This was a rough start for the year in account performance. The markets are being hit with a triple whammy of Covid surges, rising inflation and interest rates, and war in Eastern Europe. Covid has become relatively benign here in the U.S. but has been surging in Europe and Asia. This surge has caused additional lock-downs that complicate production and efforts to revive supply chains. It puts new pressures on distribution channel bottlenecks. All of this has exacerbated otherwise modest inflationary pressures and puts the Federal Reserve in a precarious bind. All this while a new hot war has broken out in Eastern Europe that threatens to disrupt energy supplies and distribution of the most important raw material while also re-arranging global trade and geopolitical alignments for decades to come.

Up until recently, the Fed had been operating on the assumption that the inflationary pressures evident on every continent and in every currency were not necessarily a U.S. dollar problem; that it is largely a result of rapidly rebounding consumer demand for finished goods in a “just-in-time” production and delivery world that was ill equipped scale up quickly enough to meet the surge in demand. Despite this conclusion, the persistence and breadth of inflation has nevertheless caused the Fed to embark on a regime of raising interest rates for as long and as far as it takes to cool the economy. Make no mistake, higher interest rates will cool the economy, cool the capital markets, the stock market, and will cool especially the housing and construction markets.

We have had excellent performance now for several years riding on a wave of some high growth tech stocks that by nature are usually vulnerable to rising interest rates. But we were also somewhat slow to increase our cash levels in accounts due to substantial unrealized capital gains that would be taxable. However, we have increasingly been taking a more cautious approach and have raised cash balances until the road forward becomes more clear. The troika of hazards above have all gotten worse since our last letter, not better. Covid is surging, inflation remains high, interest rates are rising, and there is no end in sight to the war.

As always, we remain cautious and vigilant. We anticipate and hope that Covid will retreat; that the Fed will reverse course when supply, demand and inflation normalize; and of course that the “good guys” will decisively win and end the war. Disguised in the market’s extreme daily volatility, the market itself as history has shown will likely be the best predictive leading indicator of changing conditions. The market will tell us when things are improving before they actually do seem to improve.

Please remember that because these quarterly thumbnail sketches are very brief, do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.

Very Best Regards,


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