The Zoe Blog

As discussed in my last blog, We're the wealthiest we've ever been... but who is 'we'?, Americans are the wealthiest they have ever been as a result of a surging stock market. But this new wealth does not drive consumer spending much, since the wealth is unevenly distributed. It turns out that 94% of stocks are owned by America’s wealthiest 10% of citizens. This matters because spending across income groups is uneven, as the middle class spends a much bigger percentage of their overall income than the wealthy.

The main driver of the U.S. economy is consumption. Therefore, an important question to ask is, going forward, what would cause the average American to spend more? Well, there are two options - one is for people to borrow more (which is not ideal) and the other is for them to see their incomes rise. And there lies the rub, U.S. wages haven’t risen much since the 1990s once you adjust for inflation.

An easier way to look at this is to split the economy into three main building blocks:

• American households are the wealthiest they have ever been.
• This current wealth is driven by a surging stock market.
• A surging stock market does not have the same wealth effect on consumer spending as a booming housing market.

The new Federal Reserve household data showed U.S. households reached a record net worth of $96 trillion in the second quarter of this year. It is the seventh consecutive quarter in which we have reached new levels of wealth as Americans.

In my previous blog post on North Korea, I explained how North Korea came into being, as well as the main players and their incentives in this current nuclear situation. It is now time to go through the likely scenarios going forward.

I am not going to rehash the escalation of tensions during the last eight months - the point is that tensions are escalating. The focus of this blog is around strategic options that the U.S. could apply going forward… so here we go.

When asked by the press and clients what investors should do as a result of North Korea’s escalating threat, I have answered “Do Nothing”. Now, this is not a result of disinterest in the topic. My father was an ambassador to the United Nations in the 1990s, with his area of expertise being nuclear non-proliferation, so while for most people Sunday evening dinner conversations touched on the Giants or the Yankees, for us the time would be spent getting into the weeds on the situations in Iran, Iraq or North Korea. (This also partly explains my lack of friends in middle school.)  Additionally, in my last role at JP Morgan, I got to learn about geopolitics within an investment framework from my mentor George Iwanicki, who is a prolific global historian (second only to my dad). In other words, I know enough to know that this topic is complicated and thus it is very difficult to predict a particular outcome… and even more difficult to predict how the markets will react.

Nevertheless, despite the North Korean developments being difficult to predict, it is important as a global citizen to understand what is going on. So here goes my shot at providing some context.

Against the backdrop of an escalation of words between North Korea and President Trump, investors are scrambling to figure out what this means for their portfolios.

Should I hedge my portfolio by buying gold? Should I sell stocks? 

My response: Do nothing.

As is so often the case, the answer is both yes and no.

I worked at Morgan Stanley and J.P. Morgan during the 2004–2016 period as an institutional trader and then as a global strategist. I recently left to start my own fin-tech startup Zoefin.com, so I have a good picture of how things went down and also how technology is changing Wall Street drastically.

Why No?

Although the players change and the market gyrates between boom and bust, Wall Street finds a way to re-invent itself. Back in the 80s, junk bond traders ruled the world. By the late 90s, the rage was to be a tech banker or trader... then that went bust. In the 2004–2008 period the bond traders were kings. I am talking about friends that were 27 years old making well over $1mln dollars working 8am–4pm. Bottle service 4 nights a week,Ferrari, $2mln apartments, no money down in NYC… you name it.

During the 2009–2014 period the talent moved to the “buy side” to Hedge Funds and Mutual Funds. And trust me those where golden years in these places. Forget just the investors, there are sales people at plain vanilla Mutual Fund companies that were making well over $1mln. And the conferences to rally the troops... way over the top. We'll leave it at that. As Hedge Fund returns diminished with so much competition, talent has moved into Private Equity. There are mid level guys at large PE firms that pull $1-$5mln a year right now. Meaning that their lifestyles at times are pretty extravagant.

• Is recent oil volatility unusual?
• Are current oil levels below historical standards?

When I was a kid, I used to love roller coasters. I might be exaggerating, but I think my brothers and I rode Kumba in Bush Gardens, Florida 12 times straight. Below is the picture of this beast.

Fast forward, and a few weeks back I went to Hershey Park in Pennsylvania with own my family. My kids had a great time. I would highly recommend it if you have kids under 10. When we were there I saw the below roller coaster.

I have spent years providing investment ideas to the most sophisticated hedge fund investors. Prior to starting Zoe, I worked  at J.P. Morgan Asset Management as a global strategist where I was on committees that decided what growth and inflation assumptions should be used in our U.S and Emerging Market portfolios. Roughly $300 billion in assets at stake. I can categorically tell you it is not only difficult for the average person to “beat” the market consistently... it is nearly impossible.

In my blog, "Markets are stable because the world is in a better place", I got a fair bit of pushback from readers (which I love) on our research which explained that policy uncertainty matters less to the market in the medium term than you would think. "There's no way the market doesn't care about Trump! If his tax policy is implemented... it matters a lot!" and "Did you see his last Tweet? If he is losing his mind we are all doomed!". My personal favorite was "Republican leaning presidents who tend to be more "investor friendly" go hand-in-hand with bull stock markets... so if Trump doesn't deliver the market will crash".

I spent about 2 months trying to answer this question when I was a global strategist over at J.P. Morgan. My wife was sick and tired of me talking about this topic. The good news now that I run my own firm is that I get to share it with the world!