Settling in at home after wandering the country a little, provides an opportunity to reflect on my observations, discussions and tenor of the people I engaged with. I thoroughly enjoyed the visits and sometimes lively discussions and following are a sampling of these. There is but one potential action item for my portfolio review – which is less than normal for these adventures.
Case Study Revisited
As I alluded to a few weeks ago, one of the reasons for this trip was to get a better read on human nature – notably in rural America (as a follow up to one last year). An actual subject was used (a retired CPA) whose financial institution of choice was closing smaller accounts to focus on high wealth individuals (of which he is not). Therefore his savings will be moved elsewhere, the current distribution being low yield checking and moderate yield CD.
Considering his risk-off nature a three pronged strategy was proposed with three equal weight components: Higher yield CD, High yield checking and three equally weighted blue chip stocks (KMB, CLX and WEC). Theory being the dividend yield on the stocks allow his remaining holdings to keep pace with inflation while providing a no-fee monthly income stream (Staggered dividend pay months – KMB (Jan,Apr,Jul,Oct), CLX (Feb,May,Aug,Nov), WEC (Mar,Jun,Sep,Dec)).
His choice? No stocks, but yes on the CD and Checking account options as they are FDIC insured which offsets inflation degradation by ensuring capital preservation. My only response (to myself) was: No risk translates to negative real returns.
My travels took me through a swath of farm country (Oklahoma, Kansas and Missouri) where I found the results from a recent Pew study hit the mark. However, once engaged the views presented were both adamant and heartfelt. My initial sense was that I was hearing the views of Sinclair or Fox with no offsetting dash of CNN or MSNBC thrown into the mix.
Trade Winds
Regarding tariffs, the prevailing view is that agriculture is the front line in a trade war with a high belief that any personal pain will be mitigated by presidential decree. The issue (to me) with this narrow view is that the broader picture is missed. Even if ‘make whole’ payments are made to farmers, rising PPI and CPI indices eliminate most of the gains and will likely result in higher prices for the population at large. In fact, steel mill products increased 4.3% last month which is historically not an omen of better days to come.
The picture becomes even foggier as we overlay the Administrations’ own data and forecast over the President’s rhetoric and promises.
Drop in Farm Income Forecasted
Depending on the measure used, President Trump’s team is forecasting a drop in 2018 farm income of 5-8%. This is before any tariff impacts are determined. Yet this segment remains pretty much united behind his management. To be honest, I doubt I’d be a steadfast supporter of anyone who proposed reducing my salary while using me as a pawn to achieve an uncertain end in a trade war – especially with allies.
There we are. To our President I would suggest a refresher course on the benefits of a robust export market to absorb our surplus ag production. For me – I considered investing in farmland in the 1980’s but missed the window. The next few years may present another opportunity if the presidential negotiating skills aren’t as robust as advertised.
My one takeaway from this journey? It’s time to review the loan performance of the rural banks in my portfolio – starting with the lead bank on a syndicate extending credit to farm REITs.
Seeking Returns 
Someone the Democrats are welcoming the government extra revenue from the tariff in the first quarter of $100M. I was in the rural Virginia a couple months ago, there are still a lot of empty buildings. If manufacturing would comeback, it’d still be in the cities, as the population in the rural areas have been declining and might not come back.
I grew up in a small town and even I had a dream of moving to California (well I didn’t know any better), but that’s generally the thinking, most kids just want to get out. And when they get older they’d appreciate the tranquility of the rural. But it won’t help.
On the other hand, I saw hospitals and nursing home popped up in the mountain town of Virginia, rural Maryland. What’s up with that? 🙂
MrW and I are talking about whether to invest his money in long term bonds or stocks. I’d like half and half, but I think he’s more comfortable with 100% bonds. He’s a whole generation before me so his mentality is wayyy conservative, and he misses the 5-8% savings. But it won’t come back. Not during the Trump trade generation.
Say, the government just decreases corporate taxes so the US companies can compete. Then people also have more money, our economy grows at 3-4%, so the government raises interests rates, makes it harder for companies to grow or increase the cost of borrowing. The tariffs would theoretically makes the foreign products more expensive, but the domestic companies raises their prices by 25% in concurrent with the tariff increase. So there is still no need to buy more US products even with the tariff, foreign products are still cheaper. But the big results are company can’t grow as much because it’s more expensive to buy the same products, any taxes savings would be wiped out.
So no production growth, no interest rate growth, so the FED won’t be able to increase the interest rate to 5-8% level. For that, stock investment is probably a better choice unless we’re rooting for a big market collapse and invest in bond and wait for the moment to come 🙂 if it comes later than sonner, the money might lose out due to inflation. 🙂
Hihi
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California Dreamin’, huh? Anyway,
1) The medical facilities you saw may be a part of the rural healthcare initiative (primarily Medicare & Medicaid patients) in an effort by the state to reduce costs by clinic care vs. emergency care (also a seminar topic but mostly populated by non-profits). I have never checked the REIT aspect though.
2) You might be onto something with the generational aspect. I was assuming a geographic bent. I’ll have to include that possibility.
3) My take is slightly different: The rising federal deficit will force the Fed to raise rates (especially if China is lost as a buyer) resulting in higher inflation which will offset any tariff or productivity gains. End result being selective stocks outperforming bonds. I may become a bond buyer again at around 6%+.
Thanks for the comment and observation 🙂
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I’m generally pro free markets SR. It is interesting I think the Trump administration generally operates from the protectionist, America first platform he campaigned on. However, the combination of political policies and macro economics is hard for me to get my arms around. I do know my Federal and State Income taxes are going up significantly in 2018. That I understand very clearly. Tom
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I concur! My preference (to ensure fair trade) would be for disputes to be resolved through existing mechanisms (WTO) rather than arbitrary pronouncements but I guess his base is a more important audience.
I still try to wrap my head around it all with little success. It’s the ‘shifting sands syndrome’. I now try to determine the untended consequences from either side of a debate to frame my views and investing posture..
I too feel the tax pain. Still waiting for all the rules but leaning towards (an exception to my response to Vivianne) taking a one-time tax hit on the IRAs and putting the cash into tax-free bonds. Since most my income is via RMDs and dividends, the second year of this strategy would drop me into the 0% tax bracket – assuming no change in policy by the Dems. 🙂
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