This 2nd Week of June Thoughts 2022: Bonds will keep getting more and more interesting...
JP Morgan's Jamie Diamond sees "a hurricane" and Tesla's Elon Musk has a "super bad" feeling about the economy.
Today’s hot inflation number is not a result of the Covid relief dollars paid out: it is precisely BECAUSE of these dollars that so many of our neighbors are in pretty good shape. Today’s inflation is from the debt the last 4 Fed Chairs have piled on you and me. So, here we are, and it is up to us, and our time, to Keep Calm and Carry On.
It doesn’t really matter if inflation is 7% or 8%: we will not be down to an acceptable level of inflation in 2 or 3 years. Maybe longer. The Fed is not acting quickly enough, or forcefully enough, to raise interest rates to slow inflation. Sorry but true.
After years of buying $120 BILLION a MONTH in treasury bonds, they now have $8.9 Trillion worth of DEBT on the Government’s balance sheet. Now, the plan is to sell $45 BILLION a month, but realize, $8.9 trillion has 11 zeros. It will take 197 months (16 years) to wipe out this balance sheet entry.
When CNBC reports where the market is or what the FED is doing, they are using headlines to distract their viewers from how enormous this task is. Fed Chair J Powell recently said:
“Inflation is much too high, and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down. We have both the tools we need and the resolve that it will take to restore price stability on behalf of American families and businesses. The economy and the country have been through a lot over the past two years and have proved resilient. It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all.
But, again, there’s a sort of false precision in the discussion that we as policymakers don’t really feel. You know, you’re going to raise rates, and you’re going to be kind of inquiring how that is affecting the economy through financial conditions. And, of course, if higher rates are required, then we won’t hesitate to deliver them.
No one thinks this will be easy, no one thinks it’s straightforward, but there is certainly a plausible path to this, and I do think we’ve got a good chance to do that. And, you know, our job is not to rate the chances—it is to try to achieve it. So that’s what we’re doing. There are a range of opinions, though, and that’s only appropriate.”
I don’t just see an enormous, seemingly impossible task: I see what we can do to profit from this time in history. There will be companies who can, and will, capitalize on the infrastructure dollars that will be flowing into the economy. There is a huge shift in how we drive ourselves, and our economy. There are resource-rich emerging markets that have economies that are decoupled from developed economies. And the dollar…let’s not even talk about how the strong dollar is playing out: more about that in another Thoughts.
There are many ways the excesses of the past decade are going to work through the market and I’m afraid to say, none of them will be very pleasant. I began writing about “9th Inning Investing” in 2019 when the Fed began to tackle this looming, catastrophic problem, but they chickened out when the White House hit them with both guns.
Last week, Fed Chairman Powell FINALLY admitted that they didn’t know how this was going to really work. It is like sopping up a 55-gallon barrel of gasoline, with a hanky. While you are smoking.
But, in spite of these realities, there are other realities:
1. You own the right stocks.
2. You own the right bonds.
3. We have been preparing for this for over 4 years
4. You have the cash you need to pay for your living expenses for years to come.
5. You have cash. Lots of cash.
6. We have the satisfaction of looking forward to investing that cash as rates rise.
7. We will finally be able to increase the dividends from your portfolio from the 1%-2% it has been for years, to 3%-4%.
8. We will be able to fund your living expenses and other spending needs with dividends, going forward.
We will both see the results of higher interest rates: you will find an “expected income” section of your Quarterly report that I will post to your Client Portal each quarter. Please let me know if you are having any trouble here.
I’m very satisfied with the hand we have been dealt and I have the strategy we need to capitalize on it. But, for days like today…we will all need to “breathe. 2-3-4 years from now we will see the results of the decisions we make today. Just keep reading these Thoughts Pieces…and keep lines of communication flowing. This time will pass.
Are we already in a recession? No. I don’t think so. Not if you buy this chart.
In the chart above, Matt Luzzetti of Deutsche Bank shows the Federal Reserve Bank of Philadelphia’s monthly State Coincident Indexes. This is a good historical track record showing there has always been a spike “down” before recessions: it includes all 50 states.
Compare 2022 with the 6 prior recessions going back to 1979: there are no early signs of contractions in any of the 50 states. This data series has shown an early warning that recessions were increasingly probable. The current monthly coincident state index shows all 50 state’s economies expanded: this would indicate, at least today, we are not in a recession, today. It also makes it highly unlikely we will be in a recession in the next few months. Read more here: No Recession Yet
While I will start getting clients who are in 100% cash invested in my Skye Equity Capsule Portfolio and my Skye Rising Rates Fixed Income Portfolio…for clients who are more fully invested, buying more today would be like sticking my finger in an electric outlet. During times like this, it is natural to take some action and feel we are in control, but today, I feel we should stand pat and let rates move higher. This does not mean I’ll be playing Solitaire or learning to crochet: there are trends building before the market bottoms and we need to be ready to be there. One piece of good news? Tariffs are coming off of solar panels, so renewable energy is getting very interesting, as prices fall.
In 2007 when I was at Pinnacle, the disparity between Average Hourly Earnings and the Purchase Only House Price Index was my signal to increase cash and reduce housing / lending industry stocks...
😊Why does this matter to you? Today, this makes my heart stop: the vertical gray line above was the 2007-2009 recession. When you have to spend this much more on a house, it always ends badly.
A picture is always worth 1,000 words: bond yields are the highest in a decade, or more!
😊Why does this matter to you? Higher yields are money in the bank, for investors. This is good.