Capital Ideas Newsletters


Back to the Future

September - October 2018

Debt, debt and more debt.  Wherever one looks, government debt, student debt, auto loans, consumer credit and leveraged buyouts are growing.

There are those who are not concerned, arguing that “as a percentage of gross national product and household incomes, it’s all manageable”.  This may be true, until it is NOT!  As Warren Buffett says, “You never know who’s swimming naked until the tide goes out”.

As the economic landscape changes, if you are worried about potential downside volatility, an adjustment to your allocation is probably in the offing.  Traditional asset allocation models are being challenged as millennials have only witnessed a market that goes straight up, so why worry?  One of my mentors always said, “opinion follows trend”, and boy, has he been proven correct. 

Indexes driven by a handful of stocks have continued to propel the markets higher.  So, as it relates to asset allocation, follow the rules set by the sages.  One’s allocation should be based on what is appropriate … the perfect balance of greed and fear for each person.  Despite our innate conservatism, we have been very constructive on equities these past 18 months, and we continue to believe that the climb up the wall of worry is not yet over.

The most damaged part of the current economic recovery has been the American laborer.  In the past, their hard work was rewarded with eventual economic security.  For the most part, one path to wealth creation and financial security has changed and is now driven by a “liquidity event” to create wealth – sell a business, real estate, your internet or tech company, and there you sit most ready to benefit from the rewards being offered to those with capital.

This past decade has been the perfect example of wealth transfer from labor to capital; thus, the anger of the American worker and the rise of the socialist progressive political candidates.  America is angry, and this is what concerns sociologists as a trend towards social unrest.

Notwithstanding the concerns above, the stock market moves on earnings and multiples. The expansion of either or both is what drives equities upward.  Currently, we are witnessing strong growth in the profit department, however, if interest rates continue to rise, it will be, in our opinion, inevitable that multiples contract.

Interest rates have been creeping higher, and we expect that to continue for another year. This will help slow the economy as the Fed tries to dampen any anticipated inflation.

Unfortunately, one of the casualties remaining from 2008 is the potential homeowner.  Multi-family housing has mushroomed at the expense of individual home ownership because fewer and fewer families can afford to buy their own homes.

Tariff disputes, dysfunctional legislative bodies and a very controversial administration can be used as excuses for why we might have roughshod markets, but none of these have seemed to matter.

As I type this letter on my IPHONE, I’m listening to Apple Music, accessing financial applications, asking Alexa about the weather, thinking of what I can watch on Netflix and simultaneously using Google to research information.  So why is the market higher?  THERE YOU HAVE IT!!!

America is leading innovation worldwide, and our capitalist society encourages entrepreneurs, their ideas and their dreams.  What makes America great is her innovators and thinkers.  Keep them coming!!!

Sweater weather’s coming, enjoy the air.

Till November,


As always,

Seymour W. Zises

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