Thought of the Week

1. Global Financial Private Capital, is an SEC registered investment adviser principally located in Sarasota, Florida. Investment Advisory Services offered on a fee basis
through Global Financial Private Capital, LLC. Securities offered through GF Investment Services, LLC, Member FINRA/SIPC.
2080 Ringling Boulevard, Sarasota, Florida 34237 • Tel: (866) 641-2186 • Fax: (941) 918-0405 • www.gf-pc.com • info@gf-pc.com
SYNOPSIS
• Economies are almost never perfect, and investors
are wise to weigh the headwinds against the
tailwinds to determine the pace of economic growth
or contraction.
• Although the Investment Committee remains
bullish on the U.S. economy over the next several
years, we do see a number of economic headwinds
that will keep the pace of growth muted.
• The number of times that an economy faces little
to no pressure from headwinds are few and far
between, and ironically these periods tend to be the
worst times to be in equities.
NOTHING’S PERFECT
The most prosperous investors do not achieve success
by always being right, but rather they do so by being
able to recognize and accept when they are mistaken.
For example, Warren Buffett is considered to be the
greatest value investor of all-time because he stays
in an investment when his thesis is correct, but more
importantly, he gets out quickly when he realizes that an
idea has turned against him.
The Investment Committee remains very bullish on the
overall direction of the U.S. economy and equity prices
over the next several years, however, we regularly inspect
markets to determine where potential risks may lie so
that we can properly position our portfolios.
In order to maintain this impartial approach to investing,
we conduct rigorous analysis to identify the positive
aspects of our economy (“tailwinds”), and then weigh
them against the negative ones (“headwinds”).
Since economies are inherently cyclical, there are times
when the good outweighs the bad and vice versa. The key
point is to always analyze the positive and negative data
before making a call on way or the other.
NOTE: This process prevents us from “putting the cart
before the horse” and avoids some of the behavioral
finance biases that entrap investor into first stating a
conclusion and then going to look for evidence to support.
In doing so, we see a number of headwinds
to our economy at the moment:
• Unemployment: Small businesses are not hiring due
to the uncertainty of the future of healthcare costs,
and several people are also leaving the workforce
altogether because they cannot find a suitable
job. This situation creates a drag on our economy
because a consumer without a job is far less likely to
spend money.
• Obamacare: The administration’s healthcare laws are
now in effect, and we are not exactly sure how they
will impact our economy going forward. Costs are
almost sure to rise and will negatively impact the
wallets of consumers and companies.
• Uncertainty: Midterm elections are approaching and
markets hate uncertainty. Short-term traders may
create volatility leading into the elections, and to
make matters worse, the Fed will conclude its third
round of Quantitative Easing in October. We are not
quite sure how markets will react, which leads to
even more potential uncertainty.
• U.S. Government Debt: Our government continues to
spend like drunken sailors, and political gridlock in
D.C. has kept Congress at a standstill for close to five
years now.
• Global Political Unrest: We are witnessing unrest in the
Ukraine, Palestine/Israel, Syria, Thailand, and many
others. These events are nearly impossible to predict,
and more are likely to erupt over the next decade.
The next step is to quantify the tailwinds to the
economy as well as their expected duration, much as
we do for the headwinds. Here are a few of the more
Economies Are Rarely Perfect
THOUGHT FOR THE WEEK

2. Global Financial Private Capital, is an SEC registered investment adviser principally located in Sarasota, Florida. Investment Advisory Services offered on a fee basis
through Global Financial Private Capital, LLC. Securities offered through GF Investment Services, LLC, Member FINRA/SIPC.
2080 Ringling Boulevard, Sarasota, Florida 34237 • Tel: (866) 641-2186 • Fax: (941) 918-0405 • www.gf-pc.com • info@gf-pc.com
notable tailwinds that we believe will drive our economy
forward for the next decade:
• Consumers: Consumer spending comprises 70%
of our economy, and confidence is strong for high-income
consumers who spend most of the actual
dollars in our economy. Equity portfolios, housing
prices, and wages are rising which will all likely
continue to fuel more spending.
• Energy Independence: We estimate that the U.S.
will be the world’s largest energy producer in two
years and will no longer depend on importing oil
from the rest of the world. Cheaper domestic energy
costs attract companies from across the globe to set
up factories, which means more demand for U.S.
workers, which then translates to more consumer
spending and tax generation.
• Manufacturing: Our energy and electricity costs are
the lowest in the world (natural gas in Japan is
almost triple the cost and Europe is double) and
wage gaps with countries like China are now closing
and making the logistics of managing production 12
time zones ahead less attractive. Simply put, global
companies are now viewing the U.S. as a prime
location for manufacturing.
• Deleveraging: Companies and consumers have
shed their debts and balance sheets have
never been stronger. Leaner companies can
take on riskier ventures such as mergers and
acquisitions and organic growth via research
and development for new products and services.
The final step is to determine if the headwinds outweigh
the tailwinds or vice-versa. Think about riding a bike in
downtown Chicago, which is a city known for its high
winds. There will be days when the winds will be so
strong along the lake that riding a bike may be near
impossible, but there will also be days where you can still
get around if you put a little more muscle into your ride.
This analogy is precisely where we see our economy as
we enter the second half of the year. Although there are
negative forces within our economy, we believe that the
tailwinds are not only stronger but will persist for much
longer than the headwinds.
IMPLICATIONS FOR INVESTORS
Economies are rarely so strong that they feel
impenetrable to a downturn, but the two most recent
time periods that match this description are worth noting:
• Technology Revolution (1996-1999): The economy
was surging because we as a society finally realized
the power and potential of the Internet. Confidence
was so high that investors were throwing money
blindly at recent IPOs for young companies, founded
by freshly minted and highly inexperienced MBAs,
which had yet to make even a single dime of revenue.
• Real Estate (2004-2006): Most major housing markets
across the U.S. were on fire, which fueled confidence
levels of lenders to the point where they no longer
needed documentation on potential borrowers. If
you had a heartbeat, then you could most likely get
a several hundred thousand dollar loan backed by
collateral that was seemingly rising in value every week.
Ironically, the times when economies are “white hot”
and their pace has created exuberance that is pervasive
across all sectors, as they were in the examples above,
are the times when investors tend to miss or simply
disregard the headwinds.
NOTE: Remember what happened to our economy in
2000 and 2008? These two most recent recessions
coincidentally occurred right after the aforementioned
periods because we had peaked in our economic cycle,
and exuberance in conjunction with overconfidence
made investors feel invincible.
Furthermore, surging economies are almost always met
with action from the Fed to cool things down. Although
we see the tailwinds overpowering the headwinds for
some time, we are nowhere near these examples above.
Hence, we see very little risk of any near-term action by
the Fed to slow our economy down either.
The bottom line is that waiting for all headwinds to
dissipate will typically prevent an investor from realizing
most of the gains in an economic expansion. The reason
for this paradox lies in the fact that economies without
headwinds are usually those that are peaking or have
THOUGHT FOR THE WEEK

3. Global Financial Private Capital, is an SEC registered investment adviser principally located in Sarasota, Florida. Investment Advisory Services offered on a fee basis
through Global Financial Private Capital, LLC. Securities offered through GF Investment Services, LLC, Member FINRA/SIPC.
2080 Ringling Boulevard, Sarasota, Florida 34237 • Tel: (866) 641-2186 • Fax: (941) 918-0405 • www.gf-pc.com • info@gf-pc.com
This commentary is not intended as investment advice or an investment recommendation. It is solely the
opinion of our investment managers at the time of writing. Nothing in the commentary should be construed as a
solicitation to buy or sell securities. Past performance is no indication of future performance. Liquid securities,
such as those held within DIAS portfolios, can fall in value. Global Financial Private Capital is an SEC Registered
Investment Adviser.
peaked. We strongly believe that we are several years
away from a top in this economic cycle and remain
confident in our forecast for a slow and steady rise in
equities over the coming years.
THOUGHT FOR THE WEEK
Sincerely,
Mike Sorrentino, CFA
Chief Strategist, Aviance Capital Management