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THE PENDULUM SWINGS

We have been concerned about the long term outlook for investors in the United States for many years. This concern has gradually increased over the last ten years as a fundamental change in our country’s policies became more pronounced in direction away from free market capitalism and toward a bigger government, and more centrally controlled form of society and economy. As devout capitalists (remember our profession is about investing capital), we are advocates of free market capitalism and against other economic forms where strong central government becomes an obstacle to economic freedom and growth. We frankly assumed that our country was on that path. That is, until last week.

The results of last week’s national election gave us concrete proof that this country is still capable of changing its mind. Large government has seeped into all phases of our lives, from our own healthcare and telecommunications to internet privacy. Government control has now become visible to most Americans. For small businesses, it has meant more regulation and higher taxes. New labor, environmental, and financial regulations have become a hindrance to all businesses. From farming to retail, from transportation to medicine, from manufacturing to housing, and from mining to fishing, all businesses have been confronted with increasing red tape. Americans have seen it, tasted it, and have seemingly decided that they don’t like it. The pendulum has started swinging back in the other direction, and the chance for long term economic growth has increased. The investment implications for the longer term are now leaning in a positive direction and have been enhanced by this voter reaction. Accordingly, we are much more confident about relying on the time factor in our strategy for client’s growth of capital. We have been given two years along with confirmation that America still cherishes freedom in its basic form. That’s a lot!

Now we have the short to intermediate term to focus on and concern ourselves with. Continued dollar strength will likely be a problem for certain companies and sectors and a benefit to others. Same with the declining price of oil.

Fiscal spending will undoubtedly come under scrutiny and promises to be a battleground for opposing political ideologies. There are apt to be winners and losers emerging from such a budget battle.

Federal Reserve tactics should become more responsible, with less printing of money, emanating from the change in congressional oversight committees. Depending on how this plays out, interest rates will likely be higher, or possibly lower, but almost certainly not the same. The outlook for economic growth, inflation, and deflation are all apt to change quickly as well, effecting corporate profit equations and commodity prices along the way. In this environment, there will be heightened risk for financial investments of poor or low credit quality. It should all be very interesting and probably volatile over the next year or so.

Our Foreign Policy, however, will not change. With the world in turmoil and assertive personalities dominating the stage, the odds of a crisis emanating from an exogenous event have increased. Our defense capabilities have become stretched, and we expect our enemies to move advantageously in light of this perceived weakness. Accordingly, we have taken a larger position in defense stocks as we expect increased government appropriations in that sector.

The environment remains risky, and we hope the new majority appreciates this and moves only after much deliberation. The American people will be watching carefully. This is not a “hold your nose and jump in” opportunity; nor is it a “rising tide that lifts all boats.” Rather, we expect to endure some turbulence, but with a more optimistic long-term view to back it up, we can afford to be opportunistic. We at Cadinha & Co. are looking forward to this coming year. It will certainly be interesting, and full of opportunity.

Best wishes for a joyous Holiday Season.

About the Author


Harlan J. Cadinha
Founder, Chairman and Chief Strategist
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