The economy and the markets have indeed recovered and quite nicely. The markets are priced for good (but not great)… As we have said (a lot) the last couple of months, the easy money has been made. If it appears we are in a holding pattern regarding the markets, we are…Where too forward will depend on how the market perceives the economy is doing on three things.
First…one of the most interesting things one sees today, is the numerous supply/demand imbalances. While not unexpected after the global economy has been completely shut down, the magnitude of the imbalances has been deeper due to “things done during the pandemic”. Everything from “mailbox money to juiced unemployment payments” have a lagging (and dragging) effect. While the jobs have come back, the labor force has not. To see it in action, just try and get an Uber or a cab, a restaurant reservation on a weekend, a contractor to do a home remodel job, or collect your baggage after a flight. Across the board, labor shortage is a drag on capacity and is causing labor rates to rise. Good or bad is the subject for another debate but wages in labor-intensive jobs WILL increase. The labor force will return and probably before the end of the juiced unemployment in September.
Second, the compound to this is the double whammy of commodity shortage due in part to Covid-related reduction in capacity. A year ago, things like gasoline, lumber, paper, and industrial metals weren’t in great demand. With everyone staying home, why would they be. Fast forward the tape today, and the demand far outstrips the supply. The imbalances will be worked out and equilibrium will come back, but until then expect to pay more for hard products. There will probably be some headline-grabbing stories of commodity prices soaring as the evil axis of the press looks for tomorrow’s crises but it’s to be expected.
Third, the other interesting imbalance that exists is money. Yes, the dead presidents we use to pay for things have gotten cheaper. As we went down the Covid rabbit hole, central bankers did what they should have and liquified the economy quickly. As I mentioned in prior ranting, that action was what saved us from a great economic depression. Kudo’s to them for that, but the real trick now is to take the fire hose away and wean us off cheap money and insanely low interest rates. The visible by-product has been the crazy speculation we have seen. Just look to cryptocurrency, NFTs, SPACs, Reddit day traders, and Dogecoin as the result. All functions of too much cheap money sloshing around and too many “smart people” (pun intended) looking for ways to leverage it. Looking forward, the money supply needs to go down and interest rates need to go up. The trick will be the rate of change and the ultimate landing spot for both. Again, the minions of the press will be in full throat touting “runaway inflation” or similar. True or not, they WILL push the narrative.
Looking forward, there are lots of cross-currents to navigate but then again, we always do. Personally, we would suggest taking advantage of low interest rates now if possible. Look to refi existing debt to a lower rate if you can. If you are bored or looking for a side hustle to kill time, Uber or Lyft driving has never been more lucrative. Especially on weekends or high-demand areas. Pass the idea to your kids and grandkids who may be looking for some extra cash. Regarding your investment portfolio, stay in your lane. Nothing wrong with a revisit to your risk tolerance or allocation strategy but now would not be the time to go “all in” on a crypto wealth accumulation strategy or day trading your 401k. Dabble if you will but keep your real money in your core strategy and know where your money is.
As always, thanks for listening to us ramble. If you would like to discuss it (or anything else for that matter), give us a call. Love to catch up on life and things financial.
Ed Stiles & Frank Vance with support by Tammy,