Sunrise, Sunset
Padre Island, the world’s longest barrier island, spans the south Texas coastline for 113 miles. Its narrow profile, and north to south orientation, allows for spectacular views. You can enjoy the rising and setting sun from a single vantage point, across the Gulf of Mexico to the east and the Laguna Madre to the west.
The earth’s rotation around its axis, and its axial tilt, allows for the seasons and the movement of the sun across the sky. The sun’s route produces sunrise after sunrise, sunset after sunset. It is expected, dependable, and it is the same sun and resulting light that we experience day after day. If only investment markets were as dependable. Unfortunately, the laws that govern the universe are quite different from the laws that currently govern the investment markets.
The issues that impact capital markets do not always come into view and shine a light, like the sun. Sometimes there are dark forces and unexpected events that, at one moment, are below the horizon, and at the next moment, are breaking into view to the surprise of everyone. Clearly the unexpected dawning of the three P’s, as I would call them, has dramatically impacted the contemporaneous investment view – Pandemic, Putin and Prices.
All three of the “P”s have their own unique impact, but the Coronavirus Pandemic, and Putin the Psychopath, have more directly influenced the third P, Prices, or what we call Inflation.
The last period of extended inflation, called “The Great Inflation” during the 1970’s, included excessive government spending coupled with supply shocks. Spending on LBJ’s Great Society, the cost of the Vietnam war, a less independent Federal Reserve, ongoing economic policy mistakes, and two oil supply shocks, all led to a devastating decade of economic and investment performance. This was a decade laden with economic tears.
Our situation today is similar, but also different. Our ongoing deficit spending and the huge additional spending during the pandemic (demand shocks) are reminiscent of the government spending during the late 60’s and early 70’s, although with the pandemic we are fighting a different kind of war. But like the supply shocks of the 70’s, the pandemic (supply chain) and Putin (energy) shocks have been the other elements that have helped triple the level of inflation in a very short time.
The good news is that the Federal Reserve appears to be serious about not repeating the policy mistakes of the 1970’s, where the Fed underestimated the ability of inflation to stay longer and wreak more havoc than ever before. I still remember the ‘79 oil crisis, having to get up early to join the queue at any green-flagged, open gas station, before they ran out. No remote school or work at that time! Of course, driving a car that got 12 miles to the gallon didn’t help.
Fortunately, but painfully, Fed Chair Paul Volker came to the rescue starting in ‘79, subsequently taking the fed funds rate to 20%, leading to a rare double dip recession. Today’s Fed has aggressively been raising rates over the past year and the worst bond market in over 40 years would seem to indicate their seriousness. The good news is that even at 6½%, the current 30-year mortgage rate doesn’t yet equate to the mortgage rates that topped out at over 18% in 1982!
As we have discussed on these pages many times, navigating such times requires a consistent, dependable investment process, a more “sun-like” fourth “P” if you will. This process starts with a focus on our client’s lifeway goals over the long term. This is the only way to deal with the unknown and unknowable coming over the horizon tomorrow. As always, we appreciate the opportunity to be of service to you.
To more happy days and warm sunshine,
David
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