by John Goltermann, CFA, CPA, CGMA
December 15, 2016
“Change is the law of life. And those who look only to the past or present are certain to miss the future.”
– John F. Kennedy
November, 2016 brought many changes: Just in the last month I left my post of sixteen years, saw my hometown Chicago Cubs win the World Series (for the first time since 1908), and witnessed an historic election of a populist and controversial candidate to the office of President of the United States.
Change can be necessary and good, even when it brings uncertainty and discomfort. Over the last few years investors have seen oil prices crashing, a pickup in market volatility, passive indexes outperform most active managers, interest rates decline to microscopic levels, potential debt defaults, and too many other headlines to mention. Yet we have all adjusted and persevered; and focused investors who did not change their portfolios have been rewarded for their discipline and patience. If one goes back in history to other alarming headlines, i.e., the 2008 financial crisis and recession, Y2K, Iraq, global warming, inflation, Viet Nam and on and on, we can see that we are and will always be bombarded with a never-ending stream of change, crises and fearful commentary. Many of these crises even caused us to question whether the course of our lives would be permanently altered, but sometimes it is the change itself that causes us to become better and better off.
I see a great opportunity today to build an investment advisory company that is new, focused, and delivers great value to clients. It is my sincere desire to bring purposeful energy to the investment business, to assemble a team of select professionals, and to build a company whose goal is to be the best, not the biggest. By concentrating on creating a valuable client experience, providing strong investment results with less risk and by being transparent and clear, Highgate Securities Investments will embody the principles I have always sought to provide clients during my career. The investments Highgate makes for its clients will target businesses that generate economic profit, have clear and thorough disclosures, and have management teams and boards that are true fiduciaries. The investments will not be selected based on profit forecast models and arbitrary multiples; instead, a comprehensive analysis will be done. Highgate will manage its overhead and deliver a service of unparalleled quality for a very competitive fee.
My firm will not engage in speculations, and it will not be afraid to look at the unloved and boring in investment markets. It is amongst the unloved where there is sometimes (not always) very little long-term risk. We will embrace the philosophy of taking good risks and avoiding bad ones. We will not put time and resources into forecasting the future and being wrong too often.
It is my goal for each and every client of Highgate Securities Investments to never feel compelled to change advisers for the rest of their lives, or to worry about whether they are in competent hands. I don’t want clients to question whether the decisions the firm makes are made in the clients’ best interest or in the interest of the adviser. Many advisers choose investments to try to “beat the market,” or focus too much time and attention on client acquisition or client retention. In my experience, it is the advisers who obsess over such things who end up making poor investments because a) they are not fully appreciating or caring about the high level of risk they assume; and b) they are looking in the rear view mirror.
I want Highgate’s clients to know they are well cared for, and that their loved ones will be well cared for after they are gone. I want Highgate to communicate openly, clearly and often about how it sees investment markets, not to write about guesses with respect to the direction of the US economy as a proxy for how the stock market will perform. Clients will feel that they are in a long and mutually prosperous association with a firm that cares about them and is grateful for their business. And Highgate clients will be continually informed about events influencing investment markets and the firm’s analysis of how those events may impact prices going forward.
As we move into a new political environment, it is understandable that there is trepidation around the changes potentially coming. As I write, lobbyists, professional commentators and even entire nations are scrambling to figure out what a Trump presidency means. For us, it will be important to focus on developments and their impacts on investors. Many investors, who rely mainly on the media, were gobsmacked as the election returns unfolded—but this quickly abated and morphed to cautious optimism about what Trump could do to promote growth and after-tax profits. And that, in turn, sent US stock indices to new all-time highs. Once again, the immediate fear was replaced by clearer thinking and portfolio adjustments to a new hand of political cards.
We are surprised, however, that investors seem to assume that whatever Donald wants, Donald will get: Republicans managed to barely hang on to a two-seat lead in the Senate, which means that the Democrats will have sustained opportunities to drawn-out debates—in committees and on the floor. Republicans retained a powerful majority in the House, but House Republicans are divided into blocs that can stop legislation from coming to votes. The President will find that his sweeping pronouncements won't work in this setting. He will have to discover persuasion as a strategy—and that will take an egotist time to learn.
Those who peer further into the future fear the elections in Holland and France, in which populists far to Trump's right threaten the survival of the eurozone. The euro is already sagging, and should both those elections go to anti-euro parties, it could enter free fall, producing a collapse in the trillions of negative-yield euro bonds, which are largely held by banks.
Such possibilities argue for maintaining some exposure to gold and cash, and to reduce bond risks by selling long-duration bonds. It may be the case that implementation of the Trump agenda would boost US GDP and be a boost for many equity groups. However, we would not suggest an across-the-board rush into US equities, including oil stocks—yet. The OPEC meeting might be the first in two years to drive oil prices higher on a sustained basis, but the Iran/Sunni divide, and Russia's ambiguous policies could easily produce another disappointment.
US stocks hovering near all-time highs makes sense if the Trump agenda passes Congress rapidly and if Republican-controlled state and local governments move rapidly to define and finance his proposed infrastructure projects (which have been on drawing boards since the Bush Administration). Even President-elect Trump’s big tax reduction may be held back by Democrats in the Senate and Tea Party Republicans in the House. The argument held that Reagan ran big deficits and it all worked out well, but this ignores the reality that the national debt was small (as a percent of GDP) when he took office in 1981 (see below) and interest rates were plunging, so new issues were continually priced at less cost to the budget. The exact reverse applies today. Caveat: citing history in a period without historical precedent often gets you nowhere.
Gold has obviously disappointed, but it has been, in part, a victim of the Trump-awe and repositioning in financial markets in the wake of the election. Underappreciated among the US and Europe geopolitical excitement is India’s radical currency “reforms,” which have created a liquidity crisis and prevented Indian investors from stepping into a falling gold market. We now understand why the respected Raghuram Rajan resigned as governor of the Reserve Bank of India in June, and why he has not been heard to comment on the currency crisis there.
A US recession in 2017 is now a more unlikely outcome, but it can’t be ruled out. We do not counsel huge enthusiasm for US or European or Canadian equities at current prices. Those markets are now much higher than they were a month ago, but not necessarily worth a lot more than they were a month ago. As for those who say that gold cannot survive a strong dollar, we invite you to recall what happened to gold and silver when the Eurozone faced the Greek crisis in 2010 and 2011. What could be facing Europe within weeks and months would make Grexit look like the tiny blip it really was, back when it was—week after week—the biggest financial headline.
Some of the powerful effect of what President-elect Trump dispenses is a blend of reality and the illusion of enthusiasts. He may be good for the American economy and capital markets, but any concrete results will probably take more time than today's excited investors believe.
As we embark on this journey together, I am excited by the prospect of putting positive energy into Highgate. I am excited at the prospect of publishing monthly commentaries for this new company, in which I hope to provide non-consensus perspectives and helpful information on where risks and opportunities may exist in investment markets – and where other investors might be making big mistakes. Please let me know if you are interested in being added to our email distribution list or if you’d like to discuss any of the above points or investment markets in general.
I can be reached at (970) 309-7327, or at email@example.com