There is more to this

As loyal readers know, the theme of most of my newsletters results from an article or news story, and this edition is no exception.  I read an article recently on about Amazon founder, Jeff Bezos, announcing that his company will donate $690,000 to wildfire relief efforts in Australia.  While this story isn’t particularly noteworthy, what struck me was all the criticism Bezos has received due to the size of this donation relative to his extraordinary overall net worth.  Is the value or significance of charitable giving dependent upon the overall wealth of the giver?  Was Bezos decision to give, actually an indication of stinginess, since he could have given so much more?  Why does any of this matter?

Wealth creation, one of the primary goals within a free-market capitalist system, is under attack.  We hear daily that the wealthy are responsible for many of our country’s ills, and that if they would only pay their “fair share” every problem would be solved.  Those that have wealth, or are in the process of creating it, are on the defensive.  They may not quite be embarrassed by their financial success, but they would prefer nobody know about it either.  In some respects, remaining humble despite amassing wealth has its virtue.  But feeling guilty about it, can have far-reaching negative impact on the next generation as well as our country’s future.  Moreover, it is a complicated issue, with multiple viewpoints and ramifications.  Let me explain.

By vilifying billionaires like Jeff Bezos, we are essentially saying that they should not be role models for the next generation.  Instead of admiring their intellect, creativity, work ethic, and willingness to take risks, they are being demonized because of their wealth.  Moreover, there is a political faction demanding they turn over more and more of their accumulated wealth to the government, for whatever use it sees fit.  To some, it is unjust for billionaires to even exist.  But for every billionaire, like Jeff Bezos or Bill Gates, there are millions of successful people who were inspired by what these two icons and many others like them have accomplished.  Success, in any realm and to any degree, if it is achieved honorably and ethically, should never be a source of embarrassment and ridicule.  But there is more to this…

God loves a cheerful giver…  Individuals should give generously and freely to others in need.  That is a key principle supporting every healthy community as well as our country, and it happens every day.   United States citizens give more to charity than the rest of the world combined.  Private charity usually comes from the heart, not from a sense of guilt or political purpose.  However, this dynamic changes when wealth creators are under attack.  Their giving becomes more political and less heartfelt.  Gone is the motivation to do more and the inspiration to others to do more as well. 

And still more…  Virtue and honor cannot be measured in dollars and cents.  Becoming a billionaire, or striving to become one, can be done virtuously and honorably.  Moreover, true, lasting character is only forged through struggle and the pursuit of extraordinary accomplishment.  In this sense, invaluable life lessons, can be learned while striving for financial success, even if success isn’t realized.  In short, it isn’t outcome dependent.  There need be no apology for any achievement done honorably and with integrity.  At the same time, effort and attitude, are much more character defining than the final score. 

One last point…  From a different perspective, it is a fair question to ask – Are billionaires like Jeff Bezos, the right kind of role model for our country?  It may be unfair, but people with his level of notoriety are role models whether they want to be or not.  Extraordinary talent and achievement comes with a greater level of responsibility.  Throughout our nation’s history, many extraordinary individuals have embraced this role while others have shunned it.  In either case, it doesn’t change the fact that they remain impactful.  The decision is whether the impact will be positive or negative.

It would be a step in the right direction if we measured every person, rich or poor, not for just what they did, but for the motivation behind their actions.  Does our conduct serve the greater good or are our actions self-serving?  Often a difficult and complicated question, but one that should be asked often, and not answered without serious reflection.

Michael Kayes, CFA

Christmas Spirit

Of all the joyful activities at Christmas time, my favorite is to indulge in special desserts I rarely enjoy during the rest of the year. My all-time favorite dessert, perhaps the most delectable dessert on the planet, are chocolate half-moon cookies from Geddes Bakery in North Syracuse, NY. On that note, this year’s Christmas is going to be extra special for me because my dear friend’s mom sent a box full that arrived this very day! Now, I realize there are countless things about Christmas that are way more important than favorite desserts. Family gatherings, church fellowship, sharing with others less fortunate, to name a few. Nevertheless, my friend’s thoughtfulness was much appreciated. Doing something special for a friend is surely part of the Christmas spirit.

It’s been a joyful year for most investors, as the stock market approaches the end of the year on a high note. Statistically, the S&P 500 hit nineteen new highs during the year, an astounding performance especially in the context of the long list of economic concerns, political frustrations, and social media madness. In what should be a celebratory mood at the end of such a strong year, investors seem anxious about what lies ahead. Is this anxiety warranted? Let’s try to figure that out…

The presidential election is going to take center stage in 2020 and will dominate the news throughout the year. One thing we can be certain of, whichever side has the momentum, the other side will be unhappy, if not downright angry. No matter the eventual outcome, half the country isn’t going to like it. Sadly, I see very little chance for reconciliation, compromise, and unification, given the personalities of the current candidates. Hopefully, someday this will change, but probably not in 2020.

Meanwhile, there are mixed signals regarding the U.S. economy. On the positive side, we are essentially at full employment and wages are rising for more segments of the population than what has been typical in previous economic expansions. Interest rates and inflation remain historically very low. It is not out of the realm of possibility to expect the economy to accelerate once the political scene settles down. At the same time, both China and the U.S. are motivated to reach a substantive trade agreement. At the very least, trade tension shouldn’t escalate, which means corporations can continue to adjust to the new reality, in order to find innovative ways to succeed independent of business growth in China. The resiliency of corporate America is consistently underestimated, and this is one reason the stock market outperformed most forecasts for 2019.

On the negative side, there are three issues that concern me as we approach the New Year. First, virtually the entire move in stock prices was driven by rising Price/Earnings ratios. Essentially, the 30% advance in the market came with zero growth in corporate profits. Accordingly, unless earnings accelerate, it will be very unlikely that stocks will have a repeat performance next year. Second, Congress and the President have shown no signs that they will attempt to reverse the steady climb in the federal deficit. Will this derail the economy, or at least lead to higher inflation and interest rates next year, or will the day of fiscal reckoning be pushed out into the future? That is a critical question, with no certain answer, but ignoring it won’t make it go away, either. Third, the risk of higher taxes and more government control over the economy, should the democrats sweep in the 2020 elections, is disconcerting. In essence, the market will not react favorably to higher taxes and more regulation.

From a portfolio perspective, given the strength in 2019, and the uncertain environment as we approach the New Year, it seems prudent to be a bit cautious. We have already positioned our equity portfolios in defensive mode expecting a more challenging year in 2020.

Two of our senior portfolio managers are retiring at the end of the year. Ted Ake, and Ham Davis have been an integral part of our success and will be greatly missed. We wish them both a healthy and joyful retirement. The rest of our team is excited about what the New Year will bring. I hope that we can embody the true spirit of Christmas every day as we strive to provide each one of our clients the highest level of service. Despite the uncertain and volatile environment, we are confident we can rise to any challenge. In the meantime, we wish you all a very Merry Christmas and a Happy New Year.

Michael Kayes, CFA

Ending Well

I was at the Cleveland Browns v Pittsburgh Steelers game last Thursday night. The one that didn’t end well. How unfortunate for Cleveland, a great sports town and a storied franchise. The great Jim Brown, in attendance, could not have enjoyed the game-ending brawl and the behavior by some of the players. How will this impact the rest of their season?

It is so important to end well, much more important than it is to start well. This is so true in sports, but it matters in most things.

How will the impeachment proceedings end? Will it help our country or further polarize it? No shortage of opinions on that topic…

How will the ever-increasing global debt situation end? Will there be a global economic meltdown, or can we kick the can down the road in perpetuity? I would venture to say that no one really knows, and that is worrisome.

What about trade negotiations between the U.S. and China? How will they end?

And finally, how will this record-long economic expansion end? Many believe it will end badly, due to some policy mistake or 2020 election outcome not to their liking. I can certainly relate to those concerns.

With barely a month to go before the end of the year, the stock market continues to set new highs. Corporate stock buy-backs, and historically low interest rates are two of the primary drivers to what has been an outstanding year in the stock market. But there is something else driving the stock market. Something subtle, yet powerful, that is pushing the market higher. In a nutshell, this force is the stubbornly-high level of fear and anxiety that lurks below the surface in most people’s mind. Given the adaptability and resiliency of our country, both economically and in everyday life, reality continues to unfold in defiance of our worst fears. A leading economist, Ed Yardeni, calls this the most despised bull market in history. He may be right. Yet, the stock market rarely stops rising when fear and anxiety are the dominating emotions. Economic statistics and company fundamentals always matter in terms of stock valuations and the health of the stock market. But, in periods of heightened anxiety, they can be pushed aside as critical market drivers. Currently, we seem to be in that type of situation. In our view, it is definitely a time to be cautious, disciplined and patient.

Perhaps this is a time for reflection. What would define an ideal ending for ourselves and our country? We all want financial security. We all want some level of freedom to pursue our dreams, while most understand there has to be a balance between individual rights and civic responsibility. Most, as they age, want to give back and leave a positive legacy for those who follow. I know there are many other outcomes people desire, but I think I’ve listed some of the most important ones.

So, how do we make this all happen for ourselves and for others? We can’t think about this or approach it in a vacuum. What we do and even how we think affects others. We are connected, even if we don’t realize how. In my mind, that really has to be the starting point. A realization that we are all in this together. Environmentally, economically, politically, civically, and even spiritually, we are connected to each other.

I’m wondering if the fear and anxiety prevalent today is made worse by a sense of disconnection. Is our dependence on smart phones and addiction to social media part of the problem? That might be a topic worth exploring in a future edition of Willingdon Views.

In the meantime, we shoulder on, striving, searching, wondering, and hoping that it will all end well.

Michael Kayes, CFA

Unanswered Questions

I wrote my very first newsletter in 1994, attempting to offer a unique and insightful message instead of a regurgitation of what most people had already read elsewhere. Selfishly, I wanted to share what was on my mind, or at least what I thought were important issues impacting the economy and markets.

The over-riding themes of most of my newsletters over the past few years have focused on four major points. First, that free-market capitalism is and has been the most effective economic system to improve the standard of living of millions of people around the world. Second, that free-market capitalism has been replaced by crony-capitalism and government over-regulation. Third, our country faces a moral dilemma at all levels, witnessed by the continual decline of traditional values – family, faith, individual responsibility and community. The titles of two articles in the October 17th Wall Street Journal are telling… “Youth Suicide Rate Increased 56% in Decade” and “Religion is on the Decline as More Adults Check ‘none’.”  Fourth, our country is starving for new leadership at the highest level. Self-absorbed egotists, and corrupt bureaucrats need to be replaced by individuals who can demonstrate the principles of integrity, service before self, mutual respect and commitment to hard work. Globally, our country needs to clearly and authoritatively, stake claim to the moral high ground and then walk the walk, consistently.

A very wise friend once said to me, “If everybody would sweep the mat by their own front door the world would be a much cleaner place.” That’s very true, but what do we do when one of our neighbors refuses to do so? Do we ignore it and hope he changes? Do we ask the authorities to intervene? Or do we go to his house and clean it for him or better yet, with him? Controlling the moral high ground today requires interactions and relationship-building, and a renewed sense of community. Moreover, to maintain the moral high ground over the long term, we must develop and adhere to principles with accountability at all levels. Forgiveness and tough love play important roles.

When I was a young boy, milk was delivered to our back door and placed in a small metal box by a milkman from Lovier’s Dairy. Fresh milk never tasted so good. One of the owners of that thriving local business lived next door. Lovier’s Dairy made the best ice cream I have ever tasted, and I was fortunate to work there as a teenager. Many years later, after I had left my small, upstate New York hometown, seeking fame and fortune, Wal Mart opened. It changed the entire feel of the town. When I asked my Uncle Frank, who was elderly at the time, what he thought of Wal Mart he said, “I don’t like it, you have to walk a half mile to find a carton of milk.” How best to address this problem?  Since there seems to be a sense that government can and should solve every problem.  Should an ordinance be passed making Wal Mart move the milk closer to the front of the store? Or should a friend pick up an extra carton of milk and bring it to an elderly neighbor? I have no doubt that this is what happens in many places across our nation. Helping others in need is a principle most people embrace and try to live out each day. Still, we might benefit from asking two questions –

Can we be better neighbors? Just how big is our neighborhood? Existential questions perhaps, but we need to answer them, don’t we?

Which brings me to the crux of this edition of Willingdon Views… The more control we cede to government the less obligated we feel toward contributing to the welfare of our communities. This isn’t a universal statement, but I believe it holds true in most cases. Our founding fathers knew that government could not legislate morality, and that our republic would only survive if moral principles were upheld.

If the best days for our country are ahead of us and not in the past, we need less government involvement and a recommitment to moral principles. Yes, there is a role for government and yes, we need open discussion about and how best to teach moral principles.

An important distinction… Principles are different than beliefs and values. The later change with the times while principles do not. Principles include integrity, loyalty, and the importance of hard work. All discussions about policy, cultural norms, rules and regulations should start from core principles, not from self-interests or hatred of “the other side.”

So, where are the leaders that can help us reclaim the moral high ground and reverse the current trend of ever-growing, inefficient and often corrupt, government bureaucracy? They are in our midst, but none of them are willing to run for president. How can we motivate them to serve when we need them so desperately? I wish I had an answer to that question.

Michael Kayes, CFA

The Fed Steps Out of the Limelight, For Now

Is it Fall yet?  I would welcome a break from the heat!  But the season will turn soon enough, and as the year has marched on, so has the evolution and development of the current Fed regime.  I thought it a measure of Chairman Powell’s maturation that we went through a Fed meeting and Q & A with minimal disruption in the US Treasury market.   He is doing a better job of pre-communicating the Fed’s intentions and has started to master that special way of speaking that leaves one just unsure enough about the next step that one doesn’t feel forced to take any new and sudden action.  The era of habitual consensus under Greenspan’s more autocratic leadership seems (and is) long in the rear-view mirror.  This last meeting there were three dissents with two voters preferring no hike and one (Bullard) in favor of a 50bp cut. Longer term “dots,” which are the individual Fed Governor’s best guesses as to where the target rate should be in the future, continue to inch lower, but there is a broad consensus that we might be near the end of this recalibration in the funds rate.  This is interesting to me on several levels.  First, because the degree of uncertainty regarding the path of the economy and rates at the Fed appears unusually high.  Second, because not only was the bond market reaction relatively benign, but the equity market’s response was also ho-hum. I thought the knee jerk reaction to a less dovish Fed would have been a sell-off in equities, but on closer inspection it feels like the equity market is taking the Fed action as a sign that the economy has weathered the  body blows of the “Tariff Tiff” a bit better than expected, and couldn’t sell off on a surprise attack that impacted 5% of the world’s oil supplies, so why should it take aggressive action when the market is telling it that modest action is salve enough?  We are left with a seemingly practical minded Fed that realized they went too far last year, has made course corrections, and is now waiting to see if fair winds prove that current steps taken are enough to ensure the continuation of this long and ongoing economic expansion.  On a different note I think it is noteworthy that having gotten away from the zero bound, the correct path of monetary policy is not as clear, and its ability to counter issues that are non-monetary in nature (global trade wars) is cast into doubt.  In Wizard of Oz terms, the man behind the curtain is no longer all seeing and all powerful.  I call this a welcome development, and it should put some pressure and accountability on the legislative and executive branches of government.

While we are on the subject of the Fed, I think it is worth pointing out that there was a lot of ink spilled on the topic of the repo market last week.  This is the real short rate that matters, and it is the one that the Fed tries to control at a distance by targeting the Fed Funds rate.  Well last week the Repo rate divorced itself entirely from the Fed Funds rate and traded MUCH higher (over 5% with the target under 2.25%).  The last time this market behaved this way was during the credit crisis and there were public musings as to whether we were on the cusp of a credit event.  Chairman Powell was asked about this at the press conference and he acknowledged that while the Fed knew they were in a tight overnight borrowing situation because of corporate tax date and US Treasury auction settlements, the speed with which rates moved higher and the magnitude of the rate move caught them flat-footed.  The Repo market is a high-quality collateralized loan market that is the grease for funding the positions held by dealers and hedge funds.  It is utilized as a short-term investment by money funds and corporations with spare dollars on their balance sheets.  Those spare dollars were in short supply last week.  The Fed supplied those dollars and by week’s end, with the promise of more repo operations in the future, that market had calmed down.  Regulatory changes that were meant to wring leverage out of the capital markets and the reduction (albeit from very high levels) in the Fed’s balance sheet in concert with the higher than normal financing needs were long- and short-term factors behind the persistently higher than desired rates.  Because this dislocation was exposed so dramatically the week of the Fed meeting, there wasn’t time to put a formal response in place.  My guess is that we will see the Fed active in the repo mkt through quarter end, and that at the next regularly scheduled meeting they will expand a portion of the Fed’s balance sheet and establish a permanent repo facility that will try to limit future upside spikes in repo rates.

The equity market chose to take the Chairman at his word and treat this as a plumbing problem and not the proverbial canary in the coal mine.  I don’t like ignoring the canary at the bottom of the cage, but I think he’s right on this one, and given the large amount of dollars that the Fed’s payment on excess reserves takes out of the system, the system needs more dollars to function smoothly, and the Fed will have to supply them.

If we take ourselves back to last year at this time, the Fed was still in a tightening mode and the Q4 equity market sell-off was in the offing.  That sell-off really gathered steam after Chairman Powell indicated the Fed was on autopilot to higher rates in 2019.  Fast forward to today.  Not only was the tightening cycle ended, but a mini-ease cycle has begun.  US Treasury 10yr note yields which reached 3.25% and looked like they were headed higher reversed and just a few weeks ago hit 1.43%, not far from their all-time lows of 1.32%, reached during the Great Recession.  That bond market spike has reversed, but the market’s perception of what constitutes neutral interest rate levels continues to drop.

The equity market is within sniffing distance of the all-time highs.  What gives?  For certain, low rates help justify expanded PE multiples.  But,  I also feel like the constant focus on the trade war, the age of the current economic expansion, the President’s legal troubles, weak growth in the rest of the world, and uncertainties surrounding the 2020 election cycle made the market susceptible to a “wall of worry “ climb.  Now we can add heightened tensions with Iran to the mix.  Will how these resolve in the long run matter?  Yes.  But in the short run, the market has shown resilience, the Citi surprise index has turned up and hope springs eternal that a trade deal with China could get inked.  After good gains through almost three quarters we have positioned a little more defensively and have dry powder ready to deploy if any of the previously mentioned situations resolve in a way that dictates action. 

Here’s to cooler temperatures!

Hamilton Davis

Their race to run

In the movie, “Secretariat,” it’s owner, Chris Chenery, says to his daughter when she introduces the impressive young colt to him, “Let him run his race.” Chenery sensed the inherent greatness in the big red colt that would soon be revealed to the rest of the world. The rest, as they say, is history.

In 1940, during the darkest period for Great Britain, as it faced the full fury of the German Luftwaffe, an anonymous comment revealed the courage and character of the British people.  Paraphrasing, the unnamed civilian said, “Er, what ya grousing about? We’re in the finals ain’t we? We’re playing at home, ain’t we?” As we know today, it was their finest hour.

Economically, the U.S. is in the finals. It’s the consumer against, well just about everything else. As evidenced by strong earnings at Wal Mart, the American consumer remains a powerful global economic juggernaut, despite trade wars, political polarization, and stifling bureaucracies.

It’s no surprise to me that consumer spending has remained strong, given record low employment and relatively strong growth in personal income.  Recession predictions are now front-page news, yet it is far from a foregone conclusion. A fickle equity market adds to the uncertainty much more than it signals a predetermined path for the economy.

All this begs the question – why is the U.S. consumer seemingly the lone bright light in a dark global economy? Let me get back to that.

I’ve been having an ongoing debate with my oldest son about whether his generation will achieve a higher standard of living than my generation. My sense is most people in my generation think not. But, as he wisely pointed out, it isn’t up to my generation, it is up to his generation to decide their own level of economic achievement. This, to me, strikes at the heart of my previous question. The old grow cynical and less hopeful, as admittedly, I have. But the young remain hopeful and confident in their ability to shape their own future. Our country desperately needs that hopefulness and energy to solve the challenges we all face. Our job is not to over-parent or over-regulate, but to pass the torch, offer wisdom and support as needed, but to let them run their race.

The political and economic environment will certainly impact the potential of even the brightest, hardworking, and highly motivated of the next generation. There just is no denying that fact. Which path we choose matters and it matters existentially. Do we believe in free-market capitalism and should we work to restore it, or are we resigned to cede more control of our lives to political elites? It is the defining question of our time.

There a few things we must do if we are truly going to let the next generation run their race. First, we must reduce the federal deficit and commit to living within our means. Is that even possible?

Second, we have to right-size our government. Too little regulation can be problematic, but too much creates inefficiency, corruption, and stifles innovation and growth. Do we even have a clue how to do this?

Third, and despite the enormity of the first two challenges, this may be the most daunting. We must establish principles and core values we can all commit to upholding. This will require a balance between rights and responsibilities. A balance between the desire for individuality and a willingness to sacrifice for the greater good. Most of all, it will require a renewed embodiment of morality in public discourse. Where are principles, core values and morality being discussed openly and thoroughly today?

Despite all this, the next generation soldiers on. They spend, invest, plan for their future. They move at a pace my generation struggles to match. Are they more talented? Yes. Are they as discerning? Perhaps not as much as they should. Will they lead our country to a better future? Time will tell, but it’s soon becoming their race to run.

Michael Kayes, CFA    


A teacher I know told me that he used to tell his students that he could predict their future by the books they read and by the friends they hung around.  Wise words, indeed.  On that note, one of the highlights of my week is participating in a Tuesday morning group that gets together to discuss certain books.  We just finished a thirty-three-week study of C.S. Lewis’ classic – “Mere Christianity.”  It is a must read for anyone who wonders about eternal life, or who God is, or who man is in relationship to God.  The older I get the more relevant those questions have become.  Next week our group is starting a study of the book – “21 Lessons for the 21st Century” by Yuval Noah Harari.  Here’s a quote from the beginning of this very insightful book –

Humankind is losing faith in the liberal story that dominated global politics in recent decades, exactly when the merger of biotech and infotech confronts us with the biggest challenges humankind has ever encountered.

This should be an interesting book to study, especially following Mere Christianity.  In my view, it is important to read books that challenge conventional thinking and to be open-minded to new ideas.  Which brings me to Elon Musk.  I must first admit that it would be cool to drive a Tesla.  They are fast, incredibly stylish and environmentally friendly.  Musk must be one of the most advanced, creative thinkers in our entire country.  But sometimes, innovators stumble into an area that ultimately brings dangerous consequences.  Einstein felt that way about atomic energy.  According to a Wall Street Journal article, Musk and scientists from Neuralink Corp. are seeking FDA approval to start human trials of a therapeutic device that is a “next-generation brain-computer interface.”  Neuralink has developed sort of a sewing machine that will insert electrodes into the brain, controlling thoughts and who knows what other brain functions.  This technology could result in huge breakthroughs for people suffering from spinal-cord injuries or blindness.  Still, the thought of inserting something into my brain, or a computer controlling my thoughts, gives me pause.  The potential that my brain-computer interface could one day be hacked is downright scary.  My point here is this – Before making any decision regarding technology, we should consider the potential risks and understand how the laws of unintended consequences might apply.  We might incorporate the same level of discernment to other decisions impacting the economy and our society.  Currently, I don’t think we are doing that very well, perhaps not at all.  Instead, we seem stuck in a polarized, emotional frenzy, where open-minded, respectful dialogue doesn’t exist.  I just wish I knew how to change this narrative.  As I’ve said many times before, this isn’t going to end well.

So far in July, the market has continued to grind higher, fueled by low interest rates and the outlook for further rate cuts by the Fed.  At the moment, weaker corporate earnings, unresolved trade issues and political dysfunction, have been overwhelmed by the realization that interest rates are likely to remain very low, perhaps for some time.  How long can lower rates drive equity valuations higher?  This remains the critical question.  The obvious hope is that low rates will stimulate the economy and corporate earnings.  In fact, consumer spending, which is the largest segment of the overall economy, has been relatively strong.  Nevertheless, without a meaningful trade deal with China, an economic acceleration seems unlikely no matter how many times the Fed reduces interest rates.  Moreover, should the political winds shift toward higher taxes and more government control, the entrepreneurial and innovative engine of the U.S. economy will likely come to a grinding halt.  My sincere hope is that this won’t happen, and the country will instead move closer to free-market capitalism, the most successful economic system in our planet’s history.  While we may have a long way to go to get there, even small steps in the right direction would be encouraging.

I am currently re-reading two classic books by Cornelius Ryan – “The Longest Day” and “A Bridge too Far.”  There are so many important lessons from history.  Before applying them, in order to be better in the future, we must first study and understand them.  Has this become a lost art in our country?  I’ll close with a few lessons from Ryan’s epic books.  There are few limits to what man can accomplish or to what man can demolish.  Choices matter.  Each decision we make has consequences, intended and unintended.  Most importantly, faced even with seemingly insurmountable challenges, in the end, valor and honor prevail.            

Michael Kayes, CFA    

By One Vote

My political career ended in 4th grade when I lost the election for class president.  It was the purest of elections, without exit polls, super pacs, or phony campaign promises.  It was a week-long education of why the right to vote is such an important fabric of our culture.  Above all, we learned that we should vote for the candidate who would do the best job for the benefit of the class as a whole.  Not necessarily the candidate we liked the best or who was our friend, but who would be the best leader.  Voting, we were taught, was a selfless act.  So naturally I voted for James Ramsey and lost by one vote.  It just didn’t seem right to vote for myself. 

Currently, the House Oversight Committee, the Attorney General and the Justice Department are all battling about the qualifications for voting, specifically about adding a citizenship question to the 2020 census.  A popular congresswoman from New York made a telling remark about what is at stake regarding this citizen questions when she stated, “This determines who has power in the United States of America.”  Politics in our country is all about power, not about doing what is best for the entire country.  Those in power, economically or in any other way, are loath to give it up, while those longing for power refuse to accept their plight.  I really can’t see how this polarization ends peacefully, nor how the process produces anything that benefits the country.

At this time of year, I love to read commencement speeches.  I’ve never had the opportunity to give one, probably because I lost that election in 4th grade…  If I ever get the chance, here is what I would share –

  1. Don’t expect a level playing field, they don’t exist.
  2. Whatever you choose to do, outwork everyone every day.
  3. Your legacy begins today, build it wisely.
  4. Put God first, and others before yourself, in everything you do.

I remain hopeful that someone in this next generation will be the leader we so desperately need.

In previous editions of Willingdon Views, I’ve written about the different forms of capitalism, namely free-market capitalism and our current form, crony capitalism.  Recently, I learned that there is a third called “surveillance capitalism.”  In a nutshell, as companies track where you go, what you buy, what you read and what websites you visit, they can tailor advertising and “help” you make future buying decisions.  No harm there, right?  Unfortunately, surveillance in the wrong hands can be dangerous.  For example, China is piloting a program whereby people are monitored closely and based on their behavior they are assigned some kind of “social score” which will impact their access to public services and other aspects of the economy.  Do we want to give businesses or the government that much control over our lives? 

The battle to determine the nature and effectiveness of our economic system, be it capitalism in some form or an alternative, is a long way from being decided.  The election in 2020 will likely set us on a particular course, with all kinds of consequences, intended and unintended.  I’ll try to keep in mind the lesson from my 4th grade teacher, that voting is a selfless act.  Which economic system is best for the country as a whole?  In my view, that is the critical question.         

Meanwhile, in June, the stock market has bounced back strongly following the May correction and is currently trading near an all-time high.  Despite this recent strength, investor anxiety remains elevated, driven primarily by three concerns.  First, the outlook for global growth continues to deteriorate.  All eyes will be on the upcoming discussion between President Trump and his Chinese counterpart, President Xi at the G20 meeting later this week.  There is immense pressure on the two leaders to achieve a workable trade agreement.  Whether this negotiation will produce a deal is anybody’s guess, but it would be imprudent to make a major bet on this event.  Second, corporate earnings estimates continue to fall, making valuations increasingly stretched.  Next month, we will be watching earnings announcements closely to update our valuation analysis for the remainder of the year.  Typically, stocks do not do particularly well when earnings estimates decline.  Which brings me to the third concern – interest rates.  The bond market has priced in 1-2 interest rate cuts by the Fed beginning in July.  Extremely low interest rates can support higher stock prices in the short term, but the economy and earnings must accelerate to sustain the current bull market longer term.

Given this uncertain outlook, we remain in a defensive mode across our equity portfolios.  In the meantime, we will be opportunistic and ready to adapt as the environment changes.      

Michael Kayes, CFA

Hope Calling

One of my favorite scenes from the movie “Miracle” seems apropos for this edition of Willingdon Views.  In a pivotal moment, late in THE hockey game between the U.S. and Russia, at Lake Placid in 1980, Coach Herb Brooks made an amazing statement.  Brooks said, “He doesn’t know what to do.” Brooks realized that the Russian coach did not know how to adjust his strategy when they were behind late in the game. He simply wasn’t prepared for it nor could he adjust in the pressure of the moment.

Noted World War II historian and author, Stephen Ambrose noticed the same weakness of totalitarian systems when he studied the invasion of Normandy and the subsequent battle to liberate Europe.  Overall, the Allied troops were much better than the Axis troops at improvising and demonstrating individual initiative.  In many cases, this made the difference between victory and defeat in battles across western Europe. 

Totalitarian systems work well when everything is going according to plan, but under stress have proven less adaptable.  Conversely, democratic, free-market systems are breeding grounds for creativity and entrepreneurialism.  Moreover, as decision making is pushed to lower levels, individual initiative and adaptability create greater opportunities for success, especially under pressure.  Why does this distinction matter today?

Today’s major battle ground between the U.S. and China related to trade policy, has ramifications for global economic leadership far into the future.  The battle pits the centralized, state-controlled Chinese economic system against the current U.S. version of capitalism.

First, an important distinction… Our current version of capitalism is more accurately called “crony capitalism.” Big business, political elites, and wealthy activists are all gaming the system to benefit their interests and to remain in positions of power. Crony capitalism is ripe for corruption at multiple levels. Higher taxes, more regulation and more government control make this situation worse, not better.

A move away from crony capitalism, and toward free-market capitalism, which may be an ideal, more than a potential reality given the complexity of our economy, would require truly dynamic leadership.  It would also require a commitment to values that are largely absent today on the national stage – servant leadership, self-sacrifice, and integrity, to name a few.

The election in 2020 may largely determine which version of capitalism will dominate in the years to come. Philosophically, one path points in the direction of free-market capitalism with lower taxes, less regulation and less government control, while the other path leads to higher taxes, more regulation and more government control. Without question, the devil is in the details, as actual policies and the character of our leadership matter a lot.  Nonetheless, it is important to realize that these two competing economic and political philosophies are diametrically opposed.  Moreover, the economic results will likely be very different depending on the election outcome.  On one hand, lower taxes and a more pro-business environment will likely produce greater overall economic growth as it has over the past two years.  On the other hand, higher taxes and more centralized control will stifle the entrepreneurial spirit that drives economic growth.  Businesses will sit on cash and be less inclined to take risks, both of which tend to suppress economic growth.  There is no doubt that the markets will adjust accordingly, depending on political developments.

If we become further entangled in crony capitalism, or move even closer to centralized control, we won’t win the battle against China for global economic superiority.  We risk losing our entrepreneurial spirit and our ability to adapt under duress, which will undoubtedly have dire consequences.

If we can pursue free-market capitalism within a business and government structure centered around positive core values, we will be an unstoppable economic force, driven by a powerful, entrepreneurial spirit and a commitment to doing good in the world.  Which path we take is our choice.  It is also our hope and our calling, as citizens of this great country. 

Michael Kayes, CFA


There is so much to write about, I’m not quite sure where to start. Let’s begin with a stock market update (before we get to the more interesting topics). The stock market is off to a blazing start so far this year, rising around 16%, with many major indices close to all-time highs. Despite this surge, anxiety levels remain elevated, with more cash on the sidelines than one might expect given the performance of the market. In a nutshell, stocks continue to climb a wall of worry that seemingly knows no end.

Currently, there are two major concerns supporting this wall of worry. First, valuations are being stretched across various sectors, even though earnings growth has slowed significantly.  To put this in perspective, earnings grew 20% in 2018, while current consensus estimates are for only 4% growth in 2019. It remains to be seen whether this earnings slowdown is temporary or a precursor to a recession.  

The second concern, which is being advocated by several presidential candidates, relates to the threat of “socialism” or greater government control over our economy and markets. I would expect the market to react quite negatively should this political ideology emerge as a winning strategy in next year’s presidential election. As a side note, I was encouraged by a Wall Street Journal article, “Jamie Dimon’s Timely Warning” in which the J.P. Morgan CEO stated, “socialism inevitably produces stagnation, corruption and often worse.” I suspect that Mr. Dimon, not known for political activism, understands the potential risk to our economy from socialism. I hope that more corporate icons will also speak out against socialism in the months ahead. At the same time, business leaders at all levels should model behavior that deflates the need and desire for more regulation and centralized control. “Discipline yourself so no one else has to.” John Wooden. Sounds rather simple, doesn’t it…

So, after the strong start to the year and given the earnings slowdown and political risk, we have positioned portfolios more defensively. Our investment team is being disciplined and patient as it searches for opportunities across our portfolios. What we do may not make the headlines, but it’s a prudent way to balance risk and reward in these uncertain times.

Now for the more interesting stuff

Rebuilding Notre Dame… The entire world was mesmerized watching flames engulf the historic cathedral. Catholics around the world cried and prayed as did countless others. Soon after the blaze was extinguished, several wealthy citizens and businesses pledged millions toward rebuilding efforts. It seemed a patriotic and compassionate thing to do. Then came the criticism, which still befuddles me. Shouldn’t it be an entirely personal decision to which worthy cause one decides to donate money?  

The Last of the Doolittle Raiders… On April 18, 1942, 80 brave Navy airmen, led by General Jimmy Doolittle, flew 16 B-25s off the USS Hornet, and headed toward Japan. It was an audacious, some thought suicidal mission, but the first bombing of Japan was an enormous morale boost for the United States at the time. Lt. Dick Cole, the last living member of the Doolittle Raiders, died recently at the age of 103. We should try every day, to remember and honor someone who sacrificed for our country.

Tiger wins the Masters… What a comeback story it was at Augusta as Tiger Woods won his 5th Green Jacket, one less than the Golden Bear, Jack Nicklaus. Who doesn’t love to watch a comeback for the ages?

Virginia wins the NCAA Men’s Basketball Tournament… One year after being the first, and only #1 seed to lose in the first round, the Virginia Cavaliers beat Texas Tech in an epic final. The power of perseverance on display for all to see. 

Yes, we do live in interesting times. When disaster happens, we can rebuild, when a military hero dies, we can pay tribute. When a human being stumbles and through talent and sheer will, ascends to the top once again, we can acknowledge his greatness, and when a team believes in itself and its coach, and overcomes adversity, we can marvel at their accomplishment.

Despite all the frustration and animosity that is so prevalent today, if we look close enough, there are many reasons for optimism.

Michael Kayes, CFA