Happy Independence Day
July 1, 2022
Happy Independence Day!
Enjoy friends, family, and celebrate the United States.
We truly live in the land of opportunity My family and I lived overseas for many years. I have been fortunate to travel to many parts of the world and meet many different people. Perhaps this is why I have such an appreciation for my U.S. Citizenship and all the opportunities and liberties it affords me. Gratitude is my link to happiness.
Negative news flow presents challenges to gratitude Media and social media channels have an agenda. That agenda is to make money. Others use these channels to further the agenda of a particular viewpoint or cause. I observe individuals and groups that are constantly fed tailor made news to reinforce their existing view by media channels. I watch people become emotional, enraged, and fearful with what they are fed. Most of the time people do not fully comprehend the energy they are expending and the emotional toll this takes on them. If you are prone to focus on negative impulses in financial markets, expect to read more bear market stories.
I can certainly relate to how stress and fear can physically and mentally impair us. I am obviously not immune, but I am very careful about any news that comes my way from an unknown source (my son accusing me often of being skeptical when it comes to a TikTok source; I am guilty as charged).
Black and White, Right or Left, Bear or Bull ... Why balance and patience are so important Emotion can skew a perception of reality. If you act based on a skewed view of a situation, it is likely going to cause you harm. One example:
Two years ago, we highlighted the over emphasis on wind and solar energy at the expense of fossil fuels which power 80% of the world’s energy needs. Politicians, asset managers, corporations, individuals, all seemed to be thinking one way on this very worthy effort of transitioning to cleaner sources of energy. Global warming must be addressed, and I hope we will get leadership that focuses on long term sources of green energy (nuclear included). The unfortunate result of pushing a more extreme view has resulted in less investment in oil and gas, demand continuing, and prices of oil and gas rising considerably. Instead of a White House that can follow through on its environmental pledges, we are releasing oil from strategic reserves, talking to Saudi Arabia and Venezuela, and discussing a gasoline tax holiday. It is hard to blame President Biden because the winds (no pun intended) of change shifted so quickly, but I did crave more constructive and balanced conversation between right and left.
Policy progress still gets accomplished despite people lamenting our country’s polarization. Actions and views do not have to be all or nothing; we do not need to be fatalistic. Address the problem honestly, identify potential solutions, and put yourself in the shoes of someone with an opposing viewpoint.
This just happened with Gun control. Of course, the bill went further than some wanted, and it did not go as far as others wanted, but that is compromise. It took nearly three decades, but it happened!
Patience is a requirement of a balanced outlook. Life, politics, and market developments do not occur on our schedule. It is democracy, it is capitalism, and it is a collective, collaborative, and messy process. Working together for the common good and achieving such progress is cause for celebration in my book.
“Nothing in life is to be feared, it is only to be understood.” Marie Curie I am proud to be a US Citizen. I know opportunities have been afforded to us by the mere fact of being born in the United States. We benefit from all the sacrifices people made throughout our country’s short history; sacrificing their own lives, enduring the pain of losing a loved one, and other grave sacrifices made in the aspiration that liberty and justice should be available to all human beings.
Do we as people and a system of government fall short of these lofty goals? Without question.
Can we do better? Without question.
Should we continue to try? Without question.
Despite all the flaws in our system, which are too many to list, we strive to protect an individual’s liberty, and we are open to change and transformation. Despite the selfish motives of individuals abusing power to their own advantage at the expense of others, we all strive to protect the ideals that liberty and justice should be available to all. That does not mean life will always feel “fair” to everyone, but we all know that life is not “fair.” We are all born different; each of us have different skills, athleticism, affluence, ambition, behaviors, and cognitive abilities.
Governments, corporations, and religious organizations are flawed, but if they strive to protect and uplift those most marginalized, to seek peace and truth, it is a system worth protecting. So, yes, I am proud to be American despite the vastness of America’s mistakes and arrogance.
All systems are prone to corruption through the selfish acts of individuals. The problems are not in the ideals nor in the system itself, the problems lie in the corruption of power by individuals or groups that lead us away from the ideals. The problems lie at the extremes. We all tend to stray from truth and justice for when we try and marginalize another.
The extreme views and agendas will continue, but we can choose to be more positive, more kind, more accepting of the views of others, and more constructive in our communication.
Importance of controlling emotions When we act out of emotion and passion, if we become angry about current affairs, it is a sign to pause and contemplate. Take deep breaths, stop judging the motives of others, stop trying to control the situation, and be open to another path. This does not mean we should give up on ideals that we all hold true; far from it. Putting your heart and soul into something you care deeply about is important.
At August Wealth, we care deeply about improving the lives of others. We want to help the families we serve, help our team members, and help our partners. However, we keep our emotions in check. We feel our emotions, but we try hard not to let our emotions get in the way of our mission. A balanced, empathetic, and objective view is essential in every aspect of advising.
Do not force it
Trying to force others into submission to a particular view will generally cause alienation and animosity.
Acting out of fear or greed regarding your personal investments will generally hold you back from achieving wealth in the long run.
Ignoring evidence contrary to your view will cause you to miss something you care about.
Patience and empathy will work better than anger and frustration.
This is not how things are supposed to be! In markets and in life, the only guarantee is that things will rarely go as we planned, but the new path can be beautiful, nonetheless. Life and markets can still work out in a way that benefits us all; it just may not be in the way we envisioned. But mysteriously, things can turn out better than we imagined.
A personal example and a market example:
The personal: This past weekend, my oldest son’s old roommates from Providence College organized the second annual Augustus “Gus” Cardello Memorial Golf Tournament to benefit his endowed scholarship at Providence.
This is not the path that I wanted for my son, but it is the way it turned out. I can choose to fight reality, be angry at the situation, take out my anger on others, tear others down, etc. Or I can celebrate and support our common ideals. I can embrace the fact that my son is having a huge impact on the lives of hundreds of his friends, and he is supporting students he never knew attend a college he was so privileged to be a part of. It’s not the way I want things to be; it’s hard, it’s unfair, I will never understand why. But it is just the way things are; I must accept my reality.
Mysteriously my son, Augustus, brought all these people together, and through the effort of all his friends produced a positive outcome for themselves, my family, and Providence College and its students.
For my part, I could choose to ignore the good because of my own emotions of sadness and anger, or I could be in denial and just brush off the emotions.
The reality is somewhere in the middle. I do my best to move forward with the pain; I embrace my reality, I am grateful for what I have, I nurture and support the gifts I have been given. I believe in the future.
The market: Commentators and news organizations want to sell you a “story.” Stories need simple labels like “Bear market,” “recession,” “inflation,” “transitory,” “bottom,” “top,” etc. Reality is usually somewhere in the middle, not at the extremes.
Inflation is the story of the moment. The Fed appears likely to continue raising interest rates to ensure that inflation does not become “entrenched” and self-reinforcing. It is a little funny that the Fed and other central banks globally fought “disinflation” or “deflation” for the last 20 years, and that was the “story” that was embraced. The reality was somewhat different as purchasing power of your dollars were eroded considerably over the period because inflation ran at over 2% on average in the USA from Jan 2000 to Jan 2020. To put that in perspective: $1,000,000 in January of 2000 had the same buying power as $1,528,264 in January 2020. You can check this on the Bureau of Labor Statistics website: https://www.bls.gov/data/inflation_calculator.htm
Of course, 8% inflation is obviously a bigger problem, but the important question is whether we will continue to grow at closer to 8% or closer to 2%. As discussed in the past couple of years, I believed the economic responses to Covid would cause inflation to jump. It has jumped considerably. Yet, perversely one of the best performing investments of 2022 has turned out to be a US dollar bank account earning next to 0%! It is sometimes curious how things work out.
Continuing to earn a very low interest rate in a bank account over a longer period only protects you if the prices of goods, services, real and financial assets continue to decline. Economies tend to grow, and the companies that benefit from this growth tend to rise in value over time. Is the top in rates in? Is the bottom in stocks in? Will there be a recession? I reiterate that I do not know. However, the uncertainty of today are the opportunities of tomorrow.
We may just muddle along in interest rates, real asset prices, and equity prices. It is possible we stay near current prices; economic growth slows without recession, inflation stays elevated, but drifts lower over time, maybe we are in a bear market for stocks, but maybe we do not see much movement in prices from here. Nobody really knows.
We remain defensive, but we also remain invested. If we just muddle along, why be invested?
We want to participate in the earnings of companies that have positive cash flow, we want to earn interest and dividends over time that pay us for the volatility and credit risk we assume in the short term. We want to protect your purchasing power.
Changes in view and in the portfolio: We are starting to see evidence that inflation will start to decline, growth seems to be slowing, and excesses in the system are being flushed out. Price declines in SPACS, unprofitable companies, and cryptocurrencies are healthy for the economy longer term in our view. Although uncertainty remains high, there seems a reasonable chance that we do just muddle along for some time. We do not see a high probability of recession nor runaway inflation.
We do not see the need to rush into any part of the market aggressively at the moment, but we do think there is a reasonable chance that interest rates will not go much higher than current market pricing. For that reason, we have increased exposure to corporate fixed income, and we have extended the duration of the fixed income in the portfolio. Our asset allocations to equity vs. fixed income remains roughly the same.
In more simple terms:
We have reduced the weighting of short-term treasury securities
We have increased the weighting to bonds of mainly investment grade corporations compared to government securities. These pay higher interest rates because they are not government guaranteed.
We have increased the maturity of the bonds in the portfolio to “lock in” a higher rate of interest for a longer period.
If you have questions about these actions, your portfolio, or anything at all, please give us a call. We are always happy to hear from you.
Life is good We believe in America, we believe that people are inherently good, we believe in democracy, we believe in capitalism, and we believe in our future.
Happy 4th of July and thank you all for your support. Joe
Joseph Cardello, Principal August Wealth Advisors, LLC
51 Riverside Avenue, First Floor Westport, CT 06880 Direct (916) 461-9451 toll free (800) 985-9477
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