Friday Thoughts

I’m sorry that I didn’t get to write in December. The holidays kind of got away from me this year. Clara is 8 and Sam Henry is 6 and this is a magical time in their lives. Nancy Lee and I have been trying to take in as much as we can with them and this year it seemed like we did all the things. We made every kind of sweet treat, we rode around and looked at Christmas lights. We did Christmas plays at the little Theater, and church concerts. We watched all of the Christmas cartoons and movies, visited family far and wide, and we even made it to the German Christkindl Market in Atlanta.

The children are back in school and we are working toward getting back into our regular routine. For me, that routine at this time of year is a reflection back at the previous year and some thoughts for the year to come. I don’t like to make predictions of what the markets will do in the coming year. When I was studying for my securities license, I happened to be watching CNBC on the first trading day of 2003. Maria Bartiromo was reporting from the floor of the New York Stock Exchange, a rarity back then, and turned to a trader to ask what he expected for the year. He proudly proclaimed that the post 9/11 recession was over and the markets would have a great year. So, she turned to another trader with the same question. His reply was that there was still pain to come and that 2003 would be a bad year for the markets. Huh?! I decided right then and there not make predictions such as this guys.

I wrote a few months back about three concerns I had for the end of 2021 - Legislative wrangling and spending, supply chain issues and inflation, and Federal Reserve actions of reducing their “easing”.  As I suspected, Congress did raise the debt ceiling, even if just for a little while, and passed the “infrastructure” spending bill but were unable to find compromise for the $3.5 Trillion spending plan. Supply chain issues are still a problem and will be for a while. The White House has proclaimed that they have fixed it because there are less ships sitting off of the coast of California. What they aren’t telling anyone is that ships are now just slowing down on their way in and they’re sitting further off shore, even as far as off as Mexico. Federal Reserve chairman Jerome Powell admitted in front of congress in late November that inflation was not “transitory” as they had thought. Supply chain issues and labor force problems will keep pressure on prices for most of 2022, I suspect.

The Federal Reserve’s reduction of “monetary easing”, or economic stimulus, is going to be a hot button topic for the financial media throughout much of the first quarter of 2022. As they have come to realize that the inflation genie has gotten out of the bottle, they’re trying to figure out how to put it back in. The traditional way to tamp down inflation is to raise interest rates and slow the economy on purpose. The Federal Reserve has not only been holding short term rates down since the shutdowns induced by COVID, they have also been buying US Treasuries and mortgage backed securities to keep longer term rates low. They announced in November that they would slow the purchase of those securities. Then in December, they announced that they planned on speeding up that “tapering”, as they call it.

The expectations, by the market prognosticators, is that they will completely shut down the purchase program in the first quarter, and possibly even start raising interest rates then, too. They are thinking that there will be three interest rate increases this year. Usually, when interest rates increase, it causes the economy to slow. The cost to borrow money goes up, so businesses and individuals borrow less, leading to less money in the economy. The less money in the economy, the less economic activity happens. The Fed now faces the challenge of threading the needle of raising interest rates without pushing the economy into a recession. The eye of that needle is very small.

There is one other factor to the exercises of the Federal Reserve that they don’t seem to want to acknowledge. It seems as though they have wanted to raise inflation for as long as I’ve been in the financial industry (18 years), and have kept interest rates low in an effort to do so. One of my first clients was a tax free municipal bond buyer. Whenever I found a good one earning better than he could get at the bank, we would buy it. When I called one day with one paying around 4.8%, he told me to not call back until I found one paying above 5%. The going interest rates for investment grade tax free municipal bonds has never gotten back to 5%! If the Fed couldn’t get inflation to rise by keeping rates low, how can we expect them to push inflation lower by raising rates? Maybe the old tools in their toolbox are less impactful in a world awash in debt like we are today?

My thoughts are that the inflation we are seeing is being driven by the money that has been sent to people, coupled with transition from spending on services to spending on stuff. Since the COVID shutdowns, we are eating out less. Going to the theatre and traveling have been greatly reduced. Instead, Americans are spending on durable goods like washers, dryers, home technology, and home improvements. That sudden shift has caused ripples such as the supply chain and labor issues.

The stimulus looks to be ending, as it was reported this week that there is no plans in Washington to offer another round of payments and the expanded child tax credits ended in December. I think that will help slow inflation growth. But, inflation can be sticky. It can also become a self fulfilling prophecy, if enough businesses think it will last. No one is willing to begin to reduce prices until they’re sure it’s safe to do so.

There’s still one more elephant in the room to throw more questions about what 2022 will bring: COVID and the variants. Omicron has spread at an amazingly high rate, yet seems less dangerous than Delta and the original strain. As I’m writing this, schools in Chicago are closed (not virtual, as the teacher refuse to go into the classroom and the district doesn’t want to give into them). The reactions to the virus continue to be a varied. This omicron strain may be a god thing, though. If it keeps spreading at the pace it is, and symptoms stay mild, this will blow itself out pretty quick. The virus will run out of new uninfected hosts to infect. I pray that’s the case.

I suspect that we will see volatility in the markets this year. Interest rates will probably go up, but there’s no way to say by how much. There’s even a chance they may dip again if the economy does struggle. I go back to what I decided on Thursday, January 2nd as I watched CNBC - If those guys on the floor of the New York Stock Exchange don’t have any better idea where the market is going, I don’t stand a chance. Instead, I believe in staying in a high quality, diversified investment portfolio, designed to ride through all market cycles.

If you are concerned about your investments, interest rates, or any other financial issues, please don’t hesitate to call. I’m happy to sit down and talk with you about it.

Meanwhile, it is a new year. This is a great time to reflect on where you’ve been and where you want to go. What new thing do you want to do in 2022? One thing not on my radar a year ago was getting my FAA Unmanned Aircraft Systems (drone) license. I started a training program just after Thanksgiving where I spent an hour a day for two weeks, then took the test. Amazingly, I passed with a 97. I’m now a licensed drone pilot. It’s been fun to learn and hone my skills flying. I expect to do more of it while we continue to travel the state in our effort to visit all 47 SC State Parks. We think we’ll achieve that goal by mid-summer. Then we’ll have to find a new travel goal.

I hope that you have a safe and prosperous 2022!

The views stated in this letter are not necessarily the opinion of First Allied Securities, Inc. and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein.  Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.  Past performance does not guarantee future results.