Acceptional

The positions of the Americans is quite exceptional, and it may be believed that no democratic people will ever be placed in a
similar one. – Alexis de Tocqueville

Chinese startup DeepSeek’s introduction to the world over the last weekend of the month and the resulting Monday, January 27ths 17%
sell off in market darling NVIDIA stock certainly didn’t do anything to “deep six” investor infatuation with all thing tech related. QQQ,
an ETF that tracks the NASDAQ 100, drew $4.3 billion that day from would be bargain hunters, its largest one-day inflow since 2021.
NVDL, a security which is a leveraged play on NVDIA stock, declined 34% that day and attracted a record inflow of $1 billion. Still
though that narrative didn’t quite mesh with the equity markets reality for the month. Information Technology was the sole loser among
the S&P’s eleven sectors falling 2.9%. The equal weight S&P 500 returned 3.5% outperforming the cap-weighted versions 2.8%. The
value share of the index narrowly outpaced the growth side 2.9% to 2.7% and the small cap 600’s 2.9% and the mid cap 600’s 3.8%
returns demonstrated that, at least for this one month, bigger isn’t always best. US investors who hadn’t entirely given up on the merits of
investing in foreign markets were rewarded with foreign developed markets 5.1% and European stocks 7% returns.

American Exceptionalism is a phrase that has come into such common usage these past several years that a google search even offers a
definition though primarily by its effects than its cause. It is a phrase often used in reference to “the Mag 7” stocks which are, of course,
American companies. It is likely that more investors believe in AI’s “the sky is the limit” opportunity to make money in the stock market
than are able to explain what it is but perhaps that explains our higher rates of economic growth and the superior returns of the US stock
market. That our rate of economic growth has been higher than that of most of the rest of the world is certainly true. Of the G7 countries
(Canada, France, Germany, Italy, Japan, the UK & the US) Canada’s rate of economic growth in 2024 of 1.34% was the second highest
but less than half that of the US’s 2.77%. That is a notable reversal of fortune for this country as in the five pre-pandemic years of 2015
through 2019 the US economy grew at a rate of just over 80% of the global rate but in both 2023 and 2024 the US rate of growth
exceeded it by almost 10%. So, two questions come to mind; why is this occurring and is it likely to persist?

That the United States is running very large budget deficits is scarcely new information with our government taking in revenue of
approximately $5 trillion and spending just over $6.8 trillion. The result is an increase in the market value of outstanding federal debt
from 75% of the size of our national economy in 2019 to its current level of 94%. The source of growth in the deficit is attributable to the
rise in federal spending from 22.6% to 24.6% of GDP. The reason for the increase in federal spending is interesting; it’s almost solely
due to the increase in the amount of interest the US Treasury is paying on its debt. It is how that money is borrowed though that matters
most to our rate of economic growth. If that debt is purchased by entities within this country, then, in terms of its ability to stimulate the
economy, it’s basically a wash with those funds withdrawn from the economy to purchase the debt but then reentering the economy as
government spending. In 2024 though, $1 trillion of that debt was purchased with money borrowed from other countries thus allowing
our deficit to serve as a form of economic stimulus.

Perhaps even more interesting than who we’re borrowing the money from is the form in which it is being borrowed. Typically, the US
Treasury uses notes and bonds with maturities of from two to thirty years to fund 60% to 70% of its requirements. Our former Treasury
Secretary Janet Yellen from Q3 2022 through Q1 2024 employed a notably different funding strategy using Treasury bills with maturities
of one year or less to provide 70% of the needed funds. During the pandemic the Federal Reserve added $5 trillion to its balance sheet
through Quantitative Easing or “QE.” Not wanting a sum that large to enter our economy with its likely inflationary consequences, the
Fed attracted half that amount into its Reverse Repo program by offering above market rates of interest on those balances. The US
Treasury, with its very high volume of Treasury bill issuance, then pushed Treasury bill rates above what it was paying on Reverse Repo
balances which money market funds, the owner of those balances, then withdrew to purchase all those newly created Treasury bills.
Those very large budget deficits and how they were financed are likely the true source of American Exceptionalism. As to the likelihood
of its continuation, that question may well be answered by the reality that our debt has grown to such a size that the interest that is being
paid on it that has become a major contributor to our ongoing budget deficits.

January 2025 started 50% fixed income 50% equity investors off on a cheerful note returning 1.82%. The equity share returned 2.9% thus
contributing most of that return for the month mirroring US large cap’s 2.8% but pushed just a bit beyond that assisted by US small cap’s
3.6% and foreign’ s 3.2%. Fixed Income offered returns exceeding their cash flow as 10 Year US Treasury rates closed near their lows
for the month and a hairs breadth lower that their beginning of the year level. Gold continued to shine as, after having risen 26.5% in
2024, it rose an additional 6.4% in this year’s first month.

Mark H Tekamp/February 2, 2025

Heritage Wealth Management Group is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

Interesting Rates

Interest rates are to asset prices what gravity is to the apple. When there are low interest rates, there is a low gravitational pull-on asset prices. – Warren Buffett

Though December did not deliver higher stock prices market observers were still inclined to celebrate with the S&P 500 up 25% for the year. The Wall Street Journal headlined “Dow Ends Lower on Last Day of Stellar Year for Stocks” adding, in the accompanying story, “US stocks wrapped up a stellar 2024, with the S&P 500 notching its best consecutive years since 1997 and 1998.” December joined April and October as the only negative return months for the year and the month also included the venerable Dow Jones Industrial Average’s ten-day losing streak, its longest in fifty years. As has been true of this market in recent years, 2024’s market was less than an equal opportunity one as the equal weight S&P 500 returned 13%, the Small-Cap S&P 600 8.7% and Foreign Developed Markets 3.7%.

While most investor’s attention has been focused upon the equity markets and those in the United States in particular a case can be made that it is the bond market that is the more interesting market because it contributes a great deal to explaining both the behavior of the equity markets in the recent past and quite possibly in the year ahead. It is generally agreed that the 10 Year US Treasury rate is the single most important interest rate in this country and globally. For instance, it is this rate that determines the mortgage rate home purchasers pay. Looking at a chart of that rate from 2020 to the present is like standing at the bottom of a staircase and gazing upwards. In 2020 that rate was below 1%. In 2021 it rose to 2% and in 2022 to 3 1/2%. In 2023 it touched 5% and since then has floated back and forth between 4% and 5%. Many investors would not view the reason for rising interest rates as particularly difficult to explain; inflation and the Federal Reserve’s interest rate increases implemented in its effort to push inflation back to a 2% level. There is, however, a piece missing in this explanation. In June 2022 the rate of inflation was 9%. Currently, by most measures, it is now at or below 3%. So, if inflation has declined by more than 6%, why are interest rates at or close to their highest levels?

Most economic commentators are focused on this countries rate of economic growth and believe a correlation exists between that rate, the future level of inflation and the likelihood of future interest rate reductions by the federal reserve but with all due respect I would suggest this is not true. Evidence that this is so is provided by what has occurred in the past three years. The Federal Reserve raised interest rates by 5 ¼%, the rate of economic growth accelerated in 2023 and 2024, and the rate of inflation has fallen sharply. There is no cause and effect there and why it is being used to explain the current elevated level of interest rates is thus nonsensical. So…what is the actual explanation for the current behavior of interest rates?

What we are discussing is the cost of money, the interest rate required to establish a balance between the amount of money that our government needs to borrow and those who have the money to lend. The provision of the required supply of money is referred to as liquidity and the Federal Reserve and the US Treasury have no higher priority that to be certain that the “pool” of the required liquidity is sufficient to satisfy the funding requirements of our government. In 2024 the soon to be former Secretary of the Treasury Janet Yellen shifted the maturity of its debt issuance from longer maturities to treasury bills with maturities of one year or less. The result is that 30% of the $28 trillion of outstanding US debt must be refinanced this year. All that treasury bill issuance the prior two years was liquidity enhancing and positive for both US stock prices and our rate of economic growth while depressing the level of longer-term interest rates. The government’s dependence on short term financing though is potentially harmful to financial stability and incoming Treasury Secretary Scott Bessent has vowed to shift more debt issuance to longer maturities.

This explains what investors are currently experiencing. What is positive for the prudent management of our public finances is not necessarily positive for the stock market, the rate of economic growth or the level of longer-term interest rates. The incoming administration is aware of this and will likely ask us to endure the short-term unpleasant consequences blaming those on the prior administration while hoping that circumstances will begin to improve sufficiently to enhance its political prospects in time for the 2026 mid-term elections. This is not to suggest that our experience as investors is likely to be solely influenced by politics, but it is to suggest that Jay Powell, the Federal Reserve and the rate of inflation were never as influential in influencing the economy and financial markets as they were given credit for.

50/50 portfolios returned -2.6% for the month weighted down by equities
-3.2% return partially offset by fixed incomes +1.2%. The quarter included two of the three negative months for the year with equities -0.73%. The quarter’s rise in interest rates resulted in fixed income returning -4.2%. For the year portfolios returned 10.06% with equities contributing 17.5% and fixed income 2.6%. Ten Year US Treasury rates began the year at 3.88%, hit their peak level of 4.70% on April 11th, experienced their low of 3.63% on September 16th and closed the year at 4.58%.

Mark H. Tekamp/January 12, 2025

Heritage Wealth Management Group is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

Tarrific!

If something cannot last forever, it will end. – Herb Stein; Economist

For investors in US equities November was indeed a month to be thankful for with the S&P 500 rising 5.9% for the month and 28% year
to date with even that stellar return exceeded by the MidCap 400’s 8.8% and the SmallCap 600’s 10.9% November returns. MarketWatch
headlined its story describing the month’s market action “Dow 45,000 is just the start as the stock market looks to December’s seasonal
gains” using the picture of an upward ascending rocket ship to reinforce its bullish view. Indeed, the Conference Board, in its monthly
survey of consumer confidence in the likelihood of higher stock prices in 12 months, saw that index reaching its historical high in a series
reaching back to 1987. The party though was confined to these fifty states as the S&P indices tracking the performance of European,
Latin American and Asian stocks declined 1.7%, 4.4% and 4.7% respectively. Increasingly though in the “forest” of global equities it is
“the tree” of US equities that dominates as the US share of that index has doubled from 35% in 1995 to its current representation of 70%.

This month’s bipolar return of domestic and foreign equities is likely manifesting the outcome of the November 5th US presidential
election with the winner of that contest having run on a platform promising the aggressive use of tariffs to address the issue of our almost
$1 trillion annual trade deficit. It may be though that the real significance of the discussion of the employment of what is essentially a tax
on US imports is its possible foreshadowing of the end of a global financial system that reaches all the way back in time to 1971 in which
the US dollar has served as the global reserve currency. This system has not been without its benefits for the United States, but the cost of
those benefits has possibly reached a price that neither this country nor the rest of the world is able to continue to pay.

A growing global economy requires an ever-increasing supply of money and most of the money that is required is, roll of the drum here,
the US dollar. The source of the supply of that increasing demand for dollars is the US trade deficit which results in our importing the
world’s tradable goods and the exporting of our dollars. The rest of the world cannot spend those dollars in their own countries, so those
dollars owned by foreign interests are used to purchase US financial assets, the supply of which is increased by our ever-larger federal
budget deficits and the increased issuance of US Treasury securities. Fortunately for investors in the US stock market though, a portion of
that inflow of foreign capital is used to purchase US equities which helps to explain the value of our stock market growing at a rate five
times greater than our economy this past forty years. It is also reflected in foreign interests, which owned a value of US dollar
denominated assets valued at 10% of the size of our economy in the year 2000, having seen that share rise to its current level of 80%.

As mentioned above, the current “regime” has not been without its benefits for this country and its people. US corporations, which are a
contributor of a significant share of our trade deficit, have experienced rising profit margins through their employment of lower cost
foreign labor. The financial services industry (aka “Wall Street”) has certainly benefitted as have US geopolitical interests attested to by
the thirty-seven countries that are currently subject to some form of economic sanctions by this country. The negatives though have
grown to such a level that they now pose a rising threat to the wellbeing of this nation. The wealth of US households has risen
dramatically in the past forty years, but the inflation adjusted income of the average US household has scarcely grown. The interest on
our federal debt now exceeds the size of our defense budget. The United States Navy has been forced to significantly extend the number
of years to implement its shipbuilding programs due to the “hollowing out” of this nation’s industrial base and the resulting lack of
capacity to build those ships. As the benefits of the US dollar-based system are experienced by a shrinking share of our population an
increasing share of the US population demanding a change has grown.

The incoming administration intends to reduce the size of this country’s trade deficit through the employment of tariffs, but this is a
conversation about an effect without addressing its cause. Like many conversations though this one will likely both broaden and deepen
over time to one focusing upon the cause and as it does so it will serve as a signpost indicating that we draw closer to the end of a now
fifty-year-old system and the onset of the creation of the one that is destined to succeed it. It may be global central banks sale of $225
billion of US treasuries and purchase of $500 billion purchase of gold in 2023 and its 50% rise in price the past three years outpacing
even that of even the S&P 500’s 39.6% that provide indications of what that system may be.

50/50 portfolios returned 3.3% for the month offsetting the negativity of October and leaving portfolios now +17.35% year to date.
Equities returned 5.1% with the outperformance of small cap stocks offsetting the negative returns of foreign equities allowing that asset
class to come close to if not quite reaching that of the S&P 500. The fixed income and “other” half returned 1.5% aided by the mid-month reversal in interest rates allowing fixed income to add a bit of price appreciation to their cash flow. Year to date equities have returned 21.7% and fixed income and “other” 13% so for 2024 year to date investors are thankful for an early Christmas!

Mark H. Tekamp/December 3, 2024

Heritage Wealth Management Group is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

Times That Rhyme

Time is slow, time is fast. It never stops, but it always lasts. – Anxhelo Llangozi A Poem About Time

The last day of October, Halloween, “spooked” investors in big cap tech stocks with The Wall Street Journal headlining its coverage of that day’s market action “Big Tech Earnings Drag Down Stocks” with the first sentence of the accompanying story reading “Disappointing quarterly results from big technology companies pushed stocks lower Thursday sending the S&P 500 to its first monthly loss since April.” Year to date “The Mag 7” have been carrying the rest of that index on their back but, after having cheered the spending of many billions of dollars pursuing the magic of AI, investors are showing signs of becoming nervous about how soon the promise will become the reality. The experience of the day though was at variance with that of the month as October’s -.91% return of “the 500” was materially better than that of the average stock in the index declining 1.63%, small cap stocks –2.64%, and foreign developed market’s -4.36%.

The financial markets which are the canvas upon which investors paint their perception of the future have certainly undergone a dramatic change in two years’ time. As 2022 wound its way to its end investors were looking at near 20% losses in both their equity and fixed income investments. The inverted yield curve was a signpost pointing towards recession, falling earnings and even lower stock prices with expectations of persistent and elevated levels of inflation and a Federal Reserve keeping interest rates elevated as it struggled to put the inflation genie back in its bottle. Today, that canvas is painted with colors of a distinctly different hue. Inflation has declined to close to the Federal Reserve’s target but may be poised to begin to rise. The economy may have slowed a tad, but its rate of growth too is possibly preparing to accelerate. The Fed’s ½% cut in rates is September was likely excessive and additional rate cuts may not be warranted and, if the stock market is not inexpensive, it is supported by next year’s 12% expected increase in earnings on a year over year basis.

Charts detailing US economic growth rates often indicate the times of economic recession with shadings of gray. Overlaying a history of the level of the Federal Reserve’s Fed Funds Rate to that chart and back dating it to the onset of the 21st century, it is difficult to avoid the observation of a correlation. Every economic recession, and there have been three this century to date, has occurred after a time in which the Federal Reserve concluded a cycle of raising interest rates. Each cycle of rate increases resulted in a recession and an equity bear market. Each recession and resulting equity bear market was preceded by a rate tightening cycle. We’ll discard the pandemic of 2020 as a unique event, but it may be a useful exercise for investors in equities to ask themselves if this time will be different and, if so, why this time will prove itself to be the exception.

Interest rates are the cost of borrowing, and it would seem to make a certain amount of sense that the greater amount of the debt and the larger the extent of the interest rate increases the greater the impact of those interest rate increases on the underlying economy. From March 30, 1999, to May 15, 2000, the Fed took its discount rate from 4.75% to 6.50%. The market peaked March 24, 2000, and would subsequently decline 49.15%. At year end 1999 total debt in the US was 189% of GDP. From May 4, 2004, to June 29, 2006, the Fed took the discount rate from 1.00% to 5.25%. The market peaked on October 9, 2007, and then declined 56.77%. At year end 2007 total debt in the US was 237% of GDP. From March 17, 2022, to July 26, 2023, the Fed took the discount rate from 0.25% to 5.50% with the total rate increases of 5.25% exceeding the rate increases of 2004 to 2006 by 1%. The total debt of the US is now 261%.

As mentioned above, markets at year end 2022 were “all in” on the prospects for economic recession but markets have become increasingly comfortable with their adoption of the view that “if it hasn’t happened yet it’s because it isn’t going to” but that may be a wager investors exercise care in wagering. Darker clouds even now may be starting to come into view. The US economy, with its very high levels of fiscal stimulus; the mirror image of a very large and growing federal budget deficit, has been a notable outlier in a world economy that, this year, is experiencing sequentially lower rates of growth. This is now leading to rising market-based interest rates both in the US and globally and a stronger US dollar. Foreign counties, with much of their debt valued in those same dollars, and with much weaker economies, are responding by aggressively lowering interest rates set by their central banks leading to a widening spread in their interest rates vis a vis a those set by a still very cautious US Federal Reserve. The result is a negative feedback loop creating an even stronger US dollar and the application of an increasing amount of stress upon an increasingly fragile global financial system.

With the lowering of our expectations of positive equity markets we are adjusting the model portfolio of interest from 60% equity, 40% fixed income and cash to an equal weighting of 50% each. October created a 1 3/4% negative return leaving portfolio returns +11.18% year to date. Equities returned -2.35% with large cap US equities down near 1% but foreign markets returning -6%. And small cap US -3%. The 50% fixed income and cash returned -1.15%.

Mark H. Tekamp/November 3, 2024

Heritage Wealth Management Group is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

The Green Machine

Optimism doesn’t wait on facts. It deals with prospects. – Norman Cousins

After having been cast into the role of Santa Claus on September 18th offering his fellow citizens a reduction in interest rates of half a per-cent US Federal Reserve Chairman Jerome Powell ended the month cautioning his listeners not to be overly optimistic about future rate reductions stating “This is not a committee that feels like it is in a hurry to cut rates quickly.” The S&P 500, which had been trading up on the day, promptly declined almost 1% though recovering to close up on the day. And so ended the month and quarter with that index +2.14% for September, 5.89% for the 3rd quarter and 22.08% year to date. The quarter was a bit of a strange one with utility stocks outperforming information technology +19.37% to +1.61%, the average stock in the index returning 9.60% versus the “cap weighted” index’s 5.89% and foreign emerging markets and US small companies both returning just over 10%.

Given their recent challenges in correctly forecasting economic growth rates and financial market trends it perhaps shouldn’t be too surprising that prognosticators have ventured into a side gig of psycho analysis. We have been lectured increasingly to cheer up and celebrate the era of prosperity we’ve been given the good fortune to inhabit. Lower gasoline prices and a ripping stock market. What’s not to love? Apparently, a great deal based upon the current mood of our fellow citizens. To suggest that we’re not a particularly cheerful lot would be an understatement. The University of Michigan has been measuring the American people’s attitude towards their economic prospects for seventy-two years during which we’ve experienced three prior times mirroring our current rate of despondency, 1975, 1980 and 2008. The first two reflect times of high inflation and the third the Global Financial Crisis, We were at close to peak levels of cheerfulness in January 2020 just prior to the onset of the pandemic and at the historically most pessimistic in July 2022. So here is the question. If inflation has declined significantly since its peak level in June of 2022, why are we still so unhappy?

In 1951 the total value of financial assets in the United States were 32% greater than the size of our economy. Today, financial assets exceed it by 518%. In 1980 the value of the US stock market was 40% of our economy. Now it is 160%, meaning that in the past forty-four years the stock market has risen in value at a rate four times that of the growth rate of our economy. This is reflected by the dramatic variance in the growth rate of our incomes and our wealth. From 1970 to 2021 the average family income in the United States on an inflation adjusted basis increased by 22% but our individual net worth, again inflation adjusted, by more than 330%. This is the reason why in so many instances, our children, even in their peak earning years, cannot afford to purchase the houses in which their parents live. An additional effect is the migration of the wealth from the American middle class, those in the 50th to 90th percentile, whose 35.8% share of the wealth in 1990 has declined to 28.1% while the wealthiest 1%’s share now exceeds that of the American middle class rising from 23.4% to 31.8%.

So, what is bothering the American people? Perhaps it is that we are focusing on the wrong side of the equation relating to what we are purchasing and what we are using to purchase it with. Possibly our fellow citizens are now experiencing something that is being missed by most economic commentators. It isn’t the prices we are paying that are going up but the money that we are using that is declining in value. This is the state of reality in which we now find ourselves. Gold prices have risen by 46.29% in the past year and have outperformed the S&P 500 by 10%. The average price for a house was $285,000 in 2016. It is now $426,000. The price of an acre of farmland in Iowa has increased by 60% in the past five years. The issuance of new US Treasury debt was $1 trillion a quarter from 2000 to 2009 and $2 trillion until 2020 when it would reach $3 trillion. This year the level of issuance is $7 trillion increasingly financed through the issuance of treasury bills with maturities of one year or less increasingly purchased by banks with funds provided to them by the US Federal Reserve.

60/40 equity/fixed income investors were lectured coming into the year that bonds had lost their ability to contribute meaningfully to portfolio returns. Most emphatically for 2024 that has not been true. For the quarter portfolio returns were 5.20% with equities contributing 7% and the fixed income 2.5%. For the year to date those returns are 15% at the portfolio level with equities contributing 18% and fixed income 10.5%. 2022 was a year in which both bonds and stocks declined 15% to 20%. In 2023 equities recovered nicely but fixed income contributed relatively little. This year conservative and aggressive investors alike have much to celebrate.

Mark H. Tekamp/October 6, 2024

Is It The Past That Will Last?

If we open a quarrel between the past and the present, we shall find that we have lost the future. – Winston Churchill

“The flash crash” on the 5th of August is likely the event during the month that most investors deem as most
memorable but perhaps it is the dramatic revision to the reported number of jobs created by the US economy that will
be the most important. On August 21st The Washington Post headlined “Labor Market Was Weaker Than Previously
Reported in Big Fix to Data” with the second sentence of the accompanying article reading “The government reported
Wednesday that the economy created 818,000 fewer jobs from April 2023 through March 2024 in the biggest revision
to federal jobs data in 15 years, according to the Bureau of Labor Statistics.”

In recent months commentators have been wrestling with the apparent disconnect between the reported robust
condition of the US economy and the increasing negativity of the US population’s attitude towards that same
economy. As the rate of inflation declined and the US economy provided ample opportunities for employment the
University of Michigan’s Current Economic Conditions Index had risen by March 2024 to 82.5. In the following five
months it has fallen to 61.30, a decline of 25%. Almost half of those in the workforce work for small businesses with
fewer than five hundred employees. Larger businesses obtain their capital in the bond market for longer terms and
have been significantly protected from rising interest rates. Small businesses though borrow predominantly from
regional banks at current interest rates. Those borrowing rates are now near 8%. A result is that there has been no
increase in bank loans to businesses year over year. Small businesses with fewer than fifty employees have
experienced a zero-growth rate in employment on a year over year basis and the rate of new business formations
has declined 51%. Possibly a number of widely held assumptions about the true state of our economy are on the
cusp of being significantly altered.

In the pre-pandemic world of the 2010’s the 10 Year US Treasury rate averaged 2.41%, the Fed Funds Rate 0.75%
and the US Consumer Price Index 1.78%. Most expected that to be a state of reality likely to persist. Then there was
the federal government’s public policy response to the pandemic resulting in inflation levels reaching 9% in June
2022 and the Federal Reserve’s hiking interest rates to 5.50% in July 2023 where they currently rest. In the past
three months the Core CPI Rate, which excludes food and energy because of the volatility of those specific inputs,
has fallen to an annualized rate of 1.60%, below the Fed’s 2% target.

The US Federal Reserve has what is referred to as a twin mandate; to maintain an inflation rate of 2% and a level of
economic activity sufficient to support the full employment of the US workforce. The Fed Funds rate is the interest
rate that it uses to influence the rate of economic activity. The “neutral” Fed Funds Rate is thought by many
economists to be 2.75%. Right now, the rate is 5.50%. If the economy is no longer at full employment and the
inflation rate is finding its way to 2% then that rate should find its way to 2.75% and possibly a great deal sooner than
most expect. So far this part of the picture is reasonably clear but there is another part that seems to not being
actively considered. The current Ten-Year US Treasury rate is 3.84%. The break-even rate, as identified by the
Treasury Inflation Protected Security (TIPS) market, is 2.15%, close to the pre-pandemic rate. Let’s propose a
possible scenario. We are returning to our pre-pandemic world with a Fed Funds rate of 0.75%, a CPI rate of 1.78%-
and 10-Year US Treasury rates of 2.41%. For those arguing that this is not possible a reasonable response would be
to ask what has changed that would keep it from becoming so?

With the Federal Reserve poised to take its foot off the brake that is negatively impacting half of our national
economy, the effect of materially lower interest rates could be significantly more positive than is widely assumed. The
news could be especially good for prospective home buyers. Historically, the yield spread between thirty-year fixed
rate mortgages and the Ten-Year US Treasury rate is 1.50%. That spread is currently at 2.50%. With mortgage rates
currently at 6.50% it may be that 5% rates could be in our not-too-distant future. Stock market investors may also be
hearted by the prospects of rising valuations due to lower interest rates and an economy that starts to regain its
stride with borrowing rates that become increasingly affordable.

Recovering nicely from “the flash crash” of August 5th the S&P 500 was +2.43% for the month and +19.52 year to
date but it was a very different market with “the Magnificent 7” stocks -.70% for the month with defensive sectors of
the market such as Consumer Staples, Real Estate, Utilities and Health Care posting returns twice that of the index.
MidCap stocks were flat and SmallCap was-1.44%. Foreign Developed Markets matched the S&P with European
Stocks and Latin American stocks performing particularly well. The curious disconnect between gold and
cybercurrencies continues with gold +2.31% and Bitcoin -8.84%. The 60/40 portfolio returned 1.12% for the month
with the 60% equity share returning 2.35% and the 40% fixed income share flat with portfolio returns now +13.2% ytd.

Mark H. Tekamp/August 31, 2024

Did Japan Attack NASDAQ?

It’s ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so
– Mark Twain

Perhaps the greatest challenge for investors in July was to choose the single most important news story for the
month. The shooting at the Trump rally in Pennsylvania? President Biden announcing his intention to not run for
reelection? The CrowdStrike sourced shut down of the internet? The reversal in fortune of the Magnificent 7 stocks?
The S&P 500 itself was +1.2% for the month but the S&P 400 MidCap was +5.8% and the S&P 600 SmallCap
+10.8% while five of “The 7” posted losses ranging from -5.2% (Amazon) to -8.4% (Microsoft). Reuter’s news service
had an explanation at hand in an article published July 18th. “U.S. small-cap stocks are having a long-awaited
moment, ignited by expectations of interest rate cuts and improving prospects for the election of Republican
presidential candidate Donald Trump…” There may be an explanation for the dramatic reversal of fortune in US
equity markets but US presidential politics may not be its source.

The world’s largest financial market, that of foreign exchange, the selling of one nation’s currency for the purchase of
another’s, is larger than all other financial markets combined with a daily trading volume of $6 trillion, half involving
the US dollar, in contrast to $1.2 trillion for global bonds and just over $500 billion for US equities. As nations’
economies have become increasingly interconnected the foreign exchange market has become “the dog” wagging
“the tail” of other financial markets and yet its role is often overlooked or simply ignored. That is a mistake for this is
the market where the global economic and financial systems which have become increasingly out of balance must
literally “balance their accounts.”

Foreign Exchange markets normally have much lower levels of volatility than equity markets with market trends
typically very gradual and of extended duration. The Japanese yen – US dollar relationship though has belied this
characteristic in recent years. In the five years from 2016 through 2021 the US dollar rose in value against the yen by
20%. In the just over two and one-half years from 2022 to July 11, 2024, it rose 40%. Year to date through July 11 the
dollar fell 1.74% against the euro, rose 5.11% against the Chinese yuan but 19.4% against the yen. So, why should
we care and unless we’re planning on joining our one million fellow citizens who visited Japan during the first five
months of this year to take advantage of an entire country on sale for holders of US dollars why would this matter?

Since 1989 Japan has frequently experienced falling prices so Japanese investors had been content to hold their
savings as cash and bank deposits without being paid interest. In 2022 Japan began to experience inflation of just
over 2%. To encourage Japanese savers to assume a measure of risk to earn returns on their savings Japan’s
government introduced the Nippon Investment Savings Account (NISA). In January the allowable contributions to
those accounts were doubled to $24,000 with lifetime contributions also increased to $120,000. Returns on these
accounts are exempt from tax. A preferred investment for investors making use of these accounts is US equities and
individual stocks. Flows into these investments have reached monthly levels of $5.6 billion. While less than the flow of
US investors $30 billion into US equities that amount is material and, more than US investor asset flows, focused on
technology stocks. With the additional benefit for Japanese investors of the declining value of the yen, since the end
of 2022 Japanese investors in US technology stocks have experienced returns of over 100%.

A counter party to the role played by Japan’s individual investor is the global “carry trade” in which hedge funds
borrow money in a low-interest rate currency, the Japanese yen, and use those to purchase US dollars to invest in
bonds and equities in US financial markets. The size of this trade is estimated to be as large as $20 trillion dollars.
Since 2016 the yen has steadily fallen against the US dollar making the trade both extremely popular and profitable.
The declining value of the yen though has created economic problems for Japan leading to higher levels of inflation.
At 8:30 am on July 11th a weaker than expected inflation reading for the US was released. This led to a modest
pullback in the value of the US dollar. Eleven minutes later Japan’s Ministry of Finance stepped into the market
selling US dollar’s and buying Japanese yen causing the yen to rise against the US dollar. At that point the
algorithmic trading platforms kicked in selling those assets which had previously outperformed the market (think the
“Magnificent 7” stocks) and buying the previously underperforming asset class, small cap stocks. This likely explains
the 19% “reversal of fortune” of the two asset classes from that point through month’s end. So, Japan’s individual
investors fed a market trend supported by the global carry trade manifested through the use of electronic trading
platforms that then fell victim to Japan’s monetary authorities seeking to arrest the decline in the value of the yen.
Amidst “the tempest and tumult” 60/40 equity/fixed income investors “enjoyed” a 2% positive month and 11.7% year
to date. Equities returned 2.25% and fixed income, with the interest rate declines occurring late in the month,1.625%.
There is a more than faint whiff of disinflation in the air so perhaps bonds will “spring” as we step into fall.

Mark H. Tekamp/August 3, 2024

Missed Perception

The greater the mismatch between perception and reality the greater the opportunity
– Mark H. Tekamp

“AI Frenzy Propels Stocks to Monster First Half” read the headline in July 1st’s Wall Street Journal. J.P. Morgan’s
Chief Global Strategist David Kelly was quoted elsewhere as believing “the outsized sway of technology giants over
US stocks is likely to persist, absent a major market rout.” Outsized it certainly is as the average stock in the S&P
500 declined 2.45% during the quarter in contrast to the index’s rise of 4.28%. “The Magnificent 7” stocks (Nvidia,
Apple, Amazon, Tesla, Meta, Alphabet (Google) and Microsoft) have risen 33% year to date in contrast to 5% for the
remainder of the index with the S&P 500 itself returning 15.29%. Six of the indices’ eleven sectors were negative for
the quarter, as were the MidCap and SmallCap indices and the venerable Dow Jones Industrial Average. Foreign
Developed Markets fell 0.54% though Emerging Markets rose 5.65% outperforming the S&P 500. Interest rates
finished close to where they began the quarter, allowing fixed income securities to earn their cash flow without an
appreciable decline in their market value.

The Federal Reserve seems to have succeeded in convincing the financial markets that any reduction in interest rate
this year will be modest and likely to be late in coming. Beneath the surface though a very great deal has changed,
and investors may wish to pay heed to this emerging reality. The engines of the US economy are exhibiting sufficient
thrust for the time being to keep it aloft, but it is clearly losing altitude and its ability to obtain a “soft landing”
increasingly in doubt. The Atlanta Fed’s GDPNow real GDP estimate for this year’s 2nd quarter was forecasting
growth for the quarter at over 4% six weeks ago. The current estimate is now 1.5%. Real (inflation adjusted) Personal
Consumption Expenditures one year ago were growing at a 3.25% annualized rate. It is now 0.8%. Two years ago,
employment was growing at a three-month average rate of 300,000 and the unemployment rate was 3 ½%. Now
employment is rising 177,000 and the unemployment rate is 4 ½%. Interestingly, full-time jobs have actually declined
on a year-over-year basis with the increase in employment solely attributable to the rise in the number of part-time
jobs. Meanwhile inflation shows increasing evidence of drifting down to its 2% target. The Fed’s preferred measure of
inflation, the Personal Consumption Expenditure (PCE) Core Rate (excluding Food and Energy) is at 2.74% but
excluding Healthcare, notoriously difficult to calculate due to the timing of the reset on insurance premiums, it is
below zero.

Much of the market forecasting fraternity is suggesting the possibility of a market correction due to a visibly slowing
economies effects on corporate earnings. An alternative and possibly more accurate view is that earnings are no
longer the primary driver of equity market returns having been supplanted by valuations. This is evidenced by 14% of
the 26.3% 2023 return and 8% of the 15.3% year to date return of the S&P 500 attributable to that source. And what
is the primary determinant of valuations? Interest rates because the primary demand for capital is no longer the
provision of capital for investment in the “real” economy but to provide sufficient liquidity to roll over the $300 trillion of
global debt. Lower interest rates increase the ease with which the $100 trillion global economy can roll over the
approximately $60 trillion in global debt that will mature this year. The “balance sheet” of the global economy lacks
sufficient size to retire the debt and so, like an interest only mortgage, it must be refinanced. So long as the global
financial markets permit this all things are possible. Should the day ever dawn when it does not nothing is.

The effects of the Federal Reserve’s lowering of interest rates by possibly 2% over the next six months may not be
just the extent of the rise in the equity markets but where that rise may disproportionately occur. Perhaps the market
we’ve been experiencing this past year and a half hasn’t been a bull market in stocks but rather a relatively small
share of the totality of the market experiencing something approximating a mania. Extending one’s time horizon an
additional year is helpful to obtain some additional perspective. 2022 was not a good year for investors in the stock
market with the S&P 500 declining 18.11%. Investors who purchased $1,000 of each of “The Magnificent 7” at the
onset of 2022 would have earned $4,193 by June 30, 2024, but $3,200 of those earnings came from Nvidia. The
$6,000 invested in the other six stocks would have returned 6.31% per annum, a lower return than that of 7.27% for
the S&P 500. Perhaps it isn’t the seven that are so magnificent but the one that has no equals.
60/40 portfolios returned 1.84% for the quarter and 9.90% through the year’s first half. The equity 60% share returned
2.20% and 10.60% year to date. The 40% fixed income share was +.80% for the quarter and is +.75% for the year. It
should be noted that Commercial Backed Securities (CMBS’s) are significantly outperforming the fixed income
universe as the prospect for lower interest rates is leading the market to become increasingly confident that the
commercial mortgages composing those securities will be able to be refinanced at reasonable rates when their
refinancing dates occur.

Mark H. Tekamp/July 6, 2024

Sold on Gold?

“So extraordinary a rise in the market price of Gold in this country…pointed to something in the state of our own domestic
currency…”

– The Report of the 1810 House of Commons Select Committee on the High Price of Gold

May’s reputation as unfriendly to stock market gains has long been noted as evidenced by the mantra to “sell in May
and go away.” The wisdom of that advice, at least for this year, was belied by the S&P 500 providing investors with a
return of 5%, the best performance for the month since 2009. That the love affair of investors for all things related to
AI had not yet reached the peak level of their passion was manifested by NVDIA’s 27% return for the month with
Apple joining in with 13% and even the normally pedestrian utility stocks rising 9% on the prospects for the increased
demand for electricity to power all of those artificial IQ points. Small Cap stocks modestly outperformed “the 500” and
even bonds rallied with many sectors of that market finding their way to close to break-even returns year to date.

Though having outperformed the S&P 500 by almost 40% in the past twenty-five years gold has been relegated to
being among the most forgotten of asset classes. Those proclaiming its virtues are not even dignified by being
compared to a species of animal, a bull or a bear, but that of an insect, “gold bugs.” Though the spotlight that once
shone upon it now increasingly shines upon bitcoin in the past eight months “the barbarous relic” has risen by
25 ½ % which begs the obvious question why? Historically gold tends to do well when inflation is rising, which it isn’t,
when interest rates are low, which they aren’t, and the US dollar is losing value which, at least in relation to most
other currencies, is not currently the case. Something is causing gold prices to rise at a very rapid rate and the
answering of that question might possibly offer some insights helpful to our understanding of a great deal more than
just that of the price of precious metals.

One of the most notable characteristics of life in the United States in the past third of a century has been the contrast
between the rate of growth of our wealth which has increased at a 3.3% real (adjusted for inflation) annual rate from
1990 through 2022 and the .45% annual increase in the median family income. This is further evidenced by the
performance of the US stock market which had a value equal to half that of our national economy in 1990 but was
50% larger in 2022. In other words, for whatever reason, the stock market has grown at an annual rate almost three
times faster than that of our economy.

Accompanying the rise in the stock market has been the growth of our federal government debt. From 1990 until the
Global Financial Crisis of 2008 that form of debt and the national economy grew at an approximately equal rate with a
level hovering near 60%. In the fifteen years since then federal debt has grown at a rate twice that of our economy
and is now at a level of 120%. In the past six months through April the US Treasury issued $16.8 trillion in new debt
with $15.7 trillion of it required to repay the debt that matured during that period. These are figures for six months.
Annualized, that level of debt issuance is now almost 25% larger than our national economy.

Since the onset of 2020 an acre of Iowa farmland has increased by 59 ¼% through 2023, the price of gold 55%
through May 31st and the median selling price of an existing home by 43 ½% through March. Could it be that the
underlying force propelling upwards the value of those assets is an effect not so much of the increase in their value
as it is the loss of the value of the paper money we are using to purchase those assets with? In other words, perhaps
the true source of the inflation we are observing may be an effect not so much of the rise in the price of what we are
purchasing but the decline in the value of what we are purchasing it with. And if this is true, then how should this
affect our perception of the future as investors if we are now experiencing a shift in “the balance of power” between
“paper” assets and those which are perceived as possessing real intrinsic value?

First, it may be wise to assume that the issuance of accelerating volumes of money is not likely to be reversed in the
next several years and so the sunny weather overhanging the current landscape of the financial markets may well
continue to exhibit a relative absence of storm clouds for some time. Second, it may also be wise to take note of the
relative sizes of those markets that may prosper in this future possibly unfolding scenario and those that may not. The
bond market is $130 trillion, the equity market $65 trillion, the gold market $14 trillion and bitcoin $1.4 trillion. Indeed,
it may well be the variance in size of the gold and bitcoin markets that explain the variance in bitcoin’s 100% return
the past three years and gold’s 24 1/4%. Perhaps though there is also an element of confirmation of the ever-present
relationship between risk and return.

60/40 portfolios returned 3 ¼% for the month erasing April’s decline and increasing year to date portfolio values to
their year-to-date highest level of 8 ¾%. The 60% equity share returned 4.7% with all sectors positive but with large
cap growth’s return of 6.4% notably outperforming value’s 3%. The 40% fixed income share returned 1% with modest
interest rate declines creating modest increases in the market value of those securities.

Mark H. Tekamp/June 6, 2024

Words For the Herd

“Genius abhors consensus because when consensus is reached, thinking stops. Stop nodding your head.”
–Albert Einstein

CNBC headlined on April 12th “Dow tumbles 475 points, S&P 500 suffers worst day since January as inflation woes
erupt.” Three days later UBS advised investors to prepare not for Fed rate cuts but quite the opposite suggesting
“Fed hiking rates to 6.5% is a real risk”. The financial markets had stepped into 2024 with 65% of market participants
expecting three or more rate cuts during the year. By April 18th that share had fallen to 20%, exceeded by the 30%
expecting none or actual rate hikes. The S&P 500, which started the month sporting a handsome 10.3% return, saw
that gain cut by more than half by April 19th though recovering modestly by months end with a decline of 4% for the
month but still +6% for the year.

The financial markets are doing their best this year to act in the role of Pinocchio to the Federal Reserve’s Geppetto.
Investors with memories reaching back to the start of 2023 may recall that virtually the entire fraternity of economic
forecasters was predicting the onset of an economic recession during the year. Instead, the US economy became the
focus of much admiring commentary with US economic growth rates of 2.7% for the year inhabiting a separate
universe from Canada’s ½% and Germany’s -0.3%. Let us occupy most of this commentary with thoughts on why this
was and, perhaps more importantly, the likelihood of its continuance.

It would be very difficult to discuss the current state of the US economy without focusing attention upon the federal
government’s fiscal response to the shuttering of much of our national economy in 2020. Looking at a chart of federal
spending reveals two massive increases, the 2nd quarter of 2020 and the 1st quarter of 2021. From that point federal
spending fell sharply remaining relatively stable until 2023 when it began to rise again, albeit at a more modest rate,
powered higher by the inflation-based adjustment in federal benefits payments (think Social Security). Those
increased benefits were paid for by higher levels of borrowing by the federal government with those increased
benefits then circulating through the US economy. This likely explains a great deal of our higher rate of economic
growth last year.

A bit more history but with this part measured in increments spanning decades. In the 1970’s and 1980’s the inflation
adjusted economy grew at an average annual rate of 3%. The 1990’s were a decade of transition and in the 21st
century to date we’ve seen that rate decline to 2%. There is much in economics that isn’t simple but explaining the
source of economic growth is. There are two factors that are the sources of that growth; the numbers of people
working and the level of their productivity. In the three years ending in 2023 our population grew .845% and
productivity .602% at an annual rate. That gets us to 1.447%. That is the rate we are likely migrating back to and any
notable variances to that rate of growth are likely to be temporary in nature.

A misfortune being experienced by those of our fellow citizens making their living in the real economy is their having
to pay higher prices for the goods and services they consume without an offsetting increase in their income to pay
those higher prices due to lagging growth in wages. The result will likely be lower levels of consumption, declining
rates of economic growth and falling levels of inflation. Those higher rates of growth for federal transfer payments are
now behind us so we’re likely to find the economic climate a good deal chillier than what we’ve been experiencing.
This is not necessarily a forecast of economic recession but growth rates starting with “1” likely will soon be upon us.
So, what about the financial markets? Intermediate to longer term interest rates may decline though possibly not by a
great deal. Think mortgage rates starting with a 6 and possibly 5. Prepare to say goodbye to 6% six-month certificate
of deposit rate “specials.” As unemployment rates begin to rise the fed will likely cut interest rates by 2% and possibly
more. The stock market, which is only just now starting to catch up with the future state of this reality, could rise by
another 15%. This is the world that investors inhabited from the time of the Global Financial Crisis of 2007-2009 to
the pandemic of 2020. Nothing has really changed as the final rippling effects of the pandemic subside and so this
may well be our future. For investors these are prospects they may well find pleasing in the experience.

60/40 portfolios which returned 7.8% in the first quarter gave back 2.35% of that return in April, ending the month with
year-to-date returns of +5.4%. The negativity was sourced almost solely by the previously discussed decline in the
equity markets with the slightly superior performance of foreign markets offset by the 6% decline in the small cap
space. Fixed income was slightly positive thereby protecting portfolios from experiencing more pronounced declines.

Mark H. Tekamp/May 8, 2024