Madness
Another March and another month of madness to try and process. Normally we welcome March as it brings spring flowers, warmer weather and one of the best tournaments in all of sports, NCAA’s March Madness. For the uninitiated, March Madness is a basketball tournament full of upsets, David and Goliath stories and amazing individual and team accomplishments. One of our favorite parts of March Madness is the upsets by the underdogs like a 15th or 16th seed beating a number one seed. Unfortunately, this year the madness has spread like a contagion into the financial markets as the number 16 sized bank, Silicon Valley Bank (SVB), decided to upset the entire marketplace. Keep in mind, though, we think the marketplace, just like the NCAA tournament bracket, will trend towards normalcy. In the storied history of NCAA basketball tournaments more number one seeds have won tournaments than number 16 seeds. So, while drama has ensued from SVB we don’t think the market faces any systematic risk it can’t handle. In other words, the games will play on, and you have to be in it, to win it.
Convenient sports analogies aside, SVB is an interesting experiment in what happens when you raise interest rates faster than any time in modern history after flooding the market with more money than it has ever seen. It reminds us of the story referenced in the book “Playing God with Yellowstone” where the government creates problems, tries to fix the problems they created and then gives birth to a new set of problems. They then argue they couldn’t predict these problems, but we should trust they can fix the issues. It is enough to drive one mad. Specifically, during a pandemic SVB doubled in size and fuel was added to the fire since the bank specializes in illiquid investments such as private equity and venture capital which doesn’t work well in a low interest rate environment. Therefore, you should probably expect something to break when a bank whose depositor base was over 90% uninsured runs into liquidity concerns (as an aside the majority of smaller, regional banks have around 50% uninsured deposits and are more diverse in their investor base). Add to this the fact that the SVB Chief Risk Officer resigned, and they didn’t hedge their longer-term Treasury holdings in a rising rate environment, and you see where the lethal combination occurs. Of course, these tech savvy depositors were certainly smart enough to know how to pull their money from one bank to another with a push of a button and that is exactly what they did. The “run on the bank” became one of the fastest occurrences we have ever seen. All of this is to say, SVB was a perfect storm for a set of bad actors: The Federal Reserve for raising rates too fast (after telling us inflation was transitory for too long) and a fast-growing bank who didn’t manage its business very well.
Of course, around the same time, two crypto-currency centric banks were also failing, Silvergate and Signature Bank. We think these were similar to Silicon Valley Bank in that they were niche banks with a large set of uninsured depositors. So, the run on these banks also seems somewhat business model driven as crypto-businesses had been squeezed over the past year and the depositor base was again not very diverse. Timing was not fortuitous either, as one ripple in a system can typically be managed but three or more can cause problems. Then after a week passed, we had the regional bank contagion spill into a European Bank, Credit Suisse, which had been in trouble for a while. In our opinion, this is another atypical situation as Credit Suisse had been under fire for litigation issues and lack of institutional control for years. In fact, if someone had asked us to pick a bank to fail or merge with another (UBS in this scenario), Credit Suisse would have been at the top of that list.
Madness aside, capitalism and the fractional banking system, from our vantage point, is working. Poorly run banks are disappearing and the government is providing a backstop to keep the fractional banking system from destabilizing. That being said, a banking system that allows smaller, regional banks to serve niche markets and smaller communities is very important. If the United States were comprised of five or six national banks (like some countries), the flow of cash to new ideas would not move quickly enough, in our mind. So, we are rooting for well-run smaller banks to continue to thrive and not be painted with a broad brush because of a few others. And yes, we realize we are a little biased being an affiliate of Synovus bank with a diverse set of depositors and strong institutional control. Of course, we also think the banks left standing will be well positioned for the future as one of the tenets of capitalism is that failure leaves us with the strongest survivors. In fact, many strong businesses entrench their position even more during a market correction, while their weaker counterparts lose ground. A side effect of rising rates and tighter lending conditions is that weaker, more speculative businesses, fail at a faster rate. Another corollary is that inflation typically slows down, so maybe the Fed is on its way to hitting its target of price stability and employment. We remain a little skeptical here as the Federal Reserve has a history of being more reactive than we would like, and we are mindful of unintended consequences.
What does all this mean to our clients? How do we make sense of all the madness? Well, macro considerations like inflation, recessions and interest rates are fun to talk about and we are aware of them, but fundamentals and incremental moves are what matter as they are what we control the best. Historically, roughly two-thirds of the time the market goes up, so we want to be in the stock market so we can participate in the upside. Recessions occur and are part of a normal market cycle. Balance sheet recessions like the one we had in 2008/2009 are the scariest and we don’t think we are in situation like that now. Leverage levels and balance sheets are much better than they were then so our feeling has been that if we have a recession, it would be shallow, and trying to time a shallow recession with dramatic moves proves exceedingly difficult. In fact, one could argue the market has already corrected to recessionary levels in small cap, semiconductors, housing, regional banks and technology companies. Thus, one could make the case for legging into these areas in portfolios that were conservatively positioned last year and didn’t lose as much as the benchmarks. Finally, we kept fixed income short in duration last year and it worked very well for our portfolios. We are okay lengthening duration in portfolios right now but find our flexible mandate fixed income managers are already moving in that direction for us without being permanently tied to an aggregate bond index with a duration and interest rate risk at higher levels than we want. In fact, we have been finding fixed income names at attractive levels for those clients seeking individual bonds. It reminds of us of the old days (pre-2008) when we used to purchase a significant amount of individual bonds. We are happy to do that again if yields become attractive enough as it lowers expenses across all accounts.
Finally, we like to finish our quarterly letter by tying it back to our theme in hopes we haven’t packed it so full of dry, financial information that you have drifted into slumber. We cannot deliver a quarterly missive as titillating as March Madness. The ups and downs of the tournament are exciting, but rest assured we don’t want that much movement in your portfolio. We want our investing style to bore you to wealth. Our new reporting software took longer than expected last quarter, but the reporting vendor has promised your letters will go out quicker than last quarter. On that note, we hope the letter makes it out to you before you forget all the excitement from the tournament brackets but after the drama from the banking sector has subsided. Fingers crossed for both of these.
P.S. – We don’t proclaim to have any knowledge on basketball winners/losers so please don’t call for any advice on your brackets as we will be leading you astray. We love the tournament but don’t have enough time to become experts on basketball teams and players. Now college football is a different matter as we will be more than happy to give you our opinion… speaking of Madness!
Shadow Banking
“And as we wind on down the road/Our shadows taller than our souls
There walks a lady we all know/Who shines bright light and wants to show”
Robert Plant/Led Zeppelin
Hopefully, our reference to Led Zeppelin doesn’t go over like a lead balloon with fans who never expected to see their favorite lyrics in a financial newsletter. However, if anyone is to blame for the reference, it is the Federal Reserve and our government. If anyone is the “opaque figure creating shadows taller than their soul”, it is Jerome Powell. Remember, the Federal Reserve told us inflation was transitory and it would probably drop by the end of 2021. Instead, inflation hit four-decade highs just six months later. So much for letting inflation run a little hotter than 2%, per their strategy in late 2020. Now this same group of leaders is telling us they need to keep raising rates while commodity prices have fallen, used car prices have fallen, and new home sales are at levels not seen since 2007. Forgive us for asking if someone can find a bigger spotlight to remove some of the shadows our bureaucrats are casting. Forgive us also for mixing shadow and light metaphors with monetary policy, but we don’t think it is a stretch given the expanse of the Federal Reserve’s reach nor is it a reach given investor fear of what resides in the dark.
All of our government bashing aside, we realize you needed an entity in front of a force of nature in 2020, keeping with the sunlight/shadow theme. COVID was a force that called for artificial intervention to slow the spread and protect the fragile. However, there are always unintended consequences when mankind tries to manipulate nature. When you put 40% more money into the system in 18 months than it has ever seen, then monsters like inflation are prone to rise from the shadows. Now, unfortunately, the same leaders that fostered this environment are pushing “painful” solutions onto everyone, to quote bureaucrats in Jackson Hole. Maybe a pause and a moment to reflect from a group that is supposed to focus on a dual mandate of stable prices and sustainable employment and not make comments such as, “We don’t want to see the markets up 200 points.”? Maybe citizens are wondering if central bankers are scurrying around messing with their investment accounts instead of worrying about inflation and employment. Have they become political appointee’s instead of objective third parties? No one knows for certain, but let’s just say we have lost a great deal of confidence in our current Federal Reserve leadership. We desire a clear “macro” field of view to make decisions and the shadows they created are obscuring true illumination.
On that note, we probably never have a completely clear field of view when it comes to investing, but a Fed jockeying with rates and money printing introduces even more lack of clarity. Hence the reason the market has performed the way it has this year. That being said, oftentimes you set up to make your best returns in a bear market as you are able to buy fantastic franchises at deeply discounted prices. For example, in the year following a 20% market decline, on average the S&P 500 Index return was a robust 23.9% per the Wall Street Journal. Thus, with equities down over 20% in many cases, we think averaging into the market with money one has set aside for rainy days is a prudent step. We realize this is difficult but knowing we have mitigated losses for many with our conservative portfolios that have held up well in this market, it may be easier to find the courage to search for values in the dark recesses of a bear market.
Truly to say we know how the Federal Reserve strategy is going to pan out is to border on soothsaying. However, our conservative strategy has focused on minimizing downside, while the S&P 500 and the Aggregate Bond Indexes were down 23.95% and 14.38% respectively this year, which should allow us the capability to put money back to work while fear is in the market. In a perverse way, experience tells us when uncertainty grips the market, and no one wants to buy, prices are at their best and returns (which are a function of price) are most promising. Please keep this in mind, against the backdrop of a Federal Reserve and government that may have lost their way in the short-term, but long term has had a pretty decent record of not messing things up so much that capitalism couldn’t find its way through the shadows. Keeping with the Led Zeppelin influenced J.R.R. Tolkien theme, “All who wander are not lost” and this market may wander, but it is not lost.
P.S – We are working on a new format for our performance reporting and quarterly that should be unveiled in January. Our in-house quarterly report may become a little shorter in the future, but we will plan on keeping the same spirit and “je ne sais quoi”.
General Compliance Disclosures
Statements made via this letter are the opinions of Creative Financial Group (“CFG”) and its advisors, and are not to be construed as guarantees, warranties or predictions of future events, portfolio allocations, portfolio results, investment returns, or other outcomes. None of the information contained is intended as a solicitation or offer to purchase or sell a specific security, mutual fund, bond, or any other investment. Readers should not assume that the considerations, suggestions, or recommendations will be profitable, suitable to their circumstances or that future investment and/or portfolio performance will be profitable or favorable. Past performance of indices, mutual funds, or actual portfolios does not guarantee future results. Future results may differ significantly from the past due to materially different economic and market conditions; investments in securities or other financial products involve risk and the possibility of loss, including a permanent loss of principal. Investments are not FDIC insured and have no bank guarantee.
Creative Financial Group (“CFG”) is a division of Synovus Securities, Inc (“SSI”), member FINRA/SIPC. Prior to
January 1, 2011, CFG was a separate registered investment adviser affiliate of SSI. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested. Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank.
Investment products and services provided by Synovus are offered through Synovus Securities, Inc. (“SSI”), Synovus Trust Company, N.A. (“STC”), GLOBALT, a separately identifiable division of STC and Creative Financial Group, a division of SSI. Trust services for Synovus are provided by Synovus Trust Company, N.A. The registered broker-dealer offering brokerage products for Synovus is Synovus Securities, Inc., member FINRA/SIPC. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested.
Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank and Synovus Trust. Synovus Trust Company, N.A. is a subsidiary of Synovus Bank.
Pursuant to rules adopted by the U.S. Securities and Exchange Commission governing federally registered investment advisors, we request that you take time to compare your account balances and statements issued by National Financial Services, who acts as the custodian for your account(s). We request you contact us immediately if you do not receive these statements or if the values reflected are materially different.
Cost basis reporting
If you buy and sell a security in a taxable account on or after the effective date, NFS will report cost basis for the sold security to you and the IRS on Form 1099-B. If you have a mix of covered and uncovered positions in the same security, NFS will report cost basis to you and the IRS for any covered position that is sold. NFS will apply the FIFO (First In, First Out) default method unless you inform us of a different method. Your cost basis method for all transactions must be final by settlement date. If you choose to change the default method, you can do so by notifying your Financial Consultant.
Use of Indexes
iThe investment return and style information and comparisons employ a variety of popular indices, and the index contents and strategies are the property of their respective companies (e.g., Dow Jones, Standard & Poor’s, Morningstar, Barclay Capital, Russell). Although the data is believed to be reliable, CFG makes no warranty with respect to the contents, accuracy, completeness, timeliness, suitability, or reliability of the information, which is represented here for informational use only and should not be considered investment advice or recommendation. None of the indices can be invested directly, and the return figures for these various securities indices are reported without management fees, trading costs, or other expenses subtracted from the returns, and are shown on a total return basis that assumes reinvestment of applicable capital gains and dividends. Components of indices may change over time. Small capitalization stocks are represented by the Russell 2000 Index. Mid Capitalization stocks are represented by the S&P Mid Cap 400 Index. Foreign stocks are represented by the MSCI EAFE Index and emerging markets are represented by the MSCI Emerging Markets Index.
The Dismal Science
With the airwaves filled with economists calling for recession and inflation, we think it is important to remember the John Kenneth Galbraith quote, “the only function of economic forecasting is to make astrology look respectable”. Warren Buffett has another good quote about forecasts, “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.” More important to us than catchy quotes is an article published by the CFA Institute Journal Review that found no significant evidence of positive correlation between stock markets and gross domestic product (GDP). Thus, we caution against equating stock market and economic performance as one and the same. Recessions are a natural occurrence, but economists call on timing, length, and depth of recessions have historically been less than helpful. JP Morgan’s Michael Cembalest noted in a recent study that history shows equity markets bottom well before the economy stops worsening. In other words, economists are backward looking when it comes to data while the stock market is more forward looking. More than likely, by the time the esteemed economists land their jets in some picturesque resort and sound the trumpets that we are in a recession, the market will be turning or on the way up.
Progressing away from the recessionary talk, we want to highlight the stock market. For perspective, the stock market falls on average 20% every three years[1]. However, that same stock market has annualized 7.5% from 2001 to 2020, 11.5% from 1950 to 2021, [2] and 10.49% from 1926 to 2022[3], to provide varying frames of reference. Unfortunately, many do not have the expectation the market may fall 20% on a regular basis. Therefore, they bounce in and out of the market hurting their returns based upon pearls of wisdom dropped from the same people who last year told you inflation was transitory and the subprime mortgage market was contained in 2008. As we have maintained for decades, we believe staying invested throughout the cycles of the market is vital if one wants to keep up with inflation levels not seen since 1981.
Indeed, the question falls back to, how does one stay invested when the market and economists assail one’s emotions? Here is where we reference our long-term plans and strategies. Tactically, we have kept fixed income duration low, used cash as an asset class, and added commodities to portfolios to help reduce interest rate and currency risk. In addition, we have emphasized low duration equities over long duration assets such as unprofitable growth stocks. Strategically, we have used managers, who over time, have shown the discipline and conviction to mitigate downside risk by holding cash/gold/and cheap equities when pockets of the market appear overvalued but who are also patient enough to put that same cash to work when the market falls to more attractive levels. This “investing in a bear market” is how one positions for profit in future years, as the saying goes, you just don’t realize it at the time. This patience and conviction is easier to fall back on when you have the long-term framework and strategy put together from years of financial planning.
Of course, one probably wonders, where do these opportunities reside? In a circular way, this points back to our flexible mandate managers who have put cash to work in sectors like financials that have stellar balance sheets but investors are punishing because they fear another 2008/09 market scenario. Or let’s say they are dipping into healthcare or biotech stocks where some companies are trading for less than the cash on their balance sheet. In addition, they could also drop down into an area of the market like small capitalization value stocks that are 20% below their 20-year average historical Price-to-Earnings ratio or small cap growth stocks that are 35% below their 20-year average historical valuation levels, as well. International stocks have underperformed domestic stocks for nearly 15 years now, so there are areas where managers could possibly make generational investments given the price level of those companies. The point is, there are opportunities when markets are volatile and we feel fortunate to have the flexibility to capitalize on these investments as they arise.
To that end, please keep in touch as we think our long-term strategy affords opportunity right now, but we know the financial media and economists have been painting a stormy picture that many can’t see through. Economists have a difficult job and it was not our goal to denigrate the dismal science (as Thomas Carlyle so named the field of economics years ago). It was our intention to highlight the difficulty in modeling a complex adaptive system like the economy and how the saying “All models are wrong, but some are useful” seems to apply. To quote Warren Buffett, “You cannot get rich with a weathervane.” To us, it’s more important to buy attractively valued assets with long-term growth potential that will allow us to endure whatever economic storms arise. Any other plan is akin to flying a plane into a storm cloud with no instrumentation or flight coordinates.
P.S.- On the subject of taking a trip with coordinates and instrumentation, our dear friend, Scott Mauldin is walking the Pacific Crest Trail. His trail journal is https://www.trailjournals.com/journal/25382. We highlight Scott’s journal for two reasons. One, because actively pursuing dreams and taking adventures is something we encourage. Two, because Scott quotes Emerson in his journal “Adopt the pace of nature: Her secret is patience.” Patience is vital to the art of investing and something we think should be highlighted. Stay patient, friends.
[1] Bartalos, Greg. “Chris Davis Picks Stocks, Praises Buffet, Rips Politicians”. From Barrons, June 14, 2022, https://www.barrons.com/advisor/articles/podcast-chris-davis-funds-stock-market-buffett-51655232756?mod=article_inline
[2] Source: JP Morgan Asset Management, Guide to the Markets—U.S., June 30, 2022
[3] Davis, G. Brian. “Historical Stock Market Return: Average S&P Returns Since 1926”. From SparkRental, March 29, 2022, https://sparkrental.com/historical-stock-market-return/
General Compliance Disclosures
Statements made via this letter are the opinions of Creative Financial Group (“CFG”) and its advisors, and are not to be construed as guarantees, warranties or predictions of future events, portfolio allocations, portfolio results, investment returns, or other outcomes. None of the information contained is intended as a solicitation or offer to purchase or sell a specific security, mutual fund, bond, or any other investment. Readers should not assume that the considerations, suggestions, or recommendations will be profitable, suitable to their circumstances or that future investment and/or portfolio performance will be profitable or favorable. Past performance of indices, mutual funds, or actual portfolios does not guarantee future results. Future results may differ significantly from the past due to materially different economic and market conditions; investments in securities or other financial products involve risk and the possibility of loss, including a permanent loss of principal. Investments are not FDIC insured and have no bank guarantee.
Creative Financial Group (“CFG”) is a division of Synovus Securities, Inc (“SSI”), member FINRA/SIPC. Prior to January 1, 2011, CFG was a separate registered investment adviser affiliate of SSI. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested. Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank.
Investment products and services provided by Synovus are offered through Synovus Securities, Inc. (“SSI”), Synovus Trust Company, N.A. (“STC”), GLOBALT, a separately identifiable division of STC and Creative Financial Group, a division of SSI. Trust services for Synovus are provided by Synovus Trust Company, N.A. The registered broker-dealer offering brokerage products for Synovus is Synovus Securities, Inc., member FINRA/SIPC. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested.
Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank and Synovus Trust. Synovus Trust Company, N.A. is a subsidiary of Synovus Bank.
Pursuant to rules adopted by the U.S. Securities and Exchange Commission governing federally registered investment advisors, we request that you take time to compare your account balances and statements issued by National Financial Services, who acts as the custodian for your account(s). We request you contact us immediately if you do not receive these statements or if the values reflected are materially different.
Cost basis reporting
If you buy and sell a security in a taxable account on or after the effective date, NFS will report cost basis for the sold security to you and the IRS on Form 1099-B. If you have a mix of covered and uncovered positions in the same security, NFS will report cost basis to you and the IRS for any covered position that is sold. NFS will apply the FIFO (First In, First Out) default method unless you inform us of a different method. Your cost basis method for all transactions must be final by settlement date. If you choose to change the default method, you can do so by notifying your Financial Consultant.
Use of Indexes
iThe investment return and style information and comparisons employ a variety of popular indices, and the index contents and strategies are the property of their respective companies (e.g., Dow Jones, Standard & Poor’s, Morningstar, Barclay Capital, Russell). Although the data is believed to be reliable, CFG makes no warranty with respect to the contents, accuracy, completeness, timeliness, suitability, or reliability of the information, which is represented here for informational use only and should not be considered investment advice or recommendation. None of the indices can be invested directly, and the return figures for these various securities indices are reported without management fees, trading costs, or other expenses subtracted from the returns, and are shown on a total return basis that assumes reinvestment of applicable capital gains and dividends. Components of indices may change over time. Small capitalization stocks are represented by the Russell 2000 Index. Mid Capitalization stocks are represented by the S&P Mid Cap 400 Index. Foreign stocks are represented by the MSCI EAFE Index and emerging markets are represented by the MSCI Emerging Markets Index.
SSI, its affiliates and its officers, directors and employees may from time to time acquire, hold or sell securities mentioned herein.
[1] Bartalos, Greg. “Chris Davis Picks Stocks, Praises Buffet, Rips Politicians”. From Barrons, June 14, 2022, https://www.barrons.com/advisor/articles/podcast-chris-davis-funds-stock-market-buffett-51655232756?mod=article_inline
[2] Source: JP Morgan Asset Management, Guide to the Markets—U.S., June 30, 2022
[3] Davis, G. Brian. “Historical Stock Market Return: Average S&P Returns Since 1926”. From SparkRental, March 29, 2022, https://sparkrental.com/historical-stock-market-return/
April 11, 2022
War! What is it good for?
“Absolutely nothing!” as the 1960’s protest song goes, and we agree wholeheartedly. However, we live in a world where humankind seems destined to manufacture reasons for conflict. As Fukuyama said, some men “will struggle for the sake of struggle… And if the greater part of the world in which they live is characterized by peaceful and prosperous liberal democracy, then they will struggle against that peace and prosperity,” Hopefully, the group struggling for peace and prosperity will prevail and sanctions that have isolated Putin will work. Of course, we are not military strategists so we do not profess to know how the Ukrainian conflict ends. However, given the small number of pundits that predicted Putin would invade the Ukraine, we tend to think the experts are less informed than Churchill was when he described Russia as “a riddle, wrapped in a mystery, inside an enigma”. Thus, our inability to foretell the exact outcome of the Ukrainian/Russian War is not novel. Fortunately, for all of us, long-term investment success is less predicated on Nostradamus-like soothsaying and more upon trend identification, fundamental valuation work, and probabilities.
Thus, what we do think is important for us to do for our clients, is to identify trends that may arise from this conflict and how to position for those probabilities. Most everything else is outside of our control. For instance, the movement towards energy and supply chain independence in Europe appears global in its scope now. NATO also seems to be strengthening along with the European Union. The globalization movement appears as if it is under attack which bodes poorly for commodity prices and supply chain inflation. Couple this with the push towards reduced carbon emissions and you can see why we have been adding commodities. Did we know there would be this big of a move? Not necessarily, but we did think it made sense to tactically add to an area underweighted by many because of the perception the next ten years will be just like the last ten years. Physical assets have been underinvested for years now, so the upside optionality and diversification appeal of commodities is something we felt compelled to own. Throw in the fact that Russia produces around 10% of the world’s oil supply and both Russia and Ukraine together account for about 1/3rd of the global wheat supply, and our addition to commodities seem prescient. However, please know this is more of a reflection of a humble risk management process focused on probabilities in an increasingly byzantine world where energy security remains vital to government interest.
On the subject of valuation, we have alluded to paltry fixed income expected returns for years now and how we didn’t like the risk associated with owning long term bonds. Simply put, the price of fixed income is high and the yields are low. The first quarter of this year has proven this point as the Barclays Aggregate Bond Indexi was down 6%. Only one of our bond funds didn’t outperform the index as we have emphasized reduced risk in the bond funds we have used. The one bond fund that didn’t beat the index this quarter missed by 26 basis points but has beaten the benchmark over the 1, 3, 5, 10, 15, and 20 year time frame. Thus, we are okay with slight short-term underperformance as it is a small part of our bond portfolio in place for when the stock market corrects and money runs back to Treasuries. This strategy worked very well in the first quarter of 2020. Let’s just summarize that in hindsight our tactic to shorten duration, purchase commodities, and build cash in our fixed income allocation over the past several years has served our clients very well this year.
Fundamentally, equities present different considerations for us than fixed income. Since many equities have provided strong returns for several years their valuations are not necessarily cheap. However, there are many areas in the equity world that are arguably more attractive from a long-term perspective than fixed income. Of course, rising interest rates typically do not help both equity or fixed income valuations. Thus, we continue emphasize being choosy with equites as short-term volatility may occur. As we have alluded to in the past, there are sectors that are arguably a good value such as healthcare, real estate, commodities, energy and international, that interest us. We tend to lean into those areas when the price is low as the upside probabilities can be significant in those areas. Regardless, with our conservative leanings in other areas of the equity and fixed income market we oftentimes can weather a little short-term wiggle in valuations.
Finally, war is among the conditions that moves us out of the quantifiable risk zone and into the domain of freeform uncertainty, i.e., away from probabilities. Thucydides noted that “For war of all things proceeds least upon the definite rules.” It is wisdom such as this that infuses our thought process and impresses upon us the need to build resilient, diversified portfolios with different components that will zig when other parts zag. We choose investments that are not 100% correlated so the probability of a one-for-one lock step move is minimized. Investments are chosen simultaneously for opportunity and ballast. It is also why we very seldom invest entire portfolios in all passive strategies.
Hopefully, this quarterly letter will help forestall any desire to react emotionally to geopolitical headlines. The sights and sounds from the Ukraine will certainly stay with us as the horror of what humankind can and will do to itself is oftentimes jarring to our collective psyche but we can’t just wish it away, unfortunately. We are forced to diagnose and analyze a highly volatile situation with a sober perspective that seems to inadequately capture the depth of emotion present. In other words, investments seem to pale in comparison to the needs of a nation under attack. It seems insensitive to mention that since 1940 the S&P 500i has averaged a positive 5.3% performance one year after the start of a geopolitical conflict and that the returns are even better for crises that start in a bull market but it is something we must note because frankly there is always something to cause worry when it comes to investing. It is our job to identify trends, values, and probabilities as part of your long-term strategy as that is the only way we know to fight inflation against the crosscurrents of change present today.
P.S. Right now there are at least ten other conflicts happening in addition to the Ukrainian conflict. It kind of goes without saying but we should probably always be praying for peace and humming sixties antiwar songs.
New Years!
The New Year’s Day meal seems to be an interesting time when customs and superstitions converge. At almost every house in the South there is a lively negotiation that ensues between spouses, one who tries to browbeat the other into eating collard greens as it will purportedly bring wealth, and the other tries to argue that their helping of black-eyed peas will produce luck, which will in turn create wealth. Many of us have been perfecting this argument since we were toddlers and we are not above acting like one if necessary. Of course, we all have traditions that make occasions special, and we would love to hear some of yours, but the reason we highlight the New Year’s Day meal is that somewhere in the strange superstition of black-eyed peas bringing luck is something pragmatic but hopeful; and the struggle between the two is meaningful. Similarly, somewhere amidst the speculative frenzy of a computer-generated currency, Bitcoin, going up over 50% last year, there is something practical, like a currency that has a finite supply that can’t be inflated by government. Our not too subtle parallel is that investing, like New Year’s Day dinner, is almost always full of a smattering of hope, a dollop of provision, and a dash of spice. Truly, to invest in something requires critical analysis amidst optimism sort of like the dynamic of traditions and superstitions. Here’s hoping this year doesn’t disappoint, and we all have enough collard greens and black-eyed peas to fortify us against whatever 2022 brings. At worst, we all had an inexpensive meal to start off the year.
On that note, the start of the year always brings about the dizzying desire to prognosticate. It’s enough to make one feel as if they have had two helpings of collard greens and no cornbread. Of course, we always say it is folly to forecast, especially about the future, but we do take note of things. For instance, the Federal Reserve has committed to tightening monetary policy, margin debt is near all-time highs, market valuations are not cheap on a historical basis, and the market just had two years of fabulous returns in a bull market that started many years ago. From a mean reversion standpoint, one certainly understands the hesitation to plow money into the stock market. Of course, with a bond market offering negative real rates of return one can’t get much more excited there. Areas that appear cheap from a relative standpoint are similar to collard greens on the stove in that they have a little “stench” to them. However, according to some, you can be richly rewarded for wading into stinky areas. Global equity, emerging markets, energy, China, healthcare and biotech are areas one might sniff around if one had the intestinal fortitude. Of course, we could have another year where big tech and growth stocks could come out smelling rosy and while it certainly doesn’t pay to wager against them, we do think prudence is warranted and diversification has value this far into a bull market.
Stinky metaphors aside, one wonders what is actionable in today’s market. We have continued to add to healthcare over the past six months as anything not related to Covid has done poorly and there is definitely pent-up demand for healthcare procedures that have been put on hold. In addition, we have tactically added to our positions in commodities and global securities. Finally, we have been reducing positions in areas of the market that have performed extremely well. However, we were able to make smaller moves in these areas and minimize taxes as many of our managers were already trimming winners. A good example of this would be a small cap value fund we use, that was up 45.29% last year. Yes, the performance is a good story, but their internal activity may be even more important. For instance, they purchased a company, Upstart, that ran up 676% from late 2020 to September of 2021. Per their discipline they reduced the size of the position in their portfolio (at one point it was as high as 10% of the portfolio due to the run-up). To their credit, they achieved great returns with this name but possibly more importantly they reduced it in September before it fell 51% through the end of the year. They mentioned still liking the name but a 676% gain in less than twelve months probably warrants reduction, in our opinion, and we welcome tactical moves like this within our client holdings. One might say we enjoy a little activity, variety, and spice in our life.
Hopefully, all of the New Year’s Day meal talk interspersed with investment jargon has not made you hungry and has instead inspired you to share some of your family customs with us, whether it is New Year’s Day or other holidays. We also accept recipes. In particular, if anyone has any recipes that will improve the taste of collard greens we will move those to the front of the line. Also, please know your portfolio managers and advisors made sure we ate our fair share of black- eyed peas and choked down a few collard greens as we can’t always count on others to increase their share of collards to make up for us. We realize we are in this together.
Also, we didn’t really mention pork, ham, or cornbread in this discussion as it doesn’t elicit as many humorous debates between spouses. Depending on where you grew up the ham/pork symbolizes moving forward with good health as pigs root for food moving forward. On that note, we wish you all good health in 2022. Hopefully, we all ate enough pork/ham to keep Covid at bay.
P.S – For those who love a spirited debate we will let them delve into the sweet versus unsweet cornbread debate. Some things we leave unresolved as ours is not to question why.
“Old Glory”
In an era where many are turning their backs away from “Old Glory” we think it’s highly important to celebrate the union our founding fathers created on Independence Day. Of course, this freedom of expression that so disheartens some, if not many, is part of what makes this country so great. By contrast, in Hong Kong critics are jailed and newspapers are shut down that disagree with the Chinese Communist Party. Worse, if you are an Uighur Muslim in China, you risk being detained with one million of your friends in reeducation camps as an adherence to national ideology. Hopefully, we can agree the promise of liberty and justice established many years ago, while not without blemishes, has provided a pretty high standard of performance for many years. In fact, one might say the pursuit of happiness within our constitutional republic has proven very prosperous for its constituents and the world. We realize some may disagree with this statement, and to that, we would say that the ability to disagree with this point, and not be locked up, may actually prove our point.
Political rabbit holes aside, we think it’s important to bring up nationalism because it relates to inflation, a fear on many people’s mind lately. With the global supply chain interrupted and populism growing it seems normal to expect some inflation. The question on many minds is how transitory is this inflation? Many hearken back to the 1970’s as a frame of reference and while we see the parallels, history doesn’t always follow the same pattern. Some argue the 1940’s are a better comparison, and if so, it is important to note equities did quite well in that era. The seventies, by comparison, were not a great period for equities, but nothing else did much better except gold and oil that increased more than 19%.
Thus, against the backdrop of rising debt and decreasing globalism, one certainly understands the question about inflation strategy and positioning. Conversely, one could say we have had those questions for a while now and inflation hasn’t impacted the market in a significant way. From our perspective, we would argue we have been preparing for inflation for years by keeping duration low on our fixed income, minimizing exposure to long duration assets like growth stocks and making sure we had exposure to cheap sectors of the market like financials, energy, and small caps that typically perform well in a cyclical recovery. In addition, we have recently added commodities to portfolios to help protect against inflation risk.
Is there more that we could do? Possibly. However, to significantly position beyond what we have already implemented for possible increased inflationary pressures would imply we have a crystal ball that clearly showed a material dose of inflation was here to stay. Unfortunately, we do not own a crystal ball and indicators are never that clear. Additionally, if you find someone who says they know for certain how bad inflation is going to be in the near term, we think you will find they are one of those people who are often wrong but never in doubt. Strangely, these people always find an audience no matter their track record. We find markets are more complex than most figureheads can encapsulate in a brief sound bite.
Putting the inflation talk to bed, as we feel we have proactively positioned as well as we can at this point, we move onto the rest of the market. Many have asked us about current levels of the market. To this, we say as long as liquidity flows via central banks and earnings trend higher without significant inflation, we can continue higher. There are pockets of the market that appear stretched but there are other areas of the market that could run for a good while longer. Active management has outperformed since November of 2020 and may very well continue in a market like this. Of course, we will continue to treat this market as a complex adaptive system that requires disciplined, long-term risk adjusted strategies. To govern assets in any other way would be a disservice to the trust you have placed in us, a trust we treat with great honor and dignity.
Sort of like the experiment that started two hundred and forty-five years ago when our government was derived from the consent of the governed. We, too, find a symbiotic strength and stability in the management of your wealth with your agreement. To paraphrase the Federalist papers, we are nourished in your freedom. We will continue to monitor markets in a careful and deliberate manner because we truly respect the consent you have given us and wish to protect our clients with every tactic and tool available. It may sound corny, but we will never turn our back on you, and we want to grow old and glorious with you. Please call with any questions.
“Scattered, Smothered, Covered, Chunked, Capped, Diced, Topped and Peppered”
One of our portfolio managers recently stopped at a Waffle House with his family after a weekend getaway and couldn’t help but think we need a Waffle House Economic Index. The Yogi Berra quote “Nobody goes there anymore. It’s too crowded” came to mind as he saddled his way to the counter with one of his kids and dispatched the rest of the family to an open booth. If Waffle Houses in Georgia are any indicator, then we are returning to normalcy. Of course, the true indicator of normalcy will be when they remove the lone seat by the register that is reserved to preserve social distancing. Oh, how far we have come since this time last year.
Why do we drift to Waffle House as a backdrop for our letter this quarter, you might ask? Are we trying to distract you with sweet memories of buttered waffles and sizzling bacon? All temptations aside, we simply felt the need to emphasize normalcy and what it means. As the economy starts to thaw from its “dark winter” to borrow a phrase, what are we seeing? To our credit, a lot of what we hoped for is coming to fruition. The early cycle winners such as financials, energy, value, and small cap are doing very well. Through the first quarter, energy was up 30.83%, financials +16.02%, small cap value +16.84% and large cap value +10.99% whereas large cap, middle cap and small cap growth were up at best 2.56% and at worst 1.25%. To say we knew for certain the reopening trade would play out this positively would be a hubristic statement, one not welcomed at the Waffle House counter since hubris is not something you can scatter, smother, or dice on your hash browns. However, we did feel the upside optionality was so significant in the “value” and smaller capitalization sector versus mega cap and growth stocks, that if we just trended towards normal levels then we should see a significant spike in value as the price differential dissipated. The natural question from here, is if this “value” trade can last and, if history is any indicator, then it certainly can. Of course, growth has outperformed for the ten years before the recent cycle, so it could continue but there have also been significant time periods in the past when value has outperformed (2000-2010 for a short cycle, and 1926 to present for a longer cycle).
Another area we drifted into last quarter was the inflation discussion. If you remember correctly last quarter, we alluded to the market and Federal Reserve almost inviting inflation at all costs. Well, as the saying goes, be careful what you wish for, as inflation reared its head in the first quarter. Thus, our call to keep duration short on our fixed income was prescient. Staying humble, though, it is not too hard to predict rising inflation when monetary stimulus is at levels not seen since WWII and debt levels reside over 100% of GDP before an infrastructure bill even gets passed. That being said, there are probably many investors who, unlike our clients, are unhappy with their -3.37% performance in their Bloomberg’s Barclays Aggregate Bond Index or worse than that if they held a long term bond fund like Vanguard Long Term Bond Index fund that was down 9.30% for the quarter. Our actively managed bond funds didn’t sniff levels like that with only one being down for the quarter and that one, Pimco Total Return, more than made up for it by being up 8.88% the previous year. Conversely, though, our gold investment didn’t work for the first quarter with gold being down 8.25% for the quarter. As we mentioned when we put this trade on last year, gold is more volatile than fixed income, but given the level of global monetary stimulus we felt this was a long term hedge against government malfeasance with a fiat currency and the resultant consequences. Gold has a far longer history as a currency than fiat currency and cryptocurrency. In addition, the majority of gold is not mined in China, like cryptocurrencies are. Thus, we continue to feel comfortable holding gold as a small percentage in client accounts.
Truly, the level of debt creation and government intervention makes one want to run back to Waffle House for a side of normalcy. Hopefully, once we work through vaccines, viruses and votes, the order of the day will not be so scrambled we can’t find our way forward. Of course, it’s our belief that we can always find a way to improve our lot in life and it usually starts with a good foundation whether it be eggs, bacon, or waffles. To that end, we will keep scrambling to find opportunities for you while keeping an eye on the tab (Trust us, if inflation starts creeping into the price of eggs and bacon, we will notice it).
P.S. – There actually is a Waffle House Index but it is used by FEMA. It is an informal metric used to determine the effect of a storm and the likely scale of assistance required for disaster recovery. The index is based on the reputation of Waffle House for having good disaster preparedness and staying open during extreme weather, or reopening quickly afterwards. As Craig Fugate, former head of FEMA, said about a disaster area “If you get there and the Waffle House is closed. That’s really bad…”
P.P.S – For those intrigued by the type of hash brown toppings listed at the beginning of the letter we have included them below. Admittedly, we were not aware of them all either and are considering stepping up our “hash brown” game next time we visit Waffle House. Scattered is the standard, smothered is sauteed with onions, covered is with melted cheese, chunked is with ham, diced is with tomatoes, peppered is with jalapeno peppers, capped is with mushrooms, and topped is with chili.
“Scattered, Smothered, Covered, Chunked, Capped, Diced, Topped and Peppered”
One of our portfolio managers recently stopped at a Waffle House with his family after a weekend getaway and couldn’t help but think we need a Waffle House Economic Index. The Yogi Berra quote “Nobody goes there anymore. It’s too crowded” came to mind as he saddled his way to the counter with one of his kids and dispatched the rest of the family to an open booth. If Waffle Houses in Georgia are any indicator, then we are returning to normalcy. Of course, the true indicator of normalcy will be when they remove the lone seat by the register that is reserved to preserve social distancing. Oh, how far we have come since this time last year.
Why do we drift to Waffle House as a backdrop for our letter this quarter, you might ask? Are we trying to distract you with sweet memories of buttered waffles and sizzling bacon? All temptations aside, we simply felt the need to emphasize normalcy and what it means. As the economy starts to thaw from its “dark winter” to borrow a phrase, what are we seeing? To our credit, a lot of what we hoped for is coming to fruition. The early cycle winners such as financials, energy, value, and small cap are doing very well. Through the first quarter, energy was up 30.83%, financials +16.02%, small cap value +16.84% and large cap value +10.99% whereas large cap, middle cap and small cap growth were up at best 2.56% and at worst 1.25%. To say we knew for certain the reopening trade would play out this positively would be a hubristic statement, one not welcomed at the Waffle House counter since hubris is not something you can scatter, smother, or dice on your hash browns. However, we did feel the upside optionality was so significant in the “value” and smaller capitalization sector versus mega cap and growth stocks, that if we just trended towards normal levels then we should see a significant spike in value as the price differential dissipated. The natural question from here, is if this “value” trade can last and, if history is any indicator, then it certainly can. Of course, growth has outperformed for the ten years before the recent cycle, so it could continue but there have also been significant time periods in the past when value has outperformed (2000-2010 for a short cycle, and 1926 to present for a longer cycle).
Another area we drifted into last quarter was the inflation discussion. If you remember correctly last quarter, we alluded to the market and Federal Reserve almost inviting inflation at all costs. Well, as the saying goes, be careful what you wish for, as inflation reared its head in the first quarter. Thus, our call to keep duration short on our fixed income was prescient. Staying humble, though, it is not too hard to predict rising inflation when monetary stimulus is at levels not seen since WWII and debt levels reside over 100% of GDP before an infrastructure bill even gets passed. That being said, there are probably many investors who, unlike our clients, are unhappy with their -3.37% performance in their Bloomberg’s Barclays Aggregate Bond Index or worse than that if they held a long term bond fund like Vanguard Long Term Bond Index fund that was down 9.30% for the quarter. Our actively managed bond funds didn’t sniff levels like that with only one being down for the quarter and that one, Pimco Total Return, more than made up for it by being up 8.88% the previous year. Conversely, though, our gold investment didn’t work for the first quarter with gold being down 8.25% for the quarter. As we mentioned when we put this trade on last year, gold is more volatile than fixed income, but given the level of global monetary stimulus we felt this was a long term hedge against government malfeasance with a fiat currency and the resultant consequences. Gold has a far longer history as a currency than fiat currency and cryptocurrency. In addition, the majority of gold is not mined in China, like cryptocurrencies are. Thus, we continue to feel comfortable holding gold as a small percentage in client accounts.
Truly, the level of debt creation and government intervention makes one want to run back to Waffle House for a side of normalcy. Hopefully, once we work through vaccines, viruses and votes, the order of the day will not be so scrambled we can’t find our way forward. Of course, it’s our belief that we can always find a way to improve our lot in life and it usually starts with a good foundation whether it be eggs, bacon, or waffles. To that end, we will keep scrambling to find opportunities for you while keeping an eye on the tab (Trust us, if inflation starts creeping into the price of eggs and bacon, we will notice it).
P.S. – There actually is a Waffle House Index but it is used by FEMA. It is an informal metric used to determine the effect of a storm and the likely scale of assistance required for disaster recovery. The index is based on the reputation of Waffle House for having good disaster preparedness and staying open during extreme weather, or reopening quickly afterwards. As Craig Fugate, former head of FEMA, said about a disaster area “If you get there and the Waffle House is closed. That’s really bad…”
P.P.S – For those intrigued by the type of hash brown toppings listed at the beginning of the letter we have included them below. Admittedly, we were not aware of them all either and are considering stepping up our “hash brown” game next time we visit Waffle House. Scattered is the standard, smothered is sauteed with onions, covered is with melted cheese, chunked is with ham, diced is with tomatoes, peppered is with jalapeno peppers, capped is with mushrooms, and topped is with chili.
E Pluribus Unum
E Pluribus Unum, or “Out of many, one” has such strong meaning to residents of the United States that it is printed on our coins (among other things). Being students of history, we find it a little interesting that coins with our national motto (until 1956) on them are being rationed and pennies are scheduled to be phased out of production by 2022. Meanwhile, Bitcoin is hitting new highs and the Federal Reserve has begun working on a digital dollar. At the same time, modern monetary proponents keep grabbing more and more headlines as if they are the smartest guys in the room. For instance, there is a popular book called “The Deficit Myth” that argues, since the dollar is the reserve currency, deficit spending is a self-propagated myth created and maintained by politicians. If we just spent more money on all of our problem’s, things will likely turn out fine. Why are we going down this road? Certainly not because we want to talk about political issues any more this year. We mention this because we fear the ramifications of losing our heritage and credibility on the global stage. We bring this up because political instability and greater government spending lead to something we hope to have a handle on in retirement, inflation. (Political instability may also lead to devaluation of our currency but for now, we are going to put that under the heading of inflation as both destroy the wealth of their citizenry.)
Of course, what are some of the tools under our care that we can use to fight the threat of inflation? Stocks, commodities, and to a lesser degree, short duration fixed income. As an aside, fixed income is a better diversifier against stock volatility, but it is far safer after inflation risk is reflected in its price and not before. Thus, we continue to recommend an appropriate weighting in equities, fixed income and gold. Many have entertained adding cash to portfolios this year and while we certainly have it in accounts as dry powder for buying opportunities, we do not recommend a cash overweighting. Especially if there is a concerted effort by our Federal Reserve to “allow inflation to run hotter than normal”. On that note, forgive us for being the guy in the car asking if we should be worried about the temperature gauge blinking on the dash and the smoke coming from the engine. It truly feels as if we are so desensitized to the threat of rising prices now that we are inviting it at all costs.
Not to be incendiary in any way, but what could also add fuel to the flame and burn out of control? An incoming government with a penchant for spending? A pent-up populace cooped up and ready for travel once a vaccine works? Maybe aggressive centrists calling out polarization on both sides and leading a great political moderation? All of these are big ifs (some positive and some negative) that could lead to greater inflation from current levels. Thus, we must stay vigilant and flexible in our investing. To that end, how else can we prepare for rising prices? Do we get inflation protection from equities that are up significantly over the past ten years or do we get that from equities that were pummeled due to pandemic concerns? We would argue that we certainly need representation in these beaten up areas. Many, of which, remind one of the setup for value stocks circa 2000 to 2008. Do we know that sectors like small cap, international, value and emerging markets will outperform? To say so would be arrogant, but to humbly admit that throughout history assets revert to their mean seems a very prudent tactic to protect your wealth, in our opinion. Additionally, we think you can get “One, out of many” to play on our earlier quote by having diversification across many asset classes such as gold and short duration multi-sector income funds. Just like our country has produced many great returns from the melting pot of many, stellar returns do not solely reside in the headline mega cap stocks. They also live in visions of entrepreneurs forging into new areas of growth. Sometimes they even come together in a program like “Operation Warp Speed” and create a vaccine in less than 12 months that normally takes 10 to 15 years. Truly, the teams of people and companies working together today are what give us confidence we can surmount whatever comes our way.
Yes, we know it sounds kind of hokey to talk about what we can accomplish with a unified approach against a backdrop of cynicism present in most modern day societies, along with an admittedly challenging year. However, in our opinion, the greatness of the United States, and for that matter, the human spirit, is when we work together. One of our recently deceased hometown heroes, Phil Niekro, comes to mind when we think of the type of “greatness” needed right now. As Phil said in his Hall of Fame speech “I have never met a player or an owner who can honestly stand up and say ‘I own this game. It belongs to me.’ This is America. America is baseball. This game is home and it belongs to you, the fan. Cherish it and take care of it.” As long as we cherish our gifts and work together, we can defeat most anything that comes our way.
P.S. – For those of you that don’t know Phil Niekro, we recommend spending some free time learning about him. The quote “Heroes get remembered. Legends never die” comes to mind. He may have been a better person than he was a baseball player and that is saying a lot. Also, his signature pitch, the knuckleball, may be the most appropriate metaphor we can imagine for 2020. If you have ever had a knuckleball make you look silly at home plate, then you know what we mean.
General Compliance Disclosures
Statements made via this letter are the opinions of Creative Financial Group (“CFG”) and its advisors, and are not to be construed as guarantees, warranties or predictions of future events, portfolio allocations, portfolio results, investment returns, or other outcomes. None of the information contained is intended as a solicitation or offer to purchase or sell a specific security, mutual fund, bond, or any other investment. Readers should not assume that the considerations, suggestions, or recommendations will be profitable, suitable to their circumstances or that future investment and/or portfolio performance will be profitable or favorable. Past performance of indices, mutual funds, or actual portfolios does not guarantee future results. Future results may differ significantly from the past due to materially different economic and market conditions; investments in securities or other financial products involve risk and the possibility of loss, including a permanent loss of principal. Investments are not FDIC insured and have no bank guarantee.
Creative Financial Group (“CFG”) is a division of Synovus Securities, Inc (“SSI”), member FINRA/SIPC. Prior to
January 1, 2011, CFG was a separate registered investment adviser affiliate of SSI. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested. Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank.
Investment products and services provided by Synovus are offered through Synovus Securities, Inc. (“SSI”), Synovus Trust Company, N.A. (“STC”), GLOBALT, a separately identifiable division of STC and Creative Financial Group, a division of SSI. Trust services for Synovus are provided by Synovus Trust Company, N.A. The registered broker-dealer offering brokerage products for Synovus is Synovus Securities, Inc., member FINRA/SIPC. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested.
Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank and Synovus Trust. Synovus Trust Company, N.A. is a subsidiary of Synovus Bank.
Pursuant to rules adopted by the U.S. Securities and Exchange Commission governing federally registered investment advisors, we request that you take time to compare your account balances and statements issued by National Financial Services, who acts as the custodian for your account(s). We request you contact us immediately if you do not receive these statements or if the values reflected are materially different.
Cost basis reporting
If you buy and sell a security in a taxable account on or after the effective date, NFS will report cost basis for the sold security to you and the IRS on Form 1099-B. If you have a mix of covered and uncovered positions in the same security, NFS will report cost basis to you and the IRS for any covered position that is sold. NFS will apply the FIFO (First In, First Out) default method unless you inform us of a different method. Your cost basis method for all transactions must be final by settlement date. If you choose to change the default method, you can do so by notifying your Financial Consultant.
Use of Indexes
iThe investment return and style information and comparisons employ a variety of popular indices, and the index contents and strategies are the property of their respective companies (e.g., Dow Jones, Standard & Poor’s, Morningstar, Barclay Capital, Russell). Although the data is believed to be reliable, CFG makes no warranty with respect to the contents, accuracy, completeness, timeliness, suitability, or reliability of the information, which is represented here for informational use only and should not be considered investment advice or recommendation. None of the indices can be invested directly, and the return figures for these various securities indices are reported without management fees, trading costs, or other expenses subtracted from the returns, and are shown on a total return basis that assumes reinvestment of applicable capital gains and dividends. Components of indices may change over time. Small capitalization stocks are represented by the Russell 2000 Index. Mid Capitalization stocks are represented by the S&P Mid Cap 400 Index. Foreign stocks are represented by the MSCI EAFE Index and emerging markets are represented by the MSCI Emerging Markets Index.
E Pluribus Unum
E Pluribus Unum, or “Out of many, one” has such strong meaning to residents of the United States that it is printed on our coins (among other things). Being students of history, we find it a little interesting that coins with our national motto (until 1956) on them are being rationed and pennies are scheduled to be phased out of production by 2022. Meanwhile, Bitcoin is hitting new highs and the Federal Reserve has begun working on a digital dollar. At the same time, modern monetary proponents keep grabbing more and more headlines as if they are the smartest guys in the room. For instance, there is a popular book called “The Deficit Myth” that argues, since the dollar is the reserve currency, deficit spending is a self-propagated myth created and maintained by politicians. If we just spent more money on all of our problem’s, things will likely turn out fine. Why are we going down this road? Certainly not because we want to talk about political issues any more this year. We mention this because we fear the ramifications of losing our heritage and credibility on the global stage. We bring this up because political instability and greater government spending lead to something we hope to have a handle on in retirement, inflation. (Political instability may also lead to devaluation of our currency but for now, we are going to put that under the heading of inflation as both destroy the wealth of their citizenry.)
Of course, what are some of the tools under our care that we can use to fight the threat of inflation? Stocks, commodities, and to a lesser degree, short duration fixed income. As an aside, fixed income is a better diversifier against stock volatility, but it is far safer after inflation risk is reflected in its price and not before. Thus, we continue to recommend an appropriate weighting in equities, fixed income and gold. Many have entertained adding cash to portfolios this year and while we certainly have it in accounts as dry powder for buying opportunities, we do not recommend a cash overweighting. Especially if there is a concerted effort by our Federal Reserve to “allow inflation to run hotter than normal”. On that note, forgive us for being the guy in the car asking if we should be worried about the temperature gauge blinking on the dash and the smoke coming from the engine. It truly feels as if we are so desensitized to the threat of rising prices now that we are inviting it at all costs.
Not to be incendiary in any way, but what could also add fuel to the flame and burn out of control? An incoming government with a penchant for spending? A pent-up populace cooped up and ready for travel once a vaccine works? Maybe aggressive centrists calling out polarization on both sides and leading a great political moderation? All of these are big ifs (some positive and some negative) that could lead to greater inflation from current levels. Thus, we must stay vigilant and flexible in our investing. To that end, how else can we prepare for rising prices? Do we get inflation protection from equities that are up significantly over the past ten years or do we get that from equities that were pummeled due to pandemic concerns? We would argue that we certainly need representation in these beaten up areas. Many, of which, remind one of the setup for value stocks circa 2000 to 2008. Do we know that sectors like small cap, international, value and emerging markets will outperform? To say so would be arrogant, but to humbly admit that throughout history assets revert to their mean seems a very prudent tactic to protect your wealth, in our opinion. Additionally, we think you can get “One, out of many” to play on our earlier quote by having diversification across many asset classes such as gold and short duration multi-sector income funds. Just like our country has produced many great returns from the melting pot of many, stellar returns do not solely reside in the headline mega cap stocks. They also live in visions of entrepreneurs forging into new areas of growth. Sometimes they even come together in a program like “Operation Warp Speed” and create a vaccine in less than 12 months that normally takes 10 to 15 years. Truly, the teams of people and companies working together today are what give us confidence we can surmount whatever comes our way.
Yes, we know it sounds kind of hokey to talk about what we can accomplish with a unified approach against a backdrop of cynicism present in most modern day societies, along with an admittedly challenging year. However, in our opinion, the greatness of the United States, and for that matter, the human spirit, is when we work together. One of our recently deceased hometown heroes, Phil Niekro, comes to mind when we think of the type of “greatness” needed right now. As Phil said in his Hall of Fame speech “I have never met a player or an owner who can honestly stand up and say ‘I own this game. It belongs to me.’ This is America. America is baseball. This game is home and it belongs to you, the fan. Cherish it and take care of it.” As long as we cherish our gifts and work together, we can defeat most anything that comes our way.
P.S. – For those of you that don’t know Phil Niekro, we recommend spending some free time learning about him. The quote “Heroes get remembered. Legends never die” comes to mind. He may have been a better person than he was a baseball player and that is saying a lot. Also, his signature pitch, the knuckleball, may be the most appropriate metaphor we can imagine for 2020. If you have ever had a knuckleball make you look silly at home plate, then you know what we mean.
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Statements made via this letter are the opinions of Creative Financial Group (“CFG”) and its advisors, and are not to be construed as guarantees, warranties or predictions of future events, portfolio allocations, portfolio results, investment returns, or other outcomes. None of the information contained is intended as a solicitation or offer to purchase or sell a specific security, mutual fund, bond, or any other investment. Readers should not assume that the considerations, suggestions, or recommendations will be profitable, suitable to their circumstances or that future investment and/or portfolio performance will be profitable or favorable. Past performance of indices, mutual funds, or actual portfolios does not guarantee future results. Future results may differ significantly from the past due to materially different economic and market conditions; investments in securities or other financial products involve risk and the possibility of loss, including a permanent loss of principal. Investments are not FDIC insured and have no bank guarantee.
Creative Financial Group (“CFG”) is a division of Synovus Securities, Inc (“SSI”), member FINRA/SIPC. Prior to
January 1, 2011, CFG was a separate registered investment adviser affiliate of SSI. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested. Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank.
Investment products and services provided by Synovus are offered through Synovus Securities, Inc. (“SSI”), Synovus Trust Company, N.A. (“STC”), GLOBALT, a separately identifiable division of STC and Creative Financial Group, a division of SSI. Trust services for Synovus are provided by Synovus Trust Company, N.A. The registered broker-dealer offering brokerage products for Synovus is Synovus Securities, Inc., member FINRA/SIPC. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested.
Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank and Synovus Trust. Synovus Trust Company, N.A. is a subsidiary of Synovus Bank.
Pursuant to rules adopted by the U.S. Securities and Exchange Commission governing federally registered investment advisors, we request that you take time to compare your account balances and statements issued by National Financial Services, who acts as the custodian for your account(s). We request you contact us immediately if you do not receive these statements or if the values reflected are materially different.
Cost basis reporting
If you buy and sell a security in a taxable account on or after the effective date, NFS will report cost basis for the sold security to you and the IRS on Form 1099-B. If you have a mix of covered and uncovered positions in the same security, NFS will report cost basis to you and the IRS for any covered position that is sold. NFS will apply the FIFO (First In, First Out) default method unless you inform us of a different method. Your cost basis method for all transactions must be final by settlement date. If you choose to change the default method, you can do so by notifying your Financial Consultant.
Use of Indexes
iThe investment return and style information and comparisons employ a variety of popular indices, and the index contents and strategies are the property of their respective companies (e.g., Dow Jones, Standard & Poor’s, Morningstar, Barclay Capital, Russell). Although the data is believed to be reliable, CFG makes no warranty with respect to the contents, accuracy, completeness, timeliness, suitability, or reliability of the information, which is represented here for informational use only and should not be considered investment advice or recommendation. None of the indices can be invested directly, and the return figures for these various securities indices are reported without management fees, trading costs, or other expenses subtracted from the returns, and are shown on a total return basis that assumes reinvestment of applicable capital gains and dividends. Components of indices may change over time. Small capitalization stocks are represented by the Russell 2000 Index. Mid Capitalization stocks are represented by the S&P Mid Cap 400 Index. Foreign stocks are represented by the MSCI EAFE Index and emerging markets are represented by the MSCI Emerging Markets Index.
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Creative Financial Group (“CFG”) is a division of Synovus Securities, Inc (“SSI”), member FINRA/SIPC. Prior to January 1, 2011, CFG was a separate registered investment adviser affiliate of SSI. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested. Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank. You can obtain more information about Synovus Securities, Inc. and its Registered Representatives by accessing BrokerCheck