March 5, 2019

Recession? What Recession?

Harry Truman once said, “I’d like to find a one-handed economist. All my economists say one thing and then add, ‘on the other hand’”.

I thought of Harry several times this week when there was a flurry of news articles on the possibility of an economic recession. To keep things in context, remember that our economy has a constant cycle of growth and recession. Currently the economy is better than it has been in many, many years so we have clearly been in a strong growth phase and perhaps approaching a top of this cycle, and at some point things will eventually turn down. All the articles the media outlets are flogging are being trotted out so that in a few years they can say “you heard it here first!” when the economy finally does contract a bit. Cheap journalistic tactics, if you ask me.

I’ve often said that paying attention to the news will make you crazy. Following are some good examples of this craziness:

On Feb 26^th InvestmentNews had a headline that read, “Most economists say recession is just a few years away”. I would add that recessions come along every so often so are always “a few years away” at most, so this article is really saying they don’t see one in our near future.

The same magazine on the same day said in another article, “A recession? Right around the corner – or not.” Good grief!

On Feb 20^th, the Weekly Profit newsletter stated “All signs are pointing to a looming recession” The critical reader in me caught the word all in “all signs” as a statement that is never, ever true, so my BS meter went wild. Then I noticed the word “looming”. I suppose all future events could be considered to be “looming in the future.”

The next day, John Mauldin had an article in his Over My Shoulder newsletter that goes out weekly to, as John says, “over 1.5 million of his closest friends” with the headline that read “Still No Recession in Sight!” Twenty years ago, I collaborated with John and Leonard Nimoy (yes, Spock) on an Avian Rogers book on the financial implications of Y2K and I get to occasionally rub shoulders with John at the NAAIM conferences, so I always look at his newsletters.

Perhaps the most laughable headline was in a Martin Crutsinger, an AP Economics Writer’s February 25^th article stating “Half of business economists see recession by 2020.” Which of course, means that half see no recession by 2020 but he didn’t want to say that did he?

My point is, quit worrying about things like recessions. That’s my job. Right now times are good, so enjoy them. And keep reading this newsletter. I’ll let you know when the numbers suggest one is actually starting.

Better yet, if you are not already a client, call me for an appointment to get started, and I will keep you invested in times like this when risk is low and rewards high, and I’ll move you out of the market if a recession is actually beginning.

What the Markets Are Doing

Riding the wave of continuing strong corporate earnings and economic numbers, the US stock markets continue to post strong returns during February. So far, 2019 is shaping up to be a good year for stock investors, just as the 4-year presidential investment cycle suggests. Let the good times roll!

The chairman of the Federal Reserve has signaled that he thinks that current interest rates are just right and that the FED will likely hold off on rate increases during the rest of 2019, which is good for the financial markets.

International markets also had another good month in February, however emerging market indexes posted a small loss for the month of February.

If you are worried about a trade war with China, (another media darling that can make you crazy) – Fuggedaboutit! The China index (Symbol: FXI) has outperformed the S&P 500** year-to-date through March 1, 2019. And the same for Brexit fears, too! The United Kingdom index (Symbol: EWU) is also out-performing US markets this year. This tells me that the majority of investors, who tend to be pretty smart to end up with all that money, think trade wars with China and Brexit fears are non-events.

The broadest bond index posted a small loss during February, but is up slightly for the year-to-date. Junk bonds had the best February of all bond sectors. I consider junk a bell-weather for the stock markets, suggesting more gains to come for investors.

In the past week gold has turned down, ending a multi month winning streak.

Oil prices have been creeping up since January, so expect gasoline prices to follow.

What We Were Saying Back Then

In my recent “Buy and Hold is Getting Old” article (February 5, 2019) I pointed out some of the flaws of a buy-and-hope-it-works-out mindset toward investing.

Looking back at the 4^th quarter stock market losses (20% and more in some cases) I realize that too few investors ask, “What risk am I taking to invest in a buy and hold manner?” Now they can see the price they paid by looking at those 4^th quarter losses.

Proactive management is all about providing you value by earning satisfactory returns with reduced risk. During certain periods, proactive management may outperform the indexes as Hepburn Capital has done recently, and at other times the indexes outperform us. But the risk they take in doing so can be huge during a major market decline.

If you gave me money to invest on Friday, and by Monday I had doubled your money you would probably be pleased. But if I told you I put your money on a bet at the craps table in Las Vegas your realization of the amount of risk I took to win that money might ruin the moment. Investing in index funds is a continual crap shoot as to when the next market crash will come.

Nobel Prize winner Paul Samuelson wrote an economics text used in one of my college classes, and he once said, “The longer one invests, the more likely they are to encounter a catastrophic market event. Risk does not go down with time, it goes up!” Buy and hold investors would do well to make a note of that.

I have systems to know when to move your money out of harm’s way. If you, or your advisor, don’t have systems to do this, you are just rolling the dice to make your gains.

If you are not yet a client and worry about stock market crashes give me a call to get started as a client. My #1 goal is to keep you from ever having a life changing loss like some investors experience from time to time.

This is a great time to stress test your portfolio, to see how you might do in a really bad market. If your advisor can’t do a stress test for you, call me to run that stress test for you.

What’s Happening in Your Portfolio

Our growth portfolios, anchored by our Shock Absorber Growth* suite of strategies, are fully invested and continue their strong performance. For the 3-month and 6-month periods ending March 1, 2019, all three of our growth portfolios* (described below) out-performed the S&P 500** index which represents the broad US stock market.

Our good performance was in part due to my risk reducing measures that saved you a lot of money during the 4^th quarter stock market crash. The stock market dropped 20.06% at its Dec 26^th intra-day low while Shock Absorber Growth* portfolios dropped around half that amount, and Adaptive Balance* portfolios about 1/3 that amount. That means I earned back 4-5 years of fees for you, just by avoiding the 4^th quarter losses that index fund investors took.

My Flexible Income* suite of strategies had a small loss during February, but is still up for the year and outpacing the US Aggregate Bond Index, the broadest measure of the bond market for that time period.

Shock Absorber Growth* is our 100% growth portfolio.
Flexible Income* is our 100% income portfolio.
Adaptive Growth Portfolios* (growth & income) are currently allocated with 80% Shock Absorber Growth* and 20% Flexible Income*.
Adaptive Balance* (income & growth) is 50/50 between growth and income.

The Future of Smart Cities

The following article is from Peter Diamandis’, Abundance Insider blog, March 3, 2019. I found this peek into the future fascinating enough to include it for you, here. It is a bit longer than most of my articles, but with descriptions of self-healing concrete, smart transportation systems and self-powering cities that are starting to be built right now, it is well worth reading. ~ WH

Each week alone, an estimated 1.3 million people move into cities, driving urbanization on an unstoppable scale.

By 2040, about two-thirds of the world’s population will be concentrated in urban centers. Over the decades ahead, 90 percent of this urban population growth is predicted to flourish across Asia and Africa.

Already, 1,000 smart city pilots are under construction or in their final urban planning stages across the globe, driving forward countless visions of the future.

As data becomes the gold of the 21st century, centralized databases and hyper-connected infrastructures will enable everything from sentient cities that respond to data inputs in real time, to smart public services that revolutionize modern governance.

Connecting countless industries — real estate, energy, sensors and networks, transportation, among others — tomorrow’s cities pose no end of creative possibilities and stand to completely transform the human experience.

In this blog, we’ll be taking a high-level tour of today’s cutting-edge urban enterprises involved in these three areas:

Hyperconnected urban ecosystems that respond to your data
Smart infrastructure and construction
Self-charging green cities

Let’s dive in!

Smart Cities that Interact with Your Data

Any discussion of smart cities must also involve today’s most indispensable asset: data.

As 5G connection speeds, IoT-linked (Internet of Things) devices and sophisticated city AIs give birth to trillion-sensor economies, low latencies will soon allow vehicles to talk to each other and infrastructure systems to self-correct.

Even public transit may soon validate your identity with a mere glance in any direction, using facial recognition to charge you for individualized travel packages and distances.

As explained by Deloitte Public Sector Leader Clare Ma, “real-time information serves as the ‘eye’ for urban administration.”

In most cities today, data is fragmented across corporations, SMEs, public institutions, nonprofits, and personal databases, with little standardization.

Yet to identify and respond to urban trends, we need a way of aggregating multiple layers of data, spanning traffic flows, human movement, individual transactions, shifts in energy usage, security activity, and almost any major component of contemporary economies.

Only through real-time analysis of information flows can we leverage exponential technologies to automate public services, streamlined transit, smarter security, optimized urban planning and responsive infrastructure.

And already, cutting-edge cities across the globe are building centralized data platforms to combine different standards and extract actionable insights, from smart parking to waste management.

Take China’s Nanjing, for instance.

With sensors installed in 10,000 taxis, 7,000 buses and over 1 million private vehicles, the city aggregates daily data across both physical and virtual networks. After transmitting it to the Nanjing Information Center, experts can then analyze traffic data, send smartphone updates to commuters and ultimately create new traffic routes.

Replacing the need for capital-intensive road and public transit reconstruction, real-time data from physical transit networks allow governments to maximize value of preexisting assets, saving time and increasing productivity across millions of citizens.

But beyond traffic routing, proliferating sensors and urban IoT are giving rise to real-time monitoring of any infrastructural system.

Italy’s major rail operator Trenitalia has now installed sensors on all its trains, deriving real-time status updates on each train’s mechanical condition. Now capable of calculating maintenance predictions in advance of system failure, transit disruptions are becoming a thing of the past.

Los Angeles has embedded sensors in 4,500 miles worth of new LEDs (replacing previous streetlights). The minute one street bulb malfunctions or runs low, it can be fixed near-immediately, forming part of a proactive city model that detects glitches before they occur.

And Hangzhou, home to e-commerce giant Alibaba, has now launched a “City Brain” project, aiming to build out one of the most data-responsive cities on the planet.

With cameras and other sensors installed across the entire city, a centralized AI hub processes data on everything from road conditions to weather data to vehicular collisions and citizen health emergencies.

Overseeing a population of nearly 8 million residents, Hangzhou’s City Brain then manages traffic signals at 128 intersections (coordinating over 1,000 road signals simultaneously), tracks ambulances en route and clears their paths to hospitals without risk of collision, directs traffic police to accidents at record rates, and even assists city officials in expedited decision-making. No more wasting time at a red light when there is obviously no cross traffic or pedestrians.

Already, the City Brain has cut ambulance and commuter traveling times by half. And as reported by China’s first AI-partnered traffic policeman Zheng Yijiong, “the City Brain can detect accidents within a second” allowing police to “arrive at [any] site [within] 5 minutes” across an urban area of over 3,000 square miles.

But beyond oversight of roads, traffic flows, collisions and the like, converging sensors and AI are now being used to monitor crowds and analyze human movement.

Companies like SenseTime now offer software to police bureaus that can not only identify live faces, individual gaits and car license plates, but even monitor crowd movement and detect unsafe pedestrian concentrations.

Some researchers have even posited the use of machine learning to predict population-level disease spread through crowd surveillance data, building actionable analyses from social media data, mass geolocation and urban sensors.

Yet aside from self-monitoring cities and urban AI ‘brains,’ what if infrastructure could heal itself on-demand. Forget sensors, connectivity and AI — enter materials science.

Self-Healing Infrastructure

The U.S. Department of Transportation estimates a $542.6 billion backlog needed for U.S. infrastructure repairs alone.

And as I’ve often said, the world’s most expensive problems are the world’s most profitable opportunities.

Enter self-healing construction materials.

First up, concrete.

In an effort to multiply the longevity of bridges, roads, and any number of infrastructural fortifications, engineers at Delft University have developed a prototype of bio-concrete that can repair its own cracks.

Mixed in with calcium lactate, the key ingredients of this novel ‘bio-concrete’ are minute capsules of limestone-producing bacteria distributed throughout any concrete structure. Only when the concrete cracks, letting in air and moisture, does the bacteria awaken.

Like clockwork, the bacteria begin feeding on surrounding calcium lactate as it produces a natural limestone sealant that can fill cracks in a mere three weeks — long before small crevices can even threaten structural integrity.

As head researcher Henk Jonkers explains, “What makes this limestone-producing bacterium so special is that they are able to survive in concrete for more than 200 years and come into play when the concrete is damaged. […] If cracks appear as a result of pressure on the concrete, the concrete will heal these cracks itself.”

Yet other researchers have sought to crack the code (no pun intended) of living concrete, testing everything from hydrogels that expand 10X or even 100X their original size when in contact with moisture, to fungal spores that grow and precipitate calcium carbonate the minute micro-cracks appear.

But bio-concrete is only the beginning of self-healing technologies.

As futurist architecture firms start printing plastic and carbon-fiber houses, engineers are tackling self-healing plastic that could change the game with economies of scale.

Plastic not only holds promise in real estate on Earth; it will also serve as a handy material in space. NASA engineers have pioneered a self-healing plastic that may prove vital in space missions, preventing habitat and ship ruptures in record speed.

The implications of self-healing materials are staggering, offering us resilient structures both on earth and in space.

One additional breakthrough worth noting involves the magic of graphene.

Perhaps among the greatest physics discoveries of the century, graphene is composed of a 2D honeycomb lattice over 200X stronger than steel, yet remains an ultra-thin one atom thick.

While yet to come down in cost, graphene unlocks an unprecedented host of possibilities, from weather-resistant and ultra-strong coatings for existing infrastructure, to multiplied infrastructural lifespans. Some have even posited graphene’s use in the construction of 30 km tall buildings.

And it doesn’t end there.

As biomaterials and novel polymers will soon allow future infrastructure to heal on its own, nano- and micro-materials are ushering in a new era of smart, super-strong and self-charging buildings.

Revolutionizing structural flexibility, carbon nanotubes are already dramatically increasing the strength-to-weight ratio of skyscrapers.

But imagine if we could engineer buildings that could charge themselves… or better yet, produce energy for entire cities, seamlessly feeding energy to the grid.

Self-Powering Cities

As exponential technologies across energy and water burst onto the scene, self-charging cities are becoming today’s testing ground for a slew of green infrastructure pilots, promising a future of self-sufficient societies.

In line with new materials, one hot pursuit surrounds the creation of commercializable solar power-generating windows.

In the past several years, several research teams have pioneered silicon nanoparticles to capture everyday light flowing through our windows. Little solar cells at the edges of windows then harvest this energy for ready use.

Scientists at Michigan State, for instance, have developed novel “solar concentrators.” Capable of being layered over any window, these solar concentrators leverage non-visible wavelengths of light — near infrared and ultraviolet — pushing them to those solar cells embedded at the edge of each window panel.

Rendered entirely invisible, such solar cells could generate energy on almost any sun-facing screen, from electronic gadgets to glass patio doors to reflective skyscrapers.

And beyond self-charging windows, countless future city pilots have staked ambitious goals for solar panel farms and renewable energy targets.

Take Dubai’s “Strategic Plan 2021,” for instance.

Touting a multi-decade Dubai Clean Energy Strategy 2050, launched by UAE Prime Minister Sheikh Mohammed bin Rashid Al Maktoum in 2015, Dubai aims to gradually derive 75 percent of its energy from clean sources by 2050.

With plans to launch the largest single-site solar project on the planet by 2030, boasting a projected capacity of 5,000 megawatts, Dubai further aims to derive 25 percent of its energy needs from solar power in the next decade.

And in the city’s “Strategic Plan 2021,” Dubai aims to soon:

3D-print 25 percent of its buildings;
Make 25 percent of transit automated and driverless;
Install hundreds of artificial “trees,” all leveraging solar power and providing the city with free WiFi, info-mapping screens, and charging ports;
Integrate passenger drones capable of carrying individuals to public transit systems;
And drive forward countless designs of everything from underwater bio-desalination plants to smart meters and grids.

A global leader in green technologies and renewable energy, Dubai stands as a gleaming example that any environmental context can give rise to thriving and self-sufficient eco-powerhouses.

This is one of the reasons on March 26 & 27^th, 2019 I’m holding a 2-day Abundance360 program with the leadership and CEOs of Dubai and the region.

But Dubai is not alone, and others are quickly following suit.

Leading the pack of China’s 500 smart city pilots, Xiong’an New Area (near Beijing) aims to become a thriving economic zone powered by 100 percent clean electricity.

And just as of this last December, 100 U.S. cities are committed and on their way to the same goal.

Cities as Living Organisms

As new materials forge ahead to create pliable and self-healing structures, green infrastructure technologies are exploding into a competitive marketplace.

Aided by plummeting costs, future cities will soon surround us with self-charging buildings, green city ecosystems, and urban residences that generate far more than they consume.

And as 5G communications networks, proliferating sensors and centralized AI hubs monitor and analyze every aspect of our urban environments, cities are fast becoming intelligent organisms, capable of seeing and responding to our data in real time.

Mental Floss

Six great confusions still unresolved:

1. At a movie theater, which ‘arm rest’ is yours?

2. In the word scent, is “S” silent or “C”?

3. If people evolve from monkeys, why are monkeys still around?

4. Why is there a ‘D’ in fridge, but not in refrigerator?

5. Who knew what time it was when the first clock was made?

6. If pro and con are opposites, wouldn’t the opposite of progress be…. congress?

Disclosure Documents

Hepburn Capital’s SEC form ADV Part II Brochure and our Privacy Policy have been updated and are now available on our company website, www.HepburnCapital.com. These disclosure documents are required by the government. There are no material changes being reported, but if you wish to read all the mandated disclosures (recommended best at bedtime), there they are for you.

Form ADV Brochure & Privacy Policy

Our Spotlight Strategy – Flexible Income

With our Flexible Income Strategy we strive to provide high total return consistent with Capital Preservation.

Your money will be invested in bond mutual funds and exchange traded funds (ETFs), including inverse and leveraged funds, currency funds, including precious metals that may be used as currencies and income producing stocks whose price trend is up. If the price cycles down, holdings are replaced with new investments that are going up, repeating as needed. Growth stocks are not used.

Click here to read more about Flexible Income.

A Slice of Life…

Here in Prescott we had a couple of snow days during our record snowfall (21” at my house) on Feb 21st. Gina and I took the opportunity a few days later to drive to the Grand Canyon. I had heard that snow makes it even more spectacular.

The weather scared away most of the normal visitors so we were able to park about 50’ from the canyon rim next to the landmark El Tovar hotel, get a table right at the windows overlooking the canyon, and had a wonderful quiet walk for a mile or so between the snowdrifts along the Trail of Time, a geologic timeline that is fascinating.

We arrived in the morning when the sun was out, making the snow on canyon ridges come to life. It was like our own private canyon for several hours.

Next time we have a big snow, keep this day trip in mind. It was spectacular!

* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Performance and activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.

** Indexes are unmanaged lists of stocks considered representative of a broad stock market segment. Investors cannot invest directly in an Index.

This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable, however we cannot guarantee its accuracy. Please discuss any legal or tax matters with your advisors in those areas. Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security.

In all investing, past performance cannot assure future results, and as such, our efforts are not guaranteed. Losses can occur. All strategies offered by Hepburn Capital Management, LLC, adapt to changes in the markets by changing the investments they hold, therefore, comparisons to broad stock market indexes such as the unmanaged indexes mentioned may not be appropriate. Sometimes client accounts are invested in stocks or markets not included in these indexes. Past performance does not guarantee future results. Investment return and principal value will vary so that when redeemed, an investor’s account values may be worth more or less than when purchased. Mutual fund shares and other investments used in our managed accounts are not insured by the FDIC or any other agency, are not obligations of or guaranteed by any financial institution and involve investment risk, including possible loss of principal. Advisory services offered through Hepburn Capital Management, LLC, an Arizona Registered Investment Advisor. Adviser will not transact business unless properly registered and licensed in the potential client’s state of residence.