Not Out of The Woods

For someone trying to drop 20lbs, losing the first 10 is a lot easier than losing the next 10.

For a 20 handicap golfer, getting down to a 12 is a lot easier than getting from a 12 down to a 6.

For an Administration trying to tame inflation, it’s easier to get from 9% to 5% than from 5% to 2.5%.

And although my wife recently paid $2.50 for a single orange at the Trader Joe’s last week, some will still say “inflation is dead”.

However, what we’re seeing now is that inflation is stubborn like a thorny weed, and the latest data suggests that it’s reigniting slightly higher. Many households continue to support decent looking balance sheets led with historically low debt service (2% mortgages) and asset inflation in both stock portfolios and real estate. While absurd increases in everything from property insurance to food starts to eat away at this purchasing power, the historic monetary policy we’re living through the last few years hasn’t derailed the economy just yet.

On the horizon though, there’s plenty to be concerned about. Our government is spending like a drunken sailor both domestically and abroad. A “higher for longer” interest rate scenario whereby they issue more expensive debt for themselves is extremely problematic for our government’s ability to manage a balanced budget. The flip side is cutting rates which could lead to another spike in inflation. Something’s gotta give…

At the end of the day, if the Fed can’t get inflation to its “2.5 handicap” and instead hovers in the 3-5% range, we are left with a No-Landing scenario which could have negative market implications. Nominal bonds & Treasuries in particular do not like inflation surprises, and our expectation remains that the Treasury and Yellen will attempt to keep market liquidity and equity prices in a favorable light running up to a hotly contested election. Investors don’t really like uncertainty and we have that in spades right now.

During these times, we rely on a mix of market data and instinct. This suggests to us that asset classes like commodities / real assets are a more favorable choice to defensive positions such as nominal bonds.

And as the inflation battle wages on, assets that adhere to the stock to flow dynamic tend to end up on my “good” list.

To paraphrase from our CIO Kevin Harper, “Inflation isn’t a serious problem, but it’s still a problem”.

Finally, here is what’s on my radar:

commercial real estate

The drumbeat of distressed commercial real estate continues unabated. In many major metros the beat seems to be getting faster & louder. The WSJ reports that office loan defaults are at historic levels not seen since 2012.

Coincidentally that’s 4 years after the GFC……and we are now 4 years post-COVID..

This one also blew me away, a 44-story office building in downtown St. Louis recently transacted for about $3.6 million, which is less than this renovated ranch house in Palo Alto.

markets

Many will argue Warren Buffett is the best US investor of all time. Others claim it’s Peter Lynch, or Jim Simons.

But likely none of them can match the investing prowess and uncanny market timing of one of our nation’s most notable politicians: Nancy Pelosi

The 84 year old former Speaker had another banner year in 2023, and despite all of her responsibilities in representing her state and our nation, she finds time to dabble in sophisticated options trading, mainly in tech stocks, usually where there’s pending regulation….hmmmm.

bitcoin

One of the few arguments against Bitcoin as part of an investment portfolio is its volatility. And while it is true that bitcoin is extremely volatile, that measure has been steadily dropping over the years as the market cap of the asset grows.

In fact, Fidelity is out with a piece highlighting how bitcoin is actually less volatile than some of the retail-driven Magnificent Seven large cap tech names.

Where to slot bitcoin into a portfolio can sometimes depend on how the investor views the digital asset. Some view it as a riskier version of the NASDAQ while others liken it to a store of value (aka gold, but with more potential upside) and still others view it as a medium of exchange.

Regardless the view, the research has shown that over the last 4 years holding Bitcoin has been a better risk-adjusted performer than even the S&P 500.

As the market cap of bitcoin continues to grow, one could make the argument that its volatility will continue to inch lower. As such, it creates a more compelling argument for inclusion in portfolios….which would obviously be a bullish signal. The rate of its adoption could dictate many of these metrics going forward.

Clark Gaines focuses on alternative investment strategies at Almanack Investment Partners, and is based in Charleston, SC.

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