Year-end Summary 2020

The economy at present is performing as well as could be expected under the circumstances. Housing is booming given the lowest mortgage interest rates in a century. The main factor holding back the economy is not a lack of disposable income; indeed areas where people are free to spend are also doing quite well. Rather, the curtailed growth is heavily concentrated in services where social distancing is a problem. The Fed continues to be as accommodative as possible and recognizing its own constraints to stimulate growth, is literally begging Congress for more fiscal stimulus and is encouraging even more than that which Congress is presently considering. The Fed, after trying and failing for a decade to get inflation to rise enough to meet a meager target of 2%, and now in the midst of a pandemic, has virtually abandoned any inflation concerns it may have had.

Congress at present is trying to agree on the content and size of an upcoming fiscal stimulus. The 2018 tax cuts based on old “trickle-down” economic theory, while high on promise failed to deliver as the economy began to decelerate even before the pandemic arrived. The conclusion drawn is that capital investors were already flush with cash, and apparently in hindsight, were not willing to invest in new plant capacity or additional hiring until they could see rising demand for additional product. They aren’t now, and never were, going to produce goods to sit in warehouses. The occurrence of the pandemic was fortunate in that it forced policy makers to test new theories previously regarded as economic heresy, namely, “trickle-up” economics by giving cash directly to consumers to sustain growth and to stimulate aggregate demand. The theory now is that increasing consumer demand will automatically cause capital investors to invest in new plant capacity and to increase hiring to meet the new demand. Going forward, we expect to see ongoing monetary stimulus from the Fed and fiscal stimulus from Congress in the form of a combination of both business and consumer relief to meet both consumer and capital needs. The path of the pandemic or of new strains of the virus now entering the population are the largest variables in determining the longer-term direction of the economy, the markets, and other policy initiatives that may be forthcoming.

As always, we remain cautious and vigilant. 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,

Joseph L. Toronto, CFA

3rd Quarter Update Summary

The monetary and fiscal stimulus packages that began last spring effectively halted the meltdown taking place in the economy and in the financial markets. The markets revived quickly as they always do when money is being pumped into the economy, but in the economy, the stimulus could at most mitigate in some degree the paralysis that was taking place from the effects of efforts to contain the epidemic.

Those efforts generally succeeded and bought us some time to supply our medical system with PPE and testing capability. The economy also largely survived the state-by-state scattershot approach to various lockdowns and is poised for future growth in the form of pent-up consumer demand. Although given this haphazard approach, the epidemic is returning yet again in another wave of infections further delaying a full economic recovery. The Federal Reserve has deployed its full arsenal and is literally pleading with Congress for more fiscal stimulus to weather the now prolonged epidemic. So far, the Senate Republicans do not have consensus and hence cannot pass further stimulus without Democrat votes.

Although many parts of the economy such as construction and home building have recovered and are growing, the biggest risk to the economy and the markets remains the course of the epidemic as it continues to ebb and flow unpredictably and is constantly challenging the effectiveness of our response and/or our willingness to continue to confront it.

The silver lining in this pandemic is that our global body of scientific knowledge specifically of viruses and generally of immunology is growing at light speed as we research testing, treatments, infections, spread, transmission, vaccine design, and immune response. A mere months ago ventilators were deemed critical for severe cases, but death rates have declined as ventilator use also has declined in favor of advanced mitigation of symptoms and better management of the immune response to acute infection. More than 240 vaccines are currently in development or trials, some under entirely new approaches and vectors to immune response systems and/or treatments. The knowledge gained from the massive global investment will be invaluable for our treatment of viral disease in general and in ways we can’t comprehend at present but will likely advance our knowledge of many “incurable” diseases.

We remain cautious, vigilant and patient, at least until a more clear picture emerges, as the old economic rules and measures are quite simply attuned to a pre-pandemic world and environment. Please also 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,

Joseph L. Toronto, CFA

2nd Quarter Update Summary

The stock and bond markets have continued to stabilize as volatility slowly ebbs away. The returns we have seen recently are unlikely through the remainder of the year as a full economic recovery will take some time. The markets have been buoyant primarily because it is readily apparent that close-to-zero interest rates will be with us for the foreseeable future. The markets also detect that the massive stimulus from the federal government to get us through the epidemic will not be ending abruptly anytime soon.

The abrupt shock to the economy has already caused many dislocations, but this also presents a rare opportunity to re-invest and reconfigure for a future economy in terms of transportation, energy, education, entertainment etc. The market is counting on continuing stimulus and investment going forward. Congress has been talking about infrastructure renewal for many years with no action due to worries about funding. Now we know, quite by accident, that the funding is there and has always been there. Our priorities are changing, in some cases quite dramatically, because social trauma in the form of an epidemic has this way of forcing re-evaluation of our priorities and our place in the world.

Going forward, the economy and the markets will remain highly sensitive to the national epidemic, whether it subsides or expands, and, whether and how long federal monetary and fiscal stimulus remains available to mitigate its effects. We anticipate that the epidemic will eventually subside as individuals will become sensitized to the seriousness of it and individually adopt precautionary preventative measures together with acceptance of governmental measures to control its spread. This proved to be the case in the Northeast where the epidemic has already subsided substantially.

We remain cautious and vigilant. We continue to maintain significant cash balances in most accounts. However, we recently invested some cash in a diversified mutual fund after the market collapse and as it began to recover. We do not anticipate making other targeted or strategic portfolio changes until the economic outlook becomes much more clear. Please also 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,

Joseph L. Toronto, CFA

Do Deficits or National Debt Really Matter? No. But Yes, Only in Rare Circumstances.

Anytime a given economy has excess unused labor or plant capacity, deficits and federal spending are essentially mandatory to revive and expand the economy. The greater the excess capacity, the greater federal spending (deficit) is required to employ that excess. The is especially crucial in times of economic stress where private money creation (bank lending) is either dormant or in collapse. In addition, the only constraint on money creation ought to be, and must be, inflation. And inflation, in monetarily sovereign economies generally is not evident in economies with excess labor, plant and resources.

Here’s some background to help you understand a little better:

During the Great Depression, a small recovery had begun in 1936. Unemployment had dropped from Continue reading Do Deficits or National Debt Really Matter? No. But Yes, Only in Rare Circumstances.

Basic Investment Dogma, or, When Is It Safe to Get in the Pool Again?

Yes. There’s yet another cardinal rule that tells you when to get into the market and when to get out (more or less). It has never failed us and following it, helped us avoid entirely the catastrophic markets last year and turn in positive performance for 2008.  You’ve all heard it before but let’s restate it because it’s important and it works. Herewith: “Don’t Fight the Fed!”

Fifteen years ago, Continue reading Basic Investment Dogma, or, When Is It Safe to Get in the Pool Again?