Trouble With a Capital T
One of my earliest memories is seeing The Music Man and hearing my mom sing the refrain “Ya Got Trouble” around the house.
Sung by “Professor” Harold Hill in the musical, he uses the musical monologue to drum up hysteria in the small Iowa town of River City.
“We got trouble, right here in River City.” It’s a refrain that catches the crowd’s attention which serves his selfish motives to make a few bucks.
What Me Worry
The sing-songy lyrics come to my mind given the turbulence in markets lately and especially in regard to the UST debacle [mostly because it starts with “T” and that rhymes with P which stands for “pool” but I digress…]
Diversification is supposed to offer portfolio protection but it’s been a trifecta of portfolio hits lately no matter the diversification. Take the following example of a portfolio with multiple asset classes:
Stocks are broadly down since their peak in December 2021.
The usually boring bond market is hard hit by rates rising.
Gold has at least not lost but since it’s typically a small portion of a portfolio, it didn’t do much for the average portfolio. Other commodities have been in the news for their flashy qualities. Highly volatile, the commodity asset class is usually a miniscule portion of the average investor’s portfolio allocation.
Inflation is killing cash’s value at an insane rate.
To put it in a visual format, here’s a chart showing year-to-date returns as of Friday, June 10th of the S&P 500, the Aggregate Bond Index, a Vanguard Money Market Fund, and Silver and Gold Indices:
Now compare a few sectors with the energy sector (black line) year-to-date:
(also as of Friday, June 10th)
Energy (XLE) is the outperformer you didn’t know you needed! Consumer Discretionary (XLY) has been the worst, Technology (XLK) pretty close to it, and Real Estate (XLRE) is down almost 17%. Consumer Staples (XLP) and Utilities (XLU) are hanging in there as investors chase the traditional value trend and hunker down in a perceived safe haven.
**All quoted returns worsened significantly today/Monday as I wrote this over the weekend.**
As you can begin to see from the charts, the traditional balanced portfolio is experiencing a triple whammy of hits against its bonds, stocks, and cash allocations.
Whether a passive or active investor seeking capital appreciation, stocks are practically mandatory in times of extreme inflation and hiding in cash is not a good strategy for the long term investor. Today’s news includes a consumer price index increasing 8.6% since one year ago in May. That is the highest increase seen since December of 1981. Purchasing power is getting clobbered.
Shelter costs rose at the fastest pace in 31 years! Food and energy prices are soaring and the devaluation of the dollar is on a steepening curve.
It’s been rough in 2022. That’s why we made this little ad:
…riffing on the fact that investing seemed so easy in the sugar rush days of max liquidity and historic levels of federal support of capital markets.
You know what comes after a sugar rush, though, don’t you?
The crash - LOL — No, seriously, though, the adage, “Stonks only go up” is a philosophy that was an alarming part of the Covid aftermath. Meme stocks and the gameification of investing is the unique lead-up to our own sort of Volcker Moment.
What Rhymes With “R”?
The big word on the street now is recession. Talking heads mostly seem to agree it’s imminent or is actually happening now. However, there is hope for a soft landing. Unlike a “dead cat bounce”, a soft landing is a good thing!
There’s a lot that pushes us toward using the R word: fiscal tightening, a land war in Europe adding additional long term global supply challenges as well as sky high inflation numbers. I’m rooting for a Goldilocks “just right” scenario that can get us to a soft landing without a deep and prolonged recession. However, I’m extremely cognizant of the long term effects of keeping markets propped up artificially with endless money printing. We’ve become dangerously accustomed to accomodative policy and coming down from a sugar rush is a fitting analogy to our current economic state of affairs.
With words tossed around like “cadence” in regard to the pace of the coming rate hikes, it does seem as though the fed’s approach is a thoughtful one. I’ve never had the patience for endless debate over rate changes. You’ll never please everyone because just as in investing where there’s always a buyer and a seller, there are always two opposing points to federal policy - especially monetary policy. After all, economics is the study of humans and money. Who you are as a human will determine whether the “thoughtful approach of the fed” in this Volcker-like moment results in devastation to your lifestyle or not.
Smooth Operator
The cadence — the timing and sequence of rate hikes - is a seemingly subtle thing but it will make all the difference in the way the economy sputters through the fiscal tightening process. Even the mention of a whopping rate rise of .75% is enough to give the stock market indigestion. Smooth and steady wins the race to beating inflation. Calming down a hot economy is a tricky feat to accomplish and I thought John Authers opinion piece in Bloomberg last week started with an apt description in the hopes of a soft landing:
“What are the chances of an economic soft landing? A month ago, I likened this to Captain Chesley Sullenberger’s heroic landing of a passenger jet on the Hudson River; possible, but very, very difficult.”
Authers suggests that a soft landing is possible!
Jerome Powell proclaims to be a great admirer of Paul Volcker. Let’s hope that Chair Powell succeeds in creating his own version of The Volcker Moment - tightening the fiscal reigns with the proper cadence and swiftness to quell inflation but not crash the economy.
Both he and Volcker held Federal Reserve Chair positions during times of extreme political polarization. Let’s hope that Powell can rise to the level that Volcker did in crafting a narrative that inspires confidence in a nation divided and can maneuver as deftly as the heroic Captain Chesley Sullenberger on Flight 1549’s miraculous landing on the Hudson River.
We could really use an inflation-fighting hero right about now.