December 31, 2019

 

 

 

 

Dear BrickStreet Folks:

 

The Great Recession was a full-throated economic vacuum in December 2009. The year began with a 7.2% unemployment rate and ended at 10% with 15.3 million people unemployed.

The Dow Jones Industrial Average began the year 2009 at 9,034 down 36% from the previous high established on October 7, 2007 and ended 2009 at 10,428 up a healthy 15.4% for the calendar year. Even though things on the ground were looking and feeling bleak, Wall St. was attempting a comeback.

 

Still down 40% from the all-time highs of 2007, the decade ended well as the Federal Reserve was front and center rescuing an economy that came very close to an all-out financial collapse in February of 2009.  

 

Yes, we give the Federal Reserve most of the credit for keeping the US Treasury from going upside down. The independent Central bank of the United States jumped to the top of the emergency vantage point and dictated a “wealth effect” policy that revived intangible assets… stocks and bonds… from complete disaster. By taking interest rates to zero and telling Congress to spend like crazy, and the US Treasury to sell bonds, the Federal Reserve became the buyer of over 70% of US Treasury debt in 2009-2010. The Fed stabilized liquid markets in a way that will be studied for decades. At no time in history was so much sovereign fiat currency so vulnerable to extinction.

 

Former Federal Reserve Bank Chairman Ben Bernanke stood stoically under enormous pressure and pulled it off.

 

Now ten years later, the Dow stands at almost 29,000, unemployment is 3.2%, and US auto sales have averaged over 17 million units a year since April 2015 up from 9.7 million units in December 2009. Average seat miles available for commercial airline passengers have gone from 1.33 Trillion to 1.92 Trillion in the past ten years, a 44% increase.

 

There are lots of fun facts to bring up when looking at the change that has happened since this decade began. The obvious next point of order is what happens next?

 

Here are a few things we think are important:

 

1.     Interest rates should remain low for 2 to 5 years. The United States is the best place on the globe to get a return on government backed securities. Most of Europe has negative short term interest rates in their effort to further stimulate their economies. A Danish bank named Jyske Bank is offering a negative .5% interest rate to borrowers who want to purchase a home. That’s right, they want to pay you $5 a year for every $1,000 you borrow from them to purchase a home. This economic phenomenon has caught on all over Europe in Germany, Italy, and France as banking ministers try like heck to get people to borrow money and invest in something that produces capital! The U.S. certainly benefitted from low interest rates these past ten years as we have pointed out, but at least we are charging our borrowers something for the use of our U.S. dollars. So, to compete with nations handing out money just to borrow, we think interest rates will remain low for a while until the global picture gets more stable.

 

 

2.     A 30,000 Dow should happen sometime soon. The rest of the world is desperate for stability, growth, and real economic stimulus; i.e. employment. The U.S. is the place for all of this right now. There is an enormous amount of momentum in the everyday working economy that basically got starved out between 2007 and 2014. Those folks are working, spending, having children, buying cars, and getting raises like never before in their lifetimes. We have called it the “Muddy Boot” economy, and it has proven to be a catalyst like most academics and economists have not seen since the postwar 50’s. This section of our economy is providing the bedrock of consistency in labor markets that will give confidence to policy makers for quite a while.

 

 

3.     Dividends are essential. Because interest rates are so low, and look to remain there, we have felt the need to invest in companies that pay above average, predictable, balance sheet healthy dividends. Companies like Bristol Myers, IBM, AT&T, BlackStone and Exxon all have long histories of paying dividends to their shareholders. We have been shifting to dividends and away from fixed income bonds over the past 18 months because of the growth story that we see unfolding and the flat prospect for higher borrowing rates ahead. We are focusing on names that will benefit from global economic improvement and the continuation of our domestic ground swell. We understand that income is a primary driver for most of our folks, yet maintenance of principal must be in focus.

 

 

4.     Volatility is coming, and it will be substantial. The swings in the Dow at 28,000 will be much more dramatic than past swings when the Dow was trading below 9,000. We can sense that if a news story or temporary break in market confidence happens, the Dow could easily fall 5,000 points in a few days or weeks. So if the Dow is at 30,000, and we drop 5,000 points, it’s a 15% drop. That will not be the end of free markets as we know it… it’s just a lot of points at one time. Our thinking is that until the global picture changes and improves; the U.S. will still be the best place to invest. There will be no need to sell everything and hide if we see a sell off. It will be time to be pragmatic and keep looking for income opportunities that will be selling at discounts.

 

As most of you know, our in-house artist, Nancy Dunn, retired last year, so I’m without the most fun part of these commentaries. But if she were still drawing for us, I would ask her to draw a calendar with a chart line scrawled across it displaying the ride we have been on over this decade. Surely we could figure out how to add some humor to it just to lighten up some of this boring stuff. In reality, the USA is leading the economic parade compared to the entirety of other organized economies right now, and it looks like we have a lot of field yet to harvest.

 

Happy 2020!

 

As always, we are providing advice to build and maintain wealth.

 

Matthew Burril