Thursday, July 15, 2021

“On Friday, All the Major U.S. Market Indexes Hit All Time Highs – But They Are Going Higher!” – Joe Rollins

Every now and again I like to quote myself because it seems over the last two years, I have been more closely predicting the outcome of the markets than people that are paid many times my pay scale.  It just doesn’t seem like there is a high level of confidence in the economic recovery, which is absurd given the overwhelming evidence to the contrary.  Everywhere you look prosperity reigns, but there is an overall skepticism that the general public just cannot shake.  It is unfortunate since so many potential investors have been sitting on the sidelines waiting for a market correction for the last 18 months and all the market has done is gone higher.  Maybe all  this passive cash sitting in checking accounts will be implemented in the coming months.  For their sake, I hope so.  


I have a lot to discuss for this posting and some of it I think is very useful information for future investments.  I must discuss why the unemployment rate of 5.9% in the United States is an illusion and we will get closer to pre-COVID unemployment ratios before the end of 2021.  I also want to discuss why inflation is really not an issue at the current time but, more interestingly, why is it that the bond market is not reflecting higher interest rates with potential inflation.  I also want to discuss why the U.S. government’s attack on Big Tech is entirely misplaced.  And for the new readers of this report, I am going to actually define socialism since it is the most misused and misunderstood term in the English language.  I have so much I want to discuss and so few pages, I need to get started.  First, I need to report on the month ending June 2021.  It was an excellent month by all standards to go along with an excellent six months of the year.  

Ava horseback riding in Yellowstone

The Standard & Poor’s Index of 500 stocks was up 2.3% during the month of June and up 15.2% for the six months ended June 30, 2021.  The one-year return on that index is 40.8%.  The NASDAQ Composite was up 5.6% for the month of June and is up 12.9% for the year 2021.  The one-year return on that index is 40.2%.  The Dow-Jones Industrial Average was flat during June but is up 13.8% year-to-date in 2021 and its one-year total return is 36.3%.  The Bloomberg Barclays Aggregate Bond Index was up 0.8% in June but is down 1.7% for the year 2021 and for the one-year return this index is down 0.5%.  As you can see, all the market indexes had a minimum of 36% returns and the bond index over the same time frame had a negative return.  I fully expect that bonds will underperform cash for the rest of the year, even though cash is earning virtually zero.  

This last month I was out in Montana at Yellowstone and the surrounding areas.  Everywhere we went there were signs begging for new employees.  It is amazing that the unemployment in the United States is 5.9% when there are so many employers begging for workers.  As of May 2021, it is reported that there are 9.3 million unemployed in the United States.  Recognizing that this is a huge decrease from the 23 million that were unemployed in April of 2020, the question everyone is asking is why are there still so many people unemployed?  

Dakota and Ava at the entrance to Yellowstone

As of May 2021, there were 9.2 million job openings in the United States.  As you can see the number of unemployed and the number of job openings are almost equal.  I forecast that there will be a major employment rush between now and the end of the year for reasons that should be self-evident.  

The basic reason why employees are not taking jobs and staying on unemployment is because it is in their best interest.  If you are a server or in the hospitality industry and you can make as much sitting at home, tax-free, as you make working 12-14 hours a day, it would be illogical to assume that people would take those work hours in lieu of the free money.  However, all of that is getting ready to end.  The major reason why the government is responsible for the unemployment rate is that it has made it too easy to draw unemployment for the average American.  During 2020, the Federal government supplemented state unemployment with a $600/week bonus.  During 2020, that amount was clearly needed to give people a bridge from unemployment to future employment.  However, that is tainted by the fraud that occurred in the unemployment system, which I will discuss later.  After the $600/week program terminated, Congress and its infinite wisdom added $300/week to continue through September 6, 2021.  Already, 24 states have eliminated that benefit and lo and behold, the unemployment in those 24 states is a very respectable 4.4%.  The rest of the states and the District of Columbia, set a later date to end the program in September and their unemployment rate is 6%.  I am not exactly sure what Congress misunderstands regarding these percentages, but it is fairly clear that ending these benefits led to higher employment and lower unemployment.  The President recently said that in his opinion these benefits were not leading to higher unemployment, but clearly the numbers do not support his conclusions.  

Buffalo everywhere you look!
Aren’t they beautiful?

There are two major events that are getting ready to happen that will drastically change the unemployment in America.  First, as mentioned, the $300/week supplement of unemployment by the Federal government will end on September 6, 2021, thankfully.  Many calls to extend this unemployment benefit have been proposed by Congress, but recently the Administration announced that there would be no extension granted.

But more importantly, the CDC has announced that all schools should be in-person and open for this term in 2021.  So, the combination of the availability of childcare and the elimination of the extra benefit will force many Americans, currently unemployed, to go back to work.  As I have mentioned often in these writings, when you employ people, you do a great deal to help the economy.  Suddenly you have a wage earner that is supporting other people and consuming goods which increases the economy.  It is now anticipated that the U.S. economy would grow at an astounding 9.6% for the year 2021, which would be the best GDP in over 40 years.  But also, it is very possible that this continued growth will carry over into 2022, which will accelerate corporate profits as the economy continues to grow.   

A gorgeous rainbow over the 
Grand Canyon of Yellowstone

We were all saddened to learn that recently it was announced that nearly 40% of all the unemployment benefits paid in 2020 were due to fraud.  The numbers are basically staggering.  It is estimated now that around $400 billion in unemployment benefits were paid to fraudulent recipients and the vast majority of this money ended up overseas in the criminal element.  I have often commented on these pages that the U.S. government does just about everything worse than anyone else.  I have commented often that the only good thing the U.S. government does is run the military.  I am not sure this is such high praise given that there is no competition for running the military and they are literally the only game in town.  Virtually everything the government does, it does worse than the private sector except one.  

I have the ultimate high praise for the government in the handling of this vaccine.  Back in early 2020 when the Administration opened their pocketbooks and funded research on the vaccines, who would have thought vaccines could be developed and distributed within an eight-month period?  This would not have happened without the U.S. intervention into the developing process, which has led to a complete turn around in the so-called COVID financial disaster.  We certainly could agree to disagree on how it was handled, but all of us praise the fact that it is nearly finished.  As of this morning, 333 million vaccines have been administered in the United States.  There are 151 million Americans that are fully vaccinated, which represents 56% of the total population.  While cases are not eliminated, they are dramatically reduced.  It was recently reported that 90% of the current deaths from COVID are solely from unvaccinated people.  It is hard to believe people will not get vaccinated.  I assume they just like playing “Russian Roulette” with their lives.  I often wonder if these are the same people that don’t get other vaccines, such as polio, etc.  While the business world is coming back to pre-COVID levels, this could only have been accomplished with the Federal government’s funding and handling of the vaccine rollout. 

One of the many stunning falls at Yellowstone

The important event of school opening in the fall will be a huge employment gain for Americans.  So many cases were quoted as employees could not go to work due to childcare needs.  This will be alleviated in the fall and with the elimination of the $300/week Federal unemployment benefit, those unemployed will have no choice but to seek employment.  At the current time, it pays to wait.  Each of the unemployed are looking for better jobs and the Federal subsidy gives them time.  Time is running out and now they will need to be employed.  

Last month I discussed why inflation was probably not a problem in the current stock market.  This month we are starting to see the effects of the high inflation slow down.  A lot of people misunderstood the shortage of goods we had in America once the economy began again.  It wasn’t really a shortage of goods, but a shortage in the supply chain.  Ever since America started keeping their inventory on an as-needed basis, they only maintained enough inventory to get by from day to day.  When the influx of business occurred, all of a sudden inventories were inadequate and had to be built up again.  Last month I reported that the price of lumber had jumped almost 100% and shortages were throughout the building industry.  You will be happy to know that the price of lumber fell 40% during the month of June, but it is still elevated from the pre-COVID levels.  Evidence is everywhere that the demand pressure on inflation is falling.  Retails sales are estimated to have fallen 0.6% in June after falling 1.3% during the month of May.  Almost this entire reduction of retail sales is based upon lower car sales.  There have been so many cars purchased in America over the last year at some point it was almost assured to have to fall.  Now we are seeing that happen.  

Mia’s parents – Muzzy (93) and Jennie (88)
celebrating their 68th wedding anniversary

The financial world was shocked this month when the 10-year Treasury fell to 1.25%, rather than rising due to the fear of inflation.  Many on the financial shows on T.V. are scratching their heads as to this conundrum of bond yields falling when clearly they should be rising.  Most people are projecting by the end of 2021, a 2% 10-Year Treasury, but in the short-term rates are actually falling rather than going up.  However, I predict this too will be short lived.  

The Federal Reserve in their monthly meeting notes indicated that it would continue to buy $80 billion in treasury bonds and $40 billion in mortgage bonds each month.  As you can see, the Federal Reserve is almost the sole buyer of these new bonds being issued.  This has the incredible effect of keeping interest rates down both in the treasury rates and also in the mortgage rates which benefits real estate.  The Federal Reserve has a dual mandate to maintain full employment and to control inflation.  With unemployment at 5.9%, the unemployment rate is unsatisfactorily high.  

At the current time, inflation, measured at 3.4%, has the potential to be high but has not been realized by the economy yet.  It should be clear to all that with the Federal Reserve continuing to buy up virtually the entire issues of treasury and mortgage-backed securities on a monthly basis, that the minute they stop, interest rates will reverse and go higher.  The Chairman of the Federal Reserve, Jerome Powell, has indicated he will support the economy over the foreseeable future.  He has done a spectacular job in bringing the country back from recession due to COVID, to levels that may, by the end of the year, exceed the pre-COVID economy.  However, we all should be warned that the minute he withdraws support, likely in late 2021, we will be dealing with higher inflation and higher mortgage rates, but with an economy that is more-likely-than-not to be fully employed.  

Oh, give me a home….

One of Warren Buffett’s most famous sayings is “Never bet against America”.  I got to thinking about it this month with all the Federal Government’s actions to limit big businesses.  I go back to 1971 when there was a huge oil shortage in the United States and the price of oil quadrupled in over a matter of couple months.  I also remember that Congress was pounding their fists over and over again for two decades trying to develop an energy policy in the United Sates that would encourage more oil production.  I vividly remember when George Bush (Part Two) went to Saudi Arabia and literally begged the Saudi government to sell us more oil to keep the price down.  I remember during the Jimmy Carter years when the price of oil led to inflation that was close to 12% annualized.  All this chaos in the supply of oil was solved by the private sector without the government’s intervention.

With the innovation of fracked oil in the Dakota’s and the implementation of better technology for finding oil, the United States completely reversed its position and is now the largest producer of oil in the world.  In fact, the United States produces enough oil to be self-sufficient and to even export oil.  Even though the current Administration is doing everything within their power to limit oil production, there is no question that the rest of our lifetimes for the readers of this newsletter, oil will be a majority contributor to energy.  Again, it was the private sector that solved this issue.  Better technology led to higher recovery of oil and a problem that the government could not solve was solved by the private sector.  

A quiz for the readers of this newsletter: What five companies recently had a market capitalization in excess of $1 trillion?  For those that do not know the answer, it is Apple, Amazon, Microsoft, Google, and Facebook.  Just in their short lifetime, these companies went from nothing to a $1 trillion valuation due to extraordinary technology and entrepreneurs that were willing to challenge the existing technology.  If there is one classification that the Unites States is “leaps and bounds” ahead of the rest of the world it is technology.  The software created in the United States is currently used around the world in all countries.  

Ava at “Old Faithful”

While China has proven to be an extraordinary copier of technology and software, they have yet to even scratch the surface on creating this technology juggernaut.  You will notice that wherever you see technology running, Microsoft Windows is generally behind it.  With Facebook’s 2.6 billion active users, they reach around the world, yet they sell no products.  These five companies are prime examples of entrepreneurs in the United States creating vast wealth for them and their shareholders due to a better idea.  And now our government wants to punish them.  

Rather than punishing the successful we should be praising them.  By virtue of their accelerated growth, they have made many Americans massive amounts of wealth to solve the retirement issue.  It is rather sad to see the government line up to oppose these companies and to treat them as the bad guys when in fact they should be praised by the government itself.  The beauty of these companies is that they are forever changing.  I do not even think for a second that any governmental actions could do much to harm these companies since they will just migrate around the problems for years to come.  Recently the FTC challenged Facebook to complain that they had a monopoly in the field.  The courts quickly threw out that case since it was clearly a desire of states and the FTC just to blackmail money from Facebook.  I am positive there will be thousands more lawsuits coming in recent years, but I am convinced that these dominant companies will only grow and prosper in the future.

Ava and Dakota at Steamboat Geyser

We all must give a vote of gratitude to this evolution of technology by the American companies.  It makes Americans stronger by improving their financial wealth and it continues to make America the leader by far in technology.  The one thing that we can never do as a country is to take away our desire to innovate and implement new process.  Who would have ever believed that 10 years ago electric cars were even possible? Now every major car manufacturer has vowed to only produce electric cars by 2030.  

There is a simple reason for them converting.  Electric cars are cheaper to build and cheaper to drive.  This entire concept was thought up and implemented by Tesla.  Who would have thought that one small company with one kind of weird CEO could influence the rest of the world in transportation?  Yet, it has happened, and it has happened over the last decade.  Hopefully, future government administrations will understand that you should not punish success, but you should reward it for the benefits it has provided to all Americans.  

Ava, Joe and Dakota enjoying 
the waterfall views 

All the above paragraphs have led me to give you an explanation of socialism, so you can better understand.  It has always been perplexing to me why American students come out of school so completely sold on the concept of socialism as the future.  As they teach socialism in grade school and college, I would think that anyone with any intellect would definitely want to embrace socialism.  Who in their right mind would not want an economy with no poverty?  Who in their right mind would not want an economy where everyone was treated the same?  And there would be no rich people nor poor people, but everything in between.  Who would not want an economy where the government provided for all your natural needs such as medical, food, and other benefits?  It just sounds so perfect, who possibly could object to a socialistic economy?

I am often confronted by those that believe that socialism is the answer to all the United States’ problems, so I ask them a very basic economic question.  Name a country anywhere in the world where socialism has succeeded.  Would you name Russia, Cuba, Venezuela, Argentina, or any other third world country that operates under a socialistic scheme?  The one component that the textbooks have never been able to define is how do you build into an economy the desire to get ahead under socialism?  Under socialism, the really good worker and the really bad worker earn the same amount of money.  In Cuba, everyone is paid the same rate.  You can sweep the streets for $70 a month or you can work in the tobacco fields for $70 a month.  It is very hot in Cuba, and it is very hard work.  Why would anyone pick working in the field as compared to sweeping the streets if you will be getting paid the same amount of money?  

Joe and Ava at Teton Mountains

That is where socialism fails.  Once the average worker comes to the understanding that there is no way to get ahead since everyone is treated equally, they have no incentive to improve their lifestyle.  So, what happens is workers tend to be underproductive and eventually become a drain on the economy rather than a plus.  

There are many that point to China and say there is a classic case of where socialism has succeeded.  They could not be further from the truth.  China is very much a capitalistic economy.  There are extraordinarily wealthy people in China and a huge difference between the wealthy and the poor.  While the economy has socialistic aspects such as free medical, it has a limited retirement plan and for the most part has the older people depend on the younger people to take care of them.  It is absolutely true that the government in Russia has characterized themselves as socialist, but they also have one of the greatest capitalistic economies in the world.  

The one item that the communist government has realized is that to keep political unrest from the public, they must provide jobs.  It has been reported that China has built entire cities with no occupants because they want to keep workers working.  Currently China is one of the most indebted countries in the world and every time you read that China is a risk to take over the U.S. economy, you have to question how they can ever overcome their debt issue with their current growth in economy.  Yes, China maintains a communist government, but very much a capitalist economy.  As long as China can keep workers working and wages rising, there will be no incentive to overthrow the government to a republic government such as the United States.  

So, when you explain to the average person the difference between capitalism and socialism, you have to point out the United States.  Yes, it is terrible in the United States that there has been a large gap of wealth from the rich and the poor.  But the percentage of Americans that are classified as “super rich” is a very small percentage of the total population.  What is important is that the middle-class income is rising at an extraordinary high rate at the current time.   It is estimated that the average worker is increasing their wages at 5.6% annually.  This is going to accelerate as it becomes bidding process for new employees throughout America. 

Joe and Dakota overlooking
 the Grand Canyon in Yellowstone

The one thing that America has going for it is an economy that is growing and forever changing.  If the economy hits one roadblock, the economy bounces back and does an about turn into something else as it did with oil.  We went from telephones that did not work well to very sophisticated smart phones created by a small company in California.  If ever the Federal Government attempts to prevent entrepreneurs from creating new technology, then the standard of living in America will clearly fall.  

So, as we finish the first six months of 2021, it has been very profitable and eventful.  At the beginning of the year there was a huge switch from growth stocks to value stocks.  Recently growth stocks have come crawling back and now the market is higher, as represented by the five trillion-dollar companies above.   By earning 15% in the first half, it is highly unlikely that the second half is going to generate like returns.  However, you just never know with earnings as strong as they will be going forward.  As we start to roll out earrings in the major American companies beginning next week, I forecast that you will see earnings that will blow you away.  The reason technology and growth stocks have been accelerating recently is because their earnings will be nothing short of spectacular.  I anticipate a higher level of earning for all except those industries that specialize in hospitality or travel.  

Joe and Ava having a blast 
at West Yellowstone in Montana

As I have pointed out on numerous occasions in these postings, earnings are by far the most important component of future stock prices.  If earnings continue to accelerate as I anticipate, and the economy continues to tick on a 9.6% GDP growth, earnings will be spectacular for the rest of 2021 and most assuredly will lead the indexes higher from current levels.  While it will not be a straight line higher and there will be many days that will challenge your commitment to the market, I can only encourage you to stay invested at all times and enjoy the ride.  But by all means, call us if you are having doubts.  

People have asked me my reflections after our trip to Yellowstone.  There is no question, it is a truly beautiful place, but it is a strange combination of places around Yellowstone that I truly do not understand.  I was lucky enough to visit Yellowstone when I was 12 years old and once again visited when I was 71.  I think every 59 years is often enough to get the full feeling of the place.  Not being hypocritical, but realistically how long can you actually look at a hole in the ground.  

What is amazing about Yellowstone is the number of animals that you encounter on any given day.  Buffalo are walking in the streets and around every corner there are new wild animals to watch.  It is quite an incredible experience.  But if you want to know about the prosperity in America today, it was in full bloom at Yellowstone.  

It was reported that some days there were two hour waits just to get in the gates at Yellowstone.  Fortunately, we had a pass and did not have to make that wait.  We started out staying in Jackson Hole in Wyoming and it is truly a contradiction of any type of reality.  Even though there are only 10,000 people in the town, tourists are everywhere and it is impossible to move inside the city.  You cannot get reservations at any restaurants since they are overrun with tourists.  Frankly, it reminds me of Gatlinburg with all of the gift stores and items that just sell nothing but junk.  It must be the playground for rich people since homes are so unbelievably expensive at Jackson Hole.  

Morgan, Kari and Mia celebrating
 on  Kari’s wedding day

We moved on to a little town named West Yellowstone, just outside of the west gate of Yellowstone for the rest of our trip.  This town was the exact opposite of Jackson Hole.  The best restaurant in town was a barbeque place that had picnic benches set up outdoors, nothing fancy about this town only a few hours away from Jackson Hole.  

Every interesting place in Yellowstone was covered with tourists and parking was almost nonexistent.  In many cases cars were lined up far down the road to get into the few parking places that were available.  While truly a spectacular place in every regard, if you are going there for a short, leisurely visit, I highly recommend you go in the fall and not the summer.  

One event that clearly stands out in my mind from our trip is that when I was 12 my father made it an absolute requirement that we be there one night when “Old Faithful” goes off.  All of the publicity indicated that it was an illuminated “Old Faithful” geyser.  I vividly remember all of us getting in the ’59 Chevrolet to get to that part of the park where “Old Faithful” sits even though we were almost asleep as it finally became dark around 9:30 at night.  

We could not control our excitement of the upcoming event; actually seeing “Old Faithful” illuminated.  You could guess our disappointment when finally, after dark, “Old Faithful” did its thing and shot hot water 100 feet in the sky, but only one small light illuminated it.  For reasons that I never quite understood, this seemed to satisfy my father and that was enough for all of us since we could now go to bed.  

As always, the above comments are based on my personal research and my personal opinion and certainly no one can forecast the future accurately.  However, the realization that the economy has already turned should be self-evident and those who are sitting on cash should be moved to make appropriate investments. 

On that note, come visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email.

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins