2nd Quarter Update Summary – Inflation, Fiscal Stimulus, Covid

The economy continues to grow and expand in recovery from the economic covid shocks inflicted on employment and production last year. Following a flat first quarter, the market has resumed an upward but volatile trend. Some recent inflation is sending warning signals across the economy, however, this inflation does not necessarily derive not from excess cash in the economy, but significantly from insufficiently restored production and supply chains, and from other distribution bottlenecks. The Federal Reserve is convinced the inflation is transitory and insists its expansionary policies will not change until at least 2023 or until the economy reaches full employment together with signs of overheating. This means, importantly, that going forward Fed policy in response to inflation will be more reactive vs predictive.

The housing boom, mostly caused by historically low mortgage rates, appears to have stabilized (interest rates truly cannot go much lower). Lumber prices, widely publicized to have tripled since the pandemic began, have now fallen precipitously since May to pre-pandemic levels. Other commodity prices are normalizing as production continues to ramp up. The traditional broad based inflation indicators remain persistently stable showing expected low inflation similar to that of pre-pandemic levels.

The Biden Administration is making some progress on two fiscal fronts in an effort to ensure ongoing fiscal stimulus for at least a few years. The first is a vital and necessary infrastructure funding measure that both parties agree is necessary but disagree on size and scope. The second is the federal budget that includes substantial increased and new spending in most areas of the Administration’s agenda. If the infrastructure package grinds to a halt, the budget will certainly incorporate many of the important elements of infrastructure. This twin pronged fiscal approach together with expansionary Federal Reserve monetary policy is aimed achieving the twin economic goals of full employment together with stronger wage growth in coming years.

Covid remains a concern. The unusual and unexpected politicization and dissemination of vaccine misinformation is preventing us collectively from reaching our vaccination goals, thereby resulting in covid case surges in areas where vaccination levels have been weak. The unnecessary politics of the issue together with new highly transmissible and dangerous covid variants are making any prognostication of the ultimate resolution of the epidemic very difficult. The markets are watching and reacting accordingly. This is contributing to the previously mentioned market volatility. We are not out of the woods.

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,

3rd Quarter Update Summary – The Economy Chugs Along, But Whither the Markets?

While the Fed continues to increase short-term interest rates as the economy chugs along, we had a new wrinkle appear this quarter. Previously, long-term rates remained relatively stable as short-term rates rose. This had the effect of a flattening of the term structure of the yield curve, an indicator that future growth may slow. This month however, those stable long-term interest rates have begun to rise sharply in pace with short-term rates controlled by the Fed. The cause of this is quite unknowable at this point, but we note that oil and some commodity prices have been rising together with wage increases finally showing signs of life. The takeaway here is that the economy remains robust and that a slowdown or recession does not Continue reading 3rd Quarter Update Summary – The Economy Chugs Along, But Whither the Markets?

Market Meltdown? Foreshadow? Not Likely…

The market meltdown in the previous few days was unmistakably a reaction to sharply rising bond yields which previously were rising slowly if at all in response to Fed rate increases. It was not likely a response to inflationary fears as leading inflation indicators (metals and commodities) were unmoved if not down. Add it all together and present value theory of stock prices required a downward move in prices in response to those bond yields. The consequence? The Fed, now chaired by a Wall Street insider, has no reason to be too aggressive in raising short rates and may even temper its planned sales and reductions of its massive bond portfolio.

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?