Beyond the Noise

In our last Investment Climate we discussed the long-awaited increase in the Federal Reserve’s target for interest rates. This debate continued to dominate the discussion of the financial punditry in the second quarter. While we normally expect the market to correct at the onset of higher interest rates, this particular rate increase has been anticipated for so long and its timing debated by so many that it is hard to imagine it could take the market by surprise in any way. Putting that issue aside for a moment, another favorite “elephant in the room” (at least one concocted by the same financial punditry) reared its head again: Greece! Oh yes, the profligate son of the European Union has run out of (borrowed) money again, cannot pay its bills, and the recently-elected far- left government simply blames those who lent them the money for all that ails the Greek citizenry. While we are tempted, yet again, to spend more precious space on these pages editorializing on why Greece (and Detroit) is a prime example of why socialism doesn’t work, we will not. Instead, we will use the rest of this update on a series of statements that we hope will invoke thought, and perhaps discussion, that may prompt the reader to individually ask us for elaboration, as we are more than willing to offer it directly.

So here goes our attempt to “look beyond the noise”:

Interest rates – They are going higher, maybe in September, certainly by 2016.

Inflation – It is going higher, and already has been, but not by as much as many inflation hawks would have you think. We are not in the 1970s. Not even close!

Taxes – They are too high and may be going lower. Yes, you read that right. While the political environment right now may not make it possible, it is entirely possible that some of the bi-partisan efforts that have been quietly working their way around the beltway may actually see the light of day in the next political cycle. Most likely starting with corporate tax reform, but there is some talk of full tax reform as well.

Global Freedom – It is still on the rise, again despite what many naysayers claim. Technology has made it much harder for the forces of despotism to flourish, despite the horrific events unfolding in the Middle East. We might add that those events may well be an act of desperation by one of the last vestiges of totalitarianism left in the world today. This is not to downplay the negative consequences of the rise of organizations like ISIS, but we just do not see those forces having inordinate influence on the global economy.

Regulation (a sub-set of Global Freedom) – Far too onerous in the United States, while in much of the rest of the world, not the least of which in the emerging markets, free enterprise is gaining the upper-hand over the “heavy hand of government”. We believe there is the possibility of relief in the US, also in the next political cycle. Of course, Greece and the few areas like it are exceptions!

Energy – Oil is finished going down for now, and will likely settle in the $50 -$70 range. However, the bias in energy prices is likely towards the downside over the coming years given the continued advances in technology allowing for much greater production in North America. The North American oil phenomenon is not a passing thing. It is here to stay and has reshaped the world energy markets in a very short period of time. This will continue and will keep a general “lid” on oil prices.

Technology – The last 15 years has been the era of applications (“apps”). Core technology, that which made it possible to run these apps, has been on hiatus as a focus of investment attention. This will reverse itself as the need for ever more bandwidth will propagate further advances in core technology and market value will migrate back towards those companies that can provide the network and datacenter functions which enable the proliferation of applications. The “bubble” (an overused term) in applications will not necessarily “pop”, a’ la the dot.com phenomenon, but may well just stop in its tracks, with many companies that are getting crazy valuations today left out in the cold.

Stay tuned as we see how these “calls” go in the future.