Rod Skyles: The Unconventional Economist
Stocks and Bonds
Equity markets have sold off all week, especially higher performing tech stocks, driving the S&P 500 back below the 5,000 mark in early Friday trading. I did not intend for my remark last Friday on the growing instability in the Middle East to portend an attack by Iran upon Israel (and a subsequent response today), honestly did not see that coming. When I say attack, it should be called an “attempted attack” as Israeli defenses successfully thwarted the missile and drone onslaught. Still, this is a significant escalation of events, as Iran has been acting through its proxies in the area, and now is attacking directly, taking the veil off the events. However, it has been mentioned many times here how stocks are historically overvalued at these levels, and one my surmise (reasonably) that the stock fall of the last week is nothing more than an excuse for some to take significant profits, and not the beginning of a correction in the market, or a move to a bear market (20% or greater fall).
There are a number of signs that the economy is slowing more than data would suggest, as Proctor and Gamble reported earnings this week that showed slowing sales for the consumer staples giant. While they “only” raised prices 3% over the last 12 months, still sales were flat from a dollar standpoint (down in units sold) for the last 2 reported quarters. But remember, inflation is reflected in higher prices, it is not normally higher prices. What that means is simply the dollar (for us in the States) is losing value, that is the actual inflation. That event causes us to spend more of those dollars to by the same goods and services. In the case of P&G, they raised prices well below the more accurate inflation rate of 9.6% (using 1980 official government formulas) and still are seeing slowing sales. The significant dollar devaluation caused by reckless US government spending over the last several years (at an increasing rate of recklessness) has begun to hit the average consumer resulting in less sales, even for consumer staples companies like P&G.
The equity markets have risen dramatically over the last 15 years since the bottom (in stock prices) of the Great Recession in March of 2009. I like to think of the stock market as a balloon, blow it up then let some air out and you can blow it up next time even more. But if you do not let the air out, and keep blowing it up, eventually it pops. While the markets always have in the past recovered from those times of “pops”, the corrections are normally dramatic when the pressure has built up over time without that release. We did have a short reaction by stocks early in the COVID lockdown days, but that is the only 20% or greater drop we have seen in 15 years. Historically stocks release about ever 3.8 years with a bear market of 20% or more. We have built up a LOT of air in this balloon over the last 15 years, and it worries me that a large-scale correction (40% or greater) is something of great risk here. Again, it is WAY too early to judge a roughly 4% dip in the markets as the potential beginning of something worse, but with stocks this high for this long, near-term risks for equity investors remains high.
The bond market is getting a short respite today after a very tough few weeks. The interesting thing about the last week anyway, as geopolitical instability increases, there was not a rush to Treasuries as a safety net. This is a departure from the norm, and like the dip in stocks there are too few data points to make a call, but it could indicate how weak the world sees our US government’s financial situation. In fairness, there has been no real rush to safety, as gold and silver prices also dipped early this week before returning to near-highs today. It could very well be a rotation out of risk assets like stocks into cash for now at least.
The short end of the bond market remains attractive for conservative investors as well as money that wants to sit on the sidelines for a bit to see how this all plays out. The 1-to-6-month maturity Treasures are all paying over 5.3%, with the 4-month paying over 5.4%, which is not a bad alternative for investors. While that does not keep pace with real inflation which remains near 10%, it does still offer decent somewhat risk-free returns for the above-mentioned investors. The challenge that continues for bond investors is that while a dip into what could be a deep recession may drive Treasuries higher, the borrowing habits of the government will continue to drive rates higher in the long run. One should invest in Treasuries for their low-risk nature, and in the foreseeable future, the deficit spending of the government portends a solid increase in the risk of these securities.
Taxes
Since we are on the subject of the government overspending its resources, let’s talk about those “resources” the government does have. Last Monday was “Tax Day” which was also the anniversary of the day Abraham Lincoln died and the day the Titanic sank, which seems appropriate for that dark day each year. As we begin, please recall that the Revolution, the Colonies war against Britain, began from a protest of a 2% tax on tea that was imposed on the Colonies by King George III. Today we are taxed on the money we earn, the money we spend, the money we invest, the money we save. We are taxed on the car we drive to work (to earn that money we are taxed on), driving on roads we our taxes pay for, and buying gas for our car that is taxed. The companies we work for are taxed both on what they earn and what they pay us (payroll taxes), and they office in buildings that are taxed, and have licensing fees to exist (which is another form of tax). When we get home from our long days at work, we arrive at a home that is taxed (to us if we own it, through our rent if we rent it).
Even with ALL the money we pay to the government in SO many ways, the federal government, along with many state and local governments, spend far more than they bring in. As for the federal government, this overspending (deficit spending) creates the need to “print” or create more dollars to pay the difference. Like any commodity, more dollars reduces the value of each existing dollar, which results in inflation, often called the “invisible tax”, which is an appropriate name for sure. The sad part of all this is, if you or I did any of this, it would be illegal, and is the stuff of organized crime (like paying protection money to the mob). Try to print your own dollars and see what happens, you may get more time than if you committed murder. Yet, the government has exempted the Fed from these rules, and the Fed can print money at will with no penalty or recrimination. Tax Day always brings these wonderful emotions out of me, but remember when you pay taxes (of any kind), what does the government do for you, for all of that pain they inflict? I would say it good to remember that when you go to the voting booth in November, but not sure there is any real difference in the two main political parties, at least not enough that it matters economically.
Happy Friday! Sorry for the rant…
The Masters
Scottie Scheffler continues to cement himself as the undisputed current world number one with his second victory in three years at this years Masters. His run over the last few years is almost Tiger-like, without the mystery or big personality. By all appearances, Scottie is one of the nicest guys on a tour with a lot of nice guys. Yet he treats his competitors with all the kindness of a sniper, mowing down all that may be in his way. On Sunday, this year’s Masters had all of the look of a classic finish as the leaders were playing the 8th hole, where things normally begin to get exciting on Sunday. But one by one, the contenders shot themselves in the foot whilst the World Number 1 made 6 birdies against a single bogey from the 8th hole on. Through 8 holes there were four within 1 shot of the lead and three others that were within striking distance. Each of those competitors had at least 1 double bogey coming in, and few birdies, leaving Scottie four strokes clear down the stretch.
The tournament did have some great stories, as always. The first day leader was Bryson DeChambeau, the unique personality with a first round seven under par 65. On a very difficult and windy Friday, Scottie caught Bryson and they were joined by Max Homa, one of the most likeable and unique guys on Tour. Saturday brought more challenging winds, but much less than the previous day, with Scheffler finishing the day in the lead at -7, one stroke clear of two-time major winner Colin Morikawa and two clear of Homa. Outside of the self-destruction of the leaders outside of Scottie, and of course Scottie’s fine play, a new star emerged in Ludvig Aberg (pronounced Oberg) from Sweden. This young (24) powerful Swede, whose college nickname was Ken (as in Barbie and Ken) because of his good looks, smiled his way through the final round. After a long birdie on the difficult 10th hole, the Swede found himself in first on the back nine on Sunday at Augusta. Of course, he promptly hooked his second shot into the pond fronting the 11th green, dropping himself out of first, but rebounded with birdies on 13 and 14 and finished second in his first ever major championship appearance.
While the finish of the Masters ended up boring as Scottie ran away in the final nine holes, it was great to see Morikawa back to form along with Homa beginning to come into his own. And for me, Aberg’s attitude throughout the final day gained a fan in me, and he now may be my favorite player alongside of Rory McIlroy and Max Homa. Aberg appeared to keep his composure, and looked like he was having a great time in what must be one of the most pressure packed events in sports. Go Ludvig!
Quote
“The most important step a man can take. It’s not the first one, is it? It’s the next one. Always the next step.” ― Brandon Sanderson
Like this? Share with a friend.
You can subscribe here: http://eepurl.com/h9q6sv
Rod Skyles 