Avarice or Icarus

In October 2023, a jury found Sam Bankman-Fried guilty on seven counts of defrauding FTX customers and investors.

 The conviction was front page news for several days.

Nearly to a man, the verdict was and is broadly regarded as well-deserved comeuppance.

However, recent – less widely reported – documents confirm the FTX money has been “found” and all FTX customers and creditors will be more than 100% repaid.

In May, post-bankruptcy FTX CEO John J. Ray, III said FTX customers and creditors will “recover between 118% and 142% of their Petition Date claim values.”

This unexpected and unusual outcome has generally been overshadowed by the news - which came out about the same time - that the judge in the case sentenced SBF to 25 years. 

Last fall, at the time of the trial, one prominent detractor from the villainous view was Michael Lewis.

On the same day SBF’s trail started, Lewis - of Moneyball and The Blind Side fame – published Going Infinite, the Rise and Fall of a New Tycoon.

In Going Infinite, over nearly 300 pages, Lewis sympathetically portrays SBF as the spectrum-ish shambolic hero of Effective Altruism who realized too late how far his competitors would go to break FTX (particularly also-disgraced Binance founder Changpeng Zhao).

Lewis describes how SBF, in his perennial costume of rumpled cargo shorts and a not exactly clean FTX t-shirt, would fly to DC and lobby congressional staffers for his Effective Altruism agenda - even as he was briskly building a global bitcoin trading behemoth.

A term first coined in 2011 by a group of Oxford philosophers, a core tenant of Effective Altruism is making as much money as possible with the sole aim of giving it away to causes that scientifically and objectively most benefit humanity.

SBF seems to have been hopelessly un-greedy by Wall Street standards. Driving a Toyota Corolla and living in an apartment with 9 roomies on the same property as FXT HQ (ok, yes, in the Bahamas), he gave and pledged over $300M to Effective Altruism-related causes and was touted as the most generous billionaire in the world.

Today, as FTX investors and creditors begin to get their refunds with interest, SBF remains a convicted felon, apparently playing prison ping pong like a bad ass whilst serving the 2nd year of his quarter-century sentence. 

For comparison, Theranos’ Elizabeth Holmes in serving an 11-year sentence for giving blood tests that misdiagnosed everything from diabetes to cancer and whose $600M of creditors will get…squat.

Lewis’ unpopular take on SBF nearly got the best-selling author cancelled. However, perhaps in light of the final outcome, Lewis' view deserves a second chance.

Powell put

Traders who see nary any nature love their animal metaphors – bulls, bears, doves, hawks, wolves, black swans, and even unicorns.

On May 1, Jerome Powell, the Chairman of the Federal Reserve, surprised with dovish content and seems to have ignited a bit of ye olde Keynesian animal spirits.

With the rate sensitive stock index - the Nasdaq - up nearly 8% since Powell’s May 1 presser, we should look at what he said and why it matters so.

What everyone expected Powell to say – and what he did say - was that for now rates would stay unchanged (cue frowny face).

Federal interest rates – the base rate on which most other interest, including mortgages and business lending are based - are currently an astronomical 5.25%, the highest level in more than 23 years. (And they have been at this arguably punitive yet inflation-busting rate since last July.)

What Powell did say that sent investors hearts aflutter - yes, the markets literally advanced as he was talking:

• A rate hike at the next policy meeting or even this year is unlikely,

• His “personal forecast” if for “further progress on inflation this year,” and

• The Fed would cut rates if the labor market unexpectedly weakened.

As one pundit put it, Powell clearly sent the unexpected message "rates are too high and cuts are matter of when, not if."

As I see it, the May 1 comments may well have been our introduction to the Powell put.

For the record, an eponymous put is not new.

Alan Greenspan, Fed Chair from 1986 – 2006 was notorious for the so-called Greenspan Put.

While never the stated goal, Greenspan’s policies seemed to always staunch any serious market decline, basically acting as a form of insurance against major stock market losses - akin to a trader's put option. 

Similarly to what Greenspan was up to back in the day, it seems we may be entering an analogous era where Fed policy might - albeit unintentionally - backstop steep market declines.

With August’s big Fed shindig in beatific wild-life abundant Jackson, WY we’ll find out soon if the Powell put has legs.

WWDD

So many of us get stuck merely perusing - rather than powerfully pursuing - our passions.

We marinate in our thoughts about what to do and how to do it rather than taking a deep breath, tucking that fear, pulling up the shirtsleeves and just...getting going.

Dolly Parton, on the other hand, gets stuff done. No complaining, no perseverating.

At 78, Dolly remains a woman of serious action making a real difference.

Last fall, Jeff Bezos gave the indefatigable superstar $100M to re-gift to charities of her choice.

Mr. Amazon was impressed by Dolly’s audacious $1M donation mid-2020 to Vanderbilt University to help fund a Covid vaccine.

While hardly a shoo-in at the time, Dolly’s gift helped the rapid development of the Moderna vaccine and raise awareness of vaccine safety – at least according to the New England Journal of Medicine.

Not to outdo herself, this spring, she also added blueberry muffin mix to her Duncan Hines baking collection. Why? Because why not – Dolly loves baking and sharing recipes nearly as much as she loves writing songs.

Born the ninth of twelve children in the Appalachian town of Locust Ridge, Tennessee, Dolly grew up in a two-room cabin with no electricity or running water. Yes, her first bathroom was an honest-to-God outhouse.

Her father was a tenant-farmer who never learned to read or write and her mother - who birthed all twelve children by age 35, was (understandably) often in poor health.

Dolly has honored her dad’s legacy by gifting more than 224 million books to children enrolled in a program she started back in 1995.

Today, the Imagination Library mails more than a million books a month to poor children around the world who would otherwise likely not have access to books at home.

And, yes, Dolly is still passionate about writing songs and singing. In November, she released her 49th album, Rockstar.

Two years ago, Dolly told Trevor Noah she would love to hear Beyonce do a cover of her song Jolene.

On Noah's Daily Show, she said she loves it when someone takes my little songs and make them powerhouses.

Boom, this month Beyonce released a cover of Jolene - a song Dolly first wrote and performed more than a half-century ago.

Pushing up on her ninth decade, we are talking about a woman who is still manifesting some s#@!.

Sometimes Dolly's one sentence bromides can feel as trite as a guidance counselor's poster. That doesn't mean there might not be some truth there - especially if it’s one she herself seems to live by.

You’ll never do a whole lot unless you’re brave enough to try.

Sticky

Yesterday’s Consumer Price Index (CPI) showed a surprising jump in the US inflation rate.

Signaling investors' disappointment, the S&P 500 fell below 5,000 and the Nasdaq 100 dropped -2%.

According to one analyst ( as reported by Bloomberg), the report is throwing “cold water” on prospects for a [Fed] rate cut anytime soon. He continued “sticky...inflation is likely to give the Fed pause.”

With the unexpected price increases reported yesterday, year-over-year inflation – as measured by CPI – rose to 3.9%, nearly double the Fed’s 2% target.

However, as much as it may have moved markets, the CPI is not even the Fed’s preferred method for measuring inflation.

Rather, since 2012 the Fed has looked at another inflation gauge - the Core Personal Consumption Expenditure Price Index (Core PCE).

As of end-December Core PCE was just 2.9%, a whole percentage point closer to the Fed target than the CPI figure.

But what if both measurements are much too high and true inflation is not so sticky after all?

Economist Campbell Harvey recently made just such a claim in a recent LinkedIn post.

Campbell argued that using real-time shelter inflation instead of the lagged data used by the government, both CPI and Core PCE have actually been “sub 2% for a year” already.

In case LinkedIn isn’t your preferred source for financial guidance, San Francisco Fed research reached startlingly similar conclusions.

The SF Fed’s housing cost forecast – also based on real time data – predicts 2024-25 will augur “the most severe contraction in shelter inflation since the Global Financial Crisis of 2007-09.”

As shelter costs are the largest component of both CPI and PCE, Campbell posits the Fed’s use of outdated sticky data are resulting in restrictively high rates that “greatly increase the probability of an unnecessary recession.”

In the near-term, we'd argue real time shelter inflation data suggest yesterday's rout was folly. When the official data catches up a market-friendly rate drop is the most likely outcome.

And as for the longer-term, unlike Campbell, we're not nearly as secure in the view temporarily restrictive rates will result in recession.

Playing defensives

Defensive stocks have a reputation for providing stable dividends and earnings regardless of the overall economy.

The usual examples of defensive companies include snoozers like utilities, healthcare providers, cigarette manufacturers, toilet paper producers and deodorant makers.

Basically, we are talking about the companies that make the things you’re gonna buy even if the economy’s going to heck and folks are losing their jobs.

Despite those middle-of-the night perseverations we all seem to be having these days, present US economic data is hardly supporting the doom-gloom scenarios.

So maybe it’s no wonder classic defensives are currently undervalued relative to other sectors.

And, despite the momentary upbeat economic news, for myriad reasons we've talked about, we’ve been holed up in the “recession is coming… eventually” camp for some some time now.

Therefore, perhaps could it be the time to stock up on stocks like Procter and Gamble (ticker PG), the maker of beloved essentials Charmin, Pampers, and Old Spice?

Sadly, the data on whether defensives are all that defensive is…iffy at best.

During the Great Recession, from October 2007 to March 2009, PG was down -33%. Yes, you might say a nice relative out-performance to the S&P 500 which was down -54% over the same period. Yet hardly - hardly - the secure return that spurs sound sleep. And most other so-called defensives didn't fare much better.

During the crisis before that crisis aka the Dot-Com Bubble Burst, classic defensives fared quite nicely – and not just on a relative basis.

From the beginning of 2000 until October 2002, PG added 18% while the S&P 500 lost -37% and the Nasdaq hemorrhaged -65%. Yes, you can sleep on that for sure, yet that time-frame feels a bit like ancient history.

So, what isn’t iffy in a downturn?

Boring yet beloved hiqh-quality bonds (ticker AGG). During the Great Recession, AGG was up nearly 9% and during the Dot-Com Bubble Burst they were up a sweet 13%.

Let's just say, when the stuff hits the fan, data says that's a good time to own bonds - not the companies that make your TP.

Fat chance

The Covid-era economy was marked by the highest level of inflation in more than 40 years.

With inflation topping out at nearly 14% over a two-year period (2021-2022), there’s understandable hope prices might start falling.

For example, maybe that calorific cheeseburger and fries could go back closer to the $10 it cost in 2018, instead of the whopping $13 it cost in 2023? 

Fat chance.

Based on history, next year the best you can hope for is a mouthwatering $13.50 cheeseburger/fries combo.

To digest this unpalatable reality, we need to chew on the difference between deflation and disinflation.

In the post-WWII era, there have been nary any times of sustained overall deflation – that is outright falling prices.

For some sectors of the economy - notably energy and technology - it can look like prices are prone to deflation.

However, over longer periods, even for gas and IPhones, the best we can hope for is disinflation, that is smaller price increases.

Daily fluctuations in the price of petrol, which we observe firsthand when we drive by the gas-station, often show day-on-day decreases. Realistically, however, gas prices have gone from ~$2.50/gallon in 2015 to ~$4.00/gallon today.

And as Moore’s law’s confirms, the prices of computers should be deceasing as technology advances. Yet, the average IPhone went from~$200 in 2008 to ~$800 in 2021.

Turns out, as technology advances, rather than craving less expensive phones, most of us covet more pixels and processors packed into that handheld.

Over the past year, central bankers and politicians have worked hard to foster disinflation, that is a slower rate of price increases.

Policy makers don’t like outright deflation, and maybe for good reason. The most recent time the country experienced sustained price drops - that is pure deflation - was that period we refer to as the Great Depression (1929-1939).

The hope prices might deflate and go back down to what they were yesteryear… We call that pie in the sky.

We're probably better off hoping for disinflation.

AI, chronos & kairos

Perhaps the ideal metaphor for explaining how AI and wealth management go together is the ancient Greeks' two conceptions of time - Chronos and Kairos.

Chronos is the simple measure for sequential time – e.g. clocks and calendars.

Kairos, on the other hand, is a nebulous type of time “an existential temporal experience rich in significant sacred meaning” according to (yes) the NIH.

In the Bible, Kairos is when God intervenes, touching us so deeply we are forever changed.

At its best and not unlike the uber-Chronos atomic clock at NIST, AI supplies the wealth manager with a killer best-of-breed toolkit.

However, great wealth management also has an element of Kairos-like alchemy.

The Kairos of wealth management is the application of the skill-set – AI amped – attuned, full of meaning and again and again SMACK meeting the client exactly where she is on her unique path to prosperity.

In that Kairos-esque moment the advisor and the client co-create A) insights that transform relationships to money, and B) specialized workable strategies for nurturing wealth.

Ultimately, AI is a tool that helps make the magic that much better. AI is not - and likely never will be - the sorcery itself. 

Are ya done yet?!?

Today, the Federal Reserve raised its benchmark federal funds rate by another 25bps (aka 0.25%).

In case you haven’t been watching closely - since March 2022 this is the 10th increase in a row.

With today’s hike, the underlying interest rate on which nearly all (US) lending is based went from 5% to 5.25%.

This is the highest level in more than 15 years.

It's true that US inflation is still way over its 2% target. Indeed, at ~5% inflation is a hefty double+ over target! 

The Fed keeps raising rates to try and tame inflation. The gagillion dollar question is whether it will work. 

As you might have come to expect - our view is nuanced.

We feel it has been working but with the hikes this year the Fed is most likely in overshoot territory.

Inflation was nearly 10% a year ago. So, it’s clear the Fed has done a lot to tame the beast.

However, at this point - or since about last November to be more precise - higher interest rates have probably been in “restrictive” territory. That is economist-speak for “too tight” rather than “just right.”

Our view is that given today’s economy, 2% is probably just too low a target rate - and it’s causing the Fed to over-tighten. (The number of reasons we feel 2% is too low is deserving of its own Quish Insight, so stay tuned.)

In this case, the medicine - that is these crazy-high rates - might turn out to be worse than the disease - inflation.

White Knights

While we’re all busily over-focused on inflation and the Fed, a geopolitical storm could well wreak havoc on the markets sometime in the next couple of years.

Looking forward to the Presidential elections - despite the midterm outcomes - history shows that the current state of the US economy hardly bodes well for the incumbent.

While we still don’t know if we’ll face an outright recession, most American households are certainly feeling crimped.

For example, last week the Bureau of Labor statistics reported that “real average hourly earnings decreased -2.8 percent, seasonally adjusted, from October 2021 to October 2022.” (Real wages takes into account inflation while nominal wages don’t.)

Multiple geopolitical fissures could easily boil into conflagration, providing Americans with a timely distraction from their economic woes.

Might Biden play the white knight, pouncing when an ally’s adversary crosses a line?

The reality is Iran, Russia and China are perilously close to missteps that could justly (in the view of America’s leadership and her global partners) result in a limited but real military confrontation.

A few possible upcoming attractions might include; Iran’s nuclear advancement threatening Israel, China over-playing a show of force in the Taiwan Straights and/or Russia’s saber-rattling at yet another US ally.

Indeed, for Biden, an ounce o’ Putin might be just the thing to forever differentiate this old Democrat from another old Democrat (called Jimmy Carter). And, wrapped in the afterglow of this or that contained victory, Biden - or his chosen heir - could rally round the flag - and win again.

Taper talk

While the Fed is clear about maintaining its commitment to near-zero interest rates, it has not been as transparent about when it might start to taper.

In June 2020, with the US economy in a lockdown-induced freefall, the Fed committed to buying at least $80 billion in Treasuries and $40 billion in residential and commercial backed securities “until further notice.”

This type of bond buying by the Fed is referred to as Quantitative Easing (or QE for short).

It is highly unusual and was first implemented to help counter the 2007-08 financial meltdown. And then again last year, in response to the economic torpor caused by the pandemic.

With QE, the Fed buys bonds on the open market helping increase the money supply by pushing cash into the economy, spurring spending and investment.

Since mid-2020, the Fed has been buying bonds at a feverish pace and it does seem QE has - again - helped the economy stabilize.

With last year’s QE, the Fed’s portfolio of securities jumped from $3.9 trillion to $6.6 trillion. And, so far, in 2021 the Fed has continued QE.

Trimming these bond purchases is referred to as “tapering.” And – conversely to QE - when the government starts selling bonds back into the open market, it is referred to as Quantitative Tightening. (You don't really hear that called QT though).

In their recent notes the Fed pledged to continue its bond buying every month until “substantial further progress” had been made on employment and inflation goals.

While this may sound rather anodyne to the untrained ear, some investors panicked at the mere suggestion that the Fed is even starting to talk about talking about tapering.

Indeed, when they read those words, you might even say some investors saw ghosts.

In 2013, when the fallout from the financial crisis was finally beginning to fade and the economy was getting stronger, the Fed said it might taper.

In response, there was a massive selloff in the bond market (that got the ironically cutesy nickname taper tantrum).

As it turned out, the Fed didn’t actually start to taper until 2014. And when it did, both bonds and stocks responded favorably to the positive signal QE was no longer necessary.

It’s not clear yet whether the markets will respond as constructively this time around.

Oligopo-wha?

Pro-inflation arguments are myriad and it’s true we’ve prattled on a bit. The thing is once it gets going inflation is usually like a runaway train nearly impossible to control.

So yes, we’re devoting some energy to the topic, although our concerns regarding serious inflation are for the longer 2023+ time-horizon.* Yes, year-on-year inflation looks high right now. However, this is mostly attributable to the “base effect.” Year-on-year comparisons show higher-than-average inflation because one year ago the economy was in a steep Covid-caused decline with prices in free-fall last spring.

Fed Chair Powell has assuaged markets the current inflation readings relate to this “base effect” anomaly - having more to with math than worrisome real prices increases. We concur.

That said, looking out two or three years, one pro-inflation argument we’re mulling over - and one you don’t generally hear much about - relates to oligopolies. (Yes, you read that correctly.)

Oligopolies could be described as monopolies with frenemies. A monopoly is when a single company dominates an industry – such as Standard Oil circa 1910.

An oligopoly, however, is when there are a few companies ruling a given industry. Like monopolies, oligopolies are well positioned to set prices – encouraging price inflation as well as excess profit-taking.

And compared to straight-up monopolies, oligopolies can be hard to prove, hard to regulate and hard to break-up.

Oligopolies tend to get stronger and bigger, slaying competition as they 1) have access to excess capital because they charge near-monopolistic prices and 2) can buy up potential competitors (except of course the other one or two they let stand to prove they are not a monopoly).

The main sectors with oligopolistic tendencies include all kinds of technology, the media, and even - - domestic US airlines.

Here's some examples of possible modern oligopolies. I'm sure you'll get the drift:

• Apple iOS and Google Android dominating smart phone operating systems

• Apple and Microsoft Windows dominating computer operating systems

• Google, Facebook and Amazon dominating the Internet

• T-Mobile, Sprint, Verizon and AT&T dominating cellphone service

• Comcast and… (ok, Comcast might be a straight-up monopoly)

• Netflix, Hulu, Disney and Amazon dominating streaming

• Delta, United and American dominating US air travel

This last airline example is probably the weaker oligopoly argument as there’s Frontier, Southwest, JetBlue and (yikes) Spirit. Some of these smaller birds may not make it through the Covid travel ixnay (but so far so ok).

There are also oligopolies in lesser-known industries such as construction materials and home-building.

We're looking at whether oligopolistic tendencies are significant enough to stoke inflation.

And perhaps, as importantly, we're looking at whether investing in oligopolies is worthwhile.

* The best “there won’t be inflation” claim is all about cheapening and ever advancing technology. As computers and robots continue to outperform humans at more and more tasks, everything gets cheaper. We’ll address this good argument in an upcoming Insight.

Bitcoin more harmful than assault weapons

Bitcoin is so unsafe that you cannot buy it with a credit card issued by; Wells Fargo, JP Morgan Chase, Citi, Bank of America or American Express.

Don’t worry though, if you (G## forbid) feel the need, you most certainly may use that credit card to buy military-grade assault rifles and ammo.

Tragically, that’s exactly what Omar Mateen did. In June 2016, days before killing 49 and wounding 53 at the Pulse nightclub in Orlando, he opened six new credit card accounts and bought more than $26K worth of guns, assault rifles and ammo.

The police shot and killed him on the spot, so it’s a good guess he probably never got to pay off that bloody credit card bill.

Most of America’s biggest banks claim the risk of fraud, losses and volatility in the cryptocurrency market is just too great and they have therefore banned cryptocurrency purchases with their cards.

According to a 2018 New York Times investigation, credit cards were used to finance weapons and ammunition is eight of the 13 mass shootings that killed more than 10 people between 2007 and 2018.

While PayPal, Apple Ipay and Square have banned the sale of “weapons and other devices designed to cause physical injury,” Visa’s CEO said he couldn’t possibly do the same. His job is to “facilitate fair and secure commerce.” Secure commerce for mass killers, uh-huh. Not so much for those dangerous and deranged enough to consider cryptocurrency.

How many people have died because of Bitcoin? According to an online search, zero.

After the Sandy Hook School massacre of 20 children and six adults in 2012 and again after 17 were killed and 17 maimed at Stoneman Douglas High School in Parkland, FL in 2018, there have been major efforts to renew federal legislation outlawing the non-military sale of semiautomatic weapons.* To no avail.

We’re a bit jaded when it comes to blanket approaches to “ethical” investing and see more marketing hype than substance to most ESG blather. Yet on this topic, we are unequivocal.

As Andrew Ross Sorkin said in his NYT article “the financial industry is uniquely positioned to see, if it chose to do so, a potential killer’s behavior in a way that retailers, law enforcement officials, concerned family members or mental health professionals cannot.”

Please let’s reach out to our credit card companies now. If they have the gumption to ban innocuous Bitcoin there's zero excuses why they can't help prevent the devastating loss of life caused by mass killing.

Together, let's get serious and do everything we can to ban assault rifles once and for all.

*19 assault weapons, including Colt’s AR-15, were banned in the US from 1994 to 2014. In that decade, “gun massacres of six or more killed decreased by 37 percent, then shot up 183 percent during the decade following its expiration.”

Enough vacuous platitudes

Boulder’s bubble burst yesterday – we lost ten beautiful lives to horrific gun violence: Officer Eric Talley, 51, Tralona Bartkowiak, 49, Suzanne Fountain, 59, Teri Leiker, 51, Kevin Mahoney 61, Lynn Murray, 62, Rikki Olds, 25, Neven Stanisic, 23, Denny Strong, 20, and Jody Waters, 65.

The prior week, a judge overruled Boulder’s assault weapons ban. And the NRA who had brought the case celebrated.

AR-15 assault rifles have been used in so many of the mass shootings that have claimed hundreds of innocent lives. And it was the weapon used to commit mass murder at a Boulder grocery store.

“What can we do to end this senseless murdering?” are the words ringing in our ears and in our hearts. Of course at Quish we don’t invest in gun companies. But that’s just a first step. Here’s a few other things we can all do - now:

Support Moms Demand Action and/or Guns Down America. Together we are so much stronger. These organizations are a (relatively small) counterweight to the National Rifle Association (NRA).

The canard that our 2A rights are at risk when we ban assault rifles is ridiculous. Give Moms Demand Action and Guns Down America money, support their legislative agenda and attend their events and rallies. Sensible gun polices saves lives.

Six of the nation’s top 15 banks rank an “F” on gun violence prevention. Is your bank one of them? click the link and find out. Spoiler alert: Chase, F, Wells Fargo, F.

The nation’s largest banks must be held accountable and need to stop doing business with the assault weapons industry.

This Fox news story - decrying banks and online payment companies for bowing to gun control pressure - demonstrates how the loss of banking services disrupts the assault weapons industry.

If you bank scored an "F" they need to hear your voice – now. If you are antsy about talking with your banker about how they are aiding and abetting murderers, please reach out and we can work with you on talking points and steps you can take.

Shop at Dick’s Sporting Goods and not at Cabela’s. When you shop at Dick’s tell them you are there because you support their sensible gun policies.

Ed Stack, then CEO of Dick’s and a lifelong Republican took a stand after the Parkland shootings. Dick’s no longer sells assault rifles and no longer sells any firearms to people under 21.

Dick’s is dedicated to fishing and hunting and took a risk to take a stand against mass murder. Cabela’s on the other hand still stands firmly with the NRA.

Yes of course "our hearts go out to the victims".

Please though let’s show the grieving families and friends - and our grieving selves - that their deaths were not entirely in vain. Please together let’s do what it takes to get assault rifles out of the hands of civilians.

Pent-up

It’s been a long (long, long) year since the first Covid lock-downs started in the US.

What will we do with ourselves when our collective shut-in ends? And just what have we been up to all these months locked away in our personal hidey homes?

These questions are of great interest to psychiatrists and economists alike.

Interestingly - albeit understandably - during the pandemic spending on goods has tracked far above average while spending on services is down sharply with huge gaps in areas like dining, entertainment, and recreation.

Turns out you’re not the only one who got a new rice cooker, dishwasher, sewing machine, Peloton, full-on super bad a## home gym, Aeron chair, kettle that has five-temp settings, etc. etc. etc.

Statistics show those delivery trucks lined up outside your house were just as likely heading for your neighbor’s front door (or their neighbor’s).

All in all, it’s looking like during the pandemic our demand for goods was pulled forward even as our demand for services basically disappeared.

When the lock-downs are really truly over, what will be left of our pent-up needs for services? Things like haircuts, concerts, the theater, Rocky’s games, Vegas, restaurant meals, room service (room service!), a massage…

These are things we will likely start to enjoy again, but the year of fun stuff we didn’t do – that’s kind of gone forever (cue weeping).

Economists refer to our pandemic-year of shunning services as “foregone consumption.” And it turns out this forgone consumption - despite your shiny Peloton - has led to notable excess savings for many US households.

Our pent-up longing for services will be released when the pandemic is subdued. Yet, economists believe only some accumulated savings will be directed at haircuts, hotels and Hardee's (that is at services).

Just where exactly all that excess savings will go has major implications for the markets and the economy.

Wage woes

With the US unemployment rate at a relatively high 6.2%, it is hard to fathom wage inflation on the horizon. Yet, despite the current unemployment rate, some economists are anticipating wage inflation may well lie ahead.

Good old supply/demand would suggest that when the unemployment rate is relatively high workers can’t be as demanding and wages would start to slip.

For better or worse, labor market dynamics are more nuanced than broad supply/demand suggests.

The reality is we’re facing a major skills mismatch. 

Until last year, Baby Boomers were sticking it out at their jobs, retiring much later than their own parents did. That all changed last year when more than three-million Baby Boomers left their jobs. 

The professions Boomers leave tend to be higher-wage/higher-skilled positions. At the higher end of the salary scale, there are fewer qualified workers relative to job openings. For these jobs, salaries will likely increase - even more - to meet the diminished supply of qualified workers.

At the same time, with the pandemic shutdowns, many service-sector workers have lost their jobs and there is more supply than demand for relatively lower-wage employment. Such workers are unlikely to be in a good position to demand higher wages.

(Caveat: The effect of the latest $1.9T stimulus for low-wage workers is unclear. Perhaps some workers will sit-out the job search until benefits are tapped, possibly reducing supply for lower-wage jobs.)

If less-paid workers are forced to endure higher prices for goods and services that better-paid employees helped precipitate and can more easily afford, inequality is exacerbated - an unhealthy dynamic for the economy not to mention the body politic.

Value in value?

A value stock is defined as a stock whose price seems low relative to the company’s financial performance. These days, a good example is Johnson & Johnson (JNJ).

JNJ was up 11% last year. By comparison, Apple (AAPL) was up more than 80% and the average stock was up 18%.

JNJ has what analysts like to call great fundamentals. That is to say, those tedious finance and accounting metrics such as P/E, P/Sales, ROE, etc. earn high marks. And yet last year JNJ neatly under-performed the benchmark.

Classic value stock - it looks great on paper but just doesn't get the price appreciation.

Lately there’s been a lot of talk that value is where it’s at - and growth stocks are overrated. Growth stocks are basically the opposite of value – they have high relative price appreciation but aren’t so great on the fundamentals.

Growth stocks' price appreciation is based on the idea the company will grow into its price and improve those fundamentals in the future, when they…. grow.

So far in 2021, value-oriented Exchange Traded Funds (ETFs) are seeing big inflows even as tech ETFs – classic growth stocks – are seeing corresponding outflows.

Here at Quish, we think “value” and “value versus growth” aren’t really a meaningful way to categorize stocks.

In thinking about what to buy, we’d rather look at sectors and individual companies.

For example, with interest rates so low, we’re not (yet) huge fans of most financials – a value mainstay. It’s not really rocket science that banks are probably going to have a harder time making money in an ultra-low-rate environment. And will start to do well as soon as it looks like rates are increasing.

Maybe there’s a good reason some sectors are under-performing even though they may score high on the quality metrics.

We’re fans of JNJ, but not because it’s a value stock. (It's more complicated than that.) And, let’s face it, we still like a little bite o' AAPL - classic growth - too.

When weaker is stronger

The US dollar has been in relative decline since Covid first slammed the US in March 2020.

 To help the halted economy, the Fed dropped its target rate from 1.25% to 0.25% and quickly cobbled together a $700B quantitative easing package. Congress then passed a $3T relief bill, spiking the deficit to a record peacetime high.  

Economists agree these efforts helped avert an economic depression. Unintentionally these deeds also tamped the relative value of the dollar – not necessarily a negative outcome.  

Like a double spritz of Chanel No 5, a dollar that’s too strong is not a good thing.

Yes, yes a strong dollar makes for a cheaper overseas holiday (remember those?).

Yet a too strong dollar also makes US exports less competitive in those same overseas markets.

On the other hand, a relatively cheaper dollar is a boon to US multinationals that sell products overseas – that is to say, many US companies. A devalued USD also makes foreign imports relatively more dear, helping boost domestic sales of US-made goods.

With the US economy staging its slow comeback, it really needs all the help it can get. And although perhaps counterintuitive, a somewhat weaker dollar could actually help make the US economy a bit stronger.

Who's Yellen?

Janet Louise Yellen will make history for a second time if she’s confirmed by the Senate as Biden’s Treasury secretary.*

The Treasury secretary wields enormous power both in advising the president on all economic matters as well as in managing all federal finances – paying the US’s bills and even overseeing the IRS.

The Treasury secretary also puts her signature on all newly minted paper currency. My hand hurts just thinking about it.

Yellen started her economist career teaching at Harvard and took her first government position at the Fed in 1977 - nearly half a century ago.

At her recent Senate confirmation hearing, Yellen restated her support for Biden’s $1.9T stimulus proposal as well as for a federal minimum wage of $15.

Given her labor economics expertise, Yellen is especially well-positioned to speak to the economic effects of increased wages and stimulus remittances.

The current federal minimum wage is just $7.25. When adjusted for inflation, this is nearly 30% less than low-wage earners made 50 years ago.

Economists - including Yellen - tend to agree that increasing the minimum wage could potentially foment inflation. Yet at this point in the economic cycle that just may be another bonus.

Over the last decade, the US has been flirting with deflation, and, as we’ve talked about previously, the US has been hard-pressed to reach the Fed’s 2% annual inflation target.

At this critical point in the Covid recovery increased stimulus and a higher minimum wage likely make good sense for the economy, for the markets, and especially for those toiling at low-wage jobs.

* In 2014, Yellen first made history when she became the first woman to serve as the Chair of the Federal Reserve in its 100-year history.

copper=green

Copper is called the eternal metal because it is 100% recyclable. Through history copper has been scrapped and resued, millenia before re-use was all the rage.

 When we’re thinking green we don’t usually think of copper, but perhaps we should.

 Besides its zero-waste bona fides, copper is:

·     fueling the electric vehicle (EV) revolution,

·     an essential component of solar photovoltaic (PV) systems, and

·     vital in wind turbine production.

While an old-fashioned car uses about 35lb of copper, an electric or hybrid vehicle uses – on average – almost 4x more or 132lb of copper. (I’m seeing a svelte me made of copper and I’m just saying that does seem like a lotta copper.)

Even the infrastructure connecting new alternative energy sources to the energy grid requires… yep, copper.

All its green cred aside, copper’s price tends to be an indicator of global economic health.

Heading into 2021, the World Bank is projecting 4% average global growth and nearly 9% growth in EV/PV high-use China.

In light of increased demand for alt energy plus the global growth scenario, it is unlikely copper production can keep pace with demand – the classic recipe for rising prices. And - truth be told - the main reason we believe these days copper really does =green.

As an aside, the eternal metal is so au currant it’s even naturally… anti-bacterial.

China is holding the lantern at the end of the tunnel

China's stimulus-driven recovery will provide a boost to the global business cycle. Starting in 2021 and perhaps sooner, around the world, industrial stocks will benefit from China's increased cyclical and capital expenditure.

It's looking like China is FIFO on Covid - that is first in, first out. Cases remain at record lows and signs Chinese consumers are relieving pent up demand abound. For example, car sales in August alone increased 8.9% year-on-year.

2021 marks the CPC's centenary. The Communist party's 100-year goal is to "build a moderately prosperous society in all respects." Covid deferred the dream and the party is doing everything it can policy-wise to make up for lost time.

Indeed, post-Covid stimulus is already lifting the country's real estate spending, tech outlays and retail sales.

China's growth will benefit industrial companies as well as the commodities that undergird such growth.

While Quish takes a stand on human-rights by not taking positions in Chinese-government owned companies, it would be folly to not take into account the impact of the world's second largest economy on markets generally.

(It does feel a bit like throwing a stone in a glass house to be critical of Chinese human rights in light of our own country's abuses. The difference is we are - generally and usually - free to criticize our government.)