Rod Skyles: The Unconventional Economist
Stocks and Bonds
Stocks are cooling Friday after consumer sentiment came in lower than expected. Still, the last two months equities, especially big tech, have been on a tear, with the S&P 500 up almost 8% in that time. The S&P has closed above 5,400 this week, and the tech-heavy NASDAQ has blown through the 17,000 level and is up almost 13% over the last 60 days. Inflation and investment and excitement about AI has lifted tech stocks through this period, even with a slowing economy. But remember, the market is not the economy, as there are times when stocks go up even when the economy is not great, and times when stocks go down even though the economy is good.
Going forward, stocks remain historically overvalued, and that will be an issue at some point in time, but the momentum right now is clearly positive, especially for tech and tech related issues. Consumer staple stocks are beginning to show the signs of the economic drag on the average American from the significant inflation we have seen over the last two and a half years. It may be the beginning of a downturn, but I would not bet against the market here, even if I also would not be a buyer in this environment.
As we near the end of the second quarter, one thing to pay attention to is the cyclical nature of stocks. Big investment firm managers will do what they can to drive stocks up at the end of a quarter to secure big bonuses (which are usually based on quarterly performance), and historically the end of the second and fourth quarters are the best. The first quarter can be both up and down, but if there is a struggle in the market, the third quarter historically is the worst, and most big market drops began in the third quarter. I am guessing these next few months may be a bit rocky, but honestly, this market has befuddled me. The one variable that could continue to prop stocks up is that it is highly likely that we will not get honest economic information from the government, as it is an election year, and this President is already in big trouble in an effort to get reelected.
Bonds, like stocks, have been on a big upswing lately, as the bellwether 10-year Treasury has rallied from a 4.7%+ rate in late April to just 4.2% in trading Friday. That is a significant gain, but bonds are still down year to date, 1-year, 3-year, 5-year, 10-year, and 15-year time periods. Think about that for a minute, the last 3 years bond market losses whipped out the best previous 12-year up market ever, that is just insane. And weirdly, nobody is talking about the bond market crash, and let’s be honest, that is what this has been. And look who gets hit from this crash: insurance companies, banks and credit unions, and pension funds are the biggest holder of Treasuries. This is a potential economy killer, and nobody is talking about it, certainly not the government (Administration and Congress) that has created the problem, nor their cronies in the media.
Unlike stocks, which will mostly benefit from the long-term inflation trap we find ourselves in, bonds and the conservative institutional and individual investors that depend on them, are likely in a multi-year bear market. The conditions for a continuation of a bad bond market are all there and getting far worse and not better. In every bear market there are times of temporary rallies, and this one will be no different, but the long-term prognosis for bonds, and the US dollar, are bad and getting worse, with currently no adjustments on the horizon. Look no further than Great Britain for this lesson, as the British Empire was at its peak in the 1930’s before the Second World War, and the pound was worth over 5 US dollars. Today, even though the dollar is has been plummeting, the pound is worth $1.27. This is the dollar’s future, we have passed the peak of the American Empire, and foolish government spending (see Britain) will devalue the dollar further, which is the primary cause of inflation. High and sustained inflation is the worst case for the bond market, Treasuries now offer below inflation returns and unusually high and increasing risk, not a good environment for Treasury investors.
US Economic Structure
While in the US economy still has some resemblances of capitalism, on a large scale we look much more like a fascist system, as we do have private ownership, but much of the economy is now under government control through taxation, tax incentives, and mostly regulatory capture. This turn to a more involved government in the economy has resulted in a widening wealth gap, one that is massively expanding right now. The stress that this puts on the majority of Americans has shown up in dropping life spans, and as the middle class is whittled away at by our policy makers in Washington and at the state level, this trend is likely to worsen. As the government has increasingly become more involved in healthcare prices have soared and regulations (especially Obamacare statistically) have forced consolidation in the industry, rewarding the giant insurance companies and hospitals at the cost to the consumer. The very government that touts their concern in the wealth gap is creating a worsening one by the very policies they create, many of which force small businesses out to the benefit of politicians’ big doners in large corporations. The only way to stop this trend is for government to both shrink in size (less spending of taxpayer money) and to significantly reduce the regulatory burden, which would take power and money away from the politicians, making it HIGHLY unlikely until Americans stand up and elect different politicians.
Weirdly, the left in the US readily talks about income inequality, and mostly are right about the subject, but they support policies that created the divide and make it far worse. The right tends to deny it exists and pushes back very little on the policies of the left that creates the problem, meaning they cannot be a solution to a problem they do not believe exists. In almost every measure, wealth, income, opportunity, the rich in the US are getting richer, and the divide between the top say 5% and the rest of the country is quickly widening.
I am certainly in the camp that believes the only solution that will ease income and wealth inequality is a smaller and less intrusive government. I challenge anyone to name a powerful central government that did not create a richer rich and poorer poor. The Soviet Union where the powerful controlled all and lived like kings while the 99% lived in dramatic poverty. Or Cuba, Venezuela, Nicaragua, and many other examples from today, not to mention China who has slave labor, in 2024(!), or North Korea. There is a shift going on, seen in Poland, and Italy in Europe and Argentina in the Americas, a shift away from a powerful and intrusive government back toward what the US was in the say 1950’s. There is hope of a change back towards a system that is more equitable for all, but today’s powerful US government is an antitheist to this aim and is the main antagonist behind the ever-increasing income and wealth gap between the rich and everyone else.
Opinion
A reminder, this piece is an opinion piece, and please take it as such. I saw a great quote this week about that, and while I try to base my opinions on facts as much as I am able, they are still just opinions and are certainly fallible. Here is the quote: “A fact is information minus emotion. An opinion is information plus experience. Ignorance is an opinion lacking information. And, stupidity is an opinion that ignores a fact.” I leave it up to my readers to decide which of these applies to me.
Sports
This is US Open week in golf, and we will get to that, but first let’s talk about a few other sports. I’m not a big NBA or NHL fan, but both are in their respective championship series, the NBA Finals and the Stanley Cup Finals. In the NBA, Boston will be going for a sweep Friday night over the Dallas Mavericks, if they win, they will break the championship record tie they currently hold with the Lakers, winning their 18th title. On the other hand, Florida leads Edmonton 2-0 in the Stanley Cup Finals, and need two more wins to win the franchise’s first championship. I was an Edmonton fan back in the glory days of Wayne Gretzky (the Great One) and Mark Messier when they won the Cup 4 times. On a personal note, I was playing in the Canadian Amateur in Montreal in (gulp) 1982, and Calgary Flames goalie Don Edwards told me in a practice round (he had also qualified) that I could walk into any bar in Montreal and not have to pay for a drink because I looked like Gretzky. Not sure I bought it (the nose and the hair were similar at that time, as well as stature), but it was something I will never forget.
Which brings us to the US Open, held this week at Pinehurst #2. I was privileged to caddy for my son Jordan in a major junior tournament in 2008 at #2 and fell in love with the course as well as the community there. The greens at the venerable Donald Ross course have been compared to upside-down saucers, and you will see players putt off of them this week. They look fairly large, but the edges all slope away, making the effective areas of some of the greens tiny, and recovery shots from off the green exceptionally challenging. For me, I remember the par-3 15th as being exceptionally tough, with the functional green being tiny, and when they are firm and fast for the Open, a very difficult short par three. Scores on Thursday were much lower than at least I expected with Patrick Cantlay and Rory McIlroy both firing 5-under 65s, but most players have been saying that the winning score is likely to be around 3 or 4 under in the end. Unlike the PGA, when I had an excellent record of picks, including winner Xander Schauffele, but I liked Hideki Matsuyama (first round 72) and Shane Lowry (74) as my top picks. In fairness, I had a friend asking for advice as he was headed to a casino to bet, and I said I thought a European would do well at #2 due to the creativity required, I just picked the wrong Irishman (Lowry instead of McIlroy)!
Should be an exciting weekend for golf, and for all you fathers out there Happy Father’s Day, the 15th rated holiday of the year! As a side note, Mother’s Day is the 2nd behind only Christmas… Miss you dad!!!
Quote
“My father gave me the greatest gift anyone could give another person, he believed in me.”
– Jim Valvano
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Rod Skyles 