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Make No Mistake

Good Morning,

Reality – a funny word these days.  An upcoming Steven Spielberg movie is already being used as a driver for the upgrading of some VR chip companies.  That movie will be in theaters soon:  Ready Player One.  It’s already getting rave reviews.  Here is the trailer.

It is marketed in this manner:

“The film is set in 2045, with the world on the brink of chaos and collapse. But the people have found salvation in the OASIS, an expansive virtual reality universe created by the brilliant and eccentric James Halliday (Mark Rylance). When Halliday dies, he leaves his immense fortune to the first person to find a digital Easter egg he has hidden somewhere in the OASIS, sparking a contest that grips the entire world.”

Kind of like a Gen Y Gold Rush.

The point?  Stretch your mind just a little bit and you will recognize that the world you “see” today is being dynamically defined by what you click on.  Think I am kidding?  Play a trick on yourself.  Go to say, a sporting goods place and look at a blue tent.  Click on it as though you want to buy it.  Then don’t buy it and go back to work.

Be assured that for the rest of the day – and multiple times over the next week – wherever you are “on the internet”, that blue tent will show up in ads – almost everywhere you look.

Carry it a tiny bit further. 

Recall just days ago that you clicked on an attention-getting headline of some sort – any topic really.  Do you notice that you are beginning to see more headlines like that one?  Do you notice that you see more news stories about the same type of strife?  Do you notice that the more you click on ugly news stories and bad news, the more ugly news stories and bad news show up “on your dashboard” so to speak?

In other words, the social media world is producing the world you see by simply feeding you what it thinks you want to see – because you clicked on something.

It is the same technology that makes that blue tent hunt you down no matter where you are “on the internet.”  There have already been a few outspoken programming engineers who have shed light on this from the sacred halls of Silicon Valley.  The addiction process is real.  The training process is real.  The definition of the world you see is real.

Face it, folks – virtual reality is already here – in far more ways than we may realize.  The fancy glasses are the only things missing.  In less than 10 years, those bulky, cover your entire head, goggles will be replaced by fashionable looking devices which will take you to what we call today, “the virtual world”.

Tomorrow, (I don’t mean literally tomorrow) one can see that it could easily be where we spend most of our time.

Business meetings will take place from anywhere on the planet but we will feel in every sense like we are sitting at the same conference table.

The lesson – don’t automatically laugh off or shove aside the comment “fake news” the next time you hear it.  Just in the last two weeks, for example, widespread use of YouTube has been permitted across India.  In the first week, data showed that over 82% of all video views were related to completely fake video reels.  Totally false news-feeds captured over 8 out of 10 clicks.

In case you wonder aloud if any of this is real, do yourself a favor.  Spend the next week deliberately clicking on no bad news headlines.  No terrible events.  No hyped up, trauma-driving leads…nothing.  It’s tough.  But here is what you will find:  the bad news you “see” will clear up around you.  It won’t disappear.  It will simply look like a lot less of it is going on.

Now to the Economy

While economic data is fine, as noted a few times in recent morning missives, I suspect we still stand in the middle of a trade range.  Today is no exception as red ink flows.

As we have covered before, these are tough things but they serve a purpose.  Like the one in 2014-2015, this one could last for a bit.  I don’t think that is the end of the world by the way – indeed, far from it.  It is a natural progression of an upward market.  It is a resting point….a recharging station if you will.

Traders get itchy and cause days like today.  Investors must instead stay focused on the long-term and understand these elements for what they are – weighing stations.  The weak hands will leave their seats and walk up the dock back to land.  It is the same process for every trade range.

The weak internals show that process unfolding below.  The good news?  I suspect we continue to edge toward that green zone over the next week or two:

 

Notice again that the times we visit the green zone are relatively rare – and beneficial for those who can remain patient.

The bond world continues to canter back and forth in the 2.8% range give or take some ticks.  But mind you, the world did just fine with much higher rates.  The ghosts of inflation years past are just that – ghosts.  But they can still scare people for short windows of time until something else catches the attention of the crowd’s mind:

 

Bad Dudes

Hey, just in case you think Trump is being too tough on trade, focus not on the process but on results.

This is not a political statement – it is a statement for our own good.  Presidents come and go – and in the harsh light of history, their true value becomes “known”.  Not a single one of us could withstand the tinkering and dissecting of our past without some embarrassing items coming to fore.

Here is the better issue for us to train our thoughts on in today’s trade strife:  China steals our stuff. 

Here is the perspective from our good friend Dr. Ed:

Made in China 2025. Many policy wonks have questioned the Trump administration’s recent broad, sweeping approach to tariffs on aluminum and steel. Gary Cohn, the former National Economic Council director, resigned from the administration over this issue. However, he supported stricter trade policies specifically targeted at China, a long-suspected manipulator of global trade. The USTR’s investigation memo specifically calls out China’s “Made in China 2025” industrial plan.

China’s overriding goal for “Made in China 2025” is to become a leader in advanced-technology industries, including in defensive ones like aerospace. At the cornerstone of this initiative, the USTR contends, are the unfair “acts, policies, and practices of the Government of China directed at the transfer of U.S. and other foreign technologies and intellectual property.” (See page 3 under section I.B. of the USTR’s memo for the four specific types of conduct under investigation.)

Tariff on theft. China requires US companies to establish joint ventures with Chinese partners in order to gain access to certain Chinese markets, a mechanism that naturally encourages intellectual property theft. To penalize China’s “theft of American intellectual property,” Trump and his trade advisers are readying actions, including tariffs, on at least $30 billion of annual Chinese imports, reported the 3/15 NYT.

That equals the cost that “Chinese policies aimed at acquiring American technology impose on American companies annually,” Lighthizer’s office estimates. Separately, an 8/15/17 NYT op-ed coauthored by Dennis C. Blair and Keith Alexander, both former national intelligence directors, pinned the value of Chinese annual intellectual property theft at up to $600 billion.

Section 301 requires that the US consult with external trade partners before imposing punitive measures, according to an article in the 3/2 issue of Forbes. Recently, the US has asked the Chinese government to propose a plan that would reduce its’ $300 billion-plus trade surplus with the US by $100 billion.

WTO ineffective. China wants the US to handle the dispute through the World Trade Organization (WTO), reports Forbes, which makes sense given that the WTO has been largely ineffective at enforcing actions against China’s state-led regime. “The Chinese are protectionists dressed in free market clothing,” US Secretary of Commerce Wilbur Ross has said.”

That last comment meshes well with an abundance of history – it’s just that previous Administrations chose to overlook their brazen abuses.

Keep this in mind:  With the creation of the WTO, it was expected that members would embrace open-market policies, strictly adhere to agreed rules, and observe in good faith the organization’s fundamental principles, stated the 2017 USTR Report to Congress on China’s WTO Compliance dated January 2018.

Importantly, WTO agreements do include a dispute mechanism. But “this mechanism is not designed to address a situation in which a WTO member has opted for a state-led trade regime that prevails over market forces and pursues policies guided by mercantilism rather than global economic cooperation.”

According to this most recent report, China repeatedly has acted in conflict with its WTO obligations and has failed to embrace the WTO’s ideals.  It’s summation:

“No amount of enforcement activities by other WTO members would be sufficient to remedy” such behavior.

Pretty strong language. 

And to fix it – take pretty strong actions.

The Lesson?

Sometimes, business is not pretty.  Even in the NAFTA talks – which will put us in a much better standing given that we are no longer in the economy of 25+ years ago, it is being reported that Canada is making changes aggressively to keep NAFTA intact.

Concessions have been the buzzword – and when done – you will find it improves a significant number of elements for the US economy.

In the larger picture, having this all play out in detail in the press does a few things:

a) makes for some great scare tactics

b) pressures the markets short-term when antics and hype get too loud

c) opens the door to a significant number of misunderstood actions

d) confuses reality with hard-nose negotiation tactics

e) more often than not, sets the stage for opportunity – but sadly only for the patient investor

That (e) point, of course, is the toughest one to abide by – and hence, the more valuable over the long run.

Speaking of the Long Run

Easily forgotten already was the barn-burner earnings season of Q4/17.  The Q1/18 session starts in just a few more weeks.  We should expect that we will continue to see trickling effects of the tax changes as there are many companies who do not yet have a handle on the massive benefits from expanded investment dollars.

The latest this weekend from Thomson Reuters is just an inkling:

  • Fwd 4-qtr est: $158.32 vs. last week’s $158.23.
  • P.E ratio: 17.4x.
  • PEG ratio: 0.83x.
  • S&P 500 earnings yield: 5.75% vs. last week’s 5.69%.
  • Year-over-year growth rate of fwd est: +20.8%…note this: these numbers mark the 17th consecutive week of sequential increases in the y/y growth rate.

Stand back and consider this:  In a lengthy band of history, the S&P 500 regularly corrects, on average, 15% a year, but stay focused on this fact:  the fundamental S&P 500 earnings trends are still positive, in fact, very positive.

The acceleration in expected 2018 EPS growth is unmistakable, and it’s powerful too – far more powerful than most of the short-term garbage in the news, begging you to react poorly.

One more thing for perspective… 

 

The chart above is just to help you see the stages of growth as the effect of the tax law rolls through reporting processes.  The highlighted box is the date the tax law changes were signed.

The net result long-term? 

Even as markets get flooded with red ink to begin the week, it will be valuable to mentally note that by about July/August of this year, experts will be “pricing” markets on 2019 earnings multiples.

Today, that P/E stands at 15.60 times that 2019 number from this past weekend.

With today’s red ink – that number for 2018 stands at just a 17.16 P/E…

…while those ugly old bonds are still over 35 times earnings.

Closing

It is the spirit of innovation and demographic powers in place are driving the Barbell Economy in the directions we speak of often.

A patient and disciplined view of the larger forces defining the future will help clearly define for you a more productive philosophy…no matter who resigns from the White House.

Over wide spans of time, people make markets.

The Barbell Economy is real. 

You can ignore it, you can disagree – but the two largest generations of our time are set to drive U.S. economic growth for the next 40 years.

In time, innovative and well-run companies standing in that Barbell structure will be set to generate long-term profits, and the shareholders (owners) who patiently invest for the long-term will hopefully participate in the value creation that takes place as a result.

As such – panics like the one the markets are currently finding their way through tend to be good for the long-run.  They reset values and perspectives and provide the long-term investor new opportunity to be patient and disciplined.

No one ever stated it would be easy.

Be assured of this: if it were easy, the returns available would be insignificant.

For long-term investors, hunting season is open…time to start looking.

Be grateful for the latest bouts of panic.  

The wall of worry has been rebuilt nicely…though chop and churn as aftershocks are always likely – and normal.

Demogronomics keeps you on the leading edge of change but there is a cost:  it requires a much larger, more patient and disciplined view of the elements at work.

It’s the long-term currents we need to invest upon – not the short-term waves which will assuredly always roll ashore to block the horizon – just as they are now, causing doubt in the minds of millions once again.

Those waves are the noise too many will likely continue to be lost in…and the reason the long-term game is so hard to win based on fearful activities.

In the end, like it or not, long-term investors have learned this:

Demographics Rule The Long-Term Game

Until we see you again – may your journey be grand and your legacy significant.

InvestingMike Williams