May 2022 Mid-Quarter Update
“When the facts change, I change my mind - what do you do, sir?” ― John Maynard Keynes
Last week I had the opportunity to attend and investor conference run by Hedgeye in Stamford, Connecticut. It was two days of presentations by economists and Wall Street specialists. The timing of the conference was exceptional as we were able to have discussions “real time” during the crypto currency crash and FED nominations.
As you all know, we have been defensively positioned since December for a recession that we forecasted would last two quarters. However, with new updated information, we now believe the upcoming recession will extend longer into 2023. The main driver is the impact of inflation on the economy.
Higher for Longer
- Ukraine war keeping wheat and oil costs higher.
- India banning wheat exports outside of the country.
- Sadly, we will likely have deaths from famine and starvation in Africa.
- Transportation costs will remain higher.
- China coming out of lockdown will exacerbate the supply/demand imbalance.
- The Fed has stated they will raise rates at an accelerated pace and buyback/roll off bonds from their portfolio. They have no choice but to raise rates given the +8% CPI. The size and speed of the hikes will exacerbate the mild recession that has already started.
- Higher interest rates slow the economy as companies and individuals borrowing costs are higher. 30-year mortgages are now +5%. Corporate bankruptcies will increase.
- I always try to keep politics on the peripheral, but the tardy confirmation of Jerome Powell last week will come at a pollical cost. The Fed PUT, or the idea the government will bail out the markets from a severe decline is no longer a given and may be priced-in at a much lower level than the market expects. Immediately after Powell was confirmed, he gave an interview to NPR saying that he will let companies default and allow “controlled explosions”.
- Earnings from companies are expected to decline at a faster pace (in part due to inflation causing input prices to rise).
- Companies are beginning to lay off employees (Peloton, Wells Fargo, Carvana plus Facebook announced a hiring freeze).
- Credit card debt for individuals is at its highest level ever at $52.44 billion.
- Consumer confidence is down, and many Americans are worried about making ends meet.
Given this new outlook, we are further reducing our exposure to the equity markets. We may also reduce some credit exposures in our fixed income model to avoid losses from potential contagion. We do believe that interest rates are peaking and plan to hold our high-quality positions. As rates begin to decline, prices will go back up. We will maintain our gold positions.
We will absolutely look for opportunities to re-invest at lower prices as we are confident that we have the signals and tools to recognize when the time is right. The goal today is to preserve and protect, and we look forward to the day we can focus on growing our hard-earned wealth.
Please call or write with any questions you may have. Our lines are always open, and we welcome your thoughts and input.