Revolution, Taxes, or War

Yeah, I'm thinking about starting a corporation
Who's with me?
Nowadays, that's how you get adulation
Who wants to start a corporation?
I'm thinking about taking it all the way to the top
Who's with me? 

Corporation - by Jack White

If you commit a crime in the United States, such as fraud (or even murder), do it under the guise of a corporation. In February, California utility Pacific Gas & Electric, admitted that their equipment sparked the blaze that incinerated 85 innocent Americans and destroyed over 10,000 homes. Of course, they filed for bankruptcy protection and no one at the utility is going to jail. 

According to the National Institute on Drug Abuse, 130 Americans die every day from an opioid overdose, 47,000 died in 2017. The Sacklers, the billionaire family behind OxyContin, are currently fighting more than 2,000 lawsuits, and may file for – you guessed it – bankruptcy protection

The Financial Crisis of 2008, which was rooted in our banks, caused the worst recession since the Great Depression. Nearly 9 million Americans lost their job, and at least 10 million lost their homes. But our bankers don’t go to jail for fraud, they simply write billion-dollar checks.

hamiltonwealth_bankfines.png

What would happen to me, as an individual, if I caused the death of my fellow citizens, by fire, drug overdose or otherwise? What would happen to me if I was guilty of massive fraud?  I would likely be facing jail time, rightfully so. But not corporations. Our laws are designed to protect their longevity.  Why do we treat corporations, which are fictitious entities, differently than individuals?  Why have we forfeited so much power to them?  What is the role of a corporation? Do they answer to employees, customers, shareholders, or the communities in which they operate? I believe the power we’ve relinquished to corporations has contributed to the demise of the American Middle Class. We’ve paid a step price: a toxic, populist, political environment that will bleed into economics impacting our livelihood, and portfolios. 

“Today, the wealth of the top 1% of the population is more than that of the bottom 90% of the population combined, which is the same sort of wealth gap that existed during the 1935-40 period (a period that brought in an era of great internal and external conflicts for most countries).” 

Quick guess, who said this?

  1. AOC

  2. Elizabeth Warren

  3. Bernie Sanders

  4. Ray Dalio

The country’s biggest hedge fund manager, Ray Dalio of Bridgewater, published a two-part 14 page report titled Why and How Capitalism Needs To Be Reformed. It should be mandatory reading for every American politician. A few alarming data points: 

·      There has been no income growth for the bottom 60% of American workers since 1970. Can you blame them for being so pissed off?

Americans pride themselves on upward mobility, but this is more myth than reality. 

hamiltonwealth_parents.png

It has been eroding for decades: 

·      “Most people in the bottom 60% are poor…According to a recent Federal Reserve study, 40% of all Americans would struggle to raise $400 in the event of an emergency. “ Ray Dalio (4/5/2019) 

Ray Dalio is hardly the only “non-Socialist” making this argument. Fellow Wall Street capitalists BlackRock CEO Larry Fink and hedge fund manager Paul Tudor Jones  have all made similar comments. Jones stated in his 2015 Ted Talk that extreme levels of inequality, such as we have today, historically have been resolved by revolution, taxes, or war. None of which would be positive for society, and your portfolio.   

“…trade wars are good, and easy to win.”  President Donald Trump via Twitter (3/2/2018)

Apparently not. A year ago, Trump began imposing tariffs on foreign steel and aluminum. Tariffs are simply a tax, that is usually passed onto the consumer. They raise prices on imported goods, which leads to lower demand. Tariffs are bad for consumers, which is universally accepted by economists, left and right. Sadly, Trump’s tariffs have not helped our steel and aluminum producers, simply look at their stock performance over the past year:

·      Alcoa: -54%

·      US Steel: -59%

·      Nucor: -13%

By comparison:

·      S&P 500: +5.2% (source: Morningstar.com)

“There is absolutely no question that these tariffs, if imposed and sustained, increase the probability of a recession.” Rob Martin, a former Fed section chief -Trade War Will Exact Economic Pain - NY Times (5/12/2019)

Speaking of recession, Guggenheim Partners, who manage $265 billion, recently published Forecasting the Next Recession: How Severe Will the Next Recession Be? (4/9/2019). A few direct quotes:

“…the probability of a recession occurring over the next 24 months has more than doubled.”

“…the recession could begin as early as the first half of 2020”

“…we expect a severe bear market of 40%-50% in the next recession.” 

Guggenheim admits they could be wrong on the timing. The Federal Reserve bank, in an attempt to avert a recession, may move quickly and aggressively to cut interest rates. This could prolong the economic cycle. 

The stock market had its best first quarter since 1998. However, if you simply take a longer view, things don’t appear as rosy. In fact, safe, boring, long dated US Treasury bonds have crushed stocks over the past one year:  

·      S&P 500: 5.17%

·      iShares 20+ Year Treasury Bond: 8.4% (source: Morningstar.com)

Typically, we don’t see this level of bond buying (safety seeking) when stocks are rallying. But the bond market doesn’t share the stock market’s complacency. I believe investors may be underestimating the potential fallout from a protracted trade war.  And Trump’s heightened “real” war rhetoric with Iran will not help. 

·      Additional signs of consumer weakness:  U.S. Banks' Bad-Debt Pile Creeps Higher with Credit-Card Losses - Bloomberg

·      Buying or selling real estate? Read this:  Real Estate Flippers Get Their First Taste of Losing - (5/9/2019)

This is not just anecdotal because we can see that real estate is softening for most of the country. The most recent Case-Shiller Housing Index (20-City Composite) shows that U.S. real estate appreciated just 3% over the past 1 year. Once red-hot markets are even weaker, showing annual gains of just 1.4% for San Francisco, 1.8% for Los Angeles, and 2.6% for New York. 

Due to heightened trade tensions, and weakening fundamentals, we’ve taken a more defensive stance in portfolios. Employment and interest rates (low) remain bright spots, but they alone can’t carry the day. 

Let’s discuss further at your convenience. 

Thank you!

--randy

454 Creative