3Q2016 Market Review Newsletter

July 6, 2016

3Q2016 Market Review Newsletter

It is hard to believe that half the year is over. As of June 30, 2016 the U.S. Broad U.S. Market Index is up 3.49%, per Morningstar. This is after a very rocky first 6 weeks of the year and the most recent "Brexit". Large swift movements down followed by just as swift rebounds. Yet again, decide on a portfolio and stick with it. I have two items to discuss, first is the Brexit and the second is the Morningstar Investors conference. I will start with the latter.

The Morningstar speakers were as usual varied, well informed, and interesting. Professor Austan Goolsbee, a University of Chicago Booth School economist, was one of the most interesting speakers. He was one of Obama's economic advisors in his first term. He was instrumental in things like the "cash for clunkers" program and the 1st time home buyers credit. He had two points that I thought were interesting.

First, he argued that, at the time, the government needed to stimulate the economy in some way – their solution was "cash for clunkers" and similar programs. At the time, I questioned their efficacy, and though he made some very interesting points, I still do. Their effect was very short lived, but they did something, he argued. We are still paying off the debt.

The second item he discussed was the Fed's (The Federal Reserve Board) economic projections. Their projections have now been terribly wrong for a whopping 30 months in a row. They have predicted the current slow growth of around 1% would pick up in 1 or 2 quarters to 3%, or 4% growth depending on the quarter and they would raise interest rates. They have yet to be within 2 percentage points of being right and this is measuring GDP where a .3% miss is considered big (billions of dollars). These are the smartest guys in the room, so to speak. His delivery was excellent and thought provoking: the experts, he said, still get a lot wrong. The second idea that I gleaned from the conference was that a lot of the new "investments" to earn a higher yields are not working and never have. They should be looked at as a fee gathering devices for investment firms and not good investments for you. I am very pleased to say that neither Keith, Bill, nor I have placed any of our funds into these "investments". Sometimes the best advice we can give is not to do something. A lot of hedge funds are licking their wounds and explaining why their strategies didn't work out.

The next topic is the Brexit. The British people have spoken and basically told the bureaucrats in Brussels enough, is enough. Brussels is howling mad and tried, before and after the vote to convince Britain that they will suffer immense economic pain from the exit. Like the 5 stage Kubler Ross model on death, denial, anger, bargaining, depression, and finally, acceptance. Brussels is currently in denial and anger soon to followed by bargaining for how the new agreements will be shaped, followed by depression and acceptance. Based on the U.S. market reaction the headline risk has already been already forgotten. The real questions are not for Britain but the E.U. itself. Banks have been making unrepayable loans to politically connected firms. Spend thrift politicians have been making promises they cannot pay for. And it is all coming home to roost. We shall soon see what happens and how it all works out. I have read expert after expert and like the Fed Board "the smartest guys in the room", we really just don't know. Steady as we go. I hope you had a wonderful 4th! We do live in a great country. Thank you.

Willis G. Ashby, CFP®


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