No Pau Yet!
This quarter opened with a “bang” as stocks reacted positively to a central bank’s retreat from high interest rates in the U.K. There was also some sentiment for reversing the tax-cut plans of the new Prime Minister as well as the high interest rate policy advocated by the U.S. Federal Reserve Chairman Powell. Open criticism of Powell’s inflation strategy seemed to drive stocks higher as speculation swirled around the thought that open criticism may be the beginning of the end of higher interest rates. If this speculation turns out to be accurate, then this market strength is very shortsighted. To abort the strategy would be tantamount to a surrender to inflation, accepting all the problems of a permanent high inflation rate in our country and the world at large.
We are not ready to take that bet as we believe Powell has a deeper belief in the need to control inflation. And frankly, we trust he has more courage than many of his counterparts around the world.
The rally that started the quarter had some technical flaws, so it has temporarily reversed and the market instead is going through a test of its low. So, where does this leave us?
Unfortunately, we’re back to the guessing game that has been frustrating investors for months. When will we stop raising rates? How high will they go? Will they affect the economy? How bad will the recession be? How will corporate earnings be affected? The short answer—we don’t know!
As a boy growing up in Lahaina, Maui, I quickly learned an appropriate response to any distasteful experience such as a physician’s repair job in an emergency room, or waiting in line for a movie or game, or going through some disciplinary activity. When someone muttered “No pau yet,” it meant there’s more to come—be patient. With regard to the previous set of questions: No pau yet!
The guessing game will continue until there is absolute evidence that inflation is subsiding or some other distinct factor appears that will likely change Powell’s plans.
Such a factor may be a changing fiscal strategy that promotes supply-side influence that helps complement Powell’s strategy against inflation. This will take political change but with the coming election, the timing couldn’t be better.
So much for the macroeconomic setting that affects investment decisions. We go through the process because we know it works. If we are careful to line up portfolios with the macroeconomic environment, our chances of excellent results are increased. Unfortunately, there are other considerations that must be digested before we’re acceptably comfortable.
What about Taiwan, Ukraine, and North Korean ICBMs? Bad news in this arena could quickly poke a hole in a portfolio.
When we take a hard look at our defense capabilities while considering our enemy’s, it is not comforting. Social issues like crime and porous borders give us more to worry about. The overall societal mess does not give us much confidence as millions of immigrants are put into the mix to make harmony a near impossibility.
However, out of this kind of negative environment comes much opportunity. Out of so much civic discourse can come unexpected positive change. The financial mismanagement of prior years seems ready to yield to a more positive ideology.
While we remain defensive in our investment posture, we are watching spots of innovation that could solve multiple problems for years to come. Just understand that while we have been defensive for nearly a year, we are anxiously looking for change. After spending over 50 years with Wall Street, one picks up a sixth sense. That sixth sense is beginning to tell us that a market turn is near…we certainly hope so.
As always, thank you for your continued support…