Homer Hickam, Francis Peabody & Uncle Carmen

If you are struggling to find something wholesome to watch on TV, check out the inspirational movie “October Sky” based on the true story of Homer Hickam, who earned fame as a NASA engineer. Hickam was also a Bronze Star recipient from the Viet Nam War, and is a noted author of several books including Torpedo Junction and his biography, Rocket Boys. My favorite scene in this movie is when Homer comes face to face with his father, who he fears is disappointed in him for deciding not to become a coal miner like his dad. In this emotional scene, Homer sets the record straight about the man who is his true hero. Homer’s dad assumes that his son’s hero is Dr. Wernher von Braun, the legendary rocket scientist, who has inspired Homer to pursue a career in science instead of following his dad into the coal mines –

Homer: “Dad, I may not be the best, but I come to believe that I got it in me to be somebody in this world. And it’s not because I’m so different from you either, it’s because I’m the same. I mean, I can be just as hard-headed and just as tough. I only hope I can be as good a man as you. Sure, Wernher von Braun is a great scientist, but he isn’t my hero.”

Even though Homer chose a different life path, he learned invaluable life lessons from his coal-mining father. It was how his dad lived, not what he did, that made him Homer’s hero.

In this context, I was struck by the April 14, 2016 article in the Wall Street Journal: “Peabody Energy Files for Bankruptcy.” According to the article, Peabody energy was started in 1883 by Francis Peabody, who had all but $100 and two mules to his name. It is undeniable that coal played a huge part in the industrial revolution and the economic growth of our country over the past two hundred years. Yet, what struck me most in this article was a comment made by Theo Spencer of the Natural Resources Defense Council – “The miner shouldn’t be allowed to “walk away from the billions of dollars in damages to landscapes, wildlife, and crucial water supplies that are part of coal’s legacy.” I make no argument with his statement as it relates to the environmental impact of coal usage. But, as Spencer states, environmental issues are only part of the coal’s legacy. What kind of person was Francis Peabody? I suspect, like Homer Hickam, Peabody had a hero who inspired him. Did Peabody inspire others during his lifetime to achieve greatness in some other area? I think these questions are just as important to address if one is going to discuss a legacy.

On a sad and personal note, my wife’s Uncle Carmen passed away last week, at the age of 95. Carmen was one of my heroes. On June 6, 1944, Carmen, as a soldier in the First Division, landed on Omaha Beach. He too, earned a Bronze Star as he fought with the Big Red One all the way to the end of the war. Our family will long miss him and forever be inspired by how he lived.

Our country and economy are always evolving. New industries are continually being developed while old stalwarts fade away. It is the relentless pursuit of discovery that drives this process and it is the lifeblood of our economic system. For every Edison, Bell, Gates, Hickam, or Peabody, most likely stands a hero who inspired and taught each of them invaluable life lessons – hard work, commitment to family, loyalty, and perhaps most of all, perseverance.

If this dynamic ever dies, it will mark the zenith of our great country. For some reason, I am fearful it is dead already. But I am hopeful that I am mistaken. No matter how technologically advanced our country gets, core values will always matter. They may matter more today than ever before. We cannot allow cynicism to replace hopefulness, nor should we put aside the values that made our country great, in the name of political correctness.

So in the months ahead, I am going to be on the lookout for that unique person who might emerge as a unifying hero today. How will that individual inspire us? And perhaps more importantly, how can we inspire others?

I’m also going to think about and perhaps write about core values. Which ones are most important today? Which ones from the past do we need to refocus on?

I’ll need your help with these challenging questions. So, please share your thoughts.

Economic Update from Ted Ake

Interest Rates: I continue to believe the Fed is, and has been, overly optimistic as to prospects for economic growth in the US. Historical recession and rebound stats have been frustratingly worthless in this current cycle. This has led to forecasts by the Fed to overestimate growth and therefore, also overestimate the increase in inflation, and by extension, the speed with which they would raise rates off ZIRP (Zero Interest Rate Policy). Currently, the Fed has lowered its expectations to 2 more rate increases of 25 bp each for 2016, (from 4 times). While this is possible, my call remains that they won’t raise again this year. If I am wrong, it would be in June and then no more until after the election. The reason I have been and continue to be cynical of the Fed’s projections is that while relying on easy monetary policy for their predictions, they have neglected to see the negative effects the excessive and capricious regulation has had on consumers and corporations willing to take risks. This negative fiscal policy would have less impact if there were other catalysts to drive economic growth. So let’s look around the world to see if there are other catalysts to growth in the US or the world.

US economy: 4th quarter GDP came in revised to 1.4%. Unemployment is 4.9% but the Underemployment rate is 9.7% and the Labor participation rate 62.9%. The last two are abysmal and numbers we haven’t seen since Jimmy Carter was president. Industrial Production has been declining as has Capacity Utilization. Many strategists are banking that lower oil will bring out the consumer and lead us out of the doldrums. That may have been the case when we imported all the oil, but the lower prices are causing layoffs of high paying jobs from the oil patch. Also, banks, securities firms, and insurance companies continue to lay off high paying jobs. Moreover, health care is now under siege as Obamacare hasn’t worked quite like it was advertised. This is making wage growth anemic (and unsurprisingly the reason for the popularity of Trump and Sanders). So, while in January I was looking at a recession in 2016, I will say we probably won’t have a recession as defined by 2 quarters of negative growth…but it will feel like we are in one.

Europe: Economic growth throughout most of Western Europe has been slowing for about 4 years. Most of Europe has been in flat to negative growth since 2012. Germany and Switzerland have been managing to hold the EU GDP above water most of that time, but now even Germany is flagging. Throw in the huge burdens of 1 million migrants flowing in due to the Syrian civil war and this could be the straw that breaks the camel’s back. The market always has circuit breakers and this one is the US $. As the EU has seen the economy on the verge of recession, the ECU has used NIRP (negative interest rate policy) to offset the decline. This has weakened the Euro last year and strengthened the $. This makes Euro exports cheaper and has helped stabilize the economy. But the EU has refused to address its structural problems that are the causes of weak growth. Therefore, the easy monetary policy is only a band aid that will eventually lead to the breakup of the EU. I am not sure of the timing but with the terrorism and the issues caused by the migrants seeking a peaceful refuge, I think it won’t take more than a few years.

Japan: Going back to the 1980s, the idea was that Japan was going to replace the US as the leader of the free economic world. Oops. Very negative demographics and more disastrous economic policy from the government will mean very slow growth or recession for a long time. Abenomics was supposed to solve the ills. Now they are also in NIRP territory and they have been using ZIRP for over 20 years. Maybe our Fed should be paying attention to this…but they are blind to it.

Emerging Markets: These economies were also supposed to supplant the US in world growth. The BRIC countries (Brazil, Russia, India and China) were growing at over 10%. The problem they have is that the first 2 have growth based on selling commodities and the other two are heavily regulated by Communist or crony Capitalist governments. As the $ strengthened, commodities (based in US dollars) got expensive and crashed. This should be good for China, but China has its own issues of overbuilding and misallocation of resources. How strong or weak is China? It is difficult to determine as they are not transparent with the data. The best guess is that the data is not as good as they say. Look at what they are buying ..or not. Steel prices are down as well as iron ore. Copper has bounced recently, but we will watch to see if that can continue.

Gold: Gold normally does well as a store of “value” so should outperform in a rising inflationary environment. But it is denominated in $ and pays no interest. So, when rates are low, the competition or the cost to hold gold declines. And as the world economy sputters, places like China (that have currency controls) have individuals that will buy gold as they watch the Yuan decline. Gold has bounced almost 22% since mid-Dec but is backing off the highs as the Fed has tempered their hawkishness. This again is worth watching.

Oil: Lastly, this market is integrated into everything above. I remain skeptical of a strong rebound in oil prices because of a lack of demand. Fracking has given the US and Canada the opportunity to be totally energy independent. The government has tried to dampen it through regulation on fracking and on coal. But supply is not an issue now. With Obama’s Iran deal, there will be more Iranian oil hitting the market and more Iraqi oil as well. The Russian economy is hurting and they need to sell more oil to keep foreign reserves up. The recent collapse in prices down to the mid $20s may have been an overreaction to the slowing of China, but until we get stronger world economic growth, it will be difficult to get a sustained price over $45 bbl.

The US election: Let’s look at how the election is influencing the economy and the markets. The current wisdom is that we are looking at a Clinton/Trump election. Clinton has slid far left to get the nomination but is a very weak candidate. Trump still has not “won” any state yet (he has less than 50% of every vote). And so we look at both candidates having more people that hate them than like them. The policies they are espousing are bad for the economy on trade, taxes, and regulation. So, for the next 8 months, my guess is that CEOs will continue hunkering down and will be scared to be aggressive in R&D or investment in plant and equipment. There may be more merger announcements with overseas companies to hedge against future bad regulation or taxes. We could see a giant relief rally next year or even late this year if the worst fears don’t seem to play out. But as the S&P is already priced to growth we aren’t seeing yet, (17x PE) it is still vulnerable to bad news. If no news comes out, the markets may leak upward, but equities will be vulnerable to any shock until real growth is present.