Memorial Day

Friends,

Memorial Day is a time for Americans to honor and remember those who lost their lives while serving in the armed forces. Veterans will think back on the men and women who served alongside them who gave the ultimate sacrifice for their country and know that we honor and remember them.

Let’s not forget the essential meaning of the holiday. The service and sacrifice of these men and women should always be remembered — on this day and every day.

Sincerely,

The Research Financial Strategies team

Signs on the Horizon

Signs on the Horizon

A Strange World

All around us we see the same thing: weirdness.

According to a client of mine, a McDonald’s on Interstate 81 posted a sign in the window:  

Apply Inside … Work Today!

So anyone with a pulse can walk in off the street and get a job at McDonald’s. No resume? No references? Surely an interview.

Doesn’t that paint a picture of a white-hot economy?

The housing market seems on fire. Another client reported to me that a house in her neighborhood had a bidding war with nine contracts written on the property. The winning bidder paid $52,000 over list price.

And just look around you: in formerly deserted shopping malls, consumers seem to be spending like crazy. Again, a white-hot economy?

But dark clouds are forming on the horizon.

In a CNN interview[1] Ken Rogoff, Professor of Economics and Public Policy at Harvard, said he had met with some top professional forecasters who identified some frightening signs of an “extremely difficult global situation.” According to Prof. Rogoff, with “the lockdowns in China . . . , , war in Europe, and galloping inflation, you have the makings of a perfect storm of a global recession.”

Perhaps to give viewers some hopium, he said, “It’s a pretty scary risk, but not a certainty.”

So what are the signs that have Prof. Rogoff and many other top financial analysts on the edge of their seats? We’ve singled out four economic indicators to watch.

Sign One: The Stock Market

The year began with the markets in nose-bleed territory. January posted record highs for the Dow and the S&P. “As of early 2022, the Dow’s all-time high at market close stands at 36,799.65 points—reached on Jan. 4, 2022.”[2] On the same day, the S&P reached an intraday all-time high of 4,818.62.[3]

But (there’s always a “But”) the bloom came off the rose at the end of January:

The Nasdaq Composite ended the trading day Monday down 9.49% from where it started at the beginning of January, marking its worst month since March 2020—the start of the spread of the COVID-19 pandemic in the U.S.[4]

Since that ominous day in January, the bottom seems to have fallen out of the market:

After hitting record highs in early January, the stock market has lost nearly a fifth of its value — plunging stocks near bear-market territory. The Nasdaq (COMP) is already deep into a bear market. More than $7 trillion has evaporated from the stock market this year.[5]

The bad news from Wall Street has certainly impacted Main Street. Even though a minority of Americans invest in the stock market, when they see red ticker symbols at the bottom of their TV screens, their moods shift significantly. In May, consumer sentiment dropped to its lowest level in 11 years.[6]

When consumers get frightened, they stop spending. Not good for the U.S. economy, two-thirds of which comes from consumer spending.

Sign Two: Inflation and the Fed

And when consumers spend these days, they find that their hard-earned dollar doesn’t buy nearly as much as it did last year. At the gas pump, the one gallon that $3.04 bought a year ago now hits your credit card with a charge of $4.47.[7] Californians must pony up more than $5.96.[8]

To buy the same thing, a consumer who spent $100 in April 2021 will now have to spend $108.26.[9] That 8%+ inflation rate has finally freaked the Fed.

Inflation was indeed a huge problem in 2021, but the Fed sat on its hands and failed to fight the growing inflation forces. The big 8.5% number in March thus prompted Chairman Jerome Powell and his committee to raise interest rates by a half percentage point—the largest jump in 22 years.[10]

[And Powell] said this month the central bank would continue to raise rates by half a percentage point at the conclusion of each meeting until it’s satisfied inflation is getting under control — and then the Fed would continue to raise rates by a quarter-point for a while.[11]

Deutsche Bank recently sounded the recession alarm in a letter to its clients. As reported by CNN Business:

“We regard it…as highly likely that the Fed will have to step on the brakes even more firmly, and a deep recession will be needed to bring inflation to heel,” Deutsche Bank economists wrote in its report with the ominous title, “Why the coming recession will be worse than expected.”[12]

A gospel truth among stock market forecasters: The markets don’t like interest rate hikes.

Sign Three: Bonds

In the past, many investors fleeing the stock market used the proceeds to buy bonds. But that might not happen this time.

Cash is king, for bond owners are selling, too. As they sell, prices of bonds fall. As bond prices sink, interest rates rise (there is an inverse relationship between bond prices and interest rates). And this time, there’s another big bond owner selling bonds: the Fed itself. When COVID hit in early 2020, the Fed began to increase the money supply by buying bonds on the open market. But now, to hike interest rates, it’s selling off its huge bond portfolio.

All of this bond activity has produced a “yield curve inversion”:

​As bonds sold off and investors grew more fearful of an economic downturn, the gap between short-term and long-term bond yields has been shrinking. Yields on the two-year Treasury note briefly rose above those on the benchmark 10-year note in March for the first time since September 2019.[13]

This is a yield-curve inversion, which has preceded every recession since 1955 (producing just one false sign).[14]


Sign Four: Global Chaos

Again, weirdness. All around the world. Russia continues its war-crime adventures in Ukraine, choking off a major source of food to Europe and Africa. With NATO countries and the U.S. stopping purchases of Russian oil, energy prices have soared, contributing to the galloping inflation in the U.S. China has recently been imposing severe lockdown restrictions in its fight against the COVID virus. Bizarre videos circulating on the Internet (and not verified by us) have shown thousands of Shanghai residents screaming from their balconies.[15]

​While there has been no official announcement, residents in at least four of Shanghai’s 16 districts received notices at the weekend saying they wouldn’t be allowed to leave their homes or receive deliveries, prompting a scramble to stock up on food.[16]

Just as the world became deathly ill in the winter of 2020, when the COVID virus flew on thousands of airplanes taking off from Wuhan China, the world’s economy is about to catch another dose of doldrums as the world’s second largest economy slows to crawl in its battle with the same virus.

What Now?

What will it all mean? And where do we go from here? And what should you do now?

We’ll send a follow-up email later this week with a consensus of the experts.

As always, we encourage you to pass this article along to family and friends. We would welcome the opportunity to help them preserve their hard-earned assets.

Signs on the Horizon

Q1 2022 Update

Ehhh,  What’s up Doc?

Just two years ago, media had zero coverage of inflation as a topic of interest. Now, multiple stories appear every day about how inflation is affecting the global economy, consumers, and business.

In many ways, the economy is like a three-legged stool. For a strong economy we rely on strength in three sectors, consumer discretionary, financials and technology. Inflation is affecting all three of these sectors.

Consumer Price Inflation was reported last week at 8.5%1 with many forecasters expecting that it is the peak. Then the Producer Price Index reported inflation at 11.2%. Those higher prices that manufacturers are paying have not, yet,  been passed on to retail outlets. The CPI, even if it peaks at 8.5% isn’t going to ease quickly.

Whether at the gas station, grocery store or general shopping, higher prices have caught our attention. Household and business budgets are being reprioritized by reducing discretionary expenses which will eventually impact the economy.

Housing is a major cause of inflation2 as the country deals with a limited number of houses for sale and a growing demand due to Millennial household formation. Housing data is added to the CPI on a lag. Rising home sales will be adding to the inflation data well into next year even if sales begin to slow.

Except for Baby Boomers, most investors have never seen inflation at today’s levels. Even most Boomers weren’t big investors in the ’70s when inflation was even higher than today. Gasoline rationing and grocery shortages were not supposed to happen in America.

In 1979, Fed Chairman Paul Volker changed monetary policy3 and aggressively raised interest rates to 13%. Home mortgage rates rose to as much as 21%!  The economy responded to expensive money and prices began to fall. ​The rate hike was hard and much like giving a child cod liver oil.  It was unpleasant but “what the doctor ordered.”  Collective thinking by the public and all levels of government changed from this experience.

Forty years of declining interest rates4 benefited job creation, wages, purchasing power and the country’s standard of living.  The stock and bond markets began long-term appreciation trends. “Buy the dip” and “the market always goes up” became common beliefs.

Today’s Fed Chairman, Jerome Powell, has a task similar, but different, than the Fed confronted in the ‘70s.  In the post-Covid economy business conditions are much different than at the beginning of our technology explosion.

Raising rates aggressively could cause a recession5 boosting unemployment and aggravating existing shortages.  Higher interest rates would push 30-year mortgage rates above the current 5% slowing home sales. Lower home sales results in lower employment and broadly impacting related industries.

A broad base of stocks has been declining for several years6, but the falling prices have been masked by Wall Street propping up favored technology and growth stocks.  Now, with the Fed announcing higher interest rates those same favorite stocks that dominate major indexes are being repriced to lower levels.

For investors whose major experience in the markets has been post-2008, it is time to examine basic assumptions.  Interest rates are rising which means the safe haven of bond investing is gone7.

Bonds benefit from falling interest rates and lose value with rising rates. Bond values and interest rates are connected to each other as on a teeter-totter. The majority of investors have significant bond allocations as the primary means of protecting their portfolios. It is essential to reconsider this assumption. As of mid-April, Barclay’s Aggregate Bond Index (AGG) is negative 9.11% year-to-date. That isn’t the safety asset that investors expect.

Investor’s favorite FANG stocks (Facebook, Amazon, Apple, Netflix, and Google) are negative 18.66%. The NASDAQ is negative 14.63% while the S&P is negative 7.71% at this writing. This year is different than we are used to. It is changing and as the Federal Reserve attempts to conquer the inflation it created, more changes in the markets lie ahead.

Higher interest rates make rising dividends more valuable8 in the near term than investing in a company with an unproven product or concept. That includes many growth and technology firms.

Shortages have revived a focus in commodities9 which most portfolios have ignored for a few decades. New industry leadership will surface from recent knee-jerk volatility. We will adapt.

Questions? Call us. We are here for you!  301-294-7500

 

 

 

 

1 https://www.nytimes.com/live/2022/04/12/business/cpi-inflation-report

2 https://www.washingtonpost.com/business/2022/01/31/if-policymakers-are-serious-about-tackling-inflation-they-need-address-soaring-housing-costs/

3 https://www.thebalance.com/who-is-paul-volcker-3306157

4 https://www.ocregister.com/2021/10/19/40-years-of-falling-interest-rates-who-got-rich/

5 https://www.bankrate.com/banking/federal-reserve/will-the-fed-cause-a-recession/

6 https://www.cnbc.com/2022/02/16/stock-market-futures-open-to-close-news.html

7 https://am.jpmorgan.com/br/en/asset-management/adv/insights/ltcma/rethinking-safe-haven-assets/

8 https://www.investopedia.com/articles/investing/072115/do-interest-rate-changes-affect-dividend-payers.asp

9 https://www.bnnbloomberg.ca/commodities-soar-as-anxiety-over-supply-shortages-increases-1.1732299

Signs on the Horizon

Happy Holidays from Research Financial Strategies

Traditional Holiday Fares

Whether you celebrate Christmas, Chanukah, or Kwanzaa this December, the festivities wouldn’t be complete without the scrumptious foods that make up our personal traditions. Before you reach for another helping of mashed potatoes and gravy, see how well you can match up the traditional dishes to the many other countries who will be celebrating the holidays as well.

Austria                                     Tamales
Denmark                                 Potato pancakes fried in oil
England                                   Fried carp
France                                     Big female eel
Israel                                       Turkey with truffles
Italy                                         Oysters and foie gras
Mexico                                    Porridge
Norway                                   Codfish with boiled potatoes & cabbage
Poland                                     Noodles with poppy seeds
Portugal                                   Long bread filled with ham and raisins
Spain                                       Pudding with flaming brandy
Sweden                                   Roasted goose
Venezuela                               Fish soaked in lye

This holiday, consider adding one of these dishes to make some new traditions with your friends and family. And, as is our tradition at Research Financial Strategies, we will continue to monitor your investments.

We wish you the happiest of holiday seasons!

Jack 
and your entire team at Research Financial Strategies

 

Answers:  Austria – fried carp; Denmark – goose; England – pudding with flaming brandy; France – oysters and foie gras; Israel – potato pancakes fried in oil; Italy – big female eel; Mexico – tamales; Norway – porridge; Poland – noodles with poppy seeds; Portugal – codfish with boiled potatoes and cabbage; Spain – turkey with truffles; Sweden – fish soaked in lye; Venezuela – long bread filled with cooked ham and raisins.

Special Edition – oil and gas prices going UP!

Special Edition – oil and gas prices going UP!

$200 Oil Trifecta
Cold – Supply – Change

Three Forces

The weather, Mideast supply, climate change—these three forces could combine to give us oil costing $200 per barrel in the not-so-distant future. And the first two—weather and supply—could very well give us $100 oil in the immediate future.

Bank of America (BoA)

BoA points to the weather as the potential cause of oil costing $100 per barrel in the winter of 2022. According to Reuters, BoA Global Research recently posted an update:

“A much colder than normal winter could lead global oil demand to surge by 1 to 2 million barrels per day (mbpd), with the winter supply shortfall easily exceeding 2 mpbd in such a scenario, the bank said in a note dated Sept. 10.”[1]

The BoA note continued:

“Downside risks include a new COVID-19 wave, taper tantrum, a China debt crisis, and the return of Iranian crude barrels. Having said all of that, winter weather risk is quickly becoming the most important driver of energy markets.” [2]

Weather experts point to an artic Polar Vortex threatening Europe and the United States.

“A new stratospheric Polar Vortex has now emerged over the North Pole and will continue to strengthen well into the Winter of 2021/2022. It will interact with a strong easterly wind anomaly high over the tropics. This interaction happens every few years and has actually brought colder winters to Europe and the United States in the past.”[3]

So bundle up to stay warm. And stick some extra money aside to pay for higher gas and a spike in home heating.

OPEC—At It Again

Covid brought a decrease in the demand for oil. Responding, OPEC cut its output by 5.8 million barrels per day. Then, when world economies bounced back faster then expected, OPEC raised production 400,000 barrels per month.

The rise was not enough to tackle the rise in gasoline prices, so the Biden administration and the government of India called for a more rapid increase in production.

“OPEC members seem to not view rising prices as a critical problem for now,” energy analysts at risk consultancy Eurasia Group said in a research note.[4]

So brace yourself: cold weather and a shrinking supply could give us $100 oil by year’s end.

And Then There’s This

Recently, western governments have banded together to limit the rise in the Earth’s temperature to less than 1.5 C degrees. How to achieve this goal? According to the journal Nature, the secret lies in keeping oil, gas, and coal in the ground:

“A report by scientific journal Nature earlier this week noted that 58 per cent of the world’s oil reserves, 59 per cent of fossil methane gas reserves and 89 per cent for coal reserves should remain in the ground . . . .”[5]

Needless to say, this is not music to OPEC’s ears, and according to one Mideast energy minister:

“‘Recommending that we should no longer invest in new oil… I think that’s extremely dangerous,’ Mohammed bin Hamad Al-Rumhi, Oman’s energy minister, told a conference on clean energy transitions on Thursday.”[6]

“‘My biggest fear, if we stop investing in the fossil fuel industry abruptly, is there will be energy starvation and the price of energy will just shoot (up),’ said Al-Rumhi, in charge of output in the Middle East’s largest producer outside of the Organization of Petroleum Exporting Countries.”[7]

Cutting supply does not necessarily reduce demand. As noted above, prices will just “shoot up.”

So $200 oil might very well greet us at the pump in the not-so-distant future.

Signs on the Horizon

Special important safety notice

Dear Friends,

Recently, I have been reading about a sharp increase in auto break-ins in my neighborhood and in several around me. As the COVID-19 variant surges back to levels last seen in March 2020, you can expect to see a rise in crime.

Car thieves now have a device called a “repeater.” Depending on the distance from your car to the place in your house where you keep your car keys, they can use the repeater to communicate with your auto fob and unlock your auto. If you can stand in your kitchen and unlock your car by pointing the fob through a window, they can do the opposite with the repeater and intercept the signal.

When my wife and I read posts about break-ins on our local Neighborhood Next Door website, we were surprised to read that car owners often leave purses, wallets, briefcases, laptops, and money in their cars overnight. If thieves can get into your car, they can and will help themselves to your belongings. They will also steal your EZ pass and your garage door openers, which might give them access to your house.

We all need to be more diligent as our country struggles with this new variant of the virus and its associated new crime wave.  

Please take this seriously and do whatever is necessary to protect you and your property.

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