In times of turbulence

Allow us to start off with a bold recom­mendation, and from there justify with an analysis how this year might turn out, including where the horizon might lie four years from January.

To dispel possi­ble misunderstanding, let us not mince words. Investors would do well to singularly fo­cus on cash and high liquidity vehicles such as preferred eq­uities, constant dividend-de­claring companies, bonds and debt papers with sovereign guarantees and fixed income instruments rather than gam­ble on riskier longer-term in­vestments.

Cash flows remain a prior­ity, whether now or in the half a decade ahead; nothing beats having it on hand. In both cas­es, long-term equities, however attractive now, are the kind to avoid. Temper greed. In a vol­atile environment, returns may not be as important as safety, security and the protection of capital.

As we loosen our moor­ings and cast off, allow us a qualified caveat. Most analysts see a good year ahead. We share that view as the real budget de­signed by a competent team of economic managers led by the Monetary Board, the secretary of finance and the secretary of the budget take complete rein of the economy in 2017, un­burdened as they might have been in the waning months of 2016 by a pork-fattened campaign budget created by a bunch of bungling clowns that wanted prop their losing presi­dential standard-bearer.

2017 will be the first full fiscal year under a new and decidedly more competent ad­ministration. That alone is rea­son enough to be optimistic. At least in the short run.

Our recommendation to focus on cash flows reflects the haze through which we view 2017, and the economic cycli­cal predictions by analysts on the global economy of which we have little control over. The prioritization on cash flow re­turns is fundamentally a de­fensive risk-averse stance and such implies negative to dire prospective events to defend against, thus revealing what might underlie our apparent discomfort.

Glancing at 2017’s rear­view mirror, the recommenda­tion likewise reflects that there were very little tailwinds from 2016. We are starting off with an extremely weakened peso that bloats foreign-exchange expenditures. We inherited an economy relatively shunned by foreign direct investments, on one end, and afflicted with increasing capital flight, on another. And then we have to contend with a remnant bud­get originally designed to prop a certified political loser.

2016 is a year best relegat­ed to the dustbin, its political and economic demons best forgotten, if we can manage to do that. What growth we had was generally due to the effects of non-recurring elec­tion spending and the con­sumerism associated with that – a result of unusual liquidity released in the system by both the state and the campaigning politicians, thus unsustain­able as aggregate prices rise from increased money supply, a weaker peso and the impact of higher importation costs on value chains.

On both, we can begin to see their creeping impact. The weakening peso can now pur­chase less and the rising cost of imported petroleum, which influences nearly every link in any value chain, invariably drives end-prices up, whether these imports are used to pro­duce energy at the power plant end or are burned to transport farm products at the distribu­tion end.

First, let us analyze the prospects for gross domestic productivity (GDP) growth in 2017. A number of factors tend to pull this south. One is the absence of aggressive gov­ernment spending for elections and the way that such spend­ing increases money supply, the latter catalyzing household consumption, a GDP driver.

Next, the increased liquid­ity at a time when the peso is experiencing historic deval­uations increases costs and diminishes purchasing pow­er. This slows consumption spending, which in turn slows down production as the latter adjusts to the decrease in de­mand.

Absent aggressive FDI in­flows as net capital flows back to the United States economy, we will need to rely even more on domestic capital.

The administration is banking on tax reforms, agri­cultural support and aggres­sive infrastructure spending to boost GDP. We subscribe to each of those. But each takes an inordinately long time to produce results. One requires legislation. This from a legislature notorious for sloth and stupidity. The others require lead times be­yond 2017.

Unfortunately, after 2017 the Kondratieff and Elliot Waves of economic cycle the­orists, while debunked by lin­ear economists, show a debt meltdown as we approach 2020. Do the homework. There’s a handful of wave, cycle and pattern theories that indicate a severe eco­nomic collapse is due. So far, Wall Street is on a run and as their new president is sworn in, then the topping off bull run may last a year. And then it bears exploring the cyclical predictions. In any case, it is always prudent to focus on cash flows in times of turbu­lence.