Some years ago, the leading Jewish organization, B’nai B’rith, invited an economics professor from the University of Chicago to give a keynote speech at an important dinner. By way of introducing Dr. Friedman to the audience, the host referred to the Torah, which is the collective name applied to the first five books of the (Jewish) Bible. He explained that while a reader’s journey through Genesis, Exodus, Leviticus, Numbers and Deuteronomy could be exhaustive it would provide many teachings about many of life’s fundamentals. And yet, it was still possible to distill the books down to one idea: “Treat others as you would wish for them to treat you.” He then asked Milton Friedman if he could find a way to summarize his economic philosophy as succinctly as the host had done with the Torah. Doctor Friedman was up to the challenge and simply stated that ‘there is no such thing as a free lunch.’ I wish Joe Biden and his economic advisors had been in attendance.
Last week President Biden gave a speech in which he pointed to a myriad of things and people responsible for causing the inflation that is now having hugely negative effects on the economy, the markets and everybody’s state of mind.
Biden wants us to believe that our inflation-related problems are the faults of Vladimir Putin, corporate greed, and price gouging and probably Donald Trump. To make sure we understood, he specifically stated that his policies and its 7 Trillion Dollar spending has nothing to do with it. With all due respect to the president, we disagree.
It is not possible to mail out checks to millions of people — many who admit they did not need the money – and give millions of loans to businesses (who correctly understood that the loans had no requirement of repayment) and not anticipate that there would be a devaluation of the dollars already in circulation.
This is a block that we’ve walked around before. Regular readers of this newsletter will recall that we warned of probable inflation to come. It could have been less severe, and it could have been temporary, if better policies had been the order of the day.
This week we have seen some of our biggest retailers take some serious shelling.
From SeekingAlpha website:
What happened? The big earnings miss (and halving of profits) at Target was driven by a shift away from higher-margin goods such as kitchen appliances and TVs to basics like food and toiletries. Margins felt pressure from the consumer pullback as shoppers got selective about spending on goods. In fact, operating margins were reported to be 5.3% during the quarter, falling heavily from the 9.8% seen in same period last year and below the company’s long-term goal of 8%.
Elevated fuel and freight costs also dented profits, with expenditures on those items now forecast to be “$1B higher this year” than Target management had previously estimated. Not expecting the swift change in consumer sentiment, the company further stocked up on too many discretionary categories, leading to a higher level of markdowns as quarterly inventory grew 43% Y/Y. “We did not anticipate the rapid shifts we’ve seen over the last 60 days,” CEO Brian Cornell declared, adding that Target would “have some of the same challenges in the second quarter” as it continues to set prices based on “value and affordability.”
Additionally, Target, Walmart and others who were (correctly) motivated to keep customer’s needs filled by having items on shelves, loaded up on inventory while it was available, fearing supply chain interruptions. Now that excess inventory will be a drag on sales going forward. The supply chain fiasco, it could be argued, was exacerbated (if not created) by government over-reaction to Covid-related issues.
So, back to Professor Friedman; there is no free lunch. And there is no free money either. We are just now seeing the true cost of the poorly thought-out stimulus spending. We’ll get through this but, the suffering is much worse than it needed to be.
Ron’s Market Minute — A Bear by any other Name
I have had mixed feelings about calling the present market decline a ‘real’ bear market, but that’s what it looks like to me. It’s pretty early in the Fed’s rate-hiking process for a ‘real’ bear to begin. My thought was that we would have another runup to new higher highs before the bear kicked in- thinking maybe 2023. But it is looking more likely that the bear has already begun. Historically stocks tend to trend up during the first few Fed hikes and then top when it becomes more likely that the Fed will keep the brakes on too long- leading to a recession and a bear market. Perhaps this time it’s different.
After all, there have been years of easy money, and there’s Ukraine, the Covid problems and mostly the runaway inflation which currently plagues the economy.
Whatever has caused it, the US market topped at the beginning of the year and has declined steadily (with the exception of the short false breakout in the middle of March). It is unknowable when the current bear downtrend will end, but our process of incremental portfolio changes in response to changes in the market environment have led us to a very defensive investment posture. I believe it is appropriate to maintain that defensive posture till the market environment changes. We have had a few small fits and starts, and I warned you last week not to mistake a bear-market bounce for a change in the overall trend. But the Fed is still stepping on the brakes and our junk-bond indicator is in a steep downtrend.
Bear market countertrend rallies are usually driven by short covering and are often VERY strong. Eventually one of the short-covering rallies will turn out to be the real market bottom, but there can be many false upside breakouts on the way to the real bear market bottom.
Patience is a virtue during a bear market.
Ronald P. Denk, CFP®
Denk Strategic Wealth Partners
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