"Most of the Time the World Doesn't End..."

Isn’t it funny how little it really takes to turn our frowns upside-down?  Now, I have a very biased view on things. My profession requires me to pay attention to the financial markets, financial news, and popular news every day, and I can honestly tell you the amount of bad news has not decreased in the least these past couple of months. I know I’m preaching to the choir here. There’s a constant barrage of reports of violence, endless political bickering, an incessant muddying of truth, and a plethora of doomsayers selling the end. But… on top of all that hard-to-stomach news has been little sprinkled gumdrops of good (and/or not so bad) reports. If you merge that better news with the cooling temperatures, a return to opening schools matched with a formal lessening of COVID-19 restrictions, and stock markets heading in the right direction, the stage is set for a ready smile and upbeat step to the future.

Now… back to my professional duty – I was being honest when I said there was good news, and I’ll share those bigger points. However, in the larger grand scheme of things, the sprinkling of good reports does not mean everything is fixed. Inflation might as well be as high as it’s been. The Federal Reserve will continue to raise interest rates. Volatility will still be the most obvious feature of the financial markets. The global political and economic environment is still under a state of heightened friction. I will never be one to look a gift-horse in the mouth and the strong market recovery has been an unforeseen blessing, but we should not view it as a reflection of a world that has fixed all its problems.

The pinnacle of the good news has been the slowing inflation reports. The headline consumer price index came down month-over-month, while the core inflation rate remained the same. Shipping costs have come down significantly (but are still roughly 3X what they were in 2019). The reason for this reduction is that availability of shipping capacity has grown (there is more supply, or space for shippers… bringing the price they charge down). Much of this has to do with the “traffic jam” of goods at ports, airports, trucking hubs, and rail stations finally becoming untangled. The most evident reduction in prices we’ve all seen is at the gas pumps. Finally, the employment figures continue to be exceptionally strong (3.5% unemployment report), and wage growth continues.

There are still major inputs to inflation that are not backing down. Food prices remain at 40-year highs, and rent prices continue to climb to record highs. Although energy prices have had a significant drop, and many commodity prices continue to decline, they will remain some of the most volatile inputs for inflation and going forward could continue to keep inflation elevated if the rest of the world’s problems escalate. And again, although those employment reports indicate a very healthy job market, at the end of the day increasing amounts of people making even more money than before are inflationary inputs that will probably lead to more rate increases by the Federal Reserve.

The big point I am wanting to make with all of this is that we shouldn’t let the current environment of what I am guessing to be temporary bliss, weaken our longer-term resolve. The current investment environment remains the same, but we are hoping to increase future returns with proper investment behavior. Mostly that means continuing restraint in not joining with those again chasing risky dreams, both in equity markets (MEME stocks, and SPACs), and bond markets (high-yield and emerging market debt). However, we have recently purchased strong companies and sectors offered at what we consider discounts to their fair value, and we will continue to rotate into offerings of certificates of deposit and treasury securities with increasing yields.

I know this was a bit of dry material, but from the increased activity in your accounts you can tell we are having busy times. To top it off, me, my older sister Andrea, and Libby had to take turns house/puppy sitting for Mom and Dad this month. They went to Hinterland Music Festival in St. Charles, Iowa for 10 days. They rented a camper and joined my mom’s sister and her husband, and had a blast, albeit a very, very hot blast. Carter just started the second grade on Monday. The school was, for the first time in two years, allowing parents to walk their kids to class the first week at drop-off. I asked Carter if he wanted me to walk him in and he replied without hesitation, “No, I think I’ll be okay by myself.” Busy… but good… times.

I’ll leave off with two bits of wisdom from market veterans, past and present.

In good times skepticism means recognizing the things that are too good to be true; that’s something everyone knows. But in bad times, it requires sensing when things are too bad to be true. The things that terrify other people will probably terrify you too, but to be successful an investor has to be stalwart. After all, most of the time the world doesn’t end, and if you invest when everyone else thinks it will, you’re apt to get some bargains.

- Howard Marks

The intelligent investor is a realist who sells to optimists and buys from pessimists.

– Benjamin Graham

I hope you are all doing well. We’re here as you need us.

Justin Anderson