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Good Morning,

Ok, so now we “know” what the Fed will do – uh – and that was, well, um, nothing!!!

After 2.8 seconds, the slicing and dicing began as machine traders were programmed for trades for both the words “raise” and “no change” – the average John Doe had no chance.

So what does it all mean for you and me – focused on long-term structures in place driving our economic growth ahead?

Little to nothing.

The next time the world tells you to fret over a 25-basis point rise in rates – please think about it for a moment.  By the way – the media headlines are already conjuring up “Well, so now we need to prep for a December rate hike.”

Leave the nonsense on the side of the road.

Your portfolio and your blood pressure with both thank you.

Step Back for Review

It is imperative that we consider this whole interest rate thing.  This monster that seems to be ever-present on our doorstep.  I will say again – it is a pitch in the dirt.

Rates will rise – for good reasons.  When they do it will be because the economic might of the US is slowly but surely healing from the deep emotional scars of the Great Recession.

As we stated then, “The emotional scars to our economy will last decades longer than the financial damage.”

Here is the Larger Point

When the Fed raises rates by 25 basis points, does it really matter to a well-run company?  Really?

For example, does it matter if they raise rates when companies, left and right, continue to refinance bond debts at lower and lower costs for very lengthy periods of time?  Will a rate hike – no matter when it comes – actually change anything for most companies?  The answer – very, very little.

For example, many shudder in fear that their dividend stocks will be crushed.  Nonsense.

Yes, dips and corrections will come.  But make sure you focus on this instead of fear:  If the Fed raises rates by 25 basis point in a year and your dividend producing stock does the same – are you worse off?

Keep this simple folks.  And by simple – I am not implying easy.

It can be hard if you choose – but why would you choose that?

Let me give you a real-life example which took place just this week.  One company – one set of bonds – one small debt refi in a sea of corporate debt refi’s:

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Now, I underlined a few items which are helpful as you review the bullet points.

I will highlight:  ATVI took action in a bond market filled mountains of fear-driven capital.  It refinanced $1,500,000,000 in bonds.  They were previously paying 5.625% on that tranche of money.  They will now be paying a blended rate of 2.85% on the same level of debt – further extending 55% of that debt for another 5 years!

So what does all that mean?

ATVI saves $42,000,000 EVERY year in interest going forward.

Make sure you don’t read over that too quickly:  $42,000,000 each and every year which previously went to bondholders will now stay with shareholders.  Savings that fall to the bottom line in the next five years alone?

A staggering $210,000,000 – nearly a quarter billion dollars

Again – 1 company, 1 debt tranche, 1 refi episode

This is being repeated by CFO’s across the land

I ask you simply:  Do you really think ATVI cares whether or not the Fed raises rates by a quarter point?

Your Best Actions?

Instead of fearing rate hikes, do as corporate America does.  If you want debt – go get it. Bigger house?  You have never been able to buy more house with less money on a monthly costs basis.

The fear-mongering needs to be left to others – and leave it out of your future thinking / planning process.

“But Mike – Aren’t You Missing It?”

“But Mike, companies are not investing as much.”

That’s right – you know why?  They don’t have to invest as much!!!

The blessings of a slow and steady economy are many.  One is that all needs are being satisfied by the investments already being made.  Why?  Technology falls in price every quarter.  Every new 2.0, 3.0 or 4.0 model does more with less.  The change is geometric.

The cloud – apps and software tools are doing things today which require far less expense, less investment and their output is rising.

“But Mike, manufacturing has been gutted.”

Baloney.  We just got better at it.  We have record output – we lost nothing.  Those that used to work at plants and facilities got better jobs with more pay and our output for us all went up!

So then, how could all that be correct?  What about all those things I am told I should be afraid of?

Let’s blame the proper thing – and it is a good thing by the way:  In a 2014 article from the MIT Technology Review, Erik Brynjolfsson, coauthor of a prominent 2014 book on the subject, is quoted as stating that “technology is the main driver of the recent increases.”

Supporting evidence for that theory, highlighted by Cato, was found in a 2015 Ball State University study in which economists attributed nearly 90% of the US manufacturing job losses in recent years to productivity gains.

Very important point here:  They observed: “Had we kept 2000-levels of productivity and applied them to 2010-levels of production, we would have required 20.9 million manufacturing workers. Instead, we employed only 12.1 million.”

There is no ghost in the machine.  It’s fabricated – like a movie set on a stage.  Do you really want to live in the world that would have required the 20.9 million factory workers of 2000 levels?

Think about that the next time you even ponder buying into the garbage being spewed out there about the end of life as we know it coming soon.

 So What’s Next?

More fears of course.  As we layer on the analysis of the latest Fed statement, every syllable will be sliced and diced.  Every report will be measured against it for weeks. Political analysis will tell you how the world will change ahead based on every sound-bite coming from either candidate.

Expect chop to be the norm as we go through the testing process unfdoling in markets which we have covered for weeks – and included in this simple video review for you here last week.

Closing Thought for The Day

Take a deep breath.  Yet another monster has been vanquished.  There are many more to come.  Do not fret – if there is ever an open space in the pipeline of fears to come – we will find a monster to replace it with – even if it needs to be completely manufactured out of thin air.

Until then – we need to remain focused on the long-term data at hand.  Short of an extinction event – in which case your account balance will matter to no one – tens of millions of new households will form in the US over the next 3,5, 7 and 10 year periods. Assuming birth rates remain stable, we will have Generation Z backing up Generation Y with back-to-back record breaking generations of demand.

Everything becomes new again.

Be confident of this – as we focus steadily on the long-term horizon:

This “weak recovery” economy of ours is far stronger than most understand it to be. Even though it is messy at times, we do continue to overcome many hurdles.

Our momentum is driven by a very significant and rare generation “baton shift” in a very long race.

But here is the deal:  People make markets.

As stated before, we can make it more difficult if we choose – but why would we?

The Barbell Economy is an effort to simplify the noise and even work to eliminate some of it.   Chop is fine, corrective action is also a plus at times.

Long-term reward tend to be delivered to the patient investor willing to live through the process of markets.

Stay on your plan, stay focused and patient.  We are in great shape for the long-term growth waves at hand.

Until we see you again, may your journey be grand and your legacy significant.

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