In January, Donald Trump became President of the United States to much consternation from over half of Americans and many abroad. In recent weeks, President Trump has appointed key people to his cabinet and started to transform the government. As I stressed in my annual letter for my investment advisory firm, Trump's overtly nationalistic rhetoric is very concerning to me. 

Now that Trump is beginning to govern, we are seeing proposals and executive orders for immigration bans, a repeal of ObamaCare, to reverse environmental standards and largely remake the tax system that even more benefits the super wealthy and multinational corporations. No longer can people who voted for President Trump as a protest vote or as a vote against Hillary or a vote against the establishment fall back on "well, I didn't take everything he said literally." It is clear that President Trump mostly believes what he has said and means to create policy around those beliefs.

As both citizens and investors we must be wary because much of what President Trump believes is not supported by evidence. There is a rising likelihood of very bad unintended consequences if certain policies are implemented and various actions are taken.  

Slow Growth Forever

I have discussed the "slow growth forever" global economy numerous times. On this site, I have two articles that are vital reading for anybody who wants to live in reality land. 

Understanding the "slow growth forever" global economy

Investing in the "slow growth forever" global economy

I am not going to repeat the arguments I have made in those articles, so please take the time to read those pieces and the linked columns.

What I will say is that there are massive misconceptions about why the global economy is stuck in slow growth mode. The idea that tax policy or deregulation will create sustained higher growth is so grossly wrong it is pitiful. Those ideas have failed twice in the past 4 decades, including resulting in the financial crisis. Deregulation and tax cuts largely for the wealthy, while probably pulling some growth forward temporarily, will ultimately lead to wider deficits, weaker long-term national finances, more inequality and probably another financial crisis several years out if enacted.

Economic Santelliism or Ignorance

Today I heard Rick Santelli on CNBC call arguments about "demographics" being a key factor in the slow economy "garbage." I'm not sure how stupid that is: "Galactically stupid" or rhetorically stupid? By "galactically stupid" I mean:

Rhetorically stupid is what we are running into a lot lately. Folks telling quarter truths, mixed with massive exaggeration, knowing most people will not check the facts, in order to steer a narrative for political ends.

Here's another example: Santelli also said there are "90 million people not working who could be working." I have heard others say that. The folks spouting the 90 million unemployed tripe are mostly devoted talk radio listeners, the radio talk show hosts, and the folks that write alt-right and extreme conservative websites.

The idea that there are another 90 million people in America who could be working is so dishonest or ignorant it is off the charts. That idea is meant to generate a narrative to justify radical changes to the economy. Those changes will be good for about the same percentage of people as the financial crisis was for.

Going back to Santelli, while he might have been a good trader back in the day before computers came along, anybody listening to Rick Santelli about anything other than the trading rumors he's fed in his little pit bubble world, ought to be slapped silly with an economics textbook.

Let's look at the facts (as if that matters) about employment for just a second before I move on:

  • The U.S. population is approximately 325 million according to estimates by the U.N. and the U.S. Census Bureau
  • There is about 82 million people 18 and younger.
  • There is about 49 million people 65 and older. 
  • That leaves about 194 million people between ages 18 and 64 which less disabled is roughly the workforce.
  • There are about 30 million people ages 21-64 that are disabled, but about half work, leaving about 15 million unemployed and mostly unemployable.
  • That leaves a potential workforce of about 179 million.
  • As of February 2017 there are 152.5 million people employed in the United States with about 134 million working fulltime, and of the part-time, only 5.7 million were part-time involuntarily. Since there are currently over 6 million listed job openings, and probably about twice that many really, we'll just call employment 152.5 million for simplicity.
  • So, that leaves about 26.5 million who could work, that aren't. Of those, 7.5 million say they are looking for work. So what of the 19 million who aren't looking? Well, given that there are 82 million kids and millions more elderly, I think that it's reasonable to assume a great many of them are taking care of somebody. 
  • What then is the real number for folks who are not working who could and should be. Probably the 7.5 million who claim to be looking and some fraction of the 26.5 million who aren't. What's that fraction? Your guess is as good as mine, but I generally say about 20% since there are quite a few stay at home parents and more people increasingly taking care of elderly parents (I know at least a half dozen, so that's six).
  • All told, there's about roughly 12 million folks in America that could and should be working who aren't. Yes, some of that is folks who just don't want to work, but a lot of it, considering there's over 6 million listed jobs, is a skills and training mismatch. That's America's real employment problem, we aren't training people to do the jobs that the economy is creating.

I bring this up because there is a delusion developing, which I find amazing, that we ought to make wholesale changes to an economy that is leading the world and approaching full employment. Sure, there are improvements to be made. Perfection can never be achieved, but should always be sought.

Right now, we are at an economic point in history where small adjustments designed for efficiency and to narrow the wealth gap could be monumentally effective for the long-term. However, if we tear things down that have led not just to America, but much of the world, recovering from the WORST financial crisis in a century, then we are just being destructive imbeciles.

Investing Game Plan

I have short, intermediate and long-term investment game plans. It's important to have all three because the world changes quickly in the short-term, but the long-term eventually gets to us.

In the short run I am very concerned about a flipping of the economy that creates signifucant volatility. As such, my asset allocation includes 25-50% cash or money market holdings since bonds are unattractive.

Within the volatility likely to develop by next year, there will be opportunity. What is likely to happen? The winners will continue to be winners as usual, but the middle of the pack could suffer a big decline. There are also the losers. Many companies that have been losing will continue to lose, however, some that have been long-term winners and have suffered recently, stand to come roaring back.

Among the companies that will keep winning are technology companies, companies that apply technology effectively, some healthcare and consumer stocks. I have been clear that I like the PowerShares NASDAQ 100 ETF (QQQ). It is made up of some of the leading tech, consumer and biotech companies in America. This cheap ETF has been a leader versus every other diversified index over multiple time frames including the S&P 500 by a lot.

 

QQQ is a good core holding for virtually everybody who holds equities. Up to 25% of a the equity portion of a portfolio can be in this one efficient security. For now, I am out of QQQ, but on the next correction, even a small one, I will start adding to it. I'm looking for a price below $122 to start adding if there is no large momentum to the downside that pushes it through that level. About $115 is a signficant add level if there is no large momentum to the downside. If a large correction occurs, which I think short of a black swan is unlikely in the short-term, a price in the $90s could be a back up the truck opportunity.

I am also looking to most energy as a buy in the next few weeks. With the FED raising interest rates that should put another level of pressure on stocks in the energy sectors. I have price levels set to double my positions and triple if the prices go far enough down. There are multiple economic, financial, political and currency factors, on top of a balancing supply and demand equation, setting up what I believe will be a significant bull market in energy starting soon.

I like the SPDR Oil & Gas equipment & services ETF (XES) because as shale drills more, the thinned out service and equipment sector will be able to charge better rates and generate strong margins. I like the First Trust Natural Gas Stock ETF (FCG) because while the name implies natural gas focus, many of those companies also do very well in oil. I also like several specific companies in the shale space with low breakevens, good rock (acreage) and solid balance sheets (a rarity). 

Intermediate term, I'm likely to get pretty conservative in the next few years depending on circumstances. If policy develops under the Republican Congress as I expect, we'll get a run up in the economy by pulling growth forward. That will push up stock and commodity prices. It'll be the same sort of illusion we had from 2004 to 2007 though and will end badly. Like I said before, there is NO way to create long-term growth rates much higher than current levels. Interestingly, I'll repeat something I've noted a few times, 2% economic growth has been the norm for centuries. The higher growth from WWII to 2006 was the anomaly created by the post war rebuild and aggressive monetary conditions that drove up debt. 

In the long term, I want to gradually position into alternative energy and energy storage, electric vehicles (no idea how yet), smart grid, virtual or augmented reality, travel, healthcare, tech and the strongest consumer stocks. I'd love to focus on dividends, but in a higher interest rate environment, if that's what occurs, then we have to be even more focused on growth with solid fundamentals. 

Summary

These are broad strokes and of course I ranted a bit. I think the rant was important. If we don't smarten up, then we're doomed to another financial crisis. We'll know by the end of this year most likely what's coming.