Rake: “the rake is a scaled fee taken by a card room operating a poker game. It is taken from each pot as the game is played. It reduces the value of the pot every single time.”

Even as the summer haze thickens – just as expected for August activity – the Barbell Economy portfolios continue to provide a solid cushion over the major market indexes.

As the earnings season comes to an end, one typically finds the sloppiest of the internal chop. This time it has been no different – only slightly compounded by the significant slowdown in volume for the August doldrums. In reality, over 34 years, I learned that no portfolio can escape the near-term emotional reactions of “earnings” perception.

Fang – less?

With yet another batch of Fed minutes out this week, one continues to fear the faint strings of the puppeteer. The media and the investor audience of experts continue to point some kind of blame toward Fed officials as though they are “keeping rates low.”

Let’s put this to rest as noted often before: The Fed is not controlling interest rates. Never has – never will. The Fed follows interest rates. Indeed – they have found themselves in a series of rare situations since the Great Recession. The massive fear levels along, with a record breaking demand for cash, has tied the bond market in knots.

For years, the Fed’s QE process was a broadly misunderstood act. As loud as the chatter has been, it was not about stimulus; it was instead about an unprecedented increase in the public’s (and hence the banking system’s) demand for safe, interest-bearing assets.

Massive fear drives the wish for cash.

Yes – that is trillions sitting in fear. Fear is what is keeping rates low. Fear is what will keep rates low for far longer than anticipated – no matter how much chatter we hear from the battling Fed-head opinions. All that matters is the voracious demand for bonds.

Keep this thought in mind: people are “hoarding” trillions of dollars of extra money, most of that shown in the chart above as bank savings deposits which pay little in the way of interest.

When fear recedes – we can expect this need for cash to shift. Should the public decide instead to spend capital instead of hoard cash, the resulting nominal GDP growth could be astounding.

This would also likely be matched with rising confidence which could then lead to increased capital investment, something which has been lagging during this recovery as the strike against fiscal policies endures.

The odd remaining element?

That the masses would so blindly think something selling at the equivalent of over 65 times earnings (and that is the cheap country), literally assuring loss over 10-years with even a mild hint of inflation – would somehow be deemed as the “safe” choice.


The latest from the GDPNow camp shows a bounce continues in the data. On the other hand, the latest sentiment data shows investors still not enamored with the equity world – the real gold medal winner if you ask me.

But that is great news for long-term investors willing to remain patient:

As we often state here: I think we will find in later years that the current reporting process on GDP, having been around since the 40’s, simply no longer effectively have a grasp of what is really going on. I know that sounds vague and opinionated – but it is pretty clear that something is not matching up given all the records being set.

As to sentiment – it remains clear: investors prefer bonds – almost assured to lose them money. Oddly, even as equities continue to chop back and forth at or near all-time highs, bullish sentiment remains below 40%, where it has stayed for a mesmerizing 42 straight weeks now – another record.

According to the AAII, bullish sentiment increased from 31.29% up to 35.56% this week. Yes indeed – that’s the highest since mid-July. I have added a purple dot and a red arrow to give you a sense of how low this really is – when you see market levels in contrast to time (the red line is the S&P 500 Index overlaid on sentiment).

Why the Great Dichotomy?

While the stats are nice, the element at work here is the continued experiment of socialism and the poor fiscal policy structure of the US. We’ve said it before. Business has been on an investment strike if you will. A strike against bad policies. A choice to “wait out” the administration.

Like Obamacare, itself little more than a vastly misrepresented (and that’s being polite) tax placed on the US economic engine of growth. A loser from the start, its power of reduction of the whole has slipped by the audience. So have the massive regulatory “costs” (read: income diversions), taxes and fees added – all being more like what casinos refer to as “the rake” in a card game.

Growth Being Hidden from View

Be assured – if we want to see the explosive power of the US economy shining again, please stop looking at the Fed. That effort is just another misdirect – and completely wasted.

It blinds you from the simpler solutions – and here they are:

  • Stop being afraid of everything that moves in the markets
  • Stop the high taxes
  • Stop the wasted “investments” – like Obamacare
  • Stop the massive, mind-boggling rake driven by regulations
  • Stop the most expensive corporate tax structure on planet Earth

In essence, stop the bad fiscal policies emanating from DC. If we were able to do that – one would be pleasantly surprised by how much power is actually being produced here. We would collectively see how quickly many of our “wrongs” would suddenly appear “right” – even as complaints would continue.

The Bigger, Better View?

I think we should keep this perspective in mind though:

Far from weak, the good news is that the US economy has been so strong that it has still been able to grow under the crippling “change” Obama brought to America. He did keep his promise though – but make no mistake – “the rake” has been at work since he arrived.

We Never Stop Moving Forward…

It does prove once again that we can remain confident through thick and thin. It proves to all that betting against the US, its economic might and world-leading, productive workforce is still a losing bet.

Just remember:

We make it a business to overcome obstacles. We make it ugly at times – but patience works.

I was told something once that always helps when one is frustrated in markets: “It’s never as bad as it looks or as good as it feels.”

I was also told this:

“There is a lot less to trading than meets the eye…” – meaning the lesson again is to keep it simple.

In Closing

Stay focused, be patient, remain disciplined. We have an ace in the hole as they say in Vegas:

The demographic structure of the US is significant, world-leading and rare.

This slow-moving but persistent strength will overcome the processes we are seeing near-term – positioning us well for decades ahead.

Pause for a moment and think demographics – not economics.

The future is far brighter than many care to accept today – even as trouble will always be included in the pathway, whether we like it or not.

So far, the summer swoon has evaded us. We have a near-term hurdle to get over and that is the home stretch of the political race – one that this time around is making us all look even more foolish than the last one did for us.

Alas, maybe that summer swoon to take advantage of can be hidden instead in the Sept/Oct time window. I say – Be ready.

Have a good weekend with family and friends – only a few left in the summer of 2016 – enjoy.


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