Our message to clients is that we will get through this difficult investment environment, but that it will not happen quickly. Think in terms of months, if not years, but not weeks. We hope to be pleasantly surprised but do not expect the volatility pain to cease and the stock market to recover meaningfully, until investors see tangible signs that U.S. inflation is on a downward trajectory. This trend reversal will allow the Fed to ease away from its hawkish monetary policy. Wall Street Journal At the risk of oversimplification, watch the monthly Consumer Price Index reports. The Fed will need to see multiple months of unequivocally positive reports before easing. U.S. Bureau of Labor Statistics The next CPI report is scheduled for July 13, 2022.
The Fed Is Not Omnipotent: As the controller of the money spigot, the Federal Reserve is the most important variable by far in the U.S. economy. Even so, its power is not unlimited. Inflation occurs when demand exceeds supply. The Fed dampens demand by increasing the cost of credit and eventually by increasing unemployment. It has no ability to increase supply. It cannot solve Chinese supply chain issues or bring resolution to the Russian-Ukraine war, which is driving up global energy and food prices. CNN
The Financial Markets Expect Inflation to Come Down: The financial markets do believe that inflation will be tamed. As we write this, the 5-Year Breakeven Inflation Rate is 2.84%. St. Louis Fed The 10-Year Breakeven Inflation Rate is 2.61%. St. Louis Fed Expectations matter too. Fed Reserve Chairman Powell is adamant that the Fed will bring inflation back under control. We take him at face value, but this messaging is also designed to prevent an expectation of high inflation from becoming embedded in the minds of consumers and businesses. Inflation expectations beget behaviors that lead to higher inflation.
Russian Invasion of Ukraine: On a negative note, we see no reason to expect a near term resolution to the Russian-Ukraine war. As long as Putin gains ground in eastern and southern Ukraine, he has little incentive to negotiate and can stave off internal dissension. And why should Ukraine yield its sovereign territory to a brutal invader, as long as it has the resources to maintain some equilibrium on the battlefield? The Guardian Press Herald
Biden Seeking Gas Tax Holiday: It appears as if the Biden administration will seek a moratorium on collecting the federal gas tax for several months. The tax is 18 cents a gallon on gasoline and 24 cents on diesel. We shall see whether the proposal remains more of a symbolic gesture than a realistic policy proposal. Critics of the concept say it will only increase the demand for gas and may not find its way into the pockets of consumers anyway, as the federal government does not set the price of gas. It could even further enrich the oil companies. NPR Without knowing more detail, it feels like a well-intentioned idea but not a practical solution to a real concern. Better to incentivize more supply and/or tax windfall profits and return them to taxpayers in our view. CNBC
The Fight Over ESG Investing: At RSWA we believe that investors, if they choose, should be able to factor environmental, social and governance (“ESG”) considerations into their investment strategies. One would think that this is a relatively straightforward process but not so. Axios There is regulatory confusion and disagreement over labeling and representation for starters. For example, what are the standards that must be met before a fund or ETF can self-label as an ESG fund? Then at the investor level, there is a surprising divergence over ESG values. What troubles one person may not trouble another. And then what is the “purity” standard? Does a small investment (i.e., 1%) by a fund into a perceived questionable stock taint an otherwise “good” fund? Know that we are actively engaging in making sense of these issues for clients all to the end that our clients’ investments align with their values.
Short Takes:
- Maine Donut Tour: On a lighter note (although not relative to calories), this story caught my eye. Press Herald But for the fact that I am “familiar” with all these fine establishments, I would be taking this tour. Two are a stone’s throw from our office (for better or worse).
- Waiting for Covid: The linked article talks about those who have not had Covid-19 yet and how it feels. So many of our friends and family members, most boosted to the max, have had Covid that it is starting to feel inevitable. Indeed, how many among us have had Covid but were not aware of it? Are we headed toward a world divided into two camps: those who know they have had Covid and those who have had Covid but don’t know it? Boston Globe
- Socially Isolated People Are at Risk: Know and care about someone who is socially isolated? We are wired for connection and suffer when we lack it. Social isolation alters our brains, including putting us at greater risk for dementia. Neuroscience News
- How to Make Success Insanely Easy: At the risk of veering off into cheesy self-help, I strongly believe that there is crucial insight here. To accomplish virtually anything, figure out what it takes (the “big picture”) then commit to some tiny actions that take you in the right direction. Make those actions so small, there is zero resistance. Do these tiny actions consistently and then let the momentum build as your self-identity changes. Keep raising the bar incrementally. No, it won’t make success insanely easy, but you might surprise yourself. Better Humans
- Sentient Artificial Intelligence? This article talks about a Google engineer who came to believe that a Google AI language program had become sentient. Google disagreed and fired him. My guess is that what the engineer experienced as consciousness was completely explainable by the programming. It still begs the question of whether we will be able to discern the difference between sentience and programming, as AI becomes increasingly sophisticated. New York Times
RSWA Webinar Featuring Fritz Meyer: Look for a webinar invitation to join us for an update on the markets by the highly respected market strategist, Fritz Meyer. Meanwhile, mark it down on your calendars for Thursday, July 21st at 4:30pm.
A Quote to Consider: “If nothing changes, nothing changes.” Source unclear.
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As always, thank you for reading. Stay safe and be well. We look forward to hearing from you and connecting.
