So often when it relates to markets or investing, we hear the word “surprise” it almost sub-consciously takes on a negative feel. We have been trained by the frenzied process of data to assume that surprise is somehow a bad thing – always.

We remain confident with this idea: Over the next 3, 5, 10 and 20 year periods, we will pause for a moment and look back on the haze of 2015-2016 with a largely different understanding. What has felt like a long walk through a vast field of quicksand, with a market that has effectively been stalled, will be seen instead as more like a pause, a lunch-stop if you will – a foundation, not a top.


You see, while the media has us focused on the always ready, up-to-the-second disaster in the making, some may have understandably missed a few items:

The UK markets are far higher today than they were two days after the Brexit vote – and for the year prior to the vote!

US LEI’s are doing just fine…

ISM manufacturing and services readings are surprising (vastly) to the upside

A couple quick snapshots will help you visualize, but first: we have 8 more weeks of the summer haze:

The first chart set above provides one a glimpse of the solid – and improving – activity in both the manufacturing and services sectors of the US economy. More important is to recall that the service sector of the U.S. economy is far more vital to understand: it accounts for about 70% of all jobs with manufacturing coming in at roughly 9% and government taking the rest of the pie at roughly 15%.

Why important? The health of the service sector is the important elephant to watch. The latest news – surprising all the experts again – suggests the vast portion of our economy is doing just fine, thanks.

The second is a running tally over the last decade of the LEI’s. Note the green dot shows the recent breakout of a very lengthy range which has “capped” us since the ’08/’09 events. Further, I have added a red highlight back on that peak just before the Great Recession. Hindsight tells us this “higher activity” turned out to be the real estate bubble in effect, basically erasing its validity in the long-term. One can surely argue we do not have that problem today.

Why do I point this out? Simple, a long-term view of the data below show that this highlighted area in red is the ONLY period in our history which stood above current levels. This logically hints that the perception the bond market is sniffing out of seemingly cataclysmic problems is just, well, likely incorrect.

What About Those Bonds?

Here is the unfortunate issue with bonds:

We are no longer seeing a logical view in the bond market based on US perspectives. It is becoming it’s own self-fulfilling briar patch. More important: we are not in control of it – the global investor community is instead. Be assured that the ravenous need for “safety” is being driven/fed by other global regions providing far lower rates. Those global investors are looking at the US government and corporate markets and seeing vast opportunity when compared to their homelands.

“But Mike, we are at record lows, that’s got to be bad…and you are missing it…”

I know – I hear that often. And yes, I suppose the world could be ending – but alas, it is highly unlikely. As is often the case, we have seen this before. The previous all-time low for 10-yr yields was 1.39%. It was registered July 24, 2012.

Investors who bought the 10-yr that day (and still hold it) have since pocketed a total return of about 5.7%. Not too shabby in a world of “no yield.”

However, investors who bought the S&P 500 that day instead – requiring of course that they ignored the then widespread fears of global recession and deflation which plagued markets four years ago (sound familiar?) – received a total return of 54%.

Meanwhile, gold and commodity prices fell some 15% – allowing for the recent rallies. Let’s review for a moment:

It has been a long run – years of being terrified of everything that moves. This nearly psychotic view of risk and the need to manage it has fooled even the brightest.

What’s the bigger point? This surely is not intended to suggest one throws all perception of risk in the garbage heap. However, it does highlight that the future doesn’t always turn out to be as bad as the market (or vast numbers of experts) expect.

Sometimes, oddly enough, it can and does turn out much, much better, as has been the case for the past four years….

We would argue this run has not even really started yet.

A Simpler View

Rather than buying into the hysteria, let’s keep this basic as to a possible “why”: Market participants find themselves now carrying a lengthy list of worries, accumulated from years of tumultuous activity: quantitative easing, negative yields overseas, slowing growth, geopolitical tensions, horrible fiscal policies here and abroad, inflation, deflation, etc.

But fears at this level, in this many channels at once, have a very lengthy record of being wrong. Seen another way, in order for an investment in 10-yr Treasuries today to beat alternative investments, an awful lot of very bad things are going to have to happen over the next several years.

Cutting Through the Garbage

Our process is simple, intuitive, and explainable.

We study people. Where are they, where are they headed and what do those stages of life normally entail? No, that does not mean every single person, in each of those bell curves, at every stage of life, will do the exact same thing. Of course not. But it does mean one can then logically understand more likely long-term sector tailwinds and headwinds.

We then buy companies run by people with track records of success, in industries and business models with a competitive advantage (and a vast number of people heading their way with ample demand). We work hard to buy at good prices and then, for the hardest part of all: we hold them for longer than most of our competition is willing to.

Why? Well, let’s think about it logically. If we know that 86,000,000 people are moving through the same basic stage of life for next 50 years, why in the world would a quarterly “missed by a penny” event cause that demand pipeline to change?

Recall this fact is a part of any portfolio: Investing is about probabilities, and probabilities entail elements of luck at times. But the process isn’t based on crossed fingers or palm-reading. It’s based on decades of evidence that show something too many overlook: people count first. People drive markets.

So, after we know the people part of the equation, patience and competitive advantage help to combine for a higher chance of investor success over the long-term. Indeed, investors of all sizes shouldn’t focus only on returns. Those can change in the near-term and throw one off course very easily from year to year. In the end, we always suggest one should instead strive for a rational process which can offer higher chances of success over long periods of time without relying on luck or the flavor of the month Wall Street strategy.

Boring yes….but effective.

The Barbell Lives

Like it or not…The Barbell Economy is running forward of the pack, through and under all this mess, just fine. If we are not careful, our fears can blind us to what is really going on.

Check WWAV this morning – a member of the growth portfolio. It is driven by a simple thing: a massive wave of customers who desire better quality food. Easy right? Well, it got bought today by Danone – too cheaply.

But in a sea of raging fear, smart investors can string together events which will later look like theft….when we are no longer terrified of our own shadow.

The most uncomfortable thought of all:

The US economy has so far survived the worst set of fiscal policies imaginable over the last 7 years.

In spite of that, we can thank our demographics as our economy is set to get even stronger – for years and years – not weaker.

More later –

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