July 13, 2023
It is worth re-exploring and explaining our methodical approach to markets in various ways to better articulate our (potential) uniqueness and simplicity.
“There are two kinds of forecasters. Those who don’t know, and those who know they don’t know.”
John Kenneth Galbraith
We know far less about our environment than we think we know. Part of the problem of the human condition is relating everything to OUR perspective of the world. This is one of the biggest mistakes we make in life and in markets. I’m reading a great book on this topic: An Immense World: How Animal Senses Reveal the Hidden Realms Around Us by Ed Yong (Thanks to P.L. for the recommendation). You might say a book about animals has nothing to do with investing. I disagree; I think it sums up where humans often make mistakes:
We ask the wrong questions.
We try to assert control.
We are not open minded enough.
We do not observe enough.
In financial markets, investors, and analysts with narrow perspective, clouded by their own perceptions and emotions, tend to look at the market in the way THEY THINK IT SHOULD BE, instead of THE WAY IT IS. This leads to mistakes. If participants are making mistakes, this presents opportunities. How do we exploit these opportunities:
Use the fear and greed of others to our advantage:
Diversify to reflect what we do not know.
Increase our margin of safety by selecting assets that offer quality at a fair price.
Constantly consider what can go wrong.
Focus on the long-term plan.
Volatility and uncertainty are a CERTAINTY, expect it to have an impact.
Have faith that there are opportunities in every environment.
Stay invested over the long term.
Keep fees low.
Keep it simple and keep it liquid (be able to change course when environment changes).
“What’s clear to me is that simply being invested is by far “the most important thing”.”
Howard Marx
Current Market Observations
Federal Reserve Monetary policy operates with a lag, and probability is rising that higher interest rates will start negatively impacting growth soon.
College loans will start being repaid to lenders this fall. Many borrowers increased their debt to make other purchases during this time. This increase in debt will likely hit spending.
Because the Fed knows that they need to get inflation back down toward their medium-term target of 2%, they want to keep rates high and perhaps raise rates further.
The Fed’s bias is toward keeping rates high probably because they realize they made a mistake by keeping rates too low in 2021.
Inflation continues to fall, and weaker growth is likely to push it down further.
What is increasingly likely?
The probability of recession next year is rising, but household balance sheets are still healthy compared to history.
Boom / Bust economic cycles seem more likely because of excessive Covid policy reactions and behavioral changes across the economy.
Chances are rising that the Fed may have to cut rates in 2024.
Employers are mandating more workers back to the office; this trend seems likely to continue.
Interest rates on bonds are attractive if inflation continues to fall.
Many companies and sectors are trading at lower prices compared to their 2021 highs.
Many of these companies are trading at valuable levels based on our proprietary research.
If companies can produce attractive free cash flow yields at today’s interest rates, these companies are likely to become even more attractive if interest rates fall in 2024.
Reinvestment risk for investors holding overweight positions in Treasury bills and money markets are high if rates drop quickly in 2024. This will leave many uninvested for longer term wealth protection.
Paper currencies will lose purchasing power over time.
If rates are reduced, it will likely weaken the US Dollar.
If the US Dollar declines, commodity prices (denominated in dollars) are likely to rise.
Opportunities Abound
If economic cycles will tend to be shorter due to Covid stimulus policies and behavioral changes of economic and market participants, there should be opportunities for investors that are in more liquid portfolios that can change with a changing economic environment. This is our approach.
As always, your portfolio should represent:
Your future goals for maintaining and growing your purchasing power and your beneficiaries.
Your ability to deal with the inevitable volatility (gains/losses) of your portfolio in the short term.
Your exposure or lack thereof to certain sectors and specific assets.
The available set of opportunities within the global financial markets.
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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