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Albert Einstein

“If the facts don’t fit the theory, change the facts.” Albert Einstein

While Albert had many humorous quotes, like all humor, there needs to be an inkling of truth in order for it to get a chuckle. Like many Einstein' quotes, there is debate as to whether he actually said this but for our purposes let's assume he did. The politicians and media of today’s polarized political climate are doing their best to once again show just how perceptive Einstein was. With each economic data release we receive predictable responses from both sides. Last week we received a job’s number that was either wonderful or awful depending on what channel you tuned into. The economy added many more jobs (225,000) than the consensus expectation (180,000). However, the unemployment rate increased from 3.8% to 4.0%. Wages grew but only at 2.5%. It’s easy to make the numbers support whichever theory you prefer. Our theory has been that the economy is solid and should continue growing for the remainder of 2018 and into 2019. Subdued inflation will allow businesses to sell more without having to worry about rising costs. This has and will lead to profit expansion which is good for the stock market and neutral to slightly bearish for bonds. The number we really noticed in last week’s jobs report was the increase in the labor force participation rate. We believe this increase explains why an economy can have strong job growth and also an increasing unemployment rate. It’s also why wages aren’t rising as fast as the Phillips Curve would suggest https://www.investopedia.com/terms/p/phillipscurve.asp, which posits there must be an inverse relationship between the unemployment rate and wages. The failure of this relationship over the last few years has many economists perplexed. We think it makes perfect sense. We guard against being biased towards the facts that support our theory, but we are encouraged that these numbers are consistent with our theory. We often mention we do our best to dismiss most of the political noise unless the noise would have an economic impact. A trade war would fall into that category. If a trade war develops all bets are off. Our guess is, and it is a guess, since both the U.S. and China would both do enormous harm to their respective economies, that someone will blink. We are hoping it is soon! The markets and flow of funds data seem to think China will blink, we aren't as confident that will happen. This following seems to be the market's reasoning. It’s estimated that a trade war with China would cost the U.S. .7% of GDP, while it would cost China 4% of their GDP. China is a large net exporter. They don’t have enough domestic consumption to support their economy. Not being able to export goods would be devastating to their economy. Production would immediately suffer as goods stopped being produced due to lack of foreign demand on the now higher priced Chinese goods. The U.S. is a large net importer. Roughly 70% of the U.S. economy is domestic consumption. Simply put, we are a wealthy nation that can afford our own goods. The cost of our everyday consumer goods would increase leaving consumers with less disposable income. This would have a negative impact on our economy but not a catastrophic one. Also, higher priced imports would increase the cost for goods used in production. This hurts profit margins and lowers earnings. As foolish as it may seem at times, we think both sides are logical players and things will eventually get worked out without an all out trade war developing. While it’s tempting to run and hide during these crazy times, we don’t think that is the right thing to do at this moment. That may change quickly. It’s also possible that all this craziness leads to improved trade which will further boost each economy. We really don’t know what is going to happen. It’s incredibly uncomfortable to have money invested in stocks right now. That doesn’t mean it’s not the right place for some of your money to be invested. We recommend turning off the news for a bit, finding a good novel, and going to your favorite beach. We will keep an eye on economic developments. One last thought; if you’re searching for something to read at the beach consider rereading Hemingway’s “Old Man and the Sea”. This was required reading for most of us in our teenage years and most of us likely treated it as such. If you’re like us, we bet rereading this quick and short story as an adult will give you much enjoyment and an understanding of Hemingway’s genius that as a teenager we didn’t fully appreciate. Have a Wonderful Summer, The GreenPort Team

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