Month: April 2022

Mainstream economists expected a paltry 1% GDP growth for the first quarter, a far cry from the 7% growth realized in the fourth quarter of 2021, yet yesterday’s release showed the U.S. economy contracted 1.4%.¹ The first economic contraction since the Covid19 lockdown considerably raises the probability of a near-term recession, defined as two consecutive quarters of declining GDP. What are the pros and cons of the report? Does it suggest stagflation, a deflationary recession, or a miraculous, ‘Powell-led’, soft landing approaches? What can you do to mitigate the risk of a large loss scenario, should Powell stumble again?

On the plus side of yesterday’s GDP release, consumer spending, which accounts for two-thirds of economic activity, was solid. Business investment was also strong. These are encouraging signs. But later in the day Amazon issued negative guidance for future sales and a disappointing $3.8billion loss for the quarter.² This is concerning, as it may indicate a slowdown in consumer spending is underway, a harbinger for recession. The report also confirms a slowdown in America’s economy is no longer likely, it’s happening; the question now revolves around how bad things will get.

Fed Chairman, Jerome Powell, focused far too long on restoring jobs following the Covid19 recession, which put him behind the more important task of fighting inflation. He is now in a panic to bring his 40 year high inflation under control, and is about to raise rates .5% in a contracting economy. Financial developments are exposing Powell’s errancy at every turn, making a soft landing improbable. The Fed also has a history of going too far in multi-rate hike periods, particularly when fighting inflation. I suspect it will live up to its reputation. A deep deflationary recession is unlikely near-term because supply constraints, exacerbated by the Russia-Ukraine war, de-globalization, and the developments in China and Eastern Europe, all potentially lengthy affairs, are driving worldwide price inflation. Can higher than normal inflation co-exist with a weak, or even periodically contracting, economy for months or years? It not only can, it has, and stagflation is the most probable economic scenario for America over at least the next few years.

I have read several reports from reputable sources in the last week suggesting the market has priced in a 25% probability of recession in the next twelve months. Considering a second quarter contraction, even a mild one, puts the economy officially into recession in June, coupled with Powell’s aggressive inflation posture, suggests the stock market may be grossly misjudging short-term risks.

Consider these moves to reduce risk:

• Build portfolio cash to cover anticipated withdrawals for a few years or more, and as ‘dry powder’ to buy great companies after the market discovers its error.

• Buy income-producing investments with pricing power.

• Own a chaos hedge or two.

• Lower your stock exposure a notch, but don’t over-react and sell all your stocks.

• Stay diversified.

• Take a long-term approach and lower your expectations to reduce unnecessary emotional turbulence.

Think about it, Shaun.

“Rule #1 is don’t lose money. Rule #2 is don’t forget Rule #1.” ~Warren Buffet

“He who had received the five talents came forward, bringing five talents more, saying, ‘Master, you delivered to me five talents; here, I have made five talents more’.” ~Matthew 25:20

1 Stansberry Digest, Thursday, April 29, 2022 2 USA Today, “Economy contracts first time since 2020 in first quarter as GDP falls 1.4%”, April 28, 2022 https://www.usatoday.com/story/money/2022/04/28/us-economy-growth-first-quarter/9562730002/

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.

Asset allocation does not ensure a profit or protect against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

 Companies mentioned are for informational purposes only.  It should not be considered a solicitation for the purchase or sale of the securities.  Any investment should be consistent with your objectives, time frame and risk tolerance.

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Two rare and highly disruptive market events appear to simultaneously be in their early stages today. Price inflation is at a fresh 40 year high,¹ actively devouring the cash savings of all consumers everywhere, and at an alarming rate. There have been but four commodity supercycles, or prolonged periods of broadly rising commodity prices due to elevated global demand, in the past 115 years,² yet credentialed investors are suggesting a new commodity supercycle is underway. What is the connection between these two rare market events, what factors suggest they may both be ‘sticky’ trends, and what should you do about it? 

Price inflation is measured in terms of national currencies, so when we’re told inflation is 8.5%, it means the purchase of a basket of goods and services costs 8.5% more US dollars today than it did a year ago. Consumers are willing to exchange real goods, like agriculturally productive land, or productive elements like copper and silver, for monetary currency units for many reasons, including convenience, practicality, or even habit, but one additional reason must be present for that currency to remain relevant: the consumer must believe it will retain its purchasing power while held. Artificially low interest rates mean dollar holdings provide virtually zero present income; coupled with 8.5% annual inflation, holding dollars today equates to owning a rental property that sits perpetually unoccupied while depreciating by half every 8.5 years! Only a negligent investor would delay the immediate liquidation of such a property!  

Commodities are the natural resources our Creator supplied with which humanity may be sustained and constructively engaged. Commodities, as investments, have generally experienced occasional, brief booms, followed by long, drawn out busts, and are, therefore, volatile and risky assets to hold long-term. When a currency is no longer perceived as a store of value, however, exchanging an asset that will reliably lose half its value every 8.5 years, for an asset with intrinsic value that will likely hold its value (or appreciate) short-term, becomes prudent; commodity price trends today reveal the smart money is doing precisely that.

The inseparable bond between inflation and commodity prices is that both can be viewed by savers as a store of value, and when the currency isn’t, commodities will be; that’s when commodity supercycles have historically occurred. 

An ongoing war between major commodity-producing nations which lacks resolution, ongoing global supply constraints, a government addicted to money-printing to pay fixed expenses, and the fact inflation is hard to ‘reign in’ once it invades the psyche of savers and consumers, all suggest inflation will remain high for years, not months.³ These same factors, coupled with a growing distrust in the dollar as a reliable store of value, suggest a supercycle for the ages may be developing in the commodities complex. 

One thing we should do as investors is consider whether commodity investments are more worthy of a small portion of our investable savings than more sorely depreciating dollars.         

Think about it, Shaun.   

“It makes no difference to a widow with her savings in a 5 percent passbook account whether she pays 100 percent income tax on her interest income during a period of zero inflation or pays no income tax during years of 5 percent inflation. Either way, she is ‘taxed’ in a manner that leaves her no real income whatsoever. Any money she spends comes right out of capital. She would find outrageous a 100 percent income tax but doesn’t seem to notice that 5 percent inflation is the economic equivalent.” ~Warren Buffet

“He who earns wages does so to put them into a bag with holes. “Thus says the Lord of hosts: Consider your ways.” ~Haggai 1:6-7

1 The New York Times.com, The Morning, “Inflation’s 40 Year High”, April 22, 2022

https://www.nytimes.com/2022/04/13/briefing/inflation-forty-year-high-gas-prices.html

2 Seeking Alpha, “3 Stocks for the Impending Commodity Supercycle”, April 12, 2022

https://seekingalpha.com/article/4500969-3-stocks-for-the-impending-commodity-supercycle 

3 Stansberry Digest, April 19, 2022

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.

The fast price swings in commodities will result in significant volatility in an investor’s holdings.  Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors.

https://www.fivestarprofessional.com/spotlights/90982

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I’m long past athletic peak, but the playoff atmosphere, in which decisions and execution become palpably more consequential, still excites a resilient competitive ambition. I wonder if Jerome Powell, recently exposed to “World Series pressure” by the 40 year high inflation he personally created, feels confident or afraid right now. What is the financial backdrop, what are Powell’s policy options, and how will ‘the Fed’s’ decisions affect your investments?

The 10 Year Treasury yield, the most accurate economic forecaster in the world today and the most influential financial component, has recently sounded the alarm on both escalating inflation and coming economic contraction. Ordinarily, in this phase of the economic cycle, the Fed would raise interest rates until the economy ‘breaks’, and then quickly revert to lowering rates and printing money to restart the cycle. I’m not saying this is what ‘the Fed’ should do; I’m saying this is their program. Facing the two unique dynamics in this particular cycle of 1) 40 year high inflation, and 2) the greatest debt any government has ever amassed, what are Powell’s options, and what are the implications?  

Scenario 1: The 10 Year yield, now bumping up against a 30+ year downtrend line, rolls over and begins to decline with the economy and inflation rate. The yield curve inverts further, and ‘the Fed’ raises rates into recession and then reverses course. The stock market enters a bear market, bottoms, and then begins to climb the “wall of worry”, eventually beginning a new bull market. ‘The Fed’ and its Reserve Note live to inflate another financial bubble. 

Scenario 2: The 10 Year yield rises through the downtrend line due to high inflation and a lack of demand for U.S. government debt. The Fed aggressively raises rates to fight inflation, causing a deep economic contraction. Higher interest expense on outstanding debt, coupled with lower tax receipts from recession, mean the government will then have to a) stop paying interest on Treasury bonds, b) slash entitlement spending, or c) borrow the difference.¹ ‘The Fed’ comes to the rescue with additional quantitative easing to purchase the government debt no one else wants. America has a perpetual inflation problem and the demise of ‘the Fed’ and its Reserve Note hastens.

Our central bank’s highest priority is to monetize the U.S. government’s debt; if we can remember this, the financial world will make far more sense to us. It’s no coincidence both scenarios result in additional money printing, it’s just a matter of how fast we get there, and how much pain American workers and investors must endure in the process. Keep in mind the 10 year Treasury yield calls the shots, not the Fed; ultimately, it will declare the “Federal Reserve Note” the failed currency that it is. This means we generally need to be investing for inflation, yet always protected from the occasional deflationary collapse.

Think about it, Shaun.   

“He who earns wages does so to put them into a bag with holes. “Thus says the Lord of hosts: Consider your ways.” ~Haggai 1:6-7

1 Inside Tradesmith, by Justin Brill, “What the Fed and Inflation Could Mean for Your Investments, April 5, 2022

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.