Market Commentary The Pelican Bay Group

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1 Market Commentary The Pelican Bay Group January 22,2018 The Pelican Bay Group at Morgan Stanley 1250 Pittsford Victor Rd. Building 200, Suite Fifth Avenue, 11 th Floor New York, NY Market Street Suite North Military Trail Suite N. Oregon St. Mills Building, 9 th Floor El Paso, TX N Main. Sheridan, WY Visit our website: Contact us please call: (800) Portfolio Management Team The Pelican Bay Group assists high net worth individuals and institutional clients in meeting their financial objectives by offering customized portfolio management strategies. The Pelican Bay Group, a team of Morgan Stanley s, has four experienced portfolio managers covering an array of disciplines and offering a variety of strategies designed to optimize risk to help meet their clients investment objectives. These investment styles are offered as fully discretionary strategies with a comprehensive fee based on the asset value being managed. The team currently manages over $2 billion in client assets. Menenius (to Senators in Rome) I know you can do very little alone; for your helps are many, or else your actions would grow wondrous single: your abilities are too infant-like for doing much alone. You talke of pride: O that you could turn your eyes toward the napes of your necks, and make but an interior survey of your good selves! O that you could! Brutus What then, sir? Menenius Why, then you should discover a brace of unmeriting, proud, violent, testy magistrates, alias fools, as any in Rome. Sicinius Menenius, you are known well enough too. Shakespeare, Coriolanus, ACT II Scene I The more things change, the more they often remain the same. Whether the Senate of ancient Rome, or the Senate of modern America, themes run like thread through history. Accusation, counter accusation, back and forth. One relearns why Shakespeare is so relevant to the human condition his themes are universal. The shutdown of the government is an arresting event, certainly. We think most people are more concerned about the political gridlock, the political animus that created a shutdown, than the shutdown itself. We know that unless it prolongs, its effects are muted and more in the way of anxiety-generating than an economic deterrent. However, it does bear mention that a shutdown lasting more than a few days would have increasingly negative consequences for the economy. Our view that the economy is on a roll, tax cuts are spurring positive behaviors. Its not the time to slow this all down with a fight over any issue, including immigration. Open the government, negotiate the differences, work it out. It is our guess most of you feel the same way. But this situation speaks to the broader issue of the paralysis that ensues when the far left or far right obtain control, when the centrists can t govern because crucial swing votes lie at the edges of political thought. Today, we discuss, not so much the issue of the shutdown, but the economic and investment strategy aspects of polarized politics. How the shutdown connects dots in markets. The potential investment consequences. Perversely, markets tend to like political paralysis. This is the cynical view that politicians, on balance, can create a lot of harm, so if they re locked in place and unable to make large changes, the economy is more able to act on its own impulses. After all, if you can t get consensus on a major new government program, well, that helps put a limit on the growth of government. It also creates a less uncertain immediate future if nothing is going to happen in Washington, then you can move forward without concerns about a major sea change in the wind. But of course, there is a built-in inefficiency to all of this. You waste a lot of time, money and opportunity when you can t govern. Things that need to get done don t get done and so, the negatives can fester, hold us all back. A simple thing: Passport approvals are shut down today, which means that if you need a passport to get to France to do a deal that would help your company (and employees, and stockholders and generating profits to pay taxes), you re out of luck. No deal. Maybe the Germans get your customer. And more, there is the not-inconsequential issue of the view of the global creditor community toward US debt. It is our view that we are in the this country, too cavalier about our credit rating, about how we act in front of our creditors.

2 When trillions of your debt is held by others, it doesn t hurt to act in a mature and seasoned way, show them their money is safe in your hands. Not that they will dump their holdings (this is an irrational fear) but they certainly may elect to simply buy as much, and so, upward pressure is put on our interest rates. An aside: Given all the US debt the Chinese hold, cratering the US Treasury market through massive sales would degrade the value of the debt held by China. More likely: A slow degradation in their total holdings of US debt as a percentage of their foreign reserves. Speaking of, the Chinese version of Moody s or Fitch is called Dagong Global Credit Rating. They just downgraded the United States to BBB+. Interesting this comes on the heels of rumors that the Chinese are pulling back on US debt purchases. More, this concern spills over to the US Dollar, and this is a big deal (all charts courtesy of Thomson One): This is the front month US Dollar futures contract. You can clearly see the 10% decline in the value over the past year or so. If you wonder why gold has caught a bid recently, you can most probably lay it at the feet of weak US Dollar. Here, the front month gold futures contract:

3 Over the years, we have consistently advised the slow accumulation of gold as a hedge against the depreciation of paper currencies. This tends to happen in spurts, and we may well be on the cusp of another. It wouldn t take much for the price to break out of its two-year range ($ $1380). If it does, the old highs of $1900 would no doubt be bandied about in the financial media (We re not sure on that immediate target, but the long term trend for gold appears obvious, at least from these levels). But you see, if this happens (further Dollar weakness), that spills over into higher interest rates investors holding US Dollar denominated bonds want more of those Dollars as compensation, so the interest rate rises. More, commodity prices, most of which are globally price in Dollars could take further wing, creating new inflationary pressures. Here is the copper futures contract, being driven most probably by strong global economic activity and a weaker Dollar: Stir the soup, and it pours into the bond market, here the 30-year US Treasury futures contract: Lower price = higher interest rate. So you see, the dot connection about the shutdown isn t because Starbucks won t be selling as many lattes to workers on the way to work this morning. It cuts to the very core of our economic standing in the world, and more specifically, the confidence the world has in our ability and willingness to repay our debts.

4 Markets run in great part, on confidence. Credit markets certainly more than most. And in our long experience, confidence is something that can change abruptly, without warning. The abrupt change is what we have often referred to the Minsky Moment (you can Google that for a complete explanation). It s a kind of cliff thing like Wile E Coyote, your run after the Roadrunner and suddenly find yourself high above the canyon floor, without a parachute. You think you re OK and then suddenly, you re not and you are the very face of shock and surprise. Maybe some caution would have saved you. Perhaps more thoughtful action. Tony Gallea Who Is The Pelican Bay Group? Our team of financial professionals is national in scope with s stationed in strategic locations across the country. As part of Morgan Stanley, one of the world s most respected financial services firms, we offer access to extensive resources that can prove instrumental in helping you meet even your most complex financial challenges. Our team members include: Anthony M. Gallea Managing Director-Wealth Management Jennifer D. Hartmann, CIMA Managing Director-Wealth Management Senior Institutional Consultant Family Wealth Advisor New York, NY Stephen Stribling, CPM Executive Director-Wealth Management Teresa Bustamante Senior Investment Management Consultant El Paso, TX Marcia Bonnet Associate Vice President Financial Planning Specialist Family Wealth Advisor Mark S. Ryan, CFP First Vice President-Wealth Management Portfolio Management Director Cynthia Walker-Laroche Vice President-Wealth Management Richard J. DiMarzo, CPM Paul M. Hanrahan, CRPS Professional Alliance Group Director Shelley Ford Jeff Praino, CFP Certified Divorce Financial Analyst Financial Planning Specialist William VandenBrul Vice President-Wealth Management Wealth Advisor Jeanine Delgadillo Douglas Hockett Vice President Sheridan, WY The views expressed herein are those of the author and do not necessarily reflect the views of Morgan Stanley Wealth Management or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.

5 S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally representative of the broad stock market. An investment cannot be made directly in a market index. Dow Jones Industrial Average is a price-weighted index of the 30 blue-chip stocks and serves as a measure of the U.S. market, covering such diverse industries as financial services, technology, retail, entertainment and consumer goods. An investment cannot be made directly in a market index. The investments listed may not be suitable for all investors. Morgan Stanley Smith Barney LLC recommends that investors independently evaluate particular investments, and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment will depend upon an investor's individual circumstances and objectives. Information contained herein has been obtained from sources considered to be reliable, but we do not guarantee their accuracy or completeness. Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate. Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time, including but not limited to, (i) changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events, war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention. Morgan Stanley Smith Barney LLC. Member SIPC. Date of first use: 1/22/2018 CRC