Well this has been one heck of a week. For us, it kind of started at the end of last week, as we attended the wedding of Paul Joseph Krouse, the first intern to work at Axis Wealth Planning. He married the former Elizabeth Munn, who he was dating back when he worked for us. Paul Joseph is working for Colonial Life in Columbia and Elizabeth is a Nurse Practitioner. I'm happy to see them doing so well.
Monday was the first day of the Mauldin Economics Strategic Investment Conference. I have been reading John Mauldin’s weekly economic blog for years. His annual conference has consistently had some of the most amazing speakers, from former Federal Reserve officials, industry leading researchers, and hedge fund managers. This years speakers include Henry Kissinger, former Secretary of State, and Richard Shirreff, former Deputy Supreme Allied Commander of NATO.
Ordinarily, the conference is held at a very exclusive resort somewhere remote and is cost prohibitive for me to attend. However, COVID changed all of that. It’s been a virtual conference for three years now, allowing me to listen in. And with inflation at 40 year highs and the war in Ukraine, there’s no way I’m going to miss this.
I find it interesting that the conference is happening right as the Federal Reserve is implementing their attempt to slow the economy enough to squash inflation, but not too much to cause an employment crisis. The financial industry is hoping for a “soft landing”.
Many of the speakers on Monday were of the mindset that we are either in, or about to be in, a recession. The reasons and rationale differ from person to person, but they nearly all thought recession is in the cards.
One of the more interesting takes came from David Rosenberg, of Rosenberg Research. He feels that inflation has shifted from a pulling force causing it to a pushing force, or lack there of, to causing it. Initially, demand for goods and the sheer amount of money being thrown around led to costs going up, because they couldn’t get enough goods to the consumers. Now, he argued, the consumer demand is beginning to wane, but with the Chinese shut downs of Shanghai and other areas of the country, goods aren’t getting to us. He feels that inflation will be persistent in the short term.
The good news from him is that he thinks that that will be a short term issue and inflation will come down as we go into a recession. He also thinks that rumors of international trade falling off are overblown and that the US production of energy and semiconductors will increase dramatically, helping us to recover from the impending recession. He also thinks that we’re over building multi-family housing (highest rate since 1974) and that will lead to lower rents in short order.
Several other speakers have not been as optimistic. On Wednesday, several money managers discussed their portfolios and many were quite defensive, increasing holdings on the “value” side of the investment spectrum, which is the old, slow, boring sectors such as banks, consumer staples, and oil companies.
On Wednesday afternoon, the Federal Reserve announced that they were raising the federal funds rate by 0.5%, just as had been expected. Somewhat surprisingly, Fed Chairman Jerome Powell said in his post announcement press conference that increases to the rate larger than that wasn’t really in the cards. “Seventy-five basis points (0.75%) is not something the committee is actively considering,” he said. This came a surprise to the markets, as they had been pricing in a 0.75% increase in June.
The equity markets responded positively on that news, sending the Dow Jones Industrial Average up around 900 points. It seemed as though traders were relieved that interest rates would be moved up slower. But - after getting a night’s sleep and thinking about things, they changed their minds.
The DJIA was down more than 1,000 points when the dust settled on Thursday. I suspect that market traders realized that if the Federal Reserve is going to stay slow to raise interest rates, inflation could be with us for a longer period of time. Or, maybe they realized how the Fed has gotten itself between a rock and hard place with either a recession or higher inflation, or both.
I’ve felt like the Fed has been behind the inflation curve all along, so am not surprised to hear that they’re going to take their time raising interest rates. I think that they believe inflation is truly short lived and they don’t need to raise rates much. I also believe that raising rates isn’t going to impact inflation as much as it did in the early 1980’s, so I’m okay with them taking a more conservative stance at raising rates. I’d like to see them get to around 2-2.5% and stay put for a little bit. But, they haven’t asked me!
It’s important not to get too worried about the day-to-day gyrations of the markets. For one, it’ll drive you nuts. Occasionally, I’ll get asked what the markets did on a given day. Rarely do I have any idea, as I don’t watch it throughout the day. One of the speakers on Wednesday said that he has come to learn that if an advisor has CNBC on in his office, it’s not someone he wants to work with. Secondly, watching the markets on a daily basis will distract from the bigger picture.
When I first started my career as an advisor, I would often ask clients if they could measure the distance from my office to their home. Usually, they would look at me perplexed, but agree to do so. Then, I would pull out a 12 in ruler from my desk and ask them to measure the distance with it, rather than the odometer in their car. That’s the same thing as watching the stock market on a daily basis and wondering how your investments are affected.
The Federal Reserve is in a tough spot. There is likely to be some economic challenges still to come over the next 12 - 24 months. But, it’s not the time to over react. And, it’s definitely not the time to “pull everything out” and bury your money in the back yard or put it under your mattress. We will work our way through it.
There’s actually a lot of amazing things on the horizon in the next few years because of the amazing convergence of technology, artificial intelligence, and ingenuity that we’ve seen since this pandemic has hit. I’ll try to write about some of that in the next few weeks.
For now, I’m going to wrap this up and get tuned in for the third day of the Mauldin Economics SIC. Today, we get to hear from Charles Gave, Peter Boockvar, and one of my favorite economic researchers, Jim Bianco, among others. The headliner is George Friedman, a global strategist who is the author of The Storm Before the Calm: America’s Discord, the Coming Crisis of the 2020’s, and the Triumph Beyond. I know you probably have never heard of these folks, but I find them extremely insightful and am excited to hear what they have to say.
I hope that you have a great weekend.
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.