This has been the hottest, most humid and wettest August I can remember in the Susquehanna Valley of Pennsylvania. It’s feels like a Florida summer absent the huge bugs and bad drivers. I’m so ready for college football and cooler weather as the calendar turns next week. Here’s what’s on my mind as Summer 2021 wanes.
For the first time in years, I intentionally skipped writing an investment outlook this summer, was hoping no one would notice. We’re still doing copious research and reading too many investment commentaries, but these are historically peculiar times with no historical context.
We see status quo investment conditions for the balance of 2021 and have our client portfolios in a fully invested position avoiding fixed interest rate credit - investment grade and high yield bonds - as much as possible.
The robust US economic reopening in 2021 is still ascendant. Nearly every business we know is booming; many, however, are still held back by a severe labor pool shortage and supply chain bottlenecks.
More good news arrives next week - federal unemployment benefits FINALLY end on September 4th. It was silly fiscal policy to pay workers more money to not work for so long; the cessation should really help solve the labor crisis.
We’re not overly concerned about the Delta COVID variant derailing economic momentum. Only the unvaccinated are getting really sick and there’s scant interest in a return to mass shutdowns. Moreover, there’s evidence that Delta cases are starting to peak despite the uneasy hospitalization headlines. Get vaccinated for your loved ones.
The FDA approval of the Pfizer vaccine last week was big news. The FDA did not succumb to political pressure to shortcut their normal new drug review process, which lends even more credence the Pfizer vaccine is safe. Immediately after Pfizer received FDA approval, many employers nationwide announced vaccination requirements to come to work. Good.
Mandatory vaccinations coupled with no more gratuitous unemployment benefits should fix the US labor shortage and sustain the economic momentum.
As we commented on earlier this summer, inflation is here and running hot. There’s a divergence of opinion about whether rising prices will be temporary or will persist. Our best guess is that inflation runs uncomfortably high for longer than desired but will not spin out-of-control like the 1970s.
An inflation wild card is the banking industry. The Fed’s historic manufacture of money since 2020 has created an ocean of liquidity, much of which is now deposited in banks. The banking system is healthy and leveraging these deposits into new loans, adding more fuel to the economic engine and stoking inflation. We’re obsessing about inflation and its future impact on investment portfolios.
The silver lining is that investors can make money during inflationary times, but not investing in technology stocks. The current complacency among investors owning overvalued, tech-dominated large cap stock index funds is not going to end well. Trust me, I saw this movie back in 1999 and remember the ending all too well.
Jeff Grundlach, one of the smartest investors around, recently stated the only explanation for the outrageous spending by this Congress is to intentionally forfeit the US dollar’s status as the world’s reserve currency. The spending spree has the annual fiscal deficit running at 40% of US economic output (GDP) and the total federal government debt now stands at $30 trillion and growing.
Equally disturbing is the Biden administration’s push to spend several trillion more in “social infrastructure” programs, much of which will be financed with even more debt. The future value of the US dollar is in real trouble.
Future interest rates moves are extremely difficult to handicap right now due to the distortions caused by Fed Reserve monetary policy. I read where 70% of all new Treasury debt issuance in 2021 financing the massive government budget deficit has been purchased by the Fed Reserve! You can get away with this stunt when you’re the world’s reserve currency, but not after you joined the ranks of financial banana republics.
Our best guess is that in early 2022 the Fed’s first move will be the gradual reduction of their $40 billion (!) monthly Treasury and mortgage bond purchases in the open market - which is just another way to print money - and then slowly begin to increase short term interest rates lest they upset stock and bond investors.
Good luck. The last two times the Fed has tried to undo their easy money policy - 2013 and 2018 - the US stock and bond markets went nuts and the Fed was forced to quickly reverse course. The only viable way out of the massive US debt overhang is more inflation to make yesterday’s debt obligation less valuable in future dollars. It’s how Argentina runs their government finances (ugh).
I’m troubled by the misguided anti-business tax policy that is likely to be jammed into new law later this year. We work with many business owners and respect the great risks they took to start and sustain their enterprise, creating new jobs, financially supporting families, paying their fair share of taxes and volunteering in their communities.
Now, businesses have a fat target on their backs as a piggy bank for politicians to pay for massive new social programs. Proposed tax law is seeking capital gain tax rates that could exceed 40% on the future sale of a family business plus material adverse estate tax law changes. Lenin and Trotsky would be delighted.
We know several business owners who are prepared to slam the breaks on future growth plans in this anti-business political climate. As a business owner marking the eighth anniversary of our practice, I understand their sentiment completely – I take the risk and government gets half?
Remember Margaret Thatcher’s brilliant observation about socialism: Eventually they’ll run out of other people’s money.
Here’s a toast to the continued good health of Democratic senators Joe Manchin and Kristen Sinema who (thus far) have refused to join the anti-business tax agenda. Stay strong!
Until next time, be well….Tim