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  • Robert Olsen, CPA

2021-01-25 Renegade Wealth Update

Hi Everyone:


As I expected, the IRS has just recently “delayed” the “opening” of tax season until February 12th, 2021. What that really means is this: They are not accepting any 2020 tax returns until that date, so even if you want to file a business or individual tax return, the return won’t be accepted or processed. No big deal. We just have a slightly smaller window to complete all of your tax work. That just means that we will have to work a little bit harder.


As I mentioned in earlier messages, April 15th, 2021 is still the official filing deadline for your 2020 tax returns as of today. I will keep you posted on any extension that may occur to that date.


Here are a few random notes and thoughts on the 2020 financial markets.


Lessons Learned From The Financial Markets In 2020


Investment Methodology Matters!!


One of the books I’m currently working my way through is entitled A Guide To The Good Life (The Ancient Art Of Stoic Joy) by William B. Irvine. I’m always working on at least 2 – 3 books at one time and this one seems to be a real “keeper”. It’s all about developing a personal/individual philosophy of life. I know, it sounds a bit strange and weird, but learning from the great thinkers of 2,500 years ago can actually be quite helpful if you are open to new or different perspectives, that are actually quite old. Stay with me on this one. I’ll tie it together.

So, what just happened in 2020?


We’ve all, believe it or not, just barely rounded the corner into 2021.

The “average” rate of return for our clients last years was a bit more than 22%!! No Kidding?? With all of the “chaos” swirling about??

As each of these single days flies past in the blink of an eye, time, as time is usually does, moves on, slowly and tidally, whether we like it or not. The chaos in the world “outside” is continuing to give us its best shot at bending us and breaking us. But all this … this particular way that the days and weeks and months have washed over us and saturated our collective psyche … really began in earnest about a year ago. A large percentage of us started shuffling around in panic-stricken shades of grey, last year. We weren’t at all sure just what ‘it’ was, that we were all actually grappling with. Many of us weren’t at all sure of the real point of the things that were being thrust on us. We were only sure that there was danger lurking close by.


The news of the world, and the foreboding that began each day’s news - part mass hysteria, part government overreach, began to feel like the opening salvo of a possible seismic shift of our very civilizational. As usual, this potential shift has presented some distinct psychological challenges to us all and may or may not come to pass.


The Bill Irvine Stoicism book that I mentioned earlier makes a clear distinction between the “inside” game and the “outside” world. He suggests that having an ironclad and steadfast internal philosophy of life can go a long way towards battling the outside influences, conditions and circumstances that are “outside” and well beyond our control. These “outside forces” are significant and never give up.


My strong belief in “reality-based” investing is anchored in avoiding the forecasting, speculating and constant guesswork of the media and the experts. Instead, it is based on the actual facts that are occurring each and every day in the financial markets. I have an internal strategy that I am diligent with and that doesn’t rely on circumstances that are out of my control.

If I had to single out one common thread that ran through my mind last year it would be this: “I must not only exhibit extraordinary ‘toughness’, but actually be tougher, in action, in the way I lead others, conduct business and in the way I manage money for our clients. Tougher than my clients could ever dream of being on their own. ‘Tough’, here, can mean a lot of things; but in the most encompassing sense, ‘it’ would be the living demonstration of one of the more famous pairs of stanzas from ‘If’ by Rudyard Kipling:


‘If you can keep your head when all about you Are losing theirs, and blaming it on you;

If you can trust yourself when all men doubt you But make allowance for their doubting, too.’


When clients first come aboard with us, they usually ask me what I consider to be a compact description of the philosophical stance that drives everything that I do; specifically, what drove the very creation of the investment methodologies that I implement. In short, my internal philosophy is this: “The stock market is a self-contained beast that does whatever it wants. It simply doesn’t care what’s going on in the world outside.”


That first sentence about the stock market, is always true, of course, and never subject to a sincere challenge from any sceptics. The second sentence, however - one that should be an obvious corollary to the first - is the part that rocked everyone’s world last year, because of the seeming insanity of it. “The market doesn’t care? With all this going on? How on Earth could that be?” Well. Come now. Did the market ‘care’ what was going on in the world ‘outside’, beyond the four-week ‘Bear market’, from late February to late March? Every time there was horrific, shocking news, here and abroad - recall the June jobs report with a breathtaking 40 million unemployed, as just one instance - the market said, over and over and over again, “Pop the corks! Let’s party!” Oh, my. The big takeaway? Waiting for happenings in the market to ‘make sense’, is not an input in a reality-based, mechanical, math-oriented investing methodology such as I use. It can’t be, and isn’t. In fact, the primary hallmark of my type of methodology is how delightfully sober it is in its indifference to the world outside the market. To things that ‘should’ lay waste to the best-laid plans … but frequently don’t. It’s a very Stoic way of investing money. There’s no mere mortal anywhere, who genuinely ‘knows’ what the future holds for the markets. No one. All those types routinely fall on their faces with predictions, naturally. Because of that, you simply can’t assign any credence to questions that are literally unanswerable … chiefly, “Where’s this market headed?” Any honest person must say, must only say, “I haven’t the foggiest idea!”

Relying on an internal, battle hardened philosophy of life, as the stoics of the past did, can guide you through your hazardous journey of life.


Relying on a reality-based investing methodology that is back-tested over the years can also guide us through our journey towards financial independence. In the midst of chaotic times in the world, let’s all be steadfast in our character and have a fantastic 2021.


We all love being here for you, and please lean on us as you wish, as we all forge ahead, together!


Here’s the summary and recap of last week’s activity in the world’s financial markets.


In The Markets

U.S. Markets: The major indexes moved higher for the week, hitting new intraday highs before a pullback on Friday. The Dow Jones Industrial Average rose 183 points closing at 30,997 - a gain of 0.6%. The technology-heavy NASDAQ Composite surged 4.2% to 13,543. By market cap, the large cap S&P 500 rose 1.9%, while the midcap S&P 400 and small cap Russell 2000 added 1.6% and 2.1%, respectively.


International Markets: Major international markets finished mixed for the week. Canada’s TSX declined -0.4% along with the United Kingdom’s FTSE which gave up -0.6%. On Europe’s mainland, France’s CAC 40 declined -0.9% while Germany’s DAX gained 0.6%. In Asia, China’s Shanghai Composite rose 1.1% and Japan’s Nikkei gained 0.4%. As grouped by Morgan Stanley Capital International, developed markets rose 1% while emerging markets gained 2.7%.


Commodities: Precious metals rose last week, with gold rising 1.4% to $1856.20 per ounce and silver adding 2.8% to $25.56. West Texas Intermediate crude oil had its first down week in three declining -0.3% to $52.27 per barrel. The industrial metal copper, viewed by some as a barometer of world economic health due to its wide variety of uses, ended the week up 0.7%.


U.S. Economic News: The number of Americans applying for first-time unemployment benefits fell slightly last week, but remained stubbornly high. The Labor Department reported initial jobless claims declined by 26,000 to a seasonally-adjusted 900,000 last week. Economists had expected a reading of 925,000. For perspective, claims had been running in the low 200,000’s just before the pandemic took hold. Continuing claims, which counts the number of people already receiving benefits, declined by 127,000 to 5.18 million. That number is reported with a one-week delay.


Confidence among the nation’s homebuilders remained strong but ticked down as coronavirus cases rose and the cost of building materials increased. The National Association of Home Builders’ (NAHB) reported its monthly confidence index dropped 3 points to 83 in January. Economists had expected a reading of 85. Still, the index remains far above 50—the dividing line between growth and contraction. In the details, the index that measures sentiment regarding current sales fell 2 points to 90, while the index of expectations of future sales also declined 2 points to 83. The gauge regarding prospective buyers slipped 5 points to 68. By region, confidence weakened the most in the Northeast, followed by smaller declines in the West and South. Confidence ticked up 2 points in the Midwest.


The Census Bureau reported home builders started construction at a seasonally-adjusted annual rate of 1.67 million in December - a 5.8% increase over November. Furthermore, permitting of new homes, an indicator of future building activity, rose by 4.5%. Both figures came in above analysts’ expectations reflecting growth in the single-family sector. On a monthly basis, single-family starts were up 12%, while single-family permits were up 7.8%. On a regional basis, all parts of the country saw permitting activity increase except for the Northeast, where it fell 7.2%.


The U.S. economy got off to a good start in 2021 according to a pair of surveys from analytics firm IHS Markit. Markit reported its purchasing managers’ indexes (PMI) for both the services and manufacturing sides of the economy improved this month. The PMI for the much larger services side of the economy rose to a two-month high of 57.5 in January, an increase of 2.7 points. Furthermore, the PMI for the manufacturing side of the economy climbed 2 points to a record 59.1. Of concern, however, was that hiring was especially soft among services companies (which employ more than 80% of America’s workforce). Chris Williamson, chief IHS business economist stated, “U.S. businesses reported a strong start to 2021, buoyed by hopes that vaccine developments will mean the worst of the pandemic is behind us, and that the new administration will provide a stable and supportive environment for stronger economic growth.”


Factory activity in the mid-Atlantic region surged at the beginning of the year to its highest level since the pandemic began, according to data from the Philadelphia Federal Reserve. The Philly Fed reported its business conditions index jumped to 26.5 in January—a 17.4 point increase from December. The reading was far above the consensus forecast of 10.5. In the details, the six-month outlook rose to 52.8, from 43.1 last month. New orders, employment and shipments all jumped in January. Of concern, there were signs of inflationary pressures in the supply chain. Manufacturing has been a bright spot in the U.S. economy as it’s more insulated from the stringent social distancing guidelines that weigh heavily on the services sector. Oren Klachkin, lead U.S. economist at Oxford Economics wrote in a note, “Looking ahead, manufacturing will stay on an upbeat track though we expect growth to soften as vaccines and the economy’s reopening unleash pent-up demand for deeply-damaged services.”


International Economic News: Bank of Canada governor Tiff Macklem said at a news conference that Canada’s economy is flush with enough stimulus to survive the current downturn and doesn’t need additional help from monetary policy. Macklem said policy makers considered whether more measures were needed to stimulate growth, including a cut of their 0.25% overnight policy rate, but determined that “we have a considerable amount of stimulus in place.” The bank is expecting a quick recovery from a shrinking economy in the first quarter of 2021, to extraordinarily strong growth of 4% in 2021 and 5% the year after.

Across the Atlantic, the Bank of England’s chief economist Andy Haldane made a similar forecast stating he expects Britain’s economy to begin to recover “at a rate of knots” [a British idiom for “very fast”] from the second quarter of this year, as vaccines against COVID-19 continue to roll out. Haldane said the huge economic shock delivered by the initial lockdown in March and April last year, when output fell 25%, was likely to prove more transient than the 2008-09 global financial crisis that generated a large overhang of bad debts. Britain is now rolling out vaccines faster than almost anywhere else in the world and the government hopes to be able to ease restrictions significantly by Easter and rein in costly economic support measures. “If we get that recovery that I expect to start coming on stream, probably at a rate of knots from the second quarter, that will hopefully...improve the prospects of re-employment,” Haldane said.


On Europe’s mainland, business activity in the Eurozone fell to a two-month low this month, preliminary data from Markit showed. The region is grappling with growing COVID-19 infection rates and tighter restrictions as an apparent new strain of the virus spread. Markit’s flash composite PMI for the euro zone, which looks at activity across both manufacturing and services, dropped to 47.5 January, versus 49.1 in December. A reading below 50 represents a contraction in activity. Chris Williamson, chief business economist at IHS Markit, said a double-dip recession for the Eurozone was looking “increasingly inevitable.” “Tighter Covid-19 restrictions took a further toll on businesses in January,” he said in a statement. European Central Bank President Christine Lagarde acknowledged that the pandemic still posed “serious risks” to the bloc’s economy.


Just over a year after the world’s first coronavirus cases were identified in China, the country’s economy has bounced back from the pandemic. China's economy grew by 2.3% last year, according to data from the country's National Bureau of Statistics. The steady economic recovery was largely expected, and puts China on a track that other countries haven't achieved. Nicholas Lardy, a China specialist at the Peterson Institute of International Economics stated, "It's likely that China could be the only major economy that has significant positive economic growth in 2020.” China also reported a record $75.4 billion surplus in November, after exports to the rest of the world jumped 21.1% compared to the previous year. Despite the tariffs imposed by former U.S. President Donald Trump, much of that increase was accounted for by exports to the United States.


Japan’s government maintained its view that the Japanese economy is “picking up” in its assessment for January, despite growing fears that the latest state of emergency imposed this month over the novel coronavirus could deal it a fresh blow. In its monthly report, the Cabinet Office revised its views downward on private consumption and corporate business sentiment amid a third wave of virus infections. On a positive note, the report also showed an upgrade of its assessments of business investment and housing construction as the initial shock of the pandemic on the world’s third-largest economy has eased. “The Japanese economy is still in a severe situation due to the novel coronavirus, but it is showing movements of picking up,” the office said, using the same wording for the seventh month in a row.


Finally: Video game retailer GameStop (a recent stock of interest for internet day traders) surged 51% on Friday and over 83% last week on no news that would remotely justify such a move. That kind of trading action is reminiscent of the height of the dot.com era insanity. Also reminiscent of that time is the current level of margin debt—the amount of money individuals and institutions borrow against their stock holdings in order to buy even more stock. Margin debt spiked by $56 billion in December and $53 billion in November—by far the two largest month-to-month increases on record. Along with spikes in the price of Bitcoin, any electric vehicle maker (or any manufacturers rumored to be thinking about making electric vehicles), and any penny stocks with a similar name to something Elon Musk mentioned in a tweet, now add margin debt as further evidence of a very “frothy” market.



Timeframe Summary


The Balance of Strength Signal (BOSS) is a short-term indicator that I use as our “canary in the coal mine” which normally gives us an advanced warning of turbulence, downdrafts or updrafts in direction. This is the key indicator that is used to determine entry and exit points for all of our investment models.

Ist Status Change

Balance of Strength Signal

(BOSS)

Positive

March 26th, 2020


I hope this information is useful. Thanks for reading, and always remember to Stay Focused, Stay Diligent and Let’s All Finish Strong!


Robert S. Olsen, CFP, CPA

Founder and President

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