This Thanksgiving Week 2021 Thoughts
Nancy Lazar, the head of Cornerstone Macro, wrote this week that the pandemic “pulled forward” spending by consumers, as stimulus checks stabilized budgets, in some cases but went into savings for others. There was a rush to buy automobiles by those fleeing locked-down cities for houses in the suburbs and that has caused the huge run on merchandise needed for those new digs: pools, bikes, appliances, and furniture, plus computers to work from home.
With that has come the much-covered supply-chain snags and snarls, with the endless video of shipping containers stacked high on West Coast docks, waiting to be picked up by truckers who are also in short supply. But Lazar related in client notes the crunch is already easing, with the sharp spikes in shipping rates beginning to reverse. And contrary to the tales of empty shelves ahead of the holidays, the pandemic-inspired run is about to reverse, too. As the pulled-forward demand eases, she looks for sales of Covid-boosted products to fade. That’s already happening at Clorox; Peloton Bikes, the streaming business at Disney and at Netflix . She expects growing inventories and slowing sales to lead to falling prices and this COULD slow inflation worries for next year.
But that doesn’t tell the whole inflation story, says Joe Carson, former chief economist at AllianceBernstein: pressures have moved from areas such as used-car prices, to food and energy costs, pushing overall consumer prices up over 6% from last year. “The next phase of the inflation cycle will be in consumer services,” he writes. “Owners’ housing costs are the most significant service component, at 23% and this is the implied rent that owners would have paid if they were renting their home. If these double, as expected, the consumer price inflation will be higher than the FED’s hopes and dreams Add to this to what Carson calls “Everything” Inflation.
I have a target of 2% on the 10 Year Treasury before I start adding to bond portfolios and I have to say this has been a totally gut-wrenching year. I suspect you feel the same way…but we’ve made it this far…lets Stay Calm and Carry On. This is no time to give up.
Larry Swedroe, long respected Advisor-to-Financial Advisors, published a study on Friday titled “Foundations of ESG Investing: How ESG Affects Equity Valuation, Risk and Performance.” Spoiler alert, Swedroe found that companies with strong ESG (formerly known as Sustainable Impact Investing) had above-average risk control and compliance standards at both the company and supply chain level. Another report titled; “ESG Shareholder Engagement and Downside Risk” showed that shareholder engagement…corporate resolution asking companies to improve specific aspects of the operation like selling chicken that is hormone free, or companies who have a more balanced male/female gender mix, have lower volatility and risk-inducing events.Looking at 1,712 corporate resolutions like the ones I have presented for 15 years at annual Shareholder Meetings, 43% of engagements focused on corporate governance, 22% on environmental issues, 20% on health / safety / supply chain / corruption-related events and 6% on accounting and auditing issues. 😲 Why does this matter to you? On days like Friday, when every corner of the market was down 2.5%, the evidence is in: companies with less fraud, embezzlement and corruption have a competitive advantage higher share prices. Conclusion? Firms with this “qualitative” analysis are better performing: it is not just a marketing hype: it improves performance.
Unfortunately, during times when there are high or rising interest rates, there are few investment “safe havens.” The following chart shows how many times rates have been above 0%...and how many times there have been negative rates, like today. Recessions (which always accompany market declines) are show in gray.
Figure IX - The 200-year history of the US real interest rates
😲 Why does this matter to you? We are in one of the times when our real rate of return is negative: we are losing money on cash and many bonds when you factor in the impact of inflation. Note, that there are many times when rates are over 10% or even negative, like today: know this time will pass but it will come with lots of volatility but eventually, you will be compensated by earning 0% on your cash. There are not many tools available to us as we go through this transition, other than holding cash. If you feel you are “going backwards” by holding cash, know we will profit when we are able to buy bonds at higher yields, with lower rates.