Happy Halloween! Fall is upon us, the weather has finally turned and for the first time in as long as I can remember, maybe ever, Michigan and Michigan State will face each other as top-10-ranked and undefeated football teams. Wow. Throw in Halloween weekend and I’m guessing a few couches will be burned in East Lansing Saturday night. U of M vs MSU will be the biggest game in all of college football this weekend, so enjoy; these opportunities don’t come around very often. Speaking of opportunities, I think the economic low-hanging fruit has just about been picked. For the first time in a few years, no matter where I look, it’s hard to find any economic data that is trending positively. This doesn’t mean we are headed for disaster, but it does mean that I think things will slow down, and depending on how fast that happens, it could potentially move market prices.
The impact of COVID is immeasurable. We have no idea what to expect because, frankly, none of us have ever lived through anything like this and there is no playbook or historical data that we can turn to for guidance. What happened at the beginning of 2020 should have caused the greatest economic collapse since the Great Depression. The entire world literally shut down most forms of economic production – think about that – it’s impossible to even fathom the possibilities of something so massive. And yet, we only had a two-month stock market event, albeit a nasty drop, the largest on record for such a short period of time. But then, as if COVID never happened, the stock market recovered the entire loss and, shockingly, ended up producing a nearly 20% return for the year. What the hell is going on? The answer is that for the first time in history, nearly all central banks and governments coordinated to bring to bear the most massive policy response the world has ever seen.
Let’s focus on where we live, right here in the good ole USA. Why did our stock market do so well? The answer is simple, the Federal Government along with the Federal Reserve, stepped in and created massive demand where there otherwise would not have been. Think about all the jobs lost, small businesses that went under, the baby boomers that just hung up the cleats. That should have created a gigantic hole in spending. And it probably did, but the hole was filled by Paycheck Protection Payments, $600 weekly unemployment benefits to virtually anyone who even had a part-time job going into COVID, multiple $1,200 direct stimulus payments to American citizens, and child tax-care credits. On the banking side, the Federal Reserve flooded the markets with flush liquidity, sparking a home-buying frenzy. What did all that get us, you might ask? As far as I can tell, it got us about 18 months of a pretty nifty stock market. Now, let’s look at the other side.
In the process of “saving the economy” – that, for the record, was destroyed because of our own doing – we have created a potentially greater problem. I drove back from Ann Arbor this past Saturday after attending the Michigan game. I got up early, had a long (but fun) day, and decided I would stop for coffee on the way home. I stopped at four different locations; all were closed – not permanently, just early. It was 4 p.m. There just aren’t enough employees anywhere to fill the empty jobs. The trickle-down effect is impossible to measure, but to highlight a few bullet points, the supply chains are broken, corporations can’t produce enough to meet demand because they either can’t get the goods they need, or they can’t stay open as long because they don’t have the help. Hundreds, maybe even thousands of hospitals are likely to fail within the next 12 months because the Federal Government is about to cut funding for Medicare payments to any of them that don’t meet the vaccine mandates. They’re damned if they do and damned if they don’t. If they fire the employees to increase the percentage of their workforce to meet the requirements, they lose a giant chunk of their workforce which massively reduces output and the ability to provide care. If they keep the valued employees, they go bankrupt because they lose federal funding. Following suit, major corporations have begun to fire employees who have chosen not to get the jab, again, further damaging potential output and eroding the workforce. The present trajectory is unsustainable, and we Americans are on a collision course where the actions of out-of-control policy makers will meet the further destruction of the American way of life. I have no idea how this will play out, but I think we are in for maybe a couple of decades of political turmoil before it’s settled.
On the actual economic data front, inflation has returned. Nearly anything that you would want costs more, and it probably gets worse before it gets better. I fully expect the price of oil to continue to rise and would not be surprised if it hit somewhere between $90 and $100 per barrel. If anything can pull the economy down, it’s $5 per gallon gasoline. Natural gas and propane are also on the rise; again, not good for the lower end of the socio-economic scale, precisely the group of people that had been goosing demand. Now that unemployment benefits have been reduced to normal levels and there aren’t any looming stimulus payments, I expect that demand will continue to decline.
So, what does all this mean? Fair question. I think it means more money printing, quantitative easing, central bank intervention and a last-ditch effort to right the ship before the mid-term elections. In my view, interest rates can’t really go much higher because nearly all developed-world countries are in debt up to their proverbial eyeballs and could not afford to service that debt with any appreciable rise in rates. Moreover, here in the U.S., I actually think rates will come back down after a meager attempt to push a bit higher. I think we’ve crossed the Rubicon, and we are in for nearly permanently low interest rates, coupled with intermittent urgent policy responses to revive fading demand all to keep the asset markets propped up. The net result of suppressing interest rates for so long is that savers have been forced into equity markets to find yield, taking on more risk than would normally be appropriate, particularly for those over age 60. It’s become clear to me that allowing the markets to fall too far too fast would potentially trigger a catastrophic economic collapse that nobody is willing to endure. Between policy makers in the federal government, and central bankers at the Federal Reserve, the decision makers will continue to throw money at the problem, which will further dilute the value of the dollar, but will likely, over time and with more volatility, continue to push asset prices higher.
What are we doing at Sawchuk Wealth to prepare for this? What we always do: Maintain rigorous risk management strategies while trying to capture the upside when it is available. We have transitioned a portion of our advisory assets to Howard Capital Management, as well as adding their mutual funds where appropriate. Howard Capital has a unique and effective risk management system that we believe will help our clients handle volatility, and we will continue to transition assets to their firm in the coming months. We also employ the use of different risk management strategies in our buffered annuity contracts; again, we believe these systems will serve our clients well should the future play out as we think it might. This would be an excellent time to introduce Sawchuk Wealth to anyone you care about who has resources they want to protect. I’ve only scratched the surface on the myriad of possibilities that can play out economically, and frankly, I believe most people are simply not well prepared for what may be heading our way.
We can’t be all things to all people, but we can be all things to some. For you, our client, we will do whatever we can to help protect you and the people you care about and turn economic challenge into potentially life-changing opportunity. As always, we thank you for your continued trust and confidence. Know that we are working tirelessly to give you and those you care about the best advice and financial guidance available. Oh, and GO BLUE!