2022 First Quarter Newsletter
Another major problem is inflation. My definition of inflation is too much money chasing too few goods. This inflation surge, about 8%, leaves the Fed with little room but to increase interest rates and try to get control of the money supply. The term being used is stagflation, a stagnant economy with inflation. To some in Congress, modern monetary theory says the government can keep borrowing and spending and that government largess does not portend future inflation. You are now seeing how false that is. Barron’s thinks the actual rate of inflation including food and energy, is closer to 16%.
Inflation may continue at 4% to 5% over the next several years even though the Fed is trying to get control by increasing short term interest rates. If they raise rates too fast, they might strangle our economy; too slow will not do much. Also, the government has a huge debt to service. If interest rates increase, the paid interest on new government bonds may be a large portion of our Federal budget. Another problem is if the Fed over-reaches to increase rates and the economy slows significantly, they may have to pause or reduce rates. The Fed is in a difficult place.
What I see for the near future is higher costs for gasoline and the basics. Incomes may increase, but not fast enough to offset the higher costs of living. This may push individuals to get off the dole and find employment, which is what is happening. The government is also thinking about additional funds to help people with their bills. That thinking is how we got into this mess.
The stock markets have declined since December with January and February being the worst. There was some breathing room in March and I hope that continues. I still think value will slightly outperform growth this year. If the Fed increases the short term rate about 7 times this year, bonds are going to be hurt. I still like stocks and short maturity bond funds.
One of the main reasons for market volatility is markets dislike uncertainty. That’s where we are now, lots of uncertainty. The war in Ukraine, world inflation, the price of oil, the prices for all
necessities and even the ability to get necessities are all adding up to uncertainty. It looks to me that the foreign markets have more growth problems than we do in the US. These are the toughest times I can remember. Corporate earnings should start mid-April and appear to be increasing which may decrease the uncertainty. There are discussions concerning a recession. Please remember, economists have predicted six of the last two recessions.
This is a very difficult time for all investors. It does take a lot of courage not to act and that is a legitimate strategy amid confusing crosscurrents. You should ask yourself how long before you will need your money. If it is short term, then we must act. If it is long term, then let cooler heads prevail. If you are losing sleep, please let me know so I can make changes to help you.
There may be food shortages in some of the developing countries. Ukraine and Russia are two of the larger grain exporting countries. Russia has been sanctioned which stymies their sales and Ukraine is still trying to piece together an economy ravaged by war. There may not be enough capacity in other countries to make up the shortage and that is another unknown.
Timing the markets has also gained some press lately. It means selling your portfolio and waiting for the market to drop and then buying back in. It is not that easy and I do not recommend timing the markets. I think it is a losing game. I use cash to reduce some volatility, but your basic portfolio remains the same.
I am not sure about the increase in oil prices. It has a lot to do with sanctions and the decline in US production which has a lot to do with the administration curtailing drilling. Using some of our emergency reserve does very little and it has to be replaced. Europe needs Russian oil and natural gas for heat and that need will probably lessen as spring arrives. The Middle East has not measurably increased production and our consumption has increased. The bad actors in some of the oil countries are not legitimate players in this market.
Covid problems seem to be reducing although the new Omicrom variant is growing. It appears to be less lethal but could still hinder future employment growth. Many individuals are working and that has reduced the unemployment rate to the lowest in almost 50 years. That might help the supply lines which are needed for economic growth. According to the Congressional Budget Office, government tax receipts are up about 26% from last year helped by new employment.
The new White House tax changes and the tax on unrealized cap gains is a nightmare. I do not see a way to fairly value unsold assets with no apparent way to recoup paid taxes if the value drops in the future when an asset is finally sold. The Treasury Department would be instructed to devise ways of valuing illiquid assets by setting the value and then assessing the tax. Heads they win, tails you lose. The proposed new tax law is also supposed to be for anyone worth over one billion dollars. This was tried in Europe and it never worked. Enough Senators have indicated they will not support the proposal.
When you look at your first quarter statements, you will see a decline in values. This is the first decline in a very long time. In these markets, there is no place to hide. Both stocks and bonds declined and the only asset that did not decline was cash and natural resources, if you invested early enough. Let’s look to the future. If the war reaches an end and if the Fed works its magic, the next quarter may produce some positive returns.
Thank you for your patience and trust. I am here to help. Do not hesitate to call me.
James F. Mangam, Jr., CFP, CLU