The Long Term Investor

HERE is the REAL market news from last Friday.........NOT Iran.

Fed policymakers agree rates on hold for 'a time'
https://www.reuters.com/article/us-...-agree-rates-on-hold-for-a-time-idUSKBN1Z2250

(BOLD is my opinion or what I consider important content)

"U.S. Federal Reserve policymakers agreed in their final policy meeting of 2019 that interest rates were likely to stay on hold for “a time” as the central bank set its sights on a new articulation of its monetary policy framework.
FILE PHOTO: Federal Reserve Chair Jerome Powell holds a news conference following the Federal Open Market Committee meeting in Washington, U.S., December 11, 2019./File Photo

Minutes of the Fed’s Dec. 10-11 policy meeting, released on Friday, also showed policymakers were preparing to discuss changes to the way it manages liquidity in financial markets, including a possible standing repurchase facility.

The Fed’s meeting minutes often lay out opposing camps in the discussion of whether to shift its stance of monetary policy at that meeting.

But not the minutes for its last meeting, a reflection of the firm consensus at the central bank at the end of 2019 that it had done enough to shield the economy from a downturn by cutting rates several times that year.

“Participants judged that it would be appropriate to maintain the target range for the federal funds rate,” according to the minutes.

Similarly, the minutes noted that policymakers regarded the current rate stance “as likely to remain appropriate for a time” as long as the economy stays on track.

U.S. stock prices held onto losses after the minutes were released, with financial markets generally roiled after a U.S. air strike killed Iran Quds Force chief Qassem Soleimani, increasing tensions between the two countries.

FOCUSING ON THE FRAMEWORK
Part of the Fed’s meeting in December focused on what has become a long discussion on how to best manage monetary policy.

Policymakers agreed that they would not “reaffirm” a statement on the Fed’s long-term goals in January as has become routine in recent years. “The Committee plans to revisit this statement closer to the conclusion of the review, likely around the middle of 2020.”

The minutes also said various policymakers proposed discussing at future meetings topics including a “potential role of a standing repo facility” as well as “the setting of administered rates” and the long-run composition of the Fed’s Treasury holdings.

After a surprise squeeze in bank funding markets in September sent overnight borrowing costs for banks to as high as 10% - more than four times the Fed’s lending rate at the time - the Fed launched daily liquidity operations to prevent the financial system from seizing up.

Since then, the central bank has provided roughly $50 billion a day in overnight and short-term credit to banks through repurchase agreements, or repo deals. In October, it then moved to permanently expand the size of its balance sheet - and boost the level of bank reserves - by purchasing $60 billion a month in Treasury bills.

The year-end period was of particular concern for both the Fed and Wall Street because it typically sees a high level of demand by banks to secure adequate reserves to close out the year. At the end of 2019, the Fed injected roughly $250 billion to prevent rates from repeating September’s upward spiral, and it appears to have thwarted the feared spike in borrowing costs.

Having dodged a year-end funding squeeze, though, Fed officials must soon decide how long to continue the daily repo operations and if they should implement a permanent repo facility in their place. They must also decide how long to keep up their Treasury bill purchases, currently pledged to continue through the first quarter.

At the Dec 10-11 policy meeting, a Fed staff member told policymakers that repo operations might be needed at least through April.

The staff member also said future Treasury bill purchases could have larger impacts on bill market liquidity. If that were to occur, the Fed “could consider expanding the universe of securities purchased for reserve management purposes to include coupon-bearing Treasury securities with a short time to maturity.”"

MY COMMENT

The FED is FULLY ON BOARD with the general view that..........YES.......there is NO inflation. They are fully on board with supporting the economy and the continuation of the BULL MARKET. The ten year treasury yield is ONLY 1.80%. AMAZING. Easy, low cost money will continue to drive the economy, the markets, and the housing markets through low interest mortgage loans. The Millenial generation is the first generation in my life time to be able to buy homes at unheard of, EXTREME LOW, mortgage rates. What a GIFT to be able to lock in a 30 year home purchase at less than 4%. When people in my generation were in our prime first home buying years we faced mortgage rates of 7-12%. My one continued concern about this stuff is the fact that we are STILL in a DEFLATIONARY environment. Although, we appear to be dealing with it with no problem, while the rest of the world is experiencing stagnation.

 

I ALSO believe that some inflation is a good thing. Perhaps about 2%. I CONTINUE to believe that we are in a deflationary environment. I believe that the FED is worried about deflation. I believe that in the time span around 2008/2009 we were on the edge of a deflationary depression and that danger lasted for years and is still with us today........although with not as much danger or risk. I believe that an inflation rate of 1.25% to 1.75% is significantly low considering the extent of the massive wage increases, low interest rates, etc, etc, etc, that we have been seeing with the BOOMING ECONOMY. I believe that the EU, Japan, Europe, and much of the world is now experiencing a deflationary environment. I do NOT mean stagflation, I mean deflation. I dont believe that local or anecdotal information tells the true story of where we are right now in terms of inflation and/or deflation. On the other board where I used to post, I had many discussions with those that thought we were going to see out of control inflation. Over the past 3-6 years they were all proven wrong. In fact in my lifetime, I have only seen one time that we had out of control inflation.........that was during the stagflation era in the late 1970's and early 1980's. UNFORTUNATELY that experience set the FED off on a 35 year FEAR of the inflation BOGYMAN.........usually NOT justified. I dont see ANY similarity between that situation and where we are now.

 

TomB16. The REAL bottom line.......who knows? You, me, everyone......we are all just making our best guess based on our life and what we see around us. Another reason that I am a long term investor........the short to medium term is opaque and only becomes clear over time.

 

I continue to own BOEING stock and in fact as noted in a post not too long ago, added to the position. I believe and have said on here that this stock has a $100 upside.........BUT.....at this time there is still risk due to the 737 issue, when an how it will be resolved.

If this is true it will be a nice confirmation for the stock and business:

Boeing Stock Rallies On Talk Warren Buffett Is Building A Stake

https://www.investors.com/news/warr...ay-buying-boeing-stock/?src=A00220&yptr=yahoo

"Boeing (BA) stock rose Tuesday amid rumors that investing legend Warren Buffett is buying shares as Berkshire Hathaway (BRKB) looks to put some of its massive cash pile to use.

Berkshire Hathaway told CNBC that it doesn't confirm or deny rumors. According to its third-quarter report, the holding company has $128 billion in cash to spend.

Meanwhile, a Buffett investment would come as Boeing is reportedly considering spending cuts and issuing debt to raise capital amid rising costs for the 737 Max crisis and a temporary production halt.

Boeing stock gave up some gains to close up 1.1% at 337.28 after rising as much as 3.1% on the stock market today approaching its 50-day average again, according to MarketSmith chart analysis. Berkshire Hathaway dipped 0.5%.

What Warren Buffett Wants
Warren Buffett is famous for finding good bargains, and Boeing stock has fallen over 20% since the second 737 Max crash in March and the subsequent global grounding.

In early 2016, he began building a stake in Apple (AAPL) after that stock sold off, and has continued adding shares.

But Buffett hasn't found any big deals since buying Precision Castparts in 2015, and refuses to overpay or enter into bidding wars.

Berkshire recently rejected an offer to buy Tiffany after the upscale jeweler received, and later accepted, a takeover bid from luxury goods company LVMH. Buffett also walked away from bidding wars with Tech Data (TECD), Oncor Electric Delivery, NYSE Euronext (ICE) and Constellation Energy.

But in a surprise move last year, Buffett invested $10 billion to help Occidental Petroleum (OXY) outbid Chevron (CVX) in its $55 billion acquisition of Anadarko."

 

IN SPITE of those that try to constantly talk down the economy and plant seeds of doubt in people and investors..........the economy CONTINUES TO BOOM. That is because when people have their own money on the line they tend to invest according to the actual TRUTH..........NOT political fantasy.

Private payroll growth surges in December to end 2019 strong, ADP says

https://www.cnbc.com/2020/01/08/adp-moodys-private-payrolls-december-2019.html

(BOLD is my opinion or what I consider important content)

"Private payroll growth ended 2019 on a strong note, with companies adding 202,000 positions in December in another sign of a healthy labor market, according to a report Wednesday from ADP and Moody’s Analytics.

The total was well above the 150,000 consensus estimate from economists surveyed by Dow Jones and sets the stage for the government’s official count that will be released Friday. Economists expect the Labor Department’s tally to show a gain of 160,000.

In addition to the solid December growth, ADP revised the initial November count of 67,000 up to 124,000.

Despite the big beat in December, the jobs market continues to “moderate,” said Mark Zandi, chief economist at Moody’s Analytics.

“Manufacturers, energy producers and small companies have been shedding jobs. Unemployment is low, but will begin to rise if job growth slows much further,” Zandi said in a statement.

Job gains for the month were spread across sectors, with construction adding 37,000, the best monthly gain since April and a reversal of the initially reported 5,600 loss in November.

Goods-producing industries added 29,000 after dropping 17,600 a month ago. Manufacturing saw a decline of 7,000 while natural resources and mining fell by 1,000.

Services added 173,000, led by 78,000 in trade, transportation and utilities and 61,000 in professional and business services. Education and health services rose by 49,000 and financial activities contributed 10,000.

On the negative side, leisure and hospitality, one of the biggest growth sectors during the decade-old economic expansion, lost 21,000 positions while information services posted a 14,000 drop.

Counting by company sizes, businesses employing 50 to 499 workers led the way with 88,000 new jobs, while small firms added 69,000 and large companies rose by 45,000.

The ADP count tees up the Labor Department’s official tally, though the two counts can vary widely on a monthly basis. In November, ADP’s initial reading of 67,000 sharply trailed the government’s estimate of 266,000.

However, over time the two numbers often mesh. For all of 2019, ADP’s count averaged 163,000 a month, while the Labor Department was at 166,000 through November."

MY COMMENT

We are in a rotating jobs BOOM. We are also in a HISTORIC economic golden age. JUST SHOWS what happens in the REAL WORLD when taxes are reduced and regulations are taken off the backs of business. UNFORTUNATELY memory will be short and many will take NOTHING away from this lesson in REALITY. We saw the SAME impact from the Regan tax cuts and policies back in the 1980's. Want another classic example of this...........just look to the EU and Europe. They are doing the reverse and they are experiencing exactly what you would expect. They are caught up in a deflationary depression.....although at the moment no one cares or is looking at what happens in Europe. ALL eyes are on the AMERICAN economy, as they should be. WE are the economic power of the world as well as the CAPITALISTIC power of the world. BUT.....knowing human nature.......I am sure this little lesson will be quickly lost, as usually happens. If we are lucky, enough of the younger generations will retain some memory of these times and will have the INTELLIGENCE to understand what and why we are in the current economic boom. There is actually a REASON why culture, history, social mores, etc, etc, etc, are important.

 

HATE to jinx the market in the middle of the day........BUT....the market REFUSES to go down. It is OBVIOUS that we are in a continuation of the BULL MARKET and the future direction of the markets in general is UP. We are on the verge of hitting Dow 29,000 and continued new record all time highs in all the major averages going forward.

U.S. weekly jobless claims fall, but labor market cooling

https://www.reuters.com/article/us-...l-but-labor-market-cooling-idUSKBN1Z81PX?il=0

(BOLD is my opinion or what I consider important content)

"WASHINGTON (Reuters) - New applications for U.S. jobless benefits fell more than expected last week, but the labor market appears to be cooling, with the number of Americans on unemployment rolls surging to more than a 1-1/2-year high at the end of 2019.

Initial claims for state unemployment benefits dropped 9,000 to a seasonally adjusted 214,000 for the week ended Jan. 4, the Labor Department said on Thursday. The fourth straight weekly decline saw claims almost unwinding the jump in early December, which was blamed on a later-than-normal Thanksgiving Day.

“Jobless claims have returned to normal levels, showing the labor market is in a good place,” said Chris Rupkey, chief economist at MUFG in New York.

Economists polled by Reuters had forecast claims would fall to 220,000 in the latest week. The claims data was volatile in late 2019, with applications dropping to 203,000 at the end of November and shooting up to 252,000 in early December.

The four-week moving average of initial claims, considered a better measure of labor market trends as it irons out week-to-week volatility, fell 9,500 to 224,000 last week.

U.S. financial markets were little moved by the data as politics dominated sentiment. Stocks on Wall Street rose, with the main indexes hitting record highs after the United States and Iran moved away from an all-out conflict.

The dollar .DXY gained versus a basket of currencies, while U.S. Treasury prices fell. But the labor market could be losing momentum. The number of people receiving benefits after an initial week of aid vaulted by 75,000 to 1.80 million for the week ended Dec. 28, the highest level since April 2018. The weekly increase was the largest since November 2015.

The four-week moving average of the so-called continuing claims rose 33,000 to 1.74 million. Some of the surge in continuing claims could be related to year-end volatility.

“The continuing claims data also may exhibit some volatility around the holiday season, but the trend in the data appears to have weakened over the past month or so,” said Daniel Silver, an economist at JPMorgan in New York.

PAYROLLS IN FOCUS
Labor market strength is helping to keep the economy on a moderate growth pace despite a deepening downturn in manufacturing. The White House’s 18-month trade war with China has sapped business confidence and undercut capital expenditure.

Though Washington and Beijing in December hammered out a “Phase 1” trade deal, considerable confusion remains about the details of the agreement, which is expected to be signed next week.

The U.S. government is expected to report on Friday that nonfarm payrolls increased by 164,000 jobs in December. While that would be a step down from November’s robust gain of 266,000, the anticipated pace would still be well above the roughly 100,000 jobs per month needed to keep up with growth in the working-age population.

The unemployment rate is forecast to be unchanged near a 50-year low of 3.5%. The Federal Reserve last month signaled interest rates could remain unchanged at least through this year. The Fed lowered borrowing costs three times in 2019.

Minutes of the U.S. central bank’s Dec. 10-11 policy meeting published last week showed officials “generally expected sustained expansion of economic activity, strong labor market conditions,” though some viewed next month’s expected downgrade to employment growth as an indication the labor market was cooling.

The government last August estimated the economy created 501,000 fewer jobs in the 12 months through March 2019 than previously reported, the biggest downward revision in the level of employment in a decade. That suggests job growth over that period averaged around 170,000 per month instead of 210,000. The revised payrolls data will be published on Feb. 7.

“It is not clear what the data since then will look like, but we suspect more recent job growth could be revised down,” said Kevin Cummins, senior U.S. economist at NatWest Markets in Stamford, Connecticut."

MY COMMENT

YES, the economic good news continues. As to the opinion and speculation in the article from a few quoted sources, nothing more than their biased GUESS, NOT fact. The BS in the headline and article about "cooling" is nothing more than sensationalism since everyone that is involved in this article KNOWS that is due to seasonal factors associated with Christmas and is typical every year. MORE good news for investors. ALSO MORE good news for investors that the media and others are not JUMPING on the bandwagon and creating EXUBERANCE. The markets will continue to climb a wall of worry which is a very good thing.

 

HERE is a little article showing the power of LONG TERM INVESTING. I wold love to see this data applied to a portfolio that was 100% in stocks. I find it irresponsible and mind boggling that the media and financial industry still are pushing people as young as their thirties to have a significant amount of money in bonds. ALSO, this little article starts the investment process at age 35. If started in the mid to late twenties the result would be WAY HIGHER. TIME is your friend when it comes to long term investing along with COMPOUNDING.

Here's how rich you'd be if you maxed out your 401(k) for 30 years

https://www.usatoday.com/story/money/2020/01/08/how-rich-youd-be-30-years-maxing-out-401-k/40945011/

(BOLD is my opinion or what I consider important content)

"401(k) plans can be great ways to save for retirement, and their biggest advantage is how much they let you save each year. The limit for 2020 contributions to 401(k) plans is $19,500 for those under 50 or $26,000 for those 50 or older.

That's a lot, and not everyone can max out their 401(k)s, but there are good reasons to shoot for the stars with your retirement savings. If you're fortunate and diligent enough to hit that number year in and year out throughout your career, you can end up with life-changing wealth by the time you retire.

In fact, someone who contributed the maximum for 30 years and invested it wisely would now have a nest egg of more than $1.75 million – enough to provide most people with ample and sustainable wealth throughout their golden years.

What it takes to be a super saver
In order to get to that $1.75 million number, someone who started saving 30 years ago at age 35 just had to follow a simple savings and investment strategy:

• Contribute the maximum allowed by law to your 401(k) account. That ranged from around $7,600 back in 1989 to $19,000 in 2019.
• Make catch-up contributions once you reached the permitted age of 50. That added $3,000 to $6,000 more a year starting in 2004.
• Invest using an asset allocation strategy that evolved over time. For the first 10 years from age 35 to 45, invest 80% in an S&P 500 index fund and 20% in a fund tracking 10-year Treasury returns. Change that allocation to 70%/30% during the second 10 years from age 45 to 55, and then to 60%/40% from age 55 to 65.
• Rebalance your investment portfolio to reflect the appropriate age-based asset allocation at the beginning of each year.
  
  Anyone who did that would've turned just under $500,000 in total contributions into 3½ times that figure – all thanks to returns from the financial markets.
  
  Lessons learned along the way
  Over that 30-year period, there were a lot of things the market taught investors. The 1990s were extremely kind to retirement savers, and the portfolio would've hit the $100,000 mark by 1995. Similarly, the size of the nest egg doubled between 2002 and 2007 and more than tripled from 2009 to 2019.
  
  Yet you would've had to be willing to endure long periods of tough performance. In 2002, after three tough years, your retirement account balance would've been less than it was in 1999 – even though you would've contributed $32,000 extra into your 401(k) during that period. Similarly, the market meltdown in 2008 would've lopped $90,000 off the value of your 401(k) even after considering the $21,000 you contributed during that year.
  
  One clear lesson is how important the last years of your career are to your retirement savings. 2019 was better than any other year, adding more than $350,000 to the value of your 401(k) account. Those investment returns had the same impact that 16 years' worth of contributions from 2004 to 2019 had in pushing your account balance higher. That $350,000 figure is also higher than the value of the entire account back in 2003 – after 15 long, hard years of maxing out contributions.
  
  Finally, using an asset allocation strategy can help smooth the ride. For instance, during 2008, big gains for Treasury bonds helped to ease the blow from the plunge in stocks. The same was true during the bear market of 2000 to 2002, and although bond allocations did hold back gains during big bull markets in stocks, it's a price many investors would find worth paying in exchange for being able to sleep better at night.
  
  Have a goal
  Saving for retirement is important, and 401(k) plans can help you achieve even lofty financial goals for your golden years. Whether you aim to max out contributions over your entire career or simply want to take advantage of employer matching and other benefits of 401(k) plans, the result will be a more financially secure retirement at the end of your career."
  
  MY COMMENT
  
  YES saving and investing for retirement is NOW very important. If YOU are NOT a government worker you do not have a pension. YOU need to have the discipline and intelligence to save for your retirement. As I said, I DO NOT AGREE with the allocation of 20% at the begining and more later in bonds. A TOTAL waste of very valuable EARLY investable money and a HUGE loss to the lifetime portfolio. I believe the average investor in a 401K has the ability to understand and hold through market downturns.........ESPECIALLY if writers and other would quit spouting this bond foolishness in articles aimed at people in their 20's and 30's. BUT, perhaps I am out of touch with the inability of people to understand investing. My investment plan for a GREAT RETIREMENT.........max your 401K or ROTH IRA starting in your first years of employment and from than on for life......invest ALL funds in a SP500 Index Fund. Being invested in the 500 largest, greatest companies in the USA is all the diversification needed.......and....NO NEED for re-balancing or other busy work.
  

 

I agree with your use of bonds completely. You are using them as a cash equivalent or emergency fund in addition to being an investment. You, at an older age only have 2% in bonds. You are earning income from them. They are a disaster back-up. This approach makes sense.

My problem with the current FAD is having people as young as their 20's in 20% bonds. The article above is talking about someone age 45 being 30% in bonds. I just think that is truly irresponsible and foolish for most people saving for retirement. That is one reason I am NOT a fan of target date funds. I think they are a clear path to very substandard returns on your investment. They often WAY over allocate bonds to the various ages. Most people would also be surprised to see what is in the portfolio of many of them if they looked. Of course, many of them have way under-performed.

In my self employed, business owner, early retirement, I kept a cash cushion of money for annual living expenses. I tried to always have at the minimum 3 years of living money on hand so I would not have to cash in stock and fund money in my IRA (Keogh rollover) during a down market. I tried to replenish that pot of money when at market highs so it tended to spread it out. Since this was critical living money I just kept it invested in laddered CD's that matched up with when I would need to have the money available. I would usually transfer $160,000 into my "annual living expense" Schwab account at the start of each year as the money for all living expenses for that year. Each month I would take a draw out of that account and into my checking account........so maintained the illusion of living on a monthly salary. This helped me with discipline and budgeting.....although I am not a fanatic....there are lots of times and ways we manipulated the budget over the years.

Anyway, your post was a good one.

 

WELL with SIX days (markets open) under our belt........HERE is where we are for 2020 to date:

DOW year to date +1.47%
SP500 year to date +1.36%
My Portfolio +1.46%

EXTREMELY short term numbers that CAN NOT be extrapolated to mean anything at all. BUT.......I will take the start we have had this year any time I can get it. If we can keep going we can build up a nice cushion against the inevitable correction that will come. My expectation is that we will see a little correction some time in the April/May time span. Do I care.........NO, this is NORMAL market behavior. It used to be.........in the OLD DAYS........that April was a nice month for investors. People would make their IRA contributions in April to beat the April 15 tax deadline and get the deduction. We would get a nice IRA bump up in April as investors put that money to work in stocks and funds. Now we dont really see that much anymore. With the 401K ruling supreme now as a retirement vehicle people tend to contribute out of each pay check all year long and we dont get that outsize April bump anymore.

 

I LIKE the way the author of this little article thinks:

Why stock investors should love Friday's 'disappointing' jobs report

https://finance.yahoo.com/news/why-stock-investors-love-fridays-130106039.html

(BOLD is my opinion or what I consider important content)

"The stock market is rational despite what it looks like.

Which brings me to the latest report on U.S. hiring from Friday.

The change in nonfarm payrolls in the report disappointed some. New jobs came in below expectations at a net addition of 145,000 jobs in December versus estimates of 160,000. November’s blowout number of 266,000 new jobs was revised down by 10,000 jobs. Good, but not spectacular.

The unemployment rate remained at a 50-year low. It would appear just about everyone who wants to work is working. Job growth is not too hot to spark inflation concerns and not too low to signal inflation. Which is likely to keep the Fed on the sidelines.

And then there is the fact that wages aren’t growing as fast as the experts expected.

Average hourly earnings rose a modest 0.1% in December compared to an estimate of 0.3%. Year over year, average hourly earnings rose a manageable 2.9%, again versus expectations of 3.1%.

But consumers don’t need significant wage increases to prosper. Despite unexpectedly low wage growth, the consumer is confident and still spending. That is because inflation is well below 2%, interest rates are near historic lows, tax-cuts increased net take-home pay and energy costs are muted. Since the American consumer drives two-thirds of domestic GDP growth (and 17% of global GDP growth) he or she matters to growth. And the picture looks pretty rosy.

So, Friday’s job report is bullish for stocks for three reasons.

1. The Fed is more likely to stay on the sidelines with jobs growing at reasonable but not blowout levels and wage growth manageable. Think of steady jobs and wage growth as the sweet spot for Fed policy which is good for stock investors.

2. If Americans are working, they are contributing to their 401(k) accounts, putting money into the market every two weeks and potentially driving stock prices higher. As companies buy back shares while investors increase allocation to stocks – supply becomes scarcer in the face of increased demand. It's econ 101.

3. If wage growth remains muted (as it did in December), corporate margins are not at risk. The worry for investors has been that as the unemployment rate reaches historic lows and the employment participation rate maxes out, wage pressure would rise and negatively impact corporate earnings and margins. That does not yet seem to be happening – another bit of good news for stocks.

When you are tempted to throw in the towel and declare the market irrational, remember that it is a forward discounting mechanism that is already looking past today’s news to what that means for the future.

We believe that the market may need a correction to prune back excesses and re-accelerate from here. But when a sell-off occurs, remember that the underlying fundamentals for stock performance continue to be more bullish than not. And if your neighbors are working that is better for the economy and good for all of us."

MY COMMENT

AMERICANS are benefiting in many ways from this GOLDEN ECONOMY. Wages are up.......actually a lot over the last 3-4 years. People are feeling good seeing their retirement accounts rising quickly. We are in a RARE sweet spot right now and for the near future. As I have said in the past.......the ONE issue that could derail all this "stuff" is the election. It will be an interesting year. I will......HOWEVER.....continue to be fully invested in my stocks and funds for the long term as usual.

 

AND.......on the same subject as above......the health and direction of the current markets:

Here’s what really matters for markets in 2020

https://moneyweek.com/520478/central-banks-what-really-matters-for-markets-in-2020/

(BOLD is my opinion or what I consider important content)

"I’ve spent a lot of this week pointing out that the conflict between the US and Iran is scary, but probably not that important for markets.

So if geopolitical turmoil isn’t particularly significant for investors, what is? If tidings of war and promises of strife don’t matter, then what does?

I hate to say it, but it’s the same old, same old – it’s all about how accommodating central banks plan to be.

Central banks are never out of ammo
You’ll often hear that central banks are “out of ammo” or that their effect on markets is overstated. Neither is true.

Forget the “zero bound” – you can always make monetary policy looser. You just print it. And as long as you can get it out there – and central banks can – then it’ll go somewhere.

It may or may not do much for the underlying economy. But when it comes to markets, as Eoin Treacy of FullerMoney puts it: “The simple fact is monetary policy beats most other factors most of the time.”

So given that they’re so important, the question for investors is: what are central banks planning this year?

Let’s start in the UK. Andrew Bailey takes over from Mark Carney as governor of the Bank of England in March. What can we say about Bailey? He understands financial regulation, which will be handy during the Brexit talks. And he will hopefully be less “starry” than Carney.

As for monetary policy – typically, the Bank of England takes its cue from the US. Yesterday, for example, Carney suggested that the Bank could commit to keeping rates low until inflation is clearly remaining around target – a so-called “lower for longer” strategy. He noted that there is still room to cut rates if needs be.


You might think he just wanted to give sterling another few kicks before he heads out of the door. But he’s really just echoing the general line of the Federal Reserve, America’s central bank. In all, it’s hard to see the UK’s central bank springing many surprises this year. And that’s no bad thing.

Look out for bank mergers in the eurozone
The European Central Bank (ECB) is more interesting. All central banks are political entities, of course, but the ECB is about to become much more overtly political.

The previous incumbent, Mario Draghi, lashed the eurozone together, over the misgivings of the Germans, with sticky tape and quantitative easing. It’s Christine Lagarde’s job to make that permanent.

The purpose of the euro was to make ever-closer union an inevitability. One benefit of Brexit for those who are in favour of a much closer union is that they now feel able to be much more explicit about that.

How might that manifest in monetary policy? Well, the whole point is that Lagarde probably won’t have to do much on that front, certainly not this year. Draghi set the ECB to auto-print before he left. Unless inflation in the region rockets for some reason, Lagarde can justify leaving it there.

She’ll continue to press national governments to spend more, dangling the carrot of ECB money-printing to underwrite spending on “green” tech. But what’ll be more interesting is to watch what happens in the eurozone banking sector this year. If progress is being made towards ever-closer union, that’s where it’ll start – with a load of mergers.

The policy response from Asia
What about the Bank of Japan? It hasn’t drawn much attention to itself in recent months. However, one point worth noting is that Japanese ten-year bond yields have quietly crept into (barely) positive territory in the last few weeks. The Bank of Japan will probably be quite happy about that – it wants a steeper yield curve, which is healthier for the banking sector.

As for China’s central bank – an increasingly important player – signs are that after tightening up in recent years (to impose a bit of discipline on lenders and borrowers), the People’s Bank of China is loosening monetary policy again. That will be cheered by markets.

The daddy of them all
Finally, the Fed. Ultimately the Fed is the one that matters. One reason that markets have been so exuberant over the Christmas period is that the Fed has not only backed away entirely from the idea of raising rates, but it is also injecting funds into the system to prevent liquidity from seizing up.

This isn’t quantitative easing (and I don’t think this is just semantics, it’s genuinely different). But it is keeping things ticking over and also reassuring all market participants that the central bank has their back.

The main problem for the Fed is that the US is irresistible. Everyone wants a piece of it, and that makes it hard to drive the dollar down, which to a great extent, is the key to getting a proper wild boom going.

Of course, the Fed probably shouldn’t be trying to spike the punch bowl right at this point in the cycle. But it is election year, so we know who’ll be jogging their elbows at every chance he gets.

In short, central banks are all in loosening mode. None of them is remotely concerned about a global economy that’s running at close to full employment, and they’re all apparently willing to ignore inflation until it’s firmly embedded in the system.


Given that, it’s difficult to be bearish overall. I’m sure I’ll find reasons to do so, and I’ll still favour cheap markets over expensive ones. But at the risk of repeating myself, the fundamental issue is this – until inflation takes off, there’s no reason for central banks to step back. And for as long as that’s the case, it’s hard to see why asset prices would collapse."

MY COMMENT

You will notice, not much bolded in the EU and Japan section above. My reason.......I could not care less about the EU or Japan. Japan continues to be stuck in their decades long deflationary depression due to cultural and economic structurial issues in their country. The EU.........a total FU#K UP......with little to no hope that they will ever change their socialistic, bureaucratic, crazy thinking. Between the Germans and the French the EU is just a total disaster. BUT.....who cares.....they are irrelevant.

 

HERE.........once again, as usual, is my portfolio model that is the basic pattern for all the various portfolios of mine and family that I manage.

PORTFOLIO MODEL

"Here is my "PORTFOLIO MODEL" for all accounts managed which is the basis for MUCH of my discussion in this thread. I am re-posting this since I often talk in this thread about my portfolio model. My custom in the past on this sort of thread was to re-post my portfolio model every once in a while since I will tend to talk about it once in a while. I "manage" six portfolios for various family including a trust. ALL are set up in this fashion. If I was starting this portfolio today, lets say with $200,000. I would put half the money into the stock side of the portfolio, with an equal amount going into each stock. The other half of the money would go into the fund side of the portfolio, with an equal amount going into each fund. As is my long time custom, I would than let the portfolio run as it wished with NO re-balancing, in other words, I would let the winners run. Over the LONG TERM of investing in this style (at least in my actual portfolios), the stock side seems to reach and settle in at about 55% of the total portfolio and the fund side at about 45% of the total portfolio over time. That is a GOOD THING since it tells me that my stock picks are generally beating the funds over the longer term. AND....since the funds in the account generally meet or beat the SP500, that is a VERY good thing.

As mentioned in a post in this thread, I include the funds in the portfolio as a counter-balance to my investing BIAS and stock picking BIAS and to add a VALUE style component (Dodge & Cox Stock Fund), a top active management fund that often beats the SP500 (Fidelity Contra Fund) and a SP500 Index Fund to get broad exposure to the best 500 companies in AMERICAN business and economy. The funds also give me broad diversification as a counter-balance to my very concentrated 12 stock portfolio.

STOCKS:

Alphabet Inc
Amazon
Apple
Boeing
Costco
Home Depot
Honeywell
Johnson & Johnson
Nike
3M
MSFT

MUTUAL FUNDS:

SP500 Index Fund
Fidelity Contra Fund
Dodge & Cox Stock Fund

CAUTION: This is a moderate aggressive to aggressive portfolio on the stock side with the small concentration of stocks and the mix of stocks that I hold and with the concentration of big name tech stocks. Especially for my age group. (70). So for anyone considering this sort of portfolio, be careful and consider your risk tolerance and where you are in your life and financial needs. I am able to do this sort of portfolio since my stock market account is NOT needed for my retirement income AND I have a fairly HIGH RISK TOLERANCE. In addition I am a fully invested, all the time, LONG TERM investor. (LONG TERM meaning many years, 5, 10, 20, years or more)"

MY COMMENT

This portfolio is HIGHLY CONCENTRATED on the big cap side of things. OBVIOUSLY between the funds and my eleven stock holdings there is MUCH doubling and tripling up on the stocks. THAT is INTENTIONAL. I strongly subscribe to the view of Buffett and some others that TOO MUCH diversification kills returns. I do NOT believe in the current diversification FAD that most people seem to now follow.......or think they are following. I DO NOT do bonds and think the current level of bonds held by younger investors.....those under age 50.....is extremely foolish.

AS TO TODAY.......the markets continue to RUN and show all signs of wanting to take off. New records all time in the SP and NASDAQ. A GOOD way to start the week.

 

That is the reason I have about half of each portfolio in my three funds. It gives me diversification from my very concentrated stock selections and on that portion of my account I let others do the work. The funds also serve as a balance to my personal bias as an investor......sort of a second opinion. It has been many decades since I have had more than 15 stocks in my portfolio. For a long time now it seems to be generally in the 10-15 company range.