Crowell Weedon Asset Management Montecito Investment Portfolios


Q2 2019 Market Commentary


According to numerous media outlets the U.S. has been teetering on the edge of recession for over a decade now. You can find supposed expert after expert declaring when this bull market will come to an end and the next recession will hit. It will be the most anticipated recession in history. But no one seems to ask what comes next. While it is obviously true to say “every day that passes we get closer to the next recession” it is also true to say “every day that passes we get closer to the next expansion”. That rationale seems to be lost on most because calling for the start of the next steady and gradual economic expansion just doesn’t illicit as much excitement as proclaiming to know when the next crash in the stock market will happen.

As the President vents his disapproval on Twitter and as the market meltdown of Q4 2018 has shown, consensus believes an interest rate cut is needed to insure against a possible recession. Every word of the Fed’s statement is dissected as countless media sources were fixated on the Fed’s removal of the word “patient” from their updated statement. Literally, the removal of one word from the Fed’s statement was front page news for virtually all financial media outlets. We can’t help but feel sorrow as consuming this “news” leads to short-term decision making that is directly at odds with long-term investing. We believe investors are better served by tuning out the daily panic, stop scrutinizing every word from the Fed, and pay more attention to the world around us and what is happening.


For a full decade now we’ve heard how lackluster the economy is, rebounding at one of the slowest paces on record. When you think of a struggling economy and one ready to sink into recession at any given moment you would expect to see signs of difficulty in a few areas. The first spot might be with employment. If you can’t find work, odds are times are tough. However, when analyzing the employment landscape we see an unemployment rate near historic lows and the number of job openings available near record highs (7.4 million as of April 2019). There are now more job openings than the number of people who currently want a job! With opportunities available we don’t believe you can point to employment as being lackluster.

If it’s not work perhaps the daily struggles we face in life are fueling the pessimistic tone. This too breaks down under examination and is possibly laughable as life has never been easier from numerous perspectives. Want to go to dinner tonight? No, I’ll have it come to me. Want to go to the movies? No, I’d rather sit in my living room and stream anything I want on my 65 inch TV that is 97% cheaper than it was in the year 2000. Want to go buy that new Taylor Swift album? No, I’ll just stream the songs I like through my music service along with virtually every other song ever created. Want to visit Grandma and Grandpa? No, I’ll just video chat with them for an hour on that new device we had delivered directly to their house. Life’s tasks have been simplified into push-button or voice activated commands that are so simple literally a child or even Grandma and Grandpa can do it.

So, people are working and life is more convenient than ever. Perhaps innovation has stalled and we’re just not solving the serious issues the world faces. This too breaks down under observation as we believe technology continues its exponential growth rate in a world more self-aware than ever.

Burning fossil fuels can’t be good – we now have electric vehicles that many consumers prefer to drive and every manufacturer has a plan for electrification.


Carbon output is causing global warming - the agriculture industry has plans to recapture 1 trillion tons of carbon through the natural process of planting crops.


Dumping plastic into the ocean can’t be good – numerous groups have made this their mission and are cleaning oceans turning the waste into art, fuel, and even roads.


Feeding the world with animal meat uses a lot of resources and creates a lot of waste – we now have “meat” made from vegetables that is nearly indistinguishable from animal meat.


Eventually, we might want to expand beyond Earth and travel to other parts of the Universe – let’s reuse rockets and come up with a plan to get to Mars!


These are not signs of a stagnant economy. As a matter of fact, these are signs of creativity and innovation the world has never seen before.

People are working, life is becoming more and more convenient, and innovation is advancing at a pace never witnessed in human history – so what gives? We believe the pessimism can be directly linked to the lack of innovation seen in financial reporting as we’re relying on metrics created nearly a century ago when the world and economy was vastly different.


Gross Domestic Product measures the real value of the purchases of all final goods by households, businesses, and government. Its modern day creation traces back to the obviously difficult times of the Great Depression. GDP was conceived as a way to measure economic output. However, even at its birth, the lead economist working on its creation, Simon Kuznets, was uneasy about a measure that treated all production equally. Some items he actually wanted to subtract from the calculation as he saw them as detrimental to human wellbeing. Are we better off if everyone becomes deathly ill and has to spend a ton of money on hospital bills? Are we better off for having to rebuild houses after a natural disaster like a hurricane? Are we improving lives by putting another airplane into a fleet that replaces one that went down in a horrific crash? In GDP world, the answer is yes and there is absolutely no difference between good and bad when it comes to the actual impact on people’s lives. To quote Kuznets:

“The welfare of a nation can scarcely be inferred from a measurement of national income as defined by the GDP.”

While GDP was a really useful statistic when our economy was driven by manufacturing, it’s grown woefully out of touch with today’s economy. As an example, the Information Sector (where these technology services reside) represented approximately 4 to 5% of total GDP output recently. That is the same percentage it was 35 years ago! Today, people and products accomplish far more with far less. Think of how many devices your smartphone has replaced. Many of today’s most popular applications with billions of users cost next-to-nothing to replicate and are available for free. When was the last time you bought a map or opened an encyclopedia for some information? All of this is wonderful for the welfare of a nation but woeful for measuring the prosperity of an economy via GDP.

We are not alone in wondering what the economy would look like if we were able to quantify the hugely important free services that are now part of our daily lives. A recent study led by MIT and the National Bureau of Economic Research asked people how much money they would have to receive in order to give up access to certain services such as search engines, email, maps, streaming video, e-commerce, social media, messaging, and music. The results are fascinating and illustrate how much consumers value these services:

All search engines: $17,530 per year

All e-mail: $8,414 per year

All maps: $3,648 per year

All video: $1,173 per year

All e-commerce: $842 per year

All social media: $322 per year

All music: $168 per year

All messaging: $155 per year

Total of all surveyed categories: $29,252 per year

Clearly, using survey methodology has its limitations. However, the authors said it best: “We believe it is better to be approximately correct than precisely wrong.” They are at least attempting to directly measure a value they are certain is not correctly captured in official GDP data. What if we make some assumptions about how these services would affect GDP if we could quantify what consumers would actually pay for them?

Assuming every one of the 127 million households in the U.S. values these services the same as the survey results, we would see an additional $3.7 Trillion added to GDP making it about 20% more than what it is today.

What if we assume every person in the U.S. values these like the survey results? That would mean the 330 million people would value these services adding an additional $9.65 Trillion to GDP making it more than 50% higher than it is today!

Obviously, this is not a clear cut science but measuring the economy never has been. It is and always will be an attempt to measure. What is perfectly clear is that viewing the economy through a different lens paints a far different picture than the view of sluggishness and constantly teetering on the edge of collapse.


Warren Buffet opened some eyes when he recently advised shareholders to focus on operating earnings of Berkshire Hathaway, paying little attention to earnings per share. Earnings results will fluctuate wildly due to a new accounting rule he said “isn’t sensible” regarding gains and losses in their equity portfolio. Also, Buffet said it’s time to abandon the practice of monitoring book value at Berkshire Hathaway as accounting rules require them to carry operating companies on their books at an amount far below their current value. Berkshire isn’t alone. Required financial statement filings for publicly traded companies are virtually unchanged from a century ago! In the book “The End of Accounting” the authors show that today’s current financial reports are less correlated to stock price returns than ever before and have created a wider dispersion of forecasts from analysts than at any time in history. The tools used to measure the economy and individual businesses are so behind the world’s technological advancements it feels like we’re racing Henry Ford’s Model T with Elon Musk’s Model 3.


As an entrepreneur, turning your vision into reality has never been easier. When it comes to running a company you can subscribe to services that will power human resources, contact management, communications, technological scale and even order fulfillment. Tasks that used to take teams of trained employees are now handled by a few. They have the skills and expertise needed to work with today’s technological platforms that have brought transparency and efficiency to virtually all aspects of business. This trend of quickly being able to launch an exceptionally efficient organization with far fewer resources is not slowing down – if anything it is accelerating at a mind-numbing pace. For consumers, layers of expense are being peeled away and we now have direct access to companies. These companies continue to push the boundaries of technological innovation and are creating new or improving existing products and services like never before.

Our biggest fear is that people can’t keep pace with the rapid advancement and get left behind. History has always been fearful of technological advancement. New, more efficient ways of doing things have caused apprehension. However, in the end this has always led to new opportunities and created career paths that didn’t even exist before the innovation took place. Our advice is to avoid the media’s constant doom and gloom and never grow numb to the innovation taking place around you.

Instead, we will focus on the opportunities available during this productivity and technological boom. Consumers are empowered. Entrepreneurs are empowered. And the almighty measure of prosperity, GDP, isn’t capturing any of this.


Blake Todd, CWS Senior Vice President, Financial Advisor Portfolio Manager, Branch Manager btodd@dadco.com

Jarrett Perez, CFA Senior Financial Advisor, Portfolio Manager jperez@dadco.com


Job Openings: Bureau of Labor Statistics www.bls.gov

TV Depreciation http://www.in2013dollars.com/Televisions/price-inflation

Choice Experiments to measure free services and GDP by Industry https://www.pnas.org/content/116/15/7250


The information contained in this report has been taken from trade and statistical services and other sources, which we deem reliable. We do not represent that it is accurate or complete and it should not be relied upon as such.

The opinions expressed herein are those of the authors and Montecito Investment Portfolios at this date, are subject to change, and are not necessarily that of DA Davidson & Co. The same is true of statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and statements described may not be suitable for all investors.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice. Reference to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

Neither this presentation, nor any chart or graphs within this presentation may be used, in or of themselves, to constitute investment advice, to determine which securities to buy or sell, or when to buy or sell such securities.

There are risks inherent in any investment and there is no assurance that any money manager, asset class, style or index will provide positive performance over time.

The Standard & Poor’s 500 Index is a capitalization weighted index comprised of 500 widely-held stocks on US stock exchanges. Companies included in the index are selected by the S&P Index Committee, a team of analysts & economists at Standard & Poor’s.


Created with images by nattanan23 - "money profit finance" • Priscilla Du Preez - "untitled image"

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