By Lewis J. Walker, CFP®
The annual Mendel Lecture at Atlanta’s Marcus Jewish Community Center took place September 29, 2016. While this writer did not have the pleasure of attending, high points of his presentation were covered in a column entitled “Mendel: Diversify and Defend Yourself,” by Marcia Caller Jaffe, Atlanta Jewish Times, 10/14/16.
Ed Mendel, along with his partner Ned Davis, co-founded Ned Davis Research, Inc., and Davis, Mendel & Regenstein, Inc., in 1980, when both left J.C. Bradford & Company. Known as the Ned Davis Research Group, the two firms built one of the largest stock and bond research followings on Wall Street. Ed is a minority owner of the Atlanta Falcons and is actively involved with a number of philanthropic organizations in Atlanta.
With one of the more intriguing observations, Ed noted that 117 countries , including some Arab nations, reach out to Israel for expertise in cybersecurity, water recycling, and advice on terrorism and technology. Prime Minister Benjamin Netanyahu in a January 2016 interview with journalists in Jerusalem said, “More countries want diplomatic ties with the Jewish state than ever before. Today, we have relations with countries in Asia, Africa, central and Eastern Europe, and there is something very big that's taken place. We have, of course, the two great peace treaties with Egypt and Jordan, but we have growing and expanding relations with many of the Arab countries in the Middle East." The Prime Minister noted, “There are two reasons countries want ties with Israel—help in fighting terrorism and Israel's technological prowess.” That’s promising.
Mr. Mendel opined, “The Federal Reserve has done more harm than good” with easy-money policy. Low interest rates have not propelled the recovery above anemic levels while punishing savers (and rewarding borrowers, as refinancing of mortgages has been the rage lately). Ned Davis Research does not agree with the Fed’s “strengthening outlook.” There may be some small incremental interest rate increases in this writer’s opinion, but nothing drastic. Interest rates are likely to stay substantially below historical averages for some time.
Low interest rates are hurting pension funds as earnings struggle to keep up with future obligations and promises made. Mendel notes the government borrows $70 billion a year currently just to make Social Security payments. The trust fund is facing depletion in 2034, at which point only 79% of benefits will be paid from ongoing tax revenue. Something has to give: higher Social Security tax levies on workers and business, full retirement age pushed to age 70, early retirement benefits at 65 versus 62 currently, as examples.
Our national debt is pushing $20 trillion. The Atlanta Journal-Constitution published a report on 10/15/16 that the U.S. budget deficit jumped 34% over the last fiscal year. The government borrows 15 cents of every dollar spent. Sounds alarming, but administration cheerleaders say that deficits are “only 3% of the economy,” which they claim is “sustainable.” While there is crowing about deficits being lower than they were after the 2008 debacle, the point is, debt still is growing, a pile of IOUs that will suck up more resources in any rising interest rate scenario. Mendel noted that “the Bernie Sanders’ supporters are not going away.” Young voters are enticed with the idea of free college and student debt relief. “Free stuff” is not free. Money has to come from the pockets of producers and/or increased debt.
“Diversify with real estate, bonds, securities, and gold,” Mendel advises. Be careful. You need a bond strategy to cope with rising interest rates when the yield curve ultimately steepens. Volatile gold has been in a downturn since 2011 and only recently has seen an upturn. Watch high yield junk bonds, he warns. “The best idea is to hire a distress manager to take advantage of opportunities in all the reorganizations that will inevitably happen in the credit markets.” Much of that is happening in the private equity and alternative investment space and such investments are not immediately liquid and may require higher levels of net worth and/or income plus a longer term orientation.
Ned David Research recently noted that the risk of a global recession is receding but they still see below-trend growth. That, however, supports the idea that select international and global stocks may afford bargains for the patient.
Writer Marcia Caller Jaffe observed that after listening to Mendel’s “less-than-optimistic-outlook” she still agrees with his opinion that America is “a resilient country” and “the sky is the limit when it comes to opportunities in business.” My view? If besieged Israel can survive and prosper in a hostile neighborhood, so can America. We do need a tax policy that will reward and not punish risk taking. That’s another story altogether!
Lewis Walker is a financial planning and investment strategist at Capital Insight Group; 770-441-2603. Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative and investment adviser representative of SFA which is otherwise unaffiliated with Capital Insight Group. This information is based on sources believed to be reliable; however the accuracy or completeness cannot be guaranteed. There is no guarantee that any opinion or suggested possibility will happen. This should be construed as a recommendation or offer to buy or sell any particular security or investment type.