This is not the 70s


In the 1970s, the dollar was in free-fall after we completely eliminated the gold standard. As the value of the dollar was in decline, purchasing power eroded and inflation was the result. The Fed was tasked with buying dollars a.k.a. raising rates to support this dollar free-fall and fight inflation.


Today the dollar is at multi-year highs and has never been in greater demand. You can go to Europe right now and experience a 1-for-1 exchange. Today’s inflation is a result of supply chain shocks, fiscal stimulus, and an inept energy policy during an energy crisis.



This is not the Dot Com bubble


In the 90s leading up to the 2000 tech crash, hundreds of leading companies had little to no revenue, zero profits and were being valued on Pro-forma financials. Pro-forma is Wall Street gibberish for ‘possible.’ The greater fool theory was in full effect as traders bought stocks of companies that had a business plan and a dream, in hopes of re-selling them to another trader at a higher price.


Today our tech leaders generate billions in revenue, hundreds of millions in profits and possess hard-earned cash greater than most countries’ GDP. Google alone has $125B in cash. They now sell at valuations extremely attractive for the first time in years.


This is not 2008 / 2009


Leading up to the great financial crisis, anyone could buy a home without proof of income or even a job. Flipping houses was the norm and consumers tapped more and more debt to bankroll their lifestyles, relying on ever-increasing housing prices and the ability to cash-out refi. When the music slowed, even a touch, the debt levels were too high to sustain the dance and it all came crashing down.


Today, consumer debt levels remain healthy. Housing prices have certainly escalated but long gone are the days of folks buying and flipping to the next person with no-doc loans or relying on cash out refis to bankroll the next housing purchase. Rather than uber risky, banks have become super sensitive, having to repeatedly pass stress tests and possess the required capital to maintain healthy operations.


This is 2022


History books will discuss 2020 and beyond as something completely new where the world dealt with longer-term ramifications resulting from a global shutdown and fiscal stimulus. For almost 2 years manufacturing stopped. A global ‘just in time’ system of production, shipping and delivery came to a screeching halt overnight. As products dwindled on the shelves and unemployment skyrocketed, our government provided one of the largest consumer nations with extra spending money! The result? Higher prices.


For one of the first times in our history, inflationary pressure was sparked by something other than a falling dollar, which our Federal Reserve was ill-equipped to handle. Unfortunately, old habits die hard, so interest rate hikes began, which in my opinion has been like trying to repair a broken ankle while using Asper Cream on a shoulder. It just won’t work.


The irony of all of this of course is that over time these prices have begun to come down naturally as supply chains loosen and our fiscal stimulus dwindles. Copper, Lumber, and even Oil have come down considerably these past few months and slowly it will show up in the goods and services we purchase daily. It will long be debated what the Fed’s actions actually accomplished, however my guess is they will be applauded for their efforts with Jay Powell going down as a hero. We will know differently, but we’ll golf clap along nonetheless.


Markets have responded accordingly, notching a much-improved month of July. Despite the Fed raising another 75 basis points, stocks cheered the idea that the Fed would no longer relay their ‘road map’ but rather allow the data to be their sole guiding light. Markets advanced as any observing investor can see that CPI and other inflationary data will be coming in dramatically very soon.


Earnings has also helped to lift markets here as participants realize that despite the higher interest rate environment and uncertainty surrounding Russia and Ukraine, most companies are not, in fact, going out of business.


Congress recently passed a $53B spending package designed to bolster the domestic semiconductor industry, which as we suspected gave a nice spark to many of the beaten down tech names which are now trading at valuations we haven’t seen in several years.


At this point we’ve certainly come a long way and we’re much improved, however we’re far from out of the woods just yet. We need to continue to see a softening in oil prices which will translate into better gas prices. It’s foolish to think our administration will change their position on energy policy at all so it is becoming clear to me that new stock leaders may continue to be in the alternative energy space or fuel efficiency area.


Despite all the headwinds, American ingenuity is thriving and once again it looks as if those who believed the downfall of our great nation was upon us, will once again be sadly disappointed. In the face of all the challenges we’ve seen over the last few years, we’ve continued to find a way forward and I suspect this will certainly not change now.


We’ve been rewarded for our patience this month and I am looking for this to continue into year-end.


Until next time,