, people assume if Biden and the Democrats were to carry the presidency and Senate and keep the House, all manner of tax increases would be introduced. With almost three months to lobby, most pushes in this direction will have a chance to be watered down.  Also, if the use of the tax increases is to launch infrastructure programs and help pay for the COVID vaccine and its distribution, one could argue that the funds were judiciously spent. If the Presidency and the Senate were to stay in Republican hands, an assumption would be that taxes would not be raised, and deficits would continue to mount.  With interest rates so low, this is not the immediate end of the world were such to happen.  The Federal Reserve is on record as not seeing interest rates rise before 2023 or 2024, the latter date in time for the next election. The ultimate can-kicking scenario. If there is a delayed outcome to the election, the lag in results would not be good for the market.  The pre-election uncertainty will not be resolved.  The last time this happened was in 2000 when Florida’s outcome was delayed by a recount.  This was also the time that the air was beginning to go out of the dotcom bubble. The corresponding decline of the tech-heavy NASDAQ index by almost 50 percent over the following two years also impacted other indexes, to lesser extents. Longer-term, what will guide the market is earnings, interest rates, and valuations. All three of these factors are intertwined.  Earnings depend on economic growth, both domestically and abroad.  Interest rates are under the presumed control of the Federal Reserve. However, the dollar’s falling in value as an international currency seems to indicate that, at some point, that control will be questioned.  Median valuations are as high as 1999-2000 in part due to the virus-induced contractions in earnings, which is not a good omen for the overall market.  Of these three factors, interest rates are the key.  When they start to trend upwards, other areas will feel the pressure. This year has been one of convulsions.  The induced shutdown of the economy in March was unprecedented.  The funds appropriated by the federal government kept any number of businesses and individuals afloat.  However, funds ran out in August, and new funding does not appear forthcoming in the near term.  The Federal Reserve has publicly stated that it cannot hold up the economy on its own. Still, the Senate refuses to take up a House bill to continue funding even though it cannot pass one of its own. The issues are political, ideological, and social.  It may be asking too much of a single election to resolve all these issues. A vaccine will help resolve the environment, but the other matters are perhaps outside the domain of medicine and public health. One step to national reconciliation would be to hold the distribution of content on the internet to the same standards of libel as print publications.  In the early days of the internet, when it functioned more like a bulletin board, internet content was exempted from site verification on the grounds that the distributors of information were not financially capable of editing what was posted for truth and accuracy.  Given the vast sums earned from advertising on the internet, it would seem a matter of public policy to review that exemption.   In the 1800s, so-called “yellow journalism,” essentially the publishing of sensational and misleading information, flourished.  Several newspapers in a given market wrote such stories while jousting for readership and advertisers. This largely came to an end when papers were successfully sued for libelously publishing misinformation.  The Economy The economy is being sustained by two factors.  The first is the previously mentioned government aid, which was sometimes distributed without a test for financial need.  The $1,200 per eligible person checks were distributed to all who did not have taxable income over $75,000 as individuals (or $150,000 as married couples filing jointly) – with a steep reduction in benefit above those thresholds – fall in this category.  Many families deposited these funds into a bank account or used the funds to pay off debts.  Along with the $600 per week Federal Unemployment benefit and whatever state benefit being earned, some people had take-home pay higher than their net paychecks. Criticism of the higher net amounts helped keep an extension from being passed into law.  As time goes on and there is no replacement, the lack of buying power will make itself felt.  Forecast of retail spending for the Christmas holidays now estimates a ten percent decline compared to last year. The second source of economic support is the spending of seniors.  As consumers who by and large do not work but who collectively have sustainable investment assets, senior citizens are in effect a private sector economic stimulus program in and of themselves.  Further, as Medicare and Social Security recipients, the over 65 group receives government assistance not available to most of those younger.  Interest Rates  After hitting new lows mid-year among talk of negative interest rates, yields on US Treasury assets have begun to tick upwards.  When the ten-year note hits one percent (currently about 0.74 percent), there will be a wake-up call of some magnitude. Moving that wake-up call along is the weakness of the US Dollar relative to other currencies.  As the dollar falls in value relative to other currencies, the performance of US stocks improves in foreign currency terms.  At the same time, foreign goods tend to cost more domestically in dollars, helping to fuel inflation and higher interest rates.  The Federal Reserve has predicted that interest rates will not go up until 2023. However, their ability to hold rates down may be tested by a stimulated economy on the one hand and a falling dollar on the other.    Inflation  Inflation expectations are being downplayed by the government, who, as the world’s largest creditor, would have the most to pay if they were raised.   The 1.9 percent increase in Social Security to pay for price increases in 2020 is a joke.  No one will provide the data as to how the figure came about. This will be a figure of some focus going forward, as those who depend on Social Security cannot keep up with the actual increases in the cost of food and housing.  The Stock Market  Year to date, the market is flat to up ten percent, depending on the index being used.  A technology component moves the indexes higher, just as in 1999 and 2000. The market seems to have great faith and expectations in a massive stimulus program early next year, accompanied by a boom in domestic demand and stronger economic growth.  Should this scenario not prove out, the level of the market relative to historic standards makes it vulnerable to a correction.   Warren M. Barnett, CFAOctober 26, 2020

During the internet boom of the 1990s, a culture of day trading bloomed.  The speculators tried to guess the direction of a given stock and pile into it if the direction was perceived as up.  When the gains tapered off, the stock was dumped.  By doing this several times a day, the day-trader could potentially earn high returns on his or her capital.  They could also lose their shirts, as most of them did in the ensuing crash.Unfortunately, the market became more volatile than the traders could get in front of.  Trying to “buy the dip” became a suicide mission, as the market began to go not only up but down.  As the internet stocks began to show their inability to match their growth prospects, prices went lower still.  In the end, most day traders lost money, and more than a few got wiped out.Fast forward to 2020.  With so many people impaneled at home due to the coronavirus pandemic, and with the introduction of apps on smartphones like Robinhood that permits people to trade their accounts anywhere, a new generation of day trading has come back to the stock market at full force.  As before, people are trading stocks and other securities based on their momentum.  If a stock goes up, speculators pile into it.  When the momentum shows signs of waning, the same parties look to bail, to go on to the next idea.  This time around, not only are stocks and options being traded, but commodities and currencies are as well, mostly due to the existence of an Exchange-Traded Fund (ETF) unit, which permits investors to do so.   Like the previous day trading boom, people are often speculating with their retirement accounts.That this will end badly is a given.  The question is how badly.  The crash in oil in March, when the posted price briefly went negative, showed several shortcomings of the day trading strategy.  For one, traders are not only competing with each other, but also with computer algorithms that sense the turn in prices faster than any individual trader. Such computers can see all the market trades in a security at a given time, and thus it has a perspective that no individual trader can match.  Because brokerage firms get compensated for matching up trades or flowing the trades to someone who can, the computers see the orders before they are executed.  This is equivalent to a gambler betting against the house when the house gets to see the cards before they are dealt.Add to this the fact that many day traders are dealing in securities that they do not understand, such as put and call options.  Some use leverage (borrowed funds) that can leave them with substantial liability if the trade does not work out.  The image of children playing with matches immediately comes to mind.Before thinking this is just a fringe activity, consider this: in 2010, just over 15 million option contracts were traded per day.  So far, in 2020, the volume is 27.5 million.  Trading in gold and silver is getting so voluminous that the ETFs are having a hard time finding enough physical metal to back the ETF units. Internet chat rooms talked up the stock of companies like Hertz and JC Penney to the point the stocks tripled, even after they declared bankruptcy and their pre-bankruptcy common shares were declared worthless.  E-Trade opened as many accounts in June as all of 2019.In Wall Street, there is a term for providing a supply of investments to such clients who ignorantly trade more on rumor and stories than on facts.  It is called “feeding the ducks.”  Investing takes time and research, and while assumptions have to be made, it is usually longer term.  Speculation requires none of this, only a desire to get on something when everyone else does and get off before they do.  In this sense, the name of the app Robinhood is appropriate. What is less obvious is who is being robbed.Even the more “conservative” day-trading speculators who only trade market index options like the Standard & Poors 500 can roil markets in the short run.  Currently, each time a share of index ETF symbol QQQ is purchased for speculation, around 36% of the funds flow into five stocks:  Amazon, Facebook, Netflix, Alphabet (Google), and Apple.  When the units are sold, the same happens in reverse.  Given that day-traders go in and out of their positions so often (holding for 24 hours is considered long-term), their ongoing impact on a broad index is considered minimal compared to the short-term moves in certain individual stocks. A study in England showed that almost 80 percent of day-traders lose money.  In spite of this, the lure of fabulous gains brings them back and keeps them often going until their capital runs out.  One immediately sees the parallel to gambling addiction.  In fact, some people say that the current lack of professional sports activity is fueling day trading as there are fewer sports games to bet on. That will be proven with the passage of time.  Until then, attempt to stay out of the sectors of the market that are even more over-valued than the market itself, which is not exactly a bargain right now based on historical metrics.   The EconomyWith the expiration of the $600 per week Federal Unemployment Benefit this week, and as of this writing no agreed-upon replacement, it would seem that the economy is heading to some sort of short-term contraction.  With over 1.5 million workers laid off weekly, the economy currently appears in equilibrium between jobs coming back (such as in health care) and jobs being shed in hospitality, transportation, state and local government, and the like.                    There is some hope of political compromise.  It is understood that the President is in favor of another round of $1,200 checks per household (with his signature affixed).  What rate, if any, the monthly unemployment rate will become is at this point anyone’s guess.The going assumption is that everything is in holding until a vaccine can be developed and distributed.  When this will be, and how long consumers and businesses can hold on is the question. Interest RatesThis past June, the federal deficit for the month was more than the entire year 2016.  Fiscal year to date, the deficit is $2.7 Trillion, with three months to go until the end of fiscal 2020.Much of the extra debt issued to finance this deficit has been purchased by the Federal Reserve.  We are fast approaching a point when the ability of the Fed to finance the deficit may be running out of string. When that happens, who is next in line?   China, who holds more US debt than any other country, is letting their portfolio mature while not making any more purchases.  It is thus assumed that by the end of the year, interest rates will have to rise to find more buyers.  Recalling 2018, the prospect of rising interest rates seems to be the issue the stock market is most afraid of. InflationAs mentioned previously, the best place to look for inflation is in security prices. For its own reasons, the government does not do so.  Based on goods purchased, inflation is rather tame, if rising.  Services are less tame but also rising.  Remember that this is in an environment where demand in many areas has been suppressed due to the coronavirus.One development that bears watching is the decline in the value of the US dollar relative to other currencies. This has inflationary implications, as a cheaper dollar requires more dollars to buy the same volume of imports from the exporting country. This would permit domestic producers to raise prices, knowing that imports could not compete. It would also make our exports more competitive, assuming a free market for such goods, as it would require fewer units of the foreign currency to pay for the domestic export.  Thus a falling dollar may be good for business, but less good for the consumer.The Stock MarketSince March, stocks as a group have shown an ability to rise almost regardless of the external environment.  Many of the valuation yardsticks do not seem to apply to at least some sectors.  How long this will continue is anyone’s guess.  It is expected when the estimates for 2021 earnings come out in the fourth quarter, there may be some reality introduced to the equation.  Until then, evaluation is the order of the day.  Warren M. Barnett, CFAJuly 27, 2020

After five weeks of quarantine, many people are wondering when, if ever, life will return to normal.  The short investment answer is that it won’t.Even after a vaccine is found, the ramifications of the Coronavirus pandemic will persist.  The event has exposed fault lines in society that will not easily be papered over.  It has also revealed the extent of how both the Federal Government and private entities have relied on debt to keep economic good times going.  It is surmised that credit will not flow so quickly or so cheaply going forward when compared to the past twelve years.One would have to go back to 1912, to the sinking of the RMS Titanic, to find an equivalent social movement born out of a disaster.  The Titanic was considered an engineering marvel, an example of maritime progress.  However, after it sunk and inquiries were conducted, it was noted that of the 1,500 people who perished, almost all were below deck in the steerage compartments.  Of the 600 people who survived, most were first-class passengers.  It seemed the ship had only enough lifeboats for the upper deck and none for below.  The ensuing public furor over this marked the end of the Edwardian Era.  Up to that time, the life of a commoner was considered of less value than the upper class.  The Titanic’s discriminating loss of life was reinforced with the prosecution of World War I.  Commoners were conscripted to march into a meat grinder of trench warfare, while upper-class members were enlisted as officers who often directed the carnage from a distance.  By the 1920s, Britain was taxing estates at a rate up to 120 percent; such was the contempt of the commoners for the elites.Something similar is happening now, with African Americans dying from the Coronavirus at 2.5 times greater than their share of the population.  The number of workers without masks, protection, health insurance, paid time off, or a living wage has been laid out for all to see.  These conditions are expected to find a political outlet. For some, it will not be pretty when it does. The propensity of government to raise funds it does not have to offset the mass quarantine is staggering.  So far, $4 Trillion has been committed.  Before it is over, another $2-4 Trillion may be raised.  For a country with a $24 Trillion economy, but $20 Trillion in government debt, this is a significant number.  Any attempt to pay this debt down by raising taxes or running a surplus will be a drag on the economy.  Even before the virus came along, the government was running a deficit of $1 Trillion per year.  In this sense, the Coronavirus did not so much change the fiscal course of the US as to accelerate it.The consequences of these trends would seem to be: first, higher interest rates, as the US taps into a shrinking pool of international assets for investment.  Second will be higher inflation, as the income inequalities exposed by the Coronavirus is addressed by a higher minimum wage, expanded healthcare benefits, etc.  Third will be more subdued financial markets, where investments will have to be benchmarked to a higher interest rate and lower earnings per share growth to evaluate their value.  Hedge funds that have enjoyed a privileged tax status will have it rescinded.  Private equity will no longer have borrowed money plentiful at low rates, impacting the ability of an investment to pay both the managers and the investors.  Stock buybacks with borrowed funds will be a thing of the past.Superimposed on this environment is the ongoing decline in population growth due to our stringent anti-immigration laws.  Without population growth, an economy can only get bigger through either borrowing or exporting.  Until the US dollar materially weakens, and other countries are willing to overlook various policy differences and insults by the US, it is not expected that exports will be a material source of growth going forward.This is not to say there will not be any investment opportunity. Healthcare will continue to grow, although the more political parts may be leveled by government edict.  The growing retired segment of the population will, in time, go back to taking cruises, trips, eating in restaurants, etc.  In fact, such activity will probably be considered a private sector stimulus to an economy that will be contending with reduced government spending in the form of lower deficits or even surpluses.The issue is whether the entire stock market will advance.  The answer is probably not at the rate of the past decade.  The loss of stock buybacks will take away a material source of stock demand.  Rising dividends in time will take up the slack, especially as the cash return on stocks is compared to the return on short-term debt.The world going forward will look different from the world of even a few months ago.  Out of such changes, investment opportunities are formed, and threats to the established order are created.  Thus investing resembles nothing so much as a chess game that never ends.  Play a long game, and play well.The EconomyThe economy is in a state of induced coma.  The consumer, who makes up 70 percent of the economic activity, has been dispatched to dwell in self-isolation with the exception of those considered essential to the community.  In all areas, hospitals and first responders are considered essential, as are grocery stores.  Beyond this, the list gets murky.  Liquor stores in most localities are considered essential, whereas seating in a restaurant is not.  The idea is to avoid congregating unless necessary.  The result is an unemployment rate north of 15 percent. Reviving the economy will take some finesse.  There is already some debate over which areas should be opened first, with manufacturing and transportation to be early candidates.  Schools, churches, and the like will probably come second.  A concern is a potential for the Coronavirus to flare up again, prompting a second lockdown.  It may be the second half or even 2021 before the economy and social life is restored.InflationThe most immediate effect of the Coronavirus is deflation, as lower demand responds to supply that has not adjusted.  A key example is the price of oil, where demand has dropped by over 10 million barrels per day, and almost all storage tanks are full. Yesterday the price of oil went negative, as owners of contracts could not find a place to accept delivery.  A contract is for 1,000 barrels, or 42,000 gallons.   Looking ahead, a resumption of normal activity should restore both demand and prices for oil.  In addition, higher wages and health insurance costs will drive the cost of services higher, and in time the cost of goods. Interest RatesOne of the great disservices by parts of the economics profession has been the idea that deficits do not matter in terms of a country’s finances.  This idea was first promulgated by John Maynard Keynes, who, to his credit, said that deficits in recessions needed to be paid off with surpluses in times of prosperity.From there, we had Arthur Laffer, whose curve was supposed to demonstrate that a country could grow by cutting taxes and without concern for deficits.  This was embraced as a tenant of Modern Portfolio Theory (MPT), which has driven so much of the financial market for the past decade. The trillions spent addressing the Coronavirus should help put MPT into the dustbin of history.  At some point, financial markets will demand higher interest rates to hold a security that there are so many of, even if the security in question is United States Treasury bonds and notes. The Stock MarketAfter riding along on a sea of cheap money, the stock market hit its own iceberg in February.  Since then, it has rolled over, retracing most of its decline.  It appears to be rolling over again. This is to be expected.  Usually, when a market drops as suddenly as this one has, some investors, using the peak as a reference point, “by on the dip.”  This creates the demand we have seen of late.  There is then a second decline that washes out those who ran into a burning building, so to speak.  From here, a base will be formed to lead the next advance. Recall that there is a one in five chance that the leaders of one market advance will lead the next.  This rotation of industries will need to be watched.Warren M. Barnett, CFA

My grandfather, my mother’s father, Charles H. Magill died in the flu pandemic of 1918.  Ironically, he did not die from the flu.  He died from an overdose of drugs administered by a doctor.  There was no Food and Drug Administration (FDA) in those days.  Doctors had to decide for themselves the appropriate dosage.  My mother was three years old at the time.Now we are visited upon by another virulent contagion.  The world is much more populated now than in 1918 by a factor of about five.  Science and communications make the spread of the virus much more anticipated. However, because it was not anticipated, there is no vaccination for the current outbreak, labeled COVID-19.  Nor is there a remedy, aside from contracting the virus and surviving. The effect on the stock market has been pandemonium.  There is an old adage on Wall Street that markets take an escalator going up, but the elevator going down.  Program trading has exacerbated this.  In 1987, program trading caused the stock market to fall 25 percent in a day. So far, the market has fallen about 33 percent from its peak February 19, 22 days ago.The problem with program trading is that it assumes there is someone on the other side of the trade.  This is technically known as liquidity.  When liquidity dries up, and there is no one to bid or offer at the last trade price, look out below.  Markets used to be supported by specialists and banks trading their own accounts.  Specialists were supposedly made obsolete by computers, and banks were told to curtail their support of markets as the act was deemed “too risky.”  In effect, the risk was transferred to the investing public.  Add to this mix, the usual investor who buys a stock with borrowed funds, or margin, and the downward pressure on stock prices begins in earnest.The COVID-19 virus can only be controlled by reducing the number of human interactions.  As I write this, we are midway through America’s longest enforced holiday.  Everyone who can is to stay home.  Hopefully, this will reduce the rate of spread of the virus, and (also hopefully) warm weather will cause it to hibernate until fall. This period of economic inactivity is unprecedented.  Never before have both demand and supply been depressed at the same time.  The Government is trying to revive economic activity through various legal measures.  Most have not been tried before on this scale.  The idea is to buy time for the period of inactivity to reduce the cases of infection so that our health care system does not become overloaded. So far, programs totaling $4 Trillion are being proposed.  No one is saying how this will be paid for, although the Treasury announced it would be selling more long-term debt presumably to help fund the programs.Historically, event-based market corrections are short-lived.  There is a period of time, usually, 3-9 months, when the lost ground is recovered.  This time may be different.  As people realize the precariousness of their positions, there may be an effort to create a cash cushion in the event of such an event again.  Collectively, this will reduce consumer demand.  Since about 70 percent of our GDP is consumer spending, this will have an impact going forward.Somewhat offsetting this are payments made by the government for Social Security and Medicare.  As the number of retirees increases relative to the total population, the percentage of citizens who can spend Social Security funds will go up as well. This government spending is impervious to the economic cycle and is demographically driven.Like the flu pandemic of 1918, we will get through this virus and go on from there.  The investment question is, what will the investment world look like, and how will it change.The EconomyEconomic activity is in free-fall.  With the government impaneling everyone they can into their homes, unemployment may reach 20-30 percent.Most, but not all, will return to work once this is over.  There is an estimate that as many as 30 percent of all restaurants will go out of business.  The hospitality industry, which employs about ten percent of the workforce, has been suspended.  Airlines are cutting back domestic flying by 60 percent, and international flying has been put on hold. Getting these sectors back to work will help to reduce unemployment.  The unknown is the disposition of the consumer to spend.  If spending is not robust, the recovery will take longer.InflationInflation is the factor left out of consideration at this time.  This will make it a future shock to the economy, and the market should it return. A $4 Trillion plan to revive the economy will increase the size of the national debt by about 17 percent.  Add to this the structural deficit which generates $1 Trillion per year in additional debt, and pretty soon you are talking real money.Interest RatesPanic has driven interest rates to historic lows.  Once the panic subsides, the realization that the Treasury will need to sell so much debt in short order to finance the above government programs will send interest rates higher.  Just today, the announcement that the Government was considering 50-year bonds had interest rates tracking upwards.Aside from any changes in the economy, the biggest upshot from this crisis will be to focus on the level of government debt and the deficit.  Like market liquidity, the debt doesn’t matter so long as there is someone around to purchase it at low rates.  If this assumption ceases to be valid, this could be the seed of our next calamity.The Stock MarketA stock market built on cheap and plentiful money is not on a solid foundation.  Last year, the earnings of the Standard & Poors 500 Index was almost unchanged.  It was higher valuations, in the form of higher Price-to-Earnings multiples, that caused the market to expand as it did.  Easy come easy go.No doubt, the market will recover.  Whether it goes back to its former level in a brief amount of time remains to be seen.  History tells us that the leaders of a market advance have a one in five chance of leading the next upward move.  While this market is still fluctuating heavily, there will be a time soon to get back in. As for reducing the fluctuation, both up and down, two ideas come to mind.  First, to tax security transactions. The tax amount does not have to be large (one cent per share), but the amount will be material to the hedge funds who trade in and out of shares several times a day.A second idea is to tax the income of hedge fund managers as ordinary income unless positions are held for more than a year, when it becomes taxable at capital gains rates.   Right now, hedge fund investors can get a tax break on the interest they pay to borrow stock.  The average person can deduct this too, so long as he or she has taxable income on the investments.  Hedge funds require no offsetting income, calling it carried interest.Most stocks should come back in short order.  However, this is a time to separate the wheat from the chaff.  If the environment changes, the portfolio should change with it.Warren M. Barnett, CFAMarch 23, 2020 Barnett & Company is a fee-only registered investment advisory firm registered with the Securities & Exchange Commission working with the investment and financial planning needs of individuals and organizations.  For a brochure on the company and its available services, please contact Jennifer Hairston at 423-756-0125 or This email address is being protected from spambots. You need JavaScript enabled to view it.. 

The Federal Reserve recently issued an opinion that was interpreted by many as a signal for a rate cut at the next meeting. The current interest rate for ten-year Treasury bonds is around 2 percent per year. However, this return is high compared to other countries. In Germany, the ten-year government bond or bund, as the locals call it, currently yields a minus 0.30 percent. Therefore, every $10,000 German bund returns $9,700 in ten years. In effect, investors are paying the government to hold their money. Currently, over $10 trillion worldwide is invested in instruments that have negative interest rates. This trend, started by the European Union to stimulate their economy several years ago, has become an end in itself. Countries are fearful of inducing a recession by raising rates. However, the artificially low rates are causing distortions in themselves. Money flows to private equity firms, rather than long-term investment in capital equipment and plants. The low rates seem more beneficial to larger lenders than to consumers. Finally, low rate loans are causing people to invest in such a way as to assume that the low rates will be around forever. The justification for continuing the low, even negative interest is the presumed lack of inflation in most parts of the world. The implication is that when inflation returns, rates will rise. However, the price impact on a bond with negative interest rates to an environment where interest rates turn positive would be severe. For example, if interest rates in Germany were to go from -0.30 to 5 percent, the value of the ten-year bond would fall to less than 64 cents on the dollar. Of course, inflation depends on how you measure it. Most governments have a basket of goods for computing the inflation rate, with the prices of each good weighed and calibrated each month. The problem with this approach is that it understates inflation for services. It also ignores, for the most part, the inflation of the stock market, as well as real estate. The U.S. has benefited from these trends by sustaining a relatively high rate of interest on its debt. This rate attracts foreign money looking for a return higher than offered in their native country. The investment inflows, in turn, help to elevate the value of the dollar relative to other countries since investors have to buy dollars to make investments in the United States. Normally a strong dollar is good for imports but hurts exports. However, currently, the exchange rates between countries are in many instances being overshadowed by the imposition of tariffs, which act to make imports more expensive, while retaliatory tariffs hurt exports. The one group that loses out all around is the saver. The savers are nominally risk-averse. With returns on safe assets like government debt and certificates of deposit so low, savers are in effect being penalized. Some savers have been going to the stock market for returns, in spite of their risk dispositions not being compatible with fluctuating investments. Others are choosing riskier assets to sustain their level of cash flow. Also, the U.S. is sustaining a federal budget deficit, which will be around $1 trillion this year alone. This excess spending relative to income tax revenues acts to stimulate the economy. It creates demand that only the government bond market and printing presses can finance. Finally, the slowdown in population growth in the face of the demand for labor will become inflationary at some point, unless a lack of demand makes the economy stagnate. In essence, low interest rates and deficit spending are taking the place of population growth and exports in moving the economy forward. With everyone from the president to the Federal Reserve trying to keep the stock market moving forward, there is a sense of unreality in the current situation. It does not feel sustainable. When the tariffs against other countries hit home in the form of higher prices of imported goods and foreign markets close as retaliatory tariffs are leveled against the U.S., this situation will feel less abstract and more in need of change. In the meantime, the party goes on. Until interest rates go up, or something causes the dollar to weaken, the status quo will continue intact. In terms of the investment environment, what we have is parallel to the late 1990s when the dot-com era was ascendant. In those days, the government was running a surplus, which depressed interest rates and made the internet a mania in its own right. Like all investment manias, that one went well until it didn’t. The Economy Overall, economic data is positive, although many people are looking for evidence of the end of the economic expansion. If you look at some data long enough, you can find almost anything – especially true of today, as the trade war’s impact on the economy has been thus far less quantitative than qualitative. Many businesses are making long-term commitments based on the current assessment of the import and export environment. Given the imponderables, some businesses are deferring making any decisions at all at this time. While the general public is more focused on how much prices will go up at Walmart if tariffs are imposed, a greater impact going forward will be on technology. One conclusion of the trade war with China is the acceleration of their effort to make technology in-house, rather than depend on foreign suppliers. Doing so could have a major impact on this country’s growth. Without the profits from selling technology products to the Chinese, American companies will have to find other outlets or government subsidies to fund their research efforts. Interest Rates Given the international pressure to keep interest rates down, it would seem that only something international in scope will drive them up. When interest rates go up, it will be a period of sustained inflation. What would cause such inflation is not easy to say, but if and when it was to occur, the impact will be worldwide in scope. Early indicators of inflation expectations are the price of gold, which has now gone up to $1,400 per ounce, and bitcoins, which have also rallied. A loss of faith in government-issued currency would prove devastating, were such to happen. In some circles, the issuance of currency either in the money supply or as debt, is a precursor to inflation, as more dollars chase the same number of goods and services. Still, there are no compelling data on inflation in the U.S. financial system. Until there is, it will not be an issue. Inflation In addition to the role of inflation in the matter of interest rates, the ability of inflation to impact stock prices is less understood but is a factor in the current environment. Until perhaps a decade ago, most companies recorded revenue growth of 5-7 percent per year. About 3 percent of this was unit growth, with the balance being price increases or inflation. Today, most industries cannot raise prices without inflation. On that premise, revenue growth has slowed to unit growth, which has, in turn, been adversely impacted by the slowdown in population growth as well as the population’s aging. Unit growth is currently 1 to 2 percent overall. In contrast, relatively new industries such as streaming video, cell phones, and internet interactors have commanded very high valuations. Because these firms are new, there is no relationship between their growth rates and the overall economy. When predicting their growth, any number looks legitimate. For this to change, higher interest rates are needed, which will cause some to question valuations, and an increase in unit growth, which will come from immigration reform and exports. Both factors of unit growth and immigration are political footballs, which may not be sorted out until after the election next year, if then. Stock Market Year to date, the stock market has done well, up 15 to 18 percent, depending on the index used. The bond market is up by 5 percent. It is very unusual at this stage of the economic cycle to have both stocks and bonds go up in value. As stated previously, the assumption currently is that interest rates will stay low, the dollar will continue strong, inflation will remain under control, and people will pay up for the promise of growth faster than the overall economy. Should any of these assumptions be tested and found wanting, prices will likely be reassessed. Warren M. Barnett, CFAJune 25, 2019

This year, the federal government will run up a deficit of $900 billion. The total amount of debt outstanding is about $22 trillion, which is about the same size as the entire economy. Two outstanding obligations of the federal government, Social Security and Medicare/Medicaid, are slated to run out of money in the next 10-15 years. State governments have, in many cases, similar liabilities with their state employee pension plans. Once upon a time, such data would be a cause for concern. In fact, the birth of the Tea Party in this country a decade ago was originally to publicize the deficits and advocate for their extinguishment. However, after the Tea Party coalesced around Donald Trump as its standard-bearer and he, in turn, dismissed deficits as irrelevant. The Tea Party members followed suit. The alliance has created the suspicion that the goals of the Tea Party were not so much fiscal restraint as to limit the ability of the Obama administration to respond to the greatest fiscal crisis since the Great Depression by denying them the deficit spending used by Roosevelt to address the crisis of the 1930s. Be that as it may, the deficit marches on. The tax cuts of 2017, which helped most corporations, small businesses, and the wealthy, has yet to generate offsetting revenue to pay for themselves. The non-corporate part of the tax cuts is to be slowly reversed in stages so that by 2027 rates are back to where they were before 2017. Corporate rates will be permanently reduced, or until Congress makes a change. In the meantime, government estimates of the deficit put it at over a trillion dollars per year as far as the eye can see starting in 2020. The revenue growth attained is being swamped by expenditures for Social Security and Medicare. At one time, this would have mattered. A debt clock was started in 1989 by Seymour Durst, a real estate developer. Several countries copied the idea, especially Germany, who suffered hyperinflation in the early 1920s. But beyond their progress in terms of numbers, there is little talk or concern about the federal debt. The principal reason given for the laxity about the debt is the lack of inflation. Since the implication of deficits is higher inflation, as more printed money circulates without an offsetting increase in assets, one would have expected higher inflation before now. Aside from an uptick in wages seen in the data last month, to speak of there has been no increase in inflation. While inflation in services has been far higher than inflation in goods, the overall effect is to keep the government-generated numbers fairly low. There is a school of thought that inflation, once ignited, will be difficult to contain. The primary way to contain inflation is to raise interest rates above the inflation rate. Paul Volcker stopped inflation in the early 1980s in this way. The better idea is to cut off inflation before it gets out of control. The problem is that once interest rates increase and credit is restricted, people get upset. We have already seen the President accuse the Federal Reserve of raising interest rates needlessly, which, coming from him, is an attack on the independence of the Federal Reserve to operate without political pressure. Trump has mused about firing Jerome Powell, the Fed’s Chairman, although he cannot do so. The best way to reduce the risk of increasing interest rates would be to reduce the deficit, but this would require either raising taxes or reducing spending. The only taxes under discussion to be raised by this administration are tariffs on imports. While such taxes would raise revenues, they would also be directly inflationary, increasing the price of imported goods. Citizens pay for the tariffs of the country mandating them. As for reducing spending, almost 70 percent of government expenditures are for Social Security, Medicare, or other means-tested programs. An effort to reduce these benefits would be seen as calloused at best and would be subject to ongoing legal challenges. Reducing benefits would also have direct economic consequences, as these funds usually are spent immediately. Perhaps the Tea Party should have stuck to its original mission, and not let politics deflect it from its goal of deficit reduction, assuming that was its original goal. The Economy Economic data is continuing to show signs of the disruption from the government shut down in December and January. Still, the trend is for slower real economic growth in 2019 compared to 2018, in the order of 2.3 versus 3.1 percent. The rate of growth is forecast to slow further to 1.7 percent in 2020. Contrast this to the assumptions of the President’s budget, which assumes 3.0 percent real growth each year for the next fifteen years, to result in a balanced budget by 2034. Inflation While inflation in goods and services is moderate, wage inflation is beginning to take off. A tight job market, no relief from immigration, and an aging population are combining to send wages up 3.4 percent over the same time last year. Wage inflation is important, as much of the expansion of corporate profit margins have occurred as the result of wages rising more slowly than revenues. Should this trend be reversed, companies will find themselves spending more on labor and not recovering the increase in prices. The result is a squeeze in profit margins that can only be made up by increased revenues. When the economy slows, rising revenues are harder to come by. Interest Rates The current stock market is being fueled by an expectation that the Federal Reserve will keep interest rates unchanged, which is to say below the rate of inflation. Also, the program to liquidate the government’s massive portfolio of bonds, called “quantitative tightening” will be stopped soon, so speculators will have sufficient funds to indulge in their craft of buying assets to resell at higher prices. Should either of the above assumptions be challenged, the atmosphere of the market will be sure to change, and not necessarily for the better. The Stock Market After staging a quarter that defied the naysayers who were predicting a recession last December, and citing the justification of the stock market’s direction for doing so, the market roared back in the first three months of this year to almost matching the levels of last fall. Where the market goes from here is anyone’s guess, but a long list of Initial Public Offerings (IPOs) for such companies as Uber, Lyft and any number of hot concepts is slated for release soon. In the eyes of some, this should signal a market top, as the original inside investors sell off their holdings to less knowledgeable outsiders. The result will also potentially mark the reversal of the shrinkage of stock outstanding, as new supply offsets corporate buy-backs. Even Levi Strauss, the venerable jeans maker, is public after being private for several years. Usually, when the companies become public, the stock exchange has some of its officials ring a bell. How appropriate. Meanwhile, the President has discovered a correlation between a high stock market and his popularity. Get ready for a King Canute performance, perhaps in reverse, should the stock market not deliver for him. Warren M. Barnett, CFA

World War II got off to a slow start. It officially began on September 1, 1939, with the invasion of Poland by German and Russian troops. The next advance was not until May 10, 1940, when Germany invaded Belgium, the Netherlands, and France. The eight-month interval was known by some as the “phony war,” given that there was no activity of any substance. This interval lulled some into thinking that Hitler would be satisfied with the conquest of Poland, and he was not seeking a larger involvement. History would prove such thinking wrong. This past week something similar happened to the United States’ trade war with China. Negotiations have been going on for most of the duration of the Trump administration. Last week, there were talks of additional tariffs along with the hope of some rapprochement with China. The forces of additional tariffs won out, and now billions of dollars in trade between the two countries will be taxed at 20 or 25 percent. The trade dispute reflects a long-held view of the President of the United States that a trade deficit in goods between countries amounts to some sort of weakness on the part of the country running the deficit. Thus the trade deficits of this country were the result of a failure to impose an “equalizer” in the form of a tariff to protect domestic manufacturers against unfair foreign competition. With much lower wages and living costs, goods made abroad undercut domestic competitors, and this resulted in bankruptcies and the migration of factories abroad to obtain lower wages with US ownership. In much of the rural areas and especially in the rust belt, this scenario by candidate Trump resonated. A promise to bring the jobs back from abroad and in doing so, “Make America Great Again” (MAGA) propelled him into the Oval Office. Attacking China is his effort to deliver on his campaign pledge. The trade issue resonated on other levels as well. For those worried about America’s place in the world, suppressing China seemed easier than competing with it, especially if a person believes that China does not play fair. The fear of being overtaken by another country fuels much of the xenophobia that some feel is necessary for survival. The problem is, if both sides are xenophobic, who is left to express reason? Economists who advocate unhindered trade speak of comparative advantage. If one country can make textiles more cheaply, let them. Their wealth generation will make them buyers of wine, technology, and software from affluent countries. Both sides benefit because they are producing for others what they do best. The current plan to place 20 or 25 percent tariffs on almost all trade between China and the United States negates the idea of comparative advantage. The Chinese will pay more for goods made in America, and Americans will pay more for goods imported from China. Up until now, non-consumer goods had most of the imposed tariffs, or intermediate goods, which are used to build something else. Because of this, tariffs have been slight to non-existent for most consumers. That is about to change. First, understand that a tariff is a tax paid by the consumer of the importing country. The Chinese government does not pay tariffs. American and Chinese consumers pay them. For this reason, when introduced into the mainstream, they are considered inflationary. Especially hard hit are fungible goods like farm products, which any competing country can provide. One idea is that by slapping tariffs on Chinese goods, the US will encourage cheaper imports from other countries. However, the data so far shows that the output from competing countries winds up priced as if also carrying the tariff, with the difference pocketed by the non-Chinese manufacturer. In a similar vein, domestic producers will raise their prices by the amount of the tariffs to fatten profits, secure in the knowledge that so long as tariffs exist that the excess profit will flow to them since they no longer have Chinese competition breathing down their necks. Do tariffs lead to higher employment? Not really. While there has been a revival of some steel mills here, companies who have to pay 25 percent more for expensive steel suddenly realize they cannot compete with non-Chinese imports and lay people off. Job gains and losses net out to close to zero. Finally, are tariffs inflationary? Yes, very much so. Especially after the decision this week to impose 20 or 25 percent fees on a broader sweep of goods, the price increases imposed by tariffs will be impossible to avoid. Like World War II, the beginning was slow, but the pace going forward will be much faster. Like any war, there will be a lot of collateral damage. Historians will tell us if it was worth it. The Economy It is probably a source of great frustration to the President that he cannot call for an election now. With low unemployment, low inflation, and high numbers of job creation, Trump would seem to have economic data for another four years. Alas, the elections are not for another 18 months. In that time, almost anything can happen, and almost anything will. Economic data is positive, but there is always the problem of the implication of the budget deficits, tariffs, immigration, etc. Whether the President can skate by on these issues until November 2020 is anyone’s guess. Economic forecasts now call for a slowing but still growing economy for the balance of the year. Until 2020 becomes more focused, we will stay with the trend of slower but steady growth. Interest Rates Interest rates continue to stay low, in the process fueling everything from stock prices to private equity takeovers. An obsession with letting the inflation rate dictate the prevailing interest rate has resulted in very low rates for some time, to say nothing of a valuation bubble in certain financial assets. The prevailing talk is for the Federal Reserve actually to cut interest rates sometime this year, a view embraced by the administration’s spokespeople, who want cheap and abundant money to be flowing come election time next year. The Federal Reserve is not on board for such a cut, making it problematic. Inflation With the trade war now open and raging, the currently subdued inflation is kindling searching for a match. A cursory stroll through a Walmart or Costco will confirm how much the US imports from China. An excellent preview of the inflationary effect of tariffs comes from the washing machine industry. With 25 percent duties put on imported washers and dryers early on, unit volume of laundry appliances is down five percent compared to last year, while prices are up seven percent. Stock Market The May 13th decline of some 2.4 percent in stock prices underscores the attention investors give the world outside our borders. Already the President, who yesterday said that hiking tariffs were a foregone conclusion, is now saying that he has not decided to raise tariffs on some $325 billion in Chinese imports from America. As a world leader, you can only change your mind so many times before people begin to lose faith in your ability to mean what you say. Trump continues to insist that China will pay for the tariffs. The reality is that the American people will pay in the form of higher prices for any number of items they buy. They will pay more for the imports of other countries as well as the output of domestic producers, both of whom will have less competition. Whether cooler heads will prevail is not known. What is known is that the country cannot continue to live in a state of perpetual crisis, especially of our own making. If the future cannot become more stable, stock prices will suffer. Markets are incredibly adaptable, but they need a given state in which to adapt. We are not getting that. Warren M, Barnett, CFA May 14, 2019

After the sharp decline in December and equal recovery in January, investors can be forgiven for believing that the financial markets are back to normal after a slight hiccup. While there are parts of the market and economy that are cruising along, the reality is more complex. There is a feeling among some of the more exotic investments that time is not on their side. To wit, last week the price of bitcoins dropped to a level that was less than the cost of producing them. Also, at the World Economic Forum in Davos, Switzerland this past week, where the wealthiest converge to reassure the public and themselves that all is right with the world, there was the aggressive promotion of firms like Uber, Lyft, and software companies of several stripes to prime the market for their public stock offerings, probably sooner rather than later. This stood in contrast to a year ago when wealthy investors were reluctant to go public when the perceived value of these enterprises was skyrocketing. I once knew an investor who believed that a sharp increase in the number of initial public offerings was the sign of a market top. Conversely, the low number of public offerings was symptomatic of a market bottom. The idea behind the strategy was one of supply and demand. New issues increased the supply of stock, while fewer shares of stock offered led to higher prices, given the long-term demand for shares. The concept was formed long before the days of stock buy-backs, private equity, and other forces that weigh on one side of the equation or the other. Still, the concept bears observing, especially as more companies come to market. Remember that for each buyer there is a seller. When several companies come to market at once, it may be a sign that insiders see either lower levels of growth or greater competition. Or, the owners believe that with higher interest rates to pay in the future, it may be better to sell than to share profits with the lenders. This brings up a second observation. According to earnings forecast, some companies will generate less profit in 2020 than in the last twelve months. Earnings declines over the next two years seem focused on the industries like retail banking, where in some cases the cost of funds is rising faster than the ability to charge for the same. This scenario has the effect of squeezing interest income. Other industries that are forecast to feel the heat are some real estate enterprises, retail, restaurants, and the like. Judging from the earnings estimates published thus far, it seems that cost pressures may make economic growth more difficult to translate into profit growth. This is especially true of labor-intensive companies. Demographic trends are pretty much set, and any respite from immigration reform is not on the horizon. While the federal government shutdown has been canceled, at least for the next three weeks, it gives Congress a window of time to iron out contentious issues regarding immigration and national security (issues not resolved for 60 years), there are other dates to note in the near future aside from the threat of another shutdown February 15. March 1st is the “hard deadline” in our discussions with China regarding tariffs. Without an agreement by that date, the U.S. is to impose a 25 percent tariff on all imports from China. Logically, one would expect the Chinese to impose the same tariff on goods imported from the United States. There are two bones of contention. First is the imbalance in trade that China has offered to rectify by 2026. The second concerns the theft of intellectual property. Outside of court, this is difficult to prove. It is not clear if the U.S. administration is insisting on compensation for past acts of intellectual property theft, guarantees against future theft, or what. It is true that China has insisted on access to a company’s intellectual property as a condition for setting up a manufacturing facility in China, usually as a joint venture with a Chinese firm. However, acceptance of the terms was voluntary by the company. It was considered a cost of access that was worth paying. If you wanted a presence in the Chinese market, you had to pay the price. Stated terms going in can hardly be considered intellectual theft. Also on March 1st or thereabouts, the federal debt ceiling will need to be raised, providing another legislative free-for-all. Then, March 29th is the deadline for the United Kingdom to decide whether or not to exit the European Union. Along with the unforeseen, this should be a lively spring. The Economy In truth, there is no reliable way to know how the economy is doing. All the departments of the U.S. governments associated with data collection have been shut down for the past five weeks. Without data, any assessment of the economy is a guess. With the government reopening soon, we will hopefully have data in short order on what has transpired in December, January, and February. Most assessments have been fairly benign, but with a total of two million people unpaid or out of work (800,000 civil servants and an estimated 1.6 million contract workers), the effects are perhaps more substantial than realized. Estimates by economists have called for up to 0.5 percent cut from this year’s GDP number. On the other hand, the large numbers of people retiring may make the next downturn easier on workers who stay, meaning there will be the need for fewer layoffs with so many voluntary retirements. Inflation Inflation is higher than stated. The government indexes on inflation, delayed with all other economic data, are too oriented to goods and not enough to services. Also, unemployment rates are a function of those willing to work. The data is not being tabulated, but it appears that unless we liberalize immigration, wage pressures will result in higher inflation. There are simply not enough workers to go around. Interest Rates There is a sense that the Federal Reserve may have been more lax on interest rates while the shutdown was in session, to avoid a financial problem when the government was not up and running. If this is true, funds should become a bit tighter in the coming weeks. With the passage of some time, data will tell us what we need to know. The Stock Market The market, in general, is coping with the slowdown in the economy. Parts of the market will have a harder time coping than others. Specifically, there seems to be a sense that higher interest rates and more restricted credit will bear down on some high-flying investment concepts. If a couple of new stock offerings go badly, the market could take on a different tone than the present. Warren M. Barnett, CFA January 28, 2019