On the Money:
“What amazes me more than any spectacle of boom-and-bust is our capacity as a species to witness speculative bubble inflating and bursting – or, to have read about the most notorious case studies, such as Tulipomania or the South Sea Bubble – and yet fail to remember the inevitable outcomes.”
-- Ace Greenberg, former CEO of Bear Stearns
(from his memoir, The Rise and Fall of Bear Stearns)
“It’s a frightening thought, Frank”
The ultimate signpost -- that’s what flashed to the world last week. The Federal Reserve completely caved. What does this mean? Is it a good thing? How should we be positioned?
Last week I discussed these questions with my partner Steve Korn, Fielder’s Chief Investment Officer. You can listen to our conversation HERE.
Here are some of the highlights:
Steve Korn: “The Federal Reserve is in the process of doing something that's never been done before in the terms quantitative tightening. This extra three trillion dollars that they added to their balance sheet they're now slowly taking that away… And the ramifications of which no one knows what may happen. So we're in uncharted waters with respect to the Federal Reserve pulling back the punchbowl … and I would argue that what we saw in December was the start of that.
… In December the current Federal Reserve Chairman Jay Powell made some comments to suggest that he would not at all change the quantitative tightening and the path they're on… (But) after the market gets wonky, and stocks are down, and assets are down … he reversed course… Now rate hikes are kind of on hold… So it is a complete reversal…
If we thought that our government was going to be conservative and take a moral high road, yesterday put a nail in that coffin. They are going to continue to support asset prices and markets, because not doing that could lead to complete chaos...
Frank Byrd: Governments don't get elected by cutting benefits and raising taxes. The path of least resistance is to stimulate and accept higher inflation, which of course is a slippery slope…
Steve Korn: With the baby boomers now starting to retire … we are just demographically entering a period where our spending naturally is going to go up a lot more… Does the government now get religion and take the moral high road? And do we have to have increases in taxes? Definitely possible if Democrats take charge in 2020. But do we reduce spending? I'm skeptical personally. But that path would be highly deflationary into rising debts… I just don't think it's the likely outcome.
Or the second path is we keep spending, whether we raise taxes or not, and our Federal Reserve and our government effectively continues to use the printing press to create more dollars to put more money into the system... and assets are off to the races…. we keep growing…
So what do you do? Right? What do you do if the federal government can prop up asset prices?... The dirty little sin is the retiree who is just clipping coupons on fixed income or (living off of) utilities dividend stocks thinking that they're safe. They are completely wrong footed if that's the case. The value of their income will be eroded away. And ironically that person would be better served, although much more volatile, to own assets that will inflate with the asset inflation… There you'd want to be in real assets. You want to have real estate, equities…
Frank Byrd: So the question is, looking forward, what do we expect to happen? … The key question that we all have to ask ourselves is: Do you believe that assets -- and by that, I mean stocks, bonds, real estate ... stuff ... owned stuff -- Do you believe assets or cash will outperform in the decade ahead? That's the key question. What do you believe? … We believe that central banks will succeed in their global coordinated efforts to debase cash.
Steve Korn: It's a frightening thought, Frank. It's really frightening.
Frank Byrd: And that means you want to own stuff - whether it's companies -- public or private -- stocks -- whether it's real estate -- stuff -- assets....
You can listen to our full conversation here:
HEAR FULL AUDIO
Importantly, we discuss why one should prepare – and potentially hedge – against higher volatility in asset prices. Further, we share thoughts on whether it makes sense to sit on the sidelines and wait for a chance to buy assets at cheaper prices.
Please reach out if you’d like to discuss how to best position your own affairs for a more volatile, inflating world.
Yours in the Field,
Frank Byrd, CFA
Disclaimer: While the information presented herein is believed to be accurate, Fielder Capital Group LLC (Fielder) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Fielder is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Fielder makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Fielder or its employees may have an economic interest in securities mentioned herein.