A Personal Note from Cam – Dated December 9, 2021
As I reflect back on the past couple of months, I am amazed at the speed of change that continues to occur in America and around the world!
Inflation Came Slowly…Then All at Once!
When COVID-19 hit our shores in early 2020, the U.S. Federal Reserve (Fed) and the central bankers worldwide continued with an unprecedented easy-money policy that first began during the financial crisis of 2008.
Over the past 14 years, the Fed has taken steps like implementing and maintaining extremely low interest rates, increasing money supply and giving the green light to massive spending that should have caused significant inflation, but somehow, until recently, inflation remained low.
The value of assets held on the balance sheet of the Fed increased from $871 billion in August 2007 to $8.67 trillion in November 2021.[i]
Conservative financial management appears to be a thing of the past. With interest rates at all-time lows, the Fed balance sheet now at 10 times the size it was at the turn of the century, and a $3 trillion spending deficit for 2020 alone, the pump has been primed for inflation like never before.
Ernest Hemingway, in his book The Sun Also Rises, wrote: “How did you go bankrupt?” Bill asked. “Two ways,” Mike said. “Gradually, then suddenly.”
Now guess what has happened? Just like the man in the Hemingway quote who went bankrupt, inflation arrived slowly at first-and then all at once![ii]
In October, the U.S. consumer price index increased by a whopping 6.2% from the prior year. This inflation rate of 6.2% is more than three times the 2% rate of inflation that the Federal Reserve wants to see. It is also the highest rate of inflation since 1982, when inflation averaged 6.16%.[iii]
Prices have increased across the board – furniture, rent, medical care, cars and gasoline are all up. Food prices have increased the most they have in decades.
The Supply Chain
Issues surrounding the supply chain has made its way into our everyday conversations.
The couch that Mom wants is backordered for six months. Dad can’t find a new truck to save his life. The repair parts for your kitchen trash compactor are no-where to be found. And the toys on your children’s letter to Santa are stuck on a cargo ship anchored outside the Port of Los Angeles.
In my opinion, consumer purchasing behavior has changed during the pandemic, creating an unexpected surge in demand for goods. Many companies expected demand to slow but stimulus infusions, an increase in consumer savings, and a change in where consumers were spending money (things versus experiences) sent demand for manufactured goods through the roof.
Now, couple this surge with pandemic-related shutdowns, safety process updates, and labor shortages…for manufactures and for deliverers of these goods, from airlines to truckers and the result is continued delayed output, higher prices, and clogged ports with more inventory idling in the harbor than facilities and labor can digest.[iv]
Navigating Omicron
You may know it as the fifteenth letter of the Greek alphabet, but you will soon know “Omicron” in another context. It is the designation of the latest variation of COVID-19 sweeping the globe.[v]
First reported after Thanksgiving in southern Africa, the variant has now reached 19 states in America and 50 countries worldwide.
More data reported on December 8, 2021 suggests that the current vaccines developed for COVID-19 by Moderna, Pfizer/BioNTech and Johnson & Johnson are effective against the new, highly transferrable Omicron variant.
Yesterday, Pfizer CEO Albert Bourla claimed that a booster shot restores resistance to Omicron. The results are reportedly similar to two doses fighting older strains of the coronavirus.
Dr. Scott Gottlieb – former FDA Commissioner spoke yesterday on CNBC’s “Squawk Box” and shared that although all we have at this time is non-peer-reviewed preliminary data available, early studies show a good response of three COVID vaccine shots – two initial doses plus a booster – will neutralize the Omicron variant.[vi]
We also have anti-viral medications coming down the pike from Pfizer and Merck, which will help those who come in contact with COVID in the future to reduce the worst symptoms of the disease.
All of these are helping people cope with the COVID pandemic as it continues to manifest itself around the world.
In certain places around the world – South Africa, for example – vaccines are not even available to most citizens. Thus, COVID-19 has, and will most likely continue to have, ample means to express itself in varying forms. These forms appear to be growing more highly infectious, although not necessarily more life-threatening.
Consider that today’s common cold is thought to be a remnant of a version of a coronavirus from the 1890s known as the “Russian flu.” Like COVID-19, that virus caused a loss of smell and an inability to taste in many people who contracted it.
The trillion-dollar question is will we have to suffer additional COVID-19 variants for the next century?
What do you think?
I believe it is impossible to tell.
The trick for me is to find ways to make COVID less detrimental to my life and the life of my loved ones. I believe that the current batch of vaccines and new anti-viral medications appear to do this.
The “Powell Pivot”
With the emergence of the Omicron variant of COVID-19 a couple weeks ago, all financial markets took the variant news hard.
The financial markets hate uncertainty. The Omicron variant (as all new variants will be) represented uncertainty.
Now we know that the new virus has more than 30 mutations, which most likely makes it more transmissible than the Delta variant, which was already more transmissible than the original strain of COVID-19.
From an economic perspective, I believe the new variant will cause many Americans to refrain from dining out, gathering with friends, going to the movies, booking travel reservations or reentering the workforce. These actions will slow down and dampen our economic recovery.
My biggest concern is a fear that our elected officials may introduce potential new government policies in an effort to be seen as “doing something,” even if it turns out to be the wrong thing.
While another American economic lockdown is unlikely, government overreach has the potential to stall the financial recovery, damage business, impact corporate profits and hurt the American psyche.
If I’m right, I believe we need to pay more attention to other factors that impact the economy – inflation and the Federal Reserve’s policy choices in particular.
In fact, it was the Fed’s actions that sent the markets into a tailspin last week.
On Tuesday, November 30th, in testimony before the Senate Banking Committee, Fed Chairman Jerome Powell finally capitulated on his long-held claim that the lofty inflation readings we have been seeing for seven months are “transitory.”
He said: “We tend to use [the word transitory] to mean that it won’t leave a permanent mark in the form of higher inflation. I think it’s probably a good time to retire that word and try to explain more clearly what we mean.”
Chairman Powell also suggested that the Fed may begin to withdraw monetary stimulus form the economy more quickly by further “tapering” its monthly bond purchases. Those purchases inject money directly into the economy and tend to boost the prices of everything from food to houses to stocks.
Based on what I know now, the Federal Reserve is likely to start changing monetary policy early next year, and officials will probably start explaining the process next week. That should happen after Chairman Powell’s press conference which will occur after the Fed’s two-day meeting that starts on December 15th.
I believe he will explain policy changes more clearly in the coming months. If he does that, it should be bullish for stocks since traders will not be surprised or confused by the Fed.
Should you have any questions on what I have shared, please feel free to reach out to me or Trevor at (818) 841-1746.
Yours truly,
Cam
Disclosures:
The information provided is not a complete analysis of every material fact and are subject to change.
Securities and some investment advisory services are offered through Cetera Advisor Networks LLC, member FINRA/SIPC, a broker/dealer and Registered Investment Adviser.
Financial Planning and some investment advisory services are offered through CTA Wealth Advisors, Inc., a Registered Investment Adviser.
CTA Wealth Advisors, Inc. and Cetera Advisor Networks LLC are non-affiliated companies.
The opinions expressed in this letter are those of Cameron M. Thornton, CFP®. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Past performance does not guarantee results.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
Cameron M. Thornton, CFP® is a Registered Representative with Cetera Advisor Networks LLC and may be reached at www.ctawealthadvisors.com or
(818) 841-1746.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
Citations:
[1] https://www.statista.com/statistics/1121448/fed-balance-sheet-timeline/
[2] Wealthy Retirement – Market Trends, Jody Chudley, November 16, 2021.
[3] https://www.google.com/search?q=annual+inflation+rates+from+1982+to+2021&rlz=1C1CHBF_enUS910US910&biw=1920&bih=937&sxsrf=AOaemvLZ6S0zZHeaYjFkFWimDgZR1nKEnw%3A1638996882525&ei=khuxYduPH9bB0PEP29-NoAU&ved=0ahUKEwjboOGXi9X0AhXWIDQIHdtvA1QQ4dUDCA4&uact=5&oq=annual+inflation+rates+from+1982+to+2021&gs_lcp=Cgdnd3Mtd2l6EAMyBQgAEM0CMgUIABDNAjIFCAAQzQIyBQgAEM0CMgUIABDNAjoHCAAQRxCwAzoICCEQFhAdEB5KBAhBGABKBAhGGABQvAdY4itgni5oAXACeACAAc8BiAHBBJIBBTIuMS4xmAEAoAEByAEIwAEB&sclient=gws-wiz
[4] LikeFolio. November 2021 Mega Trends Supply Chain Mayhem.
[5] Family Research Council - Mutate, Update, Repeat. Joshua Arnold. December 7, 2021.
[6] Zacks Professional Services – Today’s Key Market and Economic News. December 8, 2021.