Dear Clients and Friends, It feels like I just sent our March update!
But here we are, already entering into the second quarter of the year. Yet, in many ways every month is feeling like a year!
On March 14th, the markets started what has turned out to be a solid recovery. Our belief is this year will have modest returns and we see the risk of a recession in 2022 as low. In fact, Franklin Templeton offers an interactive “Recession Risk” dashboard. Check it out, play with the sliders, and watch the video if you have a few extra minutes.
You can see we are firmly in the expansion phase by the leading indicators:
You can also see that GDP is also growing and that we are on track for where we would have been without the COVID shutdowns. It is really quite astounding at how much GDP reduced and how strong things came back.
(source: YCharts)
Interest rates have increased dramatically on the 10-year US Treasury, from 0.65% in May of 2020 to 2.35% today. But you can also see that they are still at historic lows. I also included the historical inflation rate. And what you will notice is that they tend to move together over time.
In other words if inflation is high, then interest rates will tend to increase. The opposite is also true.
(source: YCharts)
If you are wondering why there is so much inflation, I have added to the graph the Federal Reserve’s creation of money (see M2 / blue line in the chart below) and government spending (green line).
The government has three sources of money to spend:
- Taxes
- Borrowing
- Printing
What you will notice is a spike in government spending, followed by a spike in Federal Reserve printing, followed by a spike in inflation, followed by a spike in interest rates.
You can also see that government spending has barely come down, but the money creation has come down a lot, and that interest rates have not caught up to inflation.
What the Fed and the rest of us are hoping is that as they raise interest rates and reduce the new money supply, inflation will come down. However, even if inflation comes down to 4%, interest rates will have to be close to 5% which is twice where we are now.
(source: YCharts)
The world is going through many growing pains right now, and as in life, it creates uncertainty and much volatility – but on the other side there are benefits.
I just read The Adversity Advantage, by Erik Weihenmayer who was the first blind person to climb Mount Everest. In fact, he climbed the tallest peaks on all 7 continents! The premise of the book is that adversity is the fuel of growth; that life cannot improve without adversity. Our culture tends to look at adversity as the enemy – something to be avoided, bypassed, or numbed. Jordan Peterson explains that sacrifice was one of the greatest discoveries – that giving something up in the present makes the future better.
Adversity and sacrifice apply to the markets – the best performance tends to follow the biggest downturns. Downturns, like any adversity, tend to shake out many people, but those who struggle through and even take advantage of them can be rewarded.
As always, if you have any questions, let me know and I’d be happy to help.
Warm Regards,
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All performance referenced is historical and is no guarantee of future results.