Welcome to the real world

A while back I got into a discussion with a reader asking why I recommended gold so often.

I told him back then that after the first quarter of this year, once I saw how the economy was doing and how Trump was handling his office and the Republicans were able to transition from a governing party to a legislating one, I would talk of more opportunities in the markets.

My concern about the Trump rally is the disconnect we’ve had between the markets and the economic numbers.

For example, the Dow is in its longest slide since 2011. And most economists and market veterans expect a meager 2 percent GDP for 2017, basically what GDP was last year. Yet consumer confidence is at its highest level since 2000.

Half full or half empty?

As the old saying goes, a glass of water is half full or half empty depending whether your drinking it or pouring it. I tend to lean toward the drinker’s side of this analogy.

And that means I’m not all caught up in the emotions of the markets. They are short term and Wall Street traders love to get individual investors riled up and moving their stocks and funds around so they can make money off the transactions.

Fear and greed are the fundamental emotions at play in the markets, and if you want to be successful you have to banish these emotions and all the others out of your investing.

Traders trade and investors invest. Don’t mistake one for the other.

This market rally is all about traders positioning themselves for the next leg up for big businesses.

They are strategically positioning their massive portfolios across industries’ key players and then cross hedging in the futures and options markets. Is that the way you invest?

I don’t.

The drinking side

Let’s get back to the Dow slide. I have been warning about increased volatility once this “feel good” honeymoon for Trump and the incoming Republican majority was over. It’s over.

We’re also now in a rising interest rate environment. That is already showing up in existing home sales. Last year was the best year for existing home sales in more than a decade. That pace is not matching up so far this year.

However, new home sales are rising at a healthy clip. And that is the difference between the two housing markets. New housing and developments are usually on the high end or low end of the market, and existing home sales are driven by family priorities like established communities, good school districts, etc.

Also, new homes are more likely to be purchased by developers or investors in bulk and then sold or leased individually. That would alter the sales numbers. For example, since the financial meltdown many big firms like Blackstone and Berkshire Hathaway (real estate division) picked up prime properties all around the country to add to their alternative asset (i.e., not stocks or bonds) portfolios.

Buy cheap and sell high.

When sales figures come out for home sales, there’s no differentiating between a company buying thousands of homes across the U.S. or thousands of individuals buying them.

It’s a false barometer of individuals’ economic prosperity these days.

Beyond that, I see major retailers shuttering scores of stores around the country. I see consumer debt rising faster than wages — and consumer spending (much of it debt) makes up 60 percent of the U.S economy. Macy’s CEO said it wasn’t closing store locations because of Amazon and online retailers, it was because they could no longer be price competitive.

Cocktail party fact: according to industry magazine Retail Touch Points, 94 percent of all retail sales still take place in stores.

I see a mixed bag on the earnings front, with winners richly rewarded and losers mercilessly punished — simply put, higher volatility.

The pouring side

On the upside, it looks like banks are back in business on both Wall Street and Pennsylvania Avenue. When the Treasury secretary is a former head of Goldman Sachs, you know that it’s business as usual at the Treasury.

The banks will be fine. Actually, I think they will be better than fine, especially since those that have held on to the Too Big To Fail (TBTF) designation will soon be on the hunt to grow their business.

Insurers will also fare well as their massive bond portfolios continue to splash them with cash.

The one good thing about the demise of Trump’s healthcare initiative is that it’s business as usual for the healthcare insurers and drug companies. They won’t have to figure out a new system or hedge their bets until a new system is passed.

Energy is also looking like a top spot, although don’t expect a boon in coal; it ain’t gonna happen.

Stock picker’s market

Ultimately, I still see this as a stock picker’s market, at least for another quarter or two.

I also see increased volatility which is the sign of a healthy market, but has been absent for nearly a decade now.

And none of this takes into account military escalations or trade wars, which may not be likely, but are certainly possible.

So, I say ride the consumer spending tide and when it gets tight, look to consumer staples rather than consumer discretionary stocks. They’re more defensive. Get in on the U.S. energy patch, especially the midstream players.

And to hedge your bets, I will say it again: stick with gold or silver. They will prove themselves very handy if something goes off the rails.

— GS Early

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