October 18, 2021
At the End of Q3 2021 – Investors are confronting the long-ignored problem of inflation. With food, gasoline and home heating costs rising, the problem is no longer avoidable.
There is little that households or businesses are able to do but cut out other discretionary spending. That’s problematic for lifestyles and the national economy which is dependent on consumption of non-essential goods.
Government officials, especially the Federal Reserve bankers, and stock analysts are divided over inflation as “transitory” or a stickier problem.
No one who is trying to explain inflation, or its solution, is able to alter the impact of very bad weather problems. Whether droughts in South America or typhoons in Asia, shipping has been seriously disrupted. A lack of labor at ports of entry and rail hubs persists. Even if it was plentiful, finding enough truck drivers is currently impossible.
For the first time in decades, wages are rising as businesses compete for employees. Even with more pay, it is often not enough to stay even with the cost of living. Employees are quick to quit for more pay and plenty of job choices.
An unintended consequence is company profits will gradually improve. First, owners and managers will spend more on training and automation. Employee productivity will increase allowing the higher wages to “stick.” Inflation will be less “transitory.” The cost of living will be re-set at a higher level.
Since the onset of Covid-19, the Federal Reserve and Congress have made money plentiful along with decisions to shut down the economy. The increase in Federal debt was to offset the stay-at-home policy and maintain as much consumer activity as possible. So began the work of the Law of Unintended Consequences.
Beginning in November, the Fed will begin unwinding its intervention in the markets. It will be doing so at the same time economic growth is expected to slow in the USA and globally. These concerns weighed heavily on stock prices in September and continue this month.
With the pandemic onset in 2020, technology stocks were even more heavily favored than in prior years. The result was heavy price speculation in brand name companies. That trend has cooled with rising interest rates.
The runt of the market, energy, has garnered favor with the onset of reality. Europe, which has led with embracing “green energy” sources, has insufficient power for home heat and industry as winter comes to the Northern Hemisphere.
The USA is no longer energy independent but reliant on the good graces of OPEC. THE WHAAT? OPEC likes higher prices and being back in the “catbird seat.” Smaller USA oil producers that can be profitable with oil above $80 a barrel are reluctant to restart wells fearing more adverse rules from the Administration.
Even, China’s typhoons are impacting us. How? Chinese coal mines have flooded forcing the country to buy up as much coal, oil and natural gas as it can grab.
Fossil fuels are fungible. They can be shipped to any buyer willing to pay. Supply-demand forces result in global price adjustments which affect us at the gas pump and in stores. From the shipping container to a distribution center to the local grocer or department store, transportation costs are impacting budgets.
Whether it’s commodities, retail products or stocks, markets are dynamic responding to supply and demand forces.
The individual client portfolios as well as the portfolios we manage in 401k plans adapt to market changes. Adjustments are seldom instantaneous but evolve over time. Perhaps we could say “transitory.”
Reports continue surfacing in the financial industry that the standard approach to risk management of 60% stocks and 40% bonds is outdated and an inadequate way to manage risk. When we find those reports, we smile and celebrate. “Buy and hold” isn’t risk management. “Rebalancing” a portfolio isn’t risk management.
Warren Buffett’s Rule 1 is “Don’t lose money.” Rule 2 is “Remember Rule 1.” The rules require a different approach to markets other than “investing for the long-term.” Our portfolio focus is on the here and now. We don’t know the future. Neither does anyone else.
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