Markets continued their upward trajectory in the first quarter, after a remarkable run in a chaotic though profitable 2020. The vaccination tsunami has hit the beach, and stocks continue to soar to new highs. Everyone in our office has received their jab in the arm. It is a wonderful thing, and can only get better, right?
The day-traders of yesteryear have re-emerged in droves, many of them teenagers investing(?) their hard-earned stimulus bucks (tongue-in-cheek) in GameStop and other so-called Meme stocks. You can’t lose – these neo-masters of the universe have discovered the market is more fun than high school. Doesn’t anyone find it a little troubling that much of this mania is fed through accounts offered by a firm named RobinHood? Party like its 1999. All I can say is I’ve lived through 7 corrections, and many of these new “investors” have yet to see one.
There are now 7,500 crypto-currencies, several hundred SPACS (special purpose acquisition corporations), something called “Non-fungible Tokens (NFTs), and the aforementioned Meme stocks, all trading for hundreds of Billions, if not Trillions, of dollars. There is no shortage of experts proclaiming the “inherent” value of each of these modern wonders of the financial world. We are thriving in a sea of new paradigms – Yippee ki yay!
Buyers beware. Much of this is being financed by the US Federal Reserve Bank spewing digital dollars. Cash is very fungible asset that like water will flow through an economy any which way it can. All of that free money from the Government is the same as water flowing from a burst dam, running down the valley, with much of it accruing to the benefit of asset price inflation. Tried to buy a house lately? You will know what I mean. The equity markets are equally blessed, as more funds than an economy can absorb are driven to shares of anything new and shiny, including cryptos, SPACS, NTFs, and Memes.
The contradiction of this in a world concerned with income inequality is that the top 10% who own the bulk of assets being inflated get richer, while the rest of the population has its standard of living slowly devalued away. It is a long-known concept called money illusion where today’s promise of more free stuff only results in diminished spending power over time.
There will be a cost to this. Today’s gain will lead to long-term pain. Hopefully, it will only be an acceleration of inflation, and a lowering of living standards. But money doesn’t grow on trees.
In the short-term, funds flows will power up an economy in recovery. We expect that markets will move higher for the rest of 2021.
But Seriously folks…
The most frequent question I have been asked for the last couple of months is “What are the implications of trillions of dollars of deficit spending on my retirement portfolio?” Addressing the pandemic in 2020, the US and other world governments ginned up several trillion of debt-funded cash as a necessary response to the pandemic. No one questioned the need for it.
However, an election is behind us. The new the administration is proposing additional Trillions of dollars for any number of programs, including infrastructure, the green economy, and income re-distribution. Few voices are standing up and alerting us to the fiscal risks. And the proposed tax increases won’t even come close to paying for the new largesse.
There is no shortage of pundits claiming the necessity to support an economy in dire straits, and Modern Monetary Theory supports this way of thinking. The US needs infrastructure spending, we must save the planet from fossil fuels, and stop the seas from rising. These claims are easy to ascribe to despite varying levels of veracity, as long as no one is feeling any pain from receiving free money. This is a political calculation, not an economic one.
Most Wall Street economists and strategists support the view that markets will continue to rise in 2021, and inflation will be subdued, for now. We agree partially, though inflation has already started to accelerate. At some point it will become a problem, and then someone will (presumably) act to control it. It is easy to promise relief “at some point in the future”, but current promises receive no accountability down the road.
The interests of our clients are our top priority. In anticipation of the changing fiscal environment we will seek to shift assets to those areas of the economy which provide the following:
1) Inflation protection – equities, real assets, and industrial commodities.
2) Continue seeking real growth in excess of inflation.
3) A core of defensive positions in solid value-based equities paying steady dividends.
The world around us is experiencing an increasing rate of change, and as always it is incumbent upon us to try and stay ahead of the curve of opportunity. We expect to see much growth in the areas of electric vehicles and transportation, clean energy, genomics, logistics, and internet-based industry.
We expect that bonds will continue to provide minimal opportunity as long as global deficits remain high. Governments in Japan and Europe have maintained low to negative interest rates for many years – they simply cannot afford an economy where interest rates are market driven – higher rates will explode already problematic deficits. The US is pushing itself in that direction. The result of this policy long-term is diminished prospects for economic growth.
The rules of math are fixed by the laws of the universe, and pretending otherwise is delusional. In the economic world it is money illusion. Our effort as advisors is to continue the search to stay above water in an increasingly turbulent financial sea.
Alfred E, Neuman, late of the now defunct Mad Magazine was famous for his line “What, Me Worry?” That is our job.