The Worm Has Turned

Summary

• Partial article of one I sent to subscribers last night.
• As a result of Georgia's election results, the impetus for advance in many sectors has changed.
• It falls to us to adjust our sights accordingly.
• Here are some changes, big and small, that I will be making for my clients and subscribers.

• “Treade a worme on the tayle, and it must turne agayne.”

--- from John Heywood’s 1546 proverb collection. ( I know because I was a young man back then.)

The idiom "the worm has turned" has come to mean a possibly abrupt change where a person or group, previously less successful, has gained success, or a group or organization, previously on top, may not remain there for long.

That is what is happening right now.

I refer here to investing in sectors or companies that will now be much more popular to other investors and avoiding those that may see harsher times under a new administration.

[I will not dignify the rabble that attacked and looted the United States Senate with this idiom, though they may themselves think they accomplished something by embarrassing themselves and denigrating what our our country stands for. I try to separate my national and international affairs writing from this site. If you would like to know my take on what occurred, written less than 24 hours before it all went down, I invite you to visit josephlshaefer.substack.com.]

Three Changes To Keep In Mind For Your Portfolio

Re-regulation, in many sectors and industries, is likely to occur. With Democrats now in charge, albeit by a thin thread, of the House of Representatives, the Senate, and the Executive Branch, I suspect there will be a rush to regulate, given that the ideal world to many of our congress critters and certainly the selections for the Biden cabinet, is more centralized direction from D.C.

This isn't a given. Those of us with a more sanguine outlook believe that a drift to the center, from both Democrat and Republican legislators and voters, is an equally likely and compelling narrative.  But at least initially those furthest left of center will do their best to regain control via regulation.

We must accept that decisions made solely by Executive Order are subject to change immediately upon the arrival of a new president or unto eternity. Those laws thrashed out in the chambers of Congress can only be undone by a new decision by that body or by an interpretation by the Supreme Court that said laws violate the supreme law of the land, the US Constitution.  But much has been accomplished over the past four years by Executive Order.

Since I expect an initial burst of re-regulation in the energy and health care sectors, for now I am much more cautious on both. An exception: some of the new regulations will likely punish those making or profiting from internal combustion engine vehicles. As a result, most "clean energy" companies have been bid up to serious over-valuation. I believe I have one that may not have seen as much attention and will be adding it to your Growth & Value Portfolio.

Inflation will re-appear as a steady force. The fiscally-irresponsible factions in the House and Senate will indebt, indebt and indebt future generations to buy, buy, buy more votes today.

The soon-to-be Majority Leader in the Senate, Chuck Schumer, has already stated that giving $2000 more to every American, regardless of need or request, will be the first order of business. For those suffering from lockdowns and other restrictions, unemployed who are desperately seeking work, etc. I am all for it. But does Jamie Dimon who, as CEO of JP Morgan, makes that much every minute or two, need $2000? Does Elon Musk or Warren Buffett or those who still have our jobs or businesses? Doesn't matter to these people. Spending other people's money gives them such a warm fuzzy.

Fiscal irresponsibility always creates inflation. We must be prepared for a looming reduction of value in the US dollar. This makes other nations, with sounder currencies, more attractive for 2021 and beyond than they have been. It also makes it easier for emerging markets, with much of their debt in dollar-denominated bonds, to repay their debt and use the freed-up capital for infrastructure and innovation. I will be adding mutual funds and ETFs for both these broad sector plays.

I will also, as a result of this reinflation likelihood, be adding to my short-Treasuries position.

Taxpayer-funded subsidies for the pet projects of the incoming cadre are a certainty. We will be told to forget Solyndra and Tonopah Solar (the most recent bankruptcy, this one after receiving a $737 million government loan guarantee, both from an Obama administration cookie jar for gifts to campaign contributors under the aegis of climate change.) There will be a full-court press for any firm involved, no matter how obliquely, in anything they can paint as "climate change" involvement.

No sense fighting it. After all, remember: the federal government has no money other than that which they collect from taxpayers and companies doing business in the US. Since you and I are going to pay for a lot of projects that a normal business person or responsible company would reject as a money pit, we might as well benefit as investors.

Lose it in taxes, get it back in the market. Right now I cannot in good conscience buy any old thing with "solar" or "wind" in its name -- but I know there are responsible companies in this business and I will be researching, than analyzing, then investing in. Money will be thrown at all companies, good and bad. Still, I have this thing about sticking with the good ones.

I retain an open mind beyond these three big changes. For all those fearing creeping socialism or rampant intrusion, I think we should wait and see. If President-elect Biden is true to his history of the past 40+ years, he is not one to move with alacrity or prejudice. He is a centrist. He has worked well as a legislator, a business where compromise is not a dirty word. (Well, not until recently, anyway.)

While I may privately disparage many of his cabinet choices, they are more tiresome than firebrand. Most are Obama-presidency retreads. No Bernie Sanders in charge of the Dept. of Labor or Elizabeth Warren as head of the Treasury. I also imagine the very left of center legislators will be increasingly marginalized. I even see a period where Democrats and Republicans vote the voters of their states' wishes, regardless of party affiliation.

There will be downdrafts, of course, but I see 2021 shaping up quite nicely if we are willing to make some key changes. Not a bad time to be close to fully invested.

"Your G&V Portfolio"

I am grateful to have so many readers of this blog.  While it would be sweepingly unfair to those who have joined our Investors Edge® Marketplace community to share the in-depth information I provide there or the changes to the model portfolio, allow me to express my gratitude by speaking in more general terms without mentioning the specific ETFs or companies!

I am buying an ETF for emerging markets that excludes China. Yes, I realize every other analyst is lauding China for crushing Covid-19 (if it really has) and are now expecting 8% growth in China this year, the best of any nation. As a long-time analyst on China, I don't trust the Chinese government's statistics or their pronouncements.

I also find it ludicrous to call the world's 2nd largest economy (1st as measured by Purchasing Power Parity!) a "developing nation." If you want a good international fund with some developing nations thrown in (sometimes worthwhile) then check the top countries in those funds' holdings. I will wager China is anywhere between 25% and 45%. I already have plenty of developed world exposure.

With this purchase, I get the two biggest Asia Tigers + India as the bulk of my holdings. That fits better what I see as innovation without confiscation, good demographics without the potentially dangerous demographics of China, and honest governance versus government corruption.

I am also buying more small caps, this time with a greater emphasis on microcaps.  The ETF I am buying here has 60% of its portfolio in top-drawer names in the smaller up and coming companies.

Finally, I am buying two positions that have not yet moved "as much" in their industries as their better-known high-flying clean energy cousins.

The first is an ETF that is an interesting play because it is as much a "materials" sector play as it is a hi-tech play. Yes, it owns Tesla and NIO, but the giants in the lithium, nickel, rare earth and boring industrial metals comprise the largest part of the portfolio. Consider it a safer way to play EVs.

And now for a little rank SPACulation. SPAC is the acronym for a special purpose acquisition company. They raise money for the purpose of bringing private companies public without the bother (and SEC supervision and analysis!) of an IPO. Some will work out; most probably will not. The Big Money that funds these things will always be able to cash out at a profit. You and I may not.

I have one that is being overlooked in the rush to BUY, BUY, BUY anything with "EV" in its description.  All of these are speculative. Do your own due diligence.  This SPAC plans to merge with and therefore bring public a company that is creating a niche in the "local delivery" market by manufacturing EV Class 1 vans at an existing Indiana auto plant converted for EV manufacture

Good investing as the worm turns,

Joe

Disclosure: Unless you are a client of Stanford Wealth Management, I do not know your personal financial situation. Therefore, I offer my opinions above for your due diligence and not as advice to buy or sell specific securities.

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