Michael Mott CLU,CH.F.C,CFSB
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THE “DONALD DIP” AND A FEW RAYS OF HOPE
So here we are, having concluded 2018 on a sour note. The U.S. index averages are not that bad for the year but it feels worse because all the gains up to September were lost from then through December, so markets ended negative. I believe the results of 2018 rest, in part, on the shoulders of “The Donald”. Trump, also known as “Tariff Man” and other more expletive descriptions, has shown a formidable ignorance of how things work, both domestically and internationally, the laws of his country and the laws of the world.
His anti-free trade policies are a disaster. Politicians in the later 1920’s spewed excrement about creating jobs by making everything in the United States and putting tariff’s on all the goods coming into the country from outside. Other countries responded by raising tariffs and things came to a grinding halt, as evidenced by the Great Depression. A consequence of the global mess was the rise of fascism. The solution to the problem was World War II.
I never thought I would actually see, in my lifetime, the process enacted that gives rise to fascism. Today, however, there is a mentally unstable child in charge and his own Party refuses to acknowledge that Nazi’s are bad and the conduct of his border guard is despicable.
Shortly after Donald was elected I heard a fund manager remark that 90% of the time whoever gets elected really doesn’t matter. Things just continue to go along. We may be seeing the other 10% in the short term, but there are several indicators that things may not turn out as bad as we think. The market is currently ignoring economic fundamentals. Take the employment rate as an example. Normally, full employment in the U.S. is when the unemployment rate is around 5%. Some people will always be changing jobs, or moving to another town, so 5% has been a reliable statistic historically. The last unemployment number I have seen at time of this writing for the U.S. is 3.7%. When people have jobs, they spend money. This improves Company profits and stocks tend to rise over time based on earnings.
The housing industry has been slowing for the last several years. Millennials, as a group, were not keen to get into the pleasures of home ownership. This seems to be changing and demand for new housing at the starter end has been picking up. As you know, the housing sector creates a ton of positive economic activity.
Government cental banks around the world are curtailing quantitative easing. They are no longer printing an unlimited supply of money to keep things stable, as they started to do in 2008 to offset the problems created by big bankers. This return to a normal course is creating some friction, but it will subside as interest rates rise to a historically normal level and balance sheets unwind.
It is interesting to note that the five major Canadian bank stocks share prices were down between 14% and 20% in 2018. They posted record profits, however, and all of them raised their dividends. Record earnings and lower share prices only occur when the markets are acting hysterically, like Donald does.
The reliability of earnings and stability of dividends is a good situation for those of us that have the Bridgehouse Sionna Diversified Income fund. As you may recall, the fund does not redeem shares to produce the monthly income received by those who need it. The fund just pays out the dividends received from the Companies owned in the fund. If you don’t need the income, the monthly distribution just buys more shares. I met with the manager of the fund, Marian Hoffmann, in Toronto this past October. We went through the holdings of the fund in detail and one thing was very clear. Marian’s knowledge of the Companies she owns in the fund is a mile deep. She is not guessing on anything. I come away from meetings like this knowing our investments are in the best of hands.
I must mention that one of our fund Companies now has a 10 year track record. Edgepoint has been managing money since November 2008 and their Global Portfolio has the best 10 year compound rate of return for a global mandate, in Canada. They also have the best return on a 10 year basis for their Canadian Portfolio, their Global Growth and Income fund and the second best return for the Canadian Growth and Income fund. Awesome!
Now, to put an administrative damper on things, the Regulators have been working hard and have come up with a new Regulation. I call it the “Hillary and Ivanka rule”. For 30 years I have been emailing and you have been replying to my email address firstname.lastname@example.org. This is still good for insurance communications as we have never had a privacy issue in over 3 decades. Communication concerning mutual fund business must now be sent through email@example.com, the address which goes through Professional Investments’ server. Please continue to send the jokes to firstname.lastname@example.org. I enjoy them immensely.
Take heart. The market forces of greed will soon overpower the forces of fear and The Donald will likely resign as the forces of law, order and Mueller close in on him, only to be pardoned by President Pence.
ALL THE BEST FOR 2019!