"We are in bondage to the law in order that we may be free"
It is perhaps ironic that Volume I of Edward Gibbon’s sweeping work; The History of the Decline and Fall of the Roman Empire, was first published in 1776 as our country was being founded. While many specifics in Gibbon’s history have been found untrue by later historians working with modern archeology, carbon dating, DNA analysis and new discoveries, many of his base conclusions are still accepted today. While hotly debated, Gibbon dated the “fall” of the Western Roman Empire to the Sacking of Rome by a tribe of people, thought to be from modern day Poland, called the Vandals in 455 C.E. Our words; vandal and vandalism come to us from this event. That sacking of Rome was very much on my mind as I watched our Capitol Building being stormed and ransacked on January 6. The shirtless man with the fur cape, horned helmet and painted face may have even found himself right at home among that Vandal Tribe over 1,500 years ago. But when our founders wrote our Constitution it wasn’t the fall of the Roman Empire they had in mind. As successful as it was in years, the Empire started out as the personal rule of a couple very rich and very savvy noble Roman families, and ended as a Military Dictatorship. For people trying to construct from nothing the first truly democratic government in modern times, this wasn’t the model they were looking for. Rather it was the Roman Republic, the five hundred years or so before Julius Caesar, that they used as a model. It was the fall of that Republic which for it’s last sixty years had become the plaything of a few wealthy individuals who simply refused to abide by the rules and norms of the Senate, that our founders tried to prevent. The separations of powers, the independent judiciary, staggered terms of office, the purse strings of the military controlled by one branch as the command is controlled by another, all these checks and balances that sometimes mean things seem not to get done or get done too slowly, were put in place to prevent what happened in Rome in 49 B.C.E. from happening in their new country. This was certainly the biggest test of those systems in our lifetime, as those Capitol rioters were trying to prevent they system from working as our founders intended. Fortunately for us, the system held as we once again transitioned Executive power from one President to another.
With that said, I can get to what I wanted to discuss; some thoughts about where this year may be going. There will be a Democratic Senate, although with a tie some of the more conservative Democrats, like Senator Manchin from West Virginia will have a lot of say in what gets passed, so we’re unlikely to get Sen. Bernie Sander’s full wish list. Also, there is of course, Covid. I fully expect the first months of President Biden’s term to be taken up with getting the Vaccine distribution managed, and getting another stimulus plan passed that carries us forward to when that distribution has reached the point where life gets back to some kind of normalcy. This means any major changes to the tax code are certainly not going to be put in place in 2021; Trump’s tax bill didn’t go into effect until his second year in office and that was his first agenda item. While there may be things to look at toward the end of this year if there is indeed a change in the tax code for 2022 – we will cross that bridge when we come to it. In the meantime, I think for 2021 the continued impact of the Pandemic and the Governmental response is going to weigh much more heavily on the Markets. Since the election the Markets have continued to rise, although that rise has been more evenly spread among various asset types and not as concentrated in just a few tech names like the ones that bounced back immediately following the crash in the Spring. This is due to both the assumption that we will actually go back to a pre-Pandemic economy sometime in 2021 and the fact that with single party control of Congress we will get full Governmental support of the economy until that happens. With that said, if Keeling Financial is managing your assets you will see some changes to the portfolios to reflect what we believe is likely as we pull out of the Pandemic.
Gold: We continue to believe that for now gold makes sense to retain in the portfolios. Governments around the world are running up unbelievable debts to combat Covid, and even if they want to pay those debts down it will take decades. The “price” of money, like everything else, should go down when the supply goes up – it is in times like this that gold has tended to act as at least an inflation hedge if not simply a good investment alternative. In the past year the price has gone up significantly, and the spending by Governments and Central Banks is not over. We feel this is a good alternative to traditional stocks and bonds for this unique circumstance. I’m not a “gold bug” and don’t feel this is an asset that needs to be owned by everyone, all the time, so if circumstances change, we won’t hesitate to revisit our holdings.
Value vs. Growth: We plan to stay tilted toward value. As I have already said, the initial recovery from the market downturn in the Spring of 2020 was led by a few technology companies that probably either manufacture or run the device you are reading this newsletter on right now. Many of these are fabulous companies that have literally changed the world. But everything has a price that is fair and a price that is way, way too high. The current overvaluation of the stock market that you may read about, is an entirely fair analysis. But, if you take out those 5-10 names in the S&P 500 that contributed the most to that index’s performance last year, you also take out most of the overvaluation of the same index. The “market” is historically expensive, but that doesn’t mean that all stocks are. It took a while for our portfolios, that are tilted more toward value and smaller companies to recover from the pandemic swoon than an index fund may have taken, but so what? Stocks are long-term investments anyway so six months vs. three months doesn’t matter. We feel, especially today, that this philosophy has never had stronger underpinnings and we’re looking forward to what this year brings us in the markets, even if the indexes are negative.
Real Estate: We have maintained a separate real estate holding in our portfolios for many, many years. Traditionally, Real Estate Investment Trusts (REITs) that own portfolios of real estate from shopping centers to residential apartment complexes to office space to industrial warehouses and factories; have been good sources of dividend payments while also offering the chance at price appreciation. But the pandemic has changed the way we work and live. Many people who are currently working remotely will be going back to the office once things improve; but not everyone. Those people who will stay remote don’t need to live in the city or even the close suburbs to where their company is located. They won’t be stopping at that shopping plaza along the highway on their way home, they won’t be getting drinks with their co-workers at that place down the street. These companies that have not just gotten by, but in some cases, thrived during the pandemic are going to think long and hard about this stuff. If they don’t need as much office space, when their leases are up, they’ll downsize – but that means the buildings won’t be full and the REIT that owns that building won’t make as much rent. Corporations will also start thinking about business travel and conferences. Maybe the sales rep doesn’t have to fly back to the home office four times a year for meetings? Maybe we only have to do a National Conference every other year? Maybe we don’t need to do as many Conventions? I’m reminded of driving down the New York Thruway between Syracuse and Rochester. There’s a Lockheed Martin factory along the road, in what is a pretty sparsely populated area, and right next door there’s a Best Western Hotel. Who do we think stays at that Best Western? If Lockheed gets half or a quarter the in-person visits they used to get, what happens to that hotel? Many of these hotel chains build the hotels, sell them to a REIT, and then rent them back for tax purposes. Assuming they stay in business, I bet they negotiate a lower rental payment the next time their lease is up. Basically, this whole sector is going to be a mess the next year or so, and I believe my clients would be better served to sit out that mess for the time being.
International & Emerging Markets: Frankly, many areas of the world handled Covid much better than the United States and Western Europe. Australia, New Zealand, Malaysia, Thailand, Vietnam and Japan all had more restrictive and more strictly enforced lock-downs early last year and have lowered the incidence of Covid-19 in their countries to the point where life has generally returned to normal. The Nikkei index (the Japanese Stock Market) hit its highest level in over 30 years as we closed out 2020. For 2021 we expect to keep our allocations to Developed Markets outside the U.S. as we rely on the underlying investment managers to choose among countries and companies. We are also increasing our exposure to Emerging Markets. While not every country that falls under that rubric of “Emerging” has fared as well through Covid as Vietnam and Malaysia (Brazil for instance has worse case rates and fatality numbers than we do) but if we once again rely on the underlying managers to pick and choose among countries, there is a potential opportunity in many countries that are already operating in a post-Covid world within their own boarders.
Bonds: History tells us that long-term the returns of bonds tend to be their interest rate. If that holds true, then the return from that side of our portfolios won’t be so hot going forward as you’d be lucky to get much over 2% out of a diversified, investment grade bond portfolio right now. We have been doing several things to combat these low returns, including becoming a little riskier with our bond holdings and using some strategies that try to improve returns by being able to trade in and out of the bond markets and various different types of bonds. Overall, we don’t believe this will increase anyone’s principal risk – but it will hopefully increase the return from that side of our client’s portfolios. Even getting 3-4% from fixed income these days would be a great triumph.
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What I hope for most in 2021 is that I don’t feel compelled to follow the news all day, every day. Just a few months of nothing crazy or unprecedented happening would be a welcome change. I want to see my oldest daughter actually get to go to campus for college, I want to see my youngest in class with her friends and enemies (she’s a teenage girl after all) full time. I want to pop over to a friend’s house to say hi, I want to meet somebody at a bar or a coffee shop for a drink. I want to go see a stupid movie with explosions and hearing loss inducing sound, while eating popcorn coated butter along with a hundred strangers. I want to be invited to some terrible event and actually have to creatively think of a reason I can’t attend. I am very hopeful, the slow rollout notwithstanding, I really believe by June most of us with be vaccinated and almost all restrictions will have been lifted. I want for everyone of you, that you get to do that thing you miss the most; whether it’s going to a Red Sox game, throwing a big birthday party, or just flying out to visit and hug your grandchildren. Let’s hope that the events of January 6th are the worst thing that happens in 2021. Please let me know if you need anything, or if you know anyone who may benefit from our help.