Happy Fri-YAY, all! It’s been a while. Some might say too long. And others…well we won’t worry about them. If you have missed us, thank you for your patience (and thank you for reading). It’s been a year of patience in the world of finance – to watch closely and proceed cautiously – so we took a little break from writing to make sure the message didn’t get repetitious. Today, we are going to hit the hard reset button and provide a current update of the investing landscape as we move into second half of the year.
Earlier this week, we had the pleasure of presenting to a group of small business owners on the state of the markets, the economy and things that may be relevant to local small businesses. We are going to use some of that presentation as it does a nice job of encapsulating what has happened recently and what is happening now. So here goes…
TWO YEARS BY WAY OF MEME
March 2020: Money Machine Goes VROOM VROOM
Following the market drop from the COVID outbreak, the government jumped in with the money machine. The Federal Reserve started aggressively easing and the politicians quickly got money out to businesses and citizens (direct stimulus, PPP loans, etc.). There’s a chart later in the note showing which agency did what but the important thing is the total is TRILLIONS (and lots of them). This relief kept the wheels-on-the-bus-going-round-and-round but did come with consequences.
2021: Free Money Bonanza – The Rise of the Retail Investor & the Bored Ape Yacht Club
Of the TRILLIONS in relief, a little more than $800 billion went directly to the people by way of stimulus checks. This bridged the gap for those most affected but also went to many who weren’t; some sectors were hit very hard but business-as-usual continued for the majority. Add to that rent freezes and mortgage abatements and you have a lot of money flowing around. You then factor in the slow-down in spending on travel, experiences and dining out and the pile gets bigger.
It’s impossible to know exactly how much but a portion of this money flowed into “investments” of all kinds – stocks, crypto, real estate, NFTs, collectibles, etc. Good luck trying to find anything that didn’t increase in price from 2020 to 2021 (ha-ha, just kidding, oil went to zero).
It doesn’t take a genius to know that rapid inflows can create bubbles and bubbles we did see. Not to pick on any specific asset class but digital pictures of monkeys (Bored Ape Yacht Club NFTs) traded for $400k-$500k on a daily basis. They’re cute but that’s a lot of coin (digital, of course).
In hindsight, it’s easy to throw shade on the government’s financial response but it was in a precarious spot. If you give the policy makers the benefit of the doubt, you can say they estimated the damage would be 20% and printed that amount. It turned out to only be 10% so they completely overshot. Where there is room for criticism is the lack of response to the new data that was clearly showing it wasn’t going to be a 20% event – they put the blinders on and pushed right through.
2022: Flat Busted – Worst 6 Months Since 1970
Late in 2021, many segments began to unwind in an orderly manner (we wrote about this a bunch). Cloud computing stocks, crypto, NFTs and the like started to move down substantially as it was becoming clear that the stimulus had been overdone. The Fed finally admitted that maybe the rampant inflation wasn’t “transitory” (duh) and it was time to reverse course by raising rates.
This led to an overall market sell off and a big downturn in the bond market as rates started to go up resulting in the worst start to a year for a generic stock/bond portfolio since 1970. Even with rates going up regularly the first half of the year, the inflation numbers for June just came in breathtakingly bad. With this, many market observers are predicting the Fed will raise rates a full percent in July which brings us to today.
2022 and BEYOND: DANCING ON GLASS
If we look at the charts below, there are reasons to be positive about the state of the economy while others point to more difficulty ahead. Hence, the idea of “dancing on glass”. It’s super cool to look through the floor but the stability is concerning.
The headwinds are pretty obvious at this point – inflation, rising interest rates, continued lockdowns in China and the war in Ukraine. The positives mainly are that the economy is yet to contract, and unemployment is still incredibly low. However, before we get to those charts, check this out…
Since January 1st, 2020, stocks are significantly positive, even with the 2022 drawdown. A fantastic reminder of the importance of investing time horizon. With that, here’s the chart bomb of the indicators we find most important.
INFLATION STATION 10-year chart of US consumer inflation. Yeez.
INTEREST (G)RATES
There are many ways one can look at rates but here is the chart for the 2 Year US Treasury Note for the last 10 years…
You can see that the rate is high compared to what’s been the norm, but this is another way to look at it…it’s a 1200%+ increase in a year. Wowza.
F(unemployment) is Over
Jobs are and have been plentiful. As you can see in the chart, after the brief spike during COVID lockdowns, the unemployment rate is mega low. Employed people spend money and spending money grows the economy. This will be a key metric to watch in the coming months. If this can remain stable into the fall, a quicker turnaround is in the cards. If this deteriorates, it’s likely a sign that recession is here.
As promised, here’s the breakdown of who spent what in terms of COVID relief (for those still awake). SO. MUCH. MONEY. The numbers are incomprehensible.
