The Noise is Deafening!
September 28, 2021
As discussed in previous months, although we remain positive on the economy both in the USA and globally, the markets will be more challenging to navigate. Our portfolios are generally more defensive and we are widely diversified. Our reasons have been discussed in previous commentaries; as I wrote on July 2, 2021: Why we diversify (Respect the unknown): There is so much noise around economic data presently, when judging the economic cycle, I place far less weight on these inputs today than I would have historically. Because the world became myopically focused on Covid, and policies were put in place to mitigate the risks around the disease, many historically predictable economic relationships have likely been altered significantly. This means to me that economists, strategists, companies, and government agencies are going to continually be taken by surprise around outcomes. Consumer demand, inventories, productivity, incentives for work and education have likely become more difficult to predict because traditional backwards looking models may not (I suspect will not) work anymore.
The unknowns are many at the moment: Chinese Government intervention, U.S. Fiscal Stimulus and Tax policy, COVID, back to work policies, Federal Reserve policy changes, global energy constraints, inflation forecasts, growth forecasts, etc. Essentially, nothing seems “obvious” or easy from my perspective in the short term, and that is partially because prices of many assets have become more expensive, and the economic cycle is more advanced. Which means (from my perspective) that equities, fixed income and commodities markets globally can move up or down over the next 6 to 12 months. I think it is very difficult to have an edge in the short term. You could say that I am stating the obvious, however I believe there are times where it is easier to predict the short term market (as we have discussed in previous commentaries).
That said, over a longer term time horizon, we remain constructive on economic growth and asset price inflation. Too much cash chasing too few assets remains the theme. Despite a tonal change from the Federal Reserve, policy is likely to remain (excessively?) loose over the next couple of years. There are of course risks that can derail that view. Primarily it is likely to stem from the excessive fiscal and monetary accomodation to offset perceived disruptions related to COVID. As I have argued many times, the Fed and the U.S. government myopically focusing on COVID risks and disruptions is likely a mistake. Historical economic models are unlikely to provide much help in this new world. Yes I believe that too much money has been printed, and I believe there will eventually be repercussions. In my opinion, it’s going to make navigating these markets more difficult for most investors in the coming decade.
Why am I not more concerned today? The price rises are obvious to most people. Some market prognosticators say this may result in stagflation (high prices choke off growth as spending stops), and others say it will accelerate growth and inflation as people try to buy goods before prices rise further. Honestly, I am not sure if either of those things will happen. They are risks for sure, but the world is a dynamic place:
What if people realize that the green energy transition away from fossil fuels has to happen more slowly? Supply of oil and gas may increase.
What if semi-conductor production is ramped up aggressively (TSMC, the world’s largest manufacturer has indicated they are doing just that). The supply of cars may increase.
As benefits and transfer payments from governments to individuals slow, might more people decide to go back to work (particularly if risks from COVID stabilize)? This may put a cap on wage increases.
Perhaps governments in developed countries will realize that they need to increase their labor force through immigration? Driving a truck might seem to be a lousy job to many of us, but there are many people that would risk everything (and do risk everything) for that opportunity. Shipping costs could come down.
Nobody really knows how these things will play out; we will do our best to navigate markets with all the experience, skill and effort we have at our disposal. Despite the short term volatility in the market I am not sure the person on the street will be too affected by it. Therefore, I suspect the economy and financial markets will continue to grow. Why?
Everyone is so much wealthier The chart below from the Federal Reserve shows U.S. Household Net Worth from 2000 to 2021. As you can see, the increase in assets and net worth during the past two years is dramatic. From the second quarter of 2020 to the second quarter of 2021, net worth increased by $31 trillion dollars. I think when people have more wealth, they are somewhat less likely to stress about their ability to care for themselves and their families. The gains in household net worth have been dramatic, and these gains have been widespread. My friend Cameron Crise, Bloomberg’s “Macro Man”, wrote on May 20, 2021: “...those with a high-school education saw the sort of wealth growth normally associated with much more favorable employement outcomes. This was true across the educational spectrum.” He also points out the growth was across all racial spectrums as well: “...despite job losses, every racial cohort enjoyed the sort of wealth gains typically associated with aggregate employment gains of at least 1%.” Net worth percentage growth y/y +10.2% for Whites, 11.7% for Blacks, 10% for Hispanic, and 10% for Other.
Don’t get caught in the noise
I am optimistic, but I am also realistic. Market volatility can be scary. We want to hold on to what we have; it’s human nature to resist change. As I have said previously, the short term data is not necessarily providing us the information we need to make sound judgements for our long term benefit. The trick is in sticking with a balanced long term plan. At August Wealth, we have made our portfolio adjustments to reflect the changing landscape, and we have faith that our wealth will grow over time.
This quote resonated with me this month:
“A bird sitting on a tree is never afraid of the branch breaking,because its trust is not on the branch but in its ability to fly.” —Unknown
Joseph Cardello, Principal August Wealth Advisors, LLC The Loft, 101 Franklin Street, Suite A
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