Moving Beyond Fear - September 29, 2020
This weekend, at a client hosted dinner party, I was discussing Covid and my views. The host rightly (and politely) steered me away from the discussion as another guest was clearly in disagreement with my views on the topic. I understand how emotionally charged the topic is for most people, and I found myself also getting emotional about it. My emotion stems from wanting people to understand the damage being done by the country’s reaction to Covid. Alas, there is no point in getting frustrated by battling against something that will not change; events need to take their course, and this too shall pass. For now, my focus shall remain on helping where I can, and doing my part for others, but for the sake of others and myself, I need to let the discussions go.
Fortunately, I can continue to express myself in the financial markets. The market forces us to face reality in due time, and I shall find out, as always, if my views were right or wrong.
For those that cannot move forward, the markets will not wait: My views are remarkably the same: There is too much money, sacrifice, fear, and energy going into mitigating the risk of Covid at the expense of other risks. Mitigating this risk, although extremely important, it increases the probability of market and economic turmoil in the future. It is like a magic-trick; it is classic misdirection, and if you can see how the trick is playing out, there has been, continues to be, and will be into the future, opportunities for investing. Quoting John F. Kennedy from April 12, 1959: “when written in Chinese, the word ‘crisis’ is composed of two characters – one represents danger and one represents opportunity.” One of my new clients pointed that phrase out to me (thank you M.R.).
Market Fears and Anxiety are still pervasive:
Equity and credit markets have moved on from the lows in March (Nasdaq and S+P 500 have made new highs), but many stories continue to claim that the markets are devoid of reality. There are fears in the media of a Biden election victory, contested election results, the Federal Reserve unable to stimulate further, another conservative supreme court appointee, another lockdown, and further civil unrest in the streets.
I remain positive on economic growth and higher prices for real and financial assets. This will likely lead to higher rates of inflation in goods and services further into the future.
The overarching reason why I am so positive: there is little opposition to fiscal spending right now. All the focus appears to be on offsetting short term economic pain from the pandemic. The government is arguably being given a blank check from the Federal Reserve *, and they will spend it! The Democrats and Republicans may argue in the short term about what type of stimulus and why, but I will K.I.S.S (keep it simple stupid) as my old trading boss use to say. I believe this unchecked spending will be the overarching force that will continue to buoy equity prices.
The economic damage from Covid was not nearly as bad as most people predicted, consumer balance sheets are healthy, corporations have been able to borrow incredible amounts, the worries of credit downgrades from BBB to junk were largely unfounded**, unprecedented stimulus money on top of the already unprecedented stimulus money is highly likely, inventories are very low, and lots of industries will need to hire to keep up with the expected demand.
Rates remain at zero in nominal terms and negative in real terms. If asset prices go lower, I have no doubt that the Fed will find a way to do something even more creative to make them go higher. I would not underestimate the unprecedented mandate they have been given; they will use it!
Should we be more worried?
What appears unprecedented about Covid, is the fiscal and monetary response to offset it. I believe there will be consequences to the actions and the incentive structures we have put in place, in-order to remain safe and ease the economic damage. But that is not today’s story.
The country has differences and problems of course (far left and far right, magnified by social media), but families in challenging situations can get help from caring people and institutions. Most people are not destitute (at least at this moment) enough to start a civil war, class war, or a militia. Most people are kind, they have the resources to help, and in aggregate the help is ready, willing, and able.
Fiscal spending on infrastructure, education, conversion to clean energy, boosting minimum wages, etc. will likely increase considerably after the election. We may still get an additional relief package prior to the election as well.
Jobs will be available, people will be hired, and at the end of the day, most people desire to take care of their family and friends. This requires work and a living wage; I am confident it will be available.
What are the risks?
They are the ones we are all afraid of, and they are highlighted in the media all the time of course. I think these are mostly well flagged and discounted by the market. But there are certainly unknowns that can and will come from this that can create short term volatility (perhaps this is already expected).
Remaining in cash or treasuries may result in losses in real terms, as purchasing power is likely to continue to erode the real value of cash.
Retirees that need a fixed income will face significant challenges. There are ways to achieve income, but it requires a greater level of understanding on the changing nature of the financial market environment. The risks in these products is greater than treasuries; knowing how to navigate these opportunities and risks will be essential for investing success.
In my opinion, inflation will eventually become a problem. Buying assets to mitigate that risk will be important, but the volatility in these asset classes needs to be well understood and respected.
I hope everyone enjoyed their summer, and hopefully got some time away with family.
Many people look like they are heading back to work (as I can see from my view of the train platform). Please stay safe and protect others.
Congratulations to Amanda Gilman of August Wealth for passing her Series 65 - Uniform Investment Advisor Law Exam. She can leave that stress behind!
As Yom Kippur was on Monday, thank you J.M. for the words I will reflect on this week: To those I have wronged, I ask forgiveness. To those I may have helped, I wish I had done more. To those I neglected to help, I ask for understanding. To those who helped me, I thank you with all my heart.
Joseph Cardello, Principal August Wealth Advisors, LLC The Loft, 101 Franklin Street, Suite A Westport, CT 06880 Direct (916) 461-9451 toll free (800) 985-9477
*Fed Chair Powell says more fiscal support is needed CNBC Wednesday Sept, 23, 2020 **FT and WSJ
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