Our more seasoned readers remember the 70’s and 80’s. A time where oil prices (and scarcity) were the primary lynch pin behind inflation. Inflation that ran at double digits at home and across the globe. Poor fiscal and monetary policy were a big part of the problem due to conflicting desires by policy makers. At that time, monetary policy goals included full employment, price stability, and currency stabilization. Problematic in that these goals were not simultaneously solvable. Not until the Volker rate hike culminated in March 1980 at 20 percent did inflation end. Yes it caused recession, yes it was problematic for the politicians that promised prosperity, and yes it cleaned the slate for 30 years of future growth. A reasonable trade and a good outcome.
Looking ahead (and behind) from here. We are in a place very similar to the 80’s. Poor resource policies (regarding oil), coupled with timing of global supply sources, has raised the cost side of the equation. Blanket Covid shutdowns severely disrupted supply chains and massive retirement of the “55 to 65” crowd added to the labor shortages. Top it all off with “free money” that existed as policy for too long, and you have the tinder box for inflation. Symptomatic of this was the advent of rampant speculation and excessive use of debt. Everything from crypto to the family house went parabolic in price. Too much so. Inflation (at first) seems ok but long term its economically crippling and societally disruptive. Not a devil you want to dance with…
Great story Ed… But what’s the point… In short, I believe the Fed is on the right track and will get the job done. Students of history understand failure is NOT an option. Increasing interest rates and quantitative tightening are the tonic to put the inflation genie back into the bottle. I also believe it will cause recession, much like in the 80’s. Collateral damage for sure, but necessary to achieve the price stability that is the Fed’s primary mandate. How bad a recession… depends on your situation. For those that are not over leveraged or living on hope, not too bad. Probably emotionally feel worse than the numbers will show, thanks to the media and their spin. But, and it’s the most important part… putting the economy back into normalcy, killing inflation, and pushing the reset button are the long-term answers to long term prosperity. As investors, that’s the goal. I for one, am ok with some short-term pain in trade for long term success. Portfolio declines are never fun, I get that. Having an understanding of why is helpful. So is having a longer-term perspective. When the bear market ends, I would fully expect the resultant economy (and investment) growth to overcome the recent declines. Over 3 to 5 years, by a lot… Call me an optimist, but that’s my belief.
As always, don’t hesitate to reach out at any time for anything you may want, need, or wish to discuss. We are here for you and your family. All our best.
Ed, Frank, & Tammy
Edward Stiles
200 N Union St.
Kennett Square, PA 19348
cell 610-745-1931
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